SNAP: Weak 3Q17 Vs. Expectations, New $8 Price Target -- Pivotal Research

Snap reported 3Q17 revenues of 208mm up 62 yearoveryear We previously forecast 86 revenue growth for 3Q17 for a total of 239mm essentially matching consensus as part of a path towards our prior 120 annual growth rate forecast The current quarter39s growth included 46 gains in North America on a userapportioned rather than advertiserapportioned basis down from triple digit rates in prior periods In absolute numbers European userapportioned revenue was only 27mm vs 22mm in the prior quarter and 12mm in the yearago period to account for 13 of userapportioned revenues despite accounting for 32 of usersRevenue deceleration was attributed to an increased reliance on programmatic ad sales 80 of impressions were delivered programmatically in 3Q17 vs 0 in 3Q16 Management indicated that this caused advertisers to shift from direct sales to unreserved auctions reducing CPMbased pricing by 60 yearoveryear Growth in impressions served to customers was not associated with a decline in user engagement which we agree can be viewed favorably for the business especially as so much of Snap39s potential inventory is associated with usergenerated content which might not otherwise generate as much demand if it were bought in a traditional manner While there are some clear downsides to the business from what management conveyed as the large advertisers which supports the bulk of Snap39s business did not evidently continue to increase their budget shares to Snap at a pace that compared with the pace of the recent past the expansion of revenue from small and mediumsized business can be positive at least to the extent that this reflects a new advertiser market for Snap to target As before we argue that current period growth rates matter less than what current period data and commentary suggests about longerterm trends Some deceleration was already anticipated given management comments on the impact of the Olympics although overall these results cause us to view the near and midterm revenue growth trajectory with a more negative orientation than we had previouslyCosts were high as generally expected but not quite as high as we forecast for this quarter Hosting costs which account for the bulk of direct costs were up 25 although hosting costs per user were up by only 7 Revenue share totaled 22mm or 11 of revenue in 3Q17 vs 19mm or 15 of revenue in 3Q16 Additional costs were in incurred as the company wrote down Spectacles inventory with a 40mm charge during the quarter Generally it is difficult to read too much into cost management in any one quarter or any one year at this stage of the company39s evolution not least as metrics such as spending on any given category of expense as a percentage of revenue is meaningless when those categories can exceed total revenues and when peruser costs may be distorted by general changes to the business We continue to think of the company as capable of generating a lower adjusted EBITDA margin than its closest peer Twitter which leads us to model towards an approximate 30 margin over the very longrunRevenue forecasts remain highly subjective vs other companies we cover but whatever the right number for our terminal year it seems it should be something lower given the slower trajectory that it appears the company is on At this time we reduce our prior 65bn 2023 revenue forecast down towards 58bn With a 30 adjusted EBITDA margin 550mm of combined capex and acquisitions and cashflow amounting to around 20 of revenue discounted back to the present with a 16bn share count to account for the extensive dilution in the shares that will occur because of aggressive use of RSUs we value the company at under 13bn or 8 per share on a YE2017 basis We continue to rate the stock SELLVALUATION Our DCFbased valuation includes is largely driven by a longterm discount rate of 119 and longterm growth of 6RISKS Snap39s risks include heightened uncertainty the competitive environment slowing growth in the user base a lack of a track record in building a successful business high costs and ongoing dilution as well as suboptimal organizational design and corporate governanceFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE SNAP 11717pdfClick the social buttons above or below to share this story with your friends and colleaguesThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers amp160

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SNAP: Weak 3Q17 Vs. Expectations, New $8 Price Target -- Pivotal Research

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Brian Wieser

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SNAP: Weak 3Q17 Vs. Expectations, New $8 Price Target -- Pivotal Research

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