Ahead of its IPO, Snap explains how it expects to make money


Date: 23.02.2018

Snapchat has released a new video for potential investors, with some mixed messages on its plans for profitability.

Chief financial officer Drew Vollero says in the roadshow video that the economic model "is not complicated" for the ephemeral messaging and augmented reality app. But in its regulatory filing announcing its intention to go public weeks ago, the company revealed a net loss of $514.64 million in 2016, wider than $372.89 million in 2015, and warned it "may never achieve or maintain profitability."

To turn that around for its initial public offering, expected to be March 1, the company will need to start making more money, and keep costs from ballooning at a faster pace.


As an advertising company, Snap has two potential future paths to make money — achieving massive, Facebook-like scale, or creating a high-engagement, premium product. And executives at the company tempered expectations that Snap will commit to either route.

"I think our community knows that they should expect the unexpected," CEO Evan Spiegel said in the video. "Expect change from Snap." (Watch the entire video here.)

An intimate, premium community?

Right now, Snap is a premium product with a "coveted" demographic, Vollero said, with most of its customers in developed markets with strong cellular service, powerful mobile phones and "the highest disposable incomes in the world."

With full-screen, vertical ads or interactive tools, Snapchat is one of the only platforms that provides the full "canvas" of the mobile screen, Doug Neil, executive vice president of digital marketing at NBC Universal, said in the video. But advertisers have also told CNBC that the platform requires big budgets, since the unique format of the ads often require agencies to make ads specifically for it.

Spiegel said he's found himself fielding questions on why "bigger isn't better."

"When we started our business, there was sort of this idea that on the internet, the more friends that you have, the more followers you have, the better your life will be," Spiegel said. "What we identified with Snapchat is that people were really missing the intimacy of communication...we love when people are selective with the friends that they add on our service."

Or a viral phenomenon?

Still, Vollero said that Snap is focused on cultivating a large audience — something that rivals like Facebook and Google have mastered.

"Our business is scaling quickly," Vollero said. "Almost all of our revenue gains are being driven by volume, rather than pricing."

Then there's the costs.

User growth is driven by product innovation, Snap chief strategy officer Imran Khan said in the video. The company is also hiring "aggressively."

"It takes time to make great products — meaningful innovation doesn't come on a schedule, and our community is already difficult to predict," Khan said.

Quarterly earnings reports to investors do come on schedules, and Khan said that buyers should expect "lumpiness." Vollero, on the other hand, called the company's monetization "sustainable" and its cost structure "straightforward."

"We have...employed a series of efficiency and effectiveness initiatives to reduce costs," Vollero said.


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