Category: Applications

Snap Investor Day

Posted on by io-fund

At its virtual Investor Day Feb. 23, Snap executives announced the company is on track to generate revenue growth of more than 50% YoY for the next several years, and laid out the strategy to achieve this target.   

Snap has organized its mobile app into five main screens (left to right): Map, Communications, Camera, Stories, and Spotlight. These screens are represented in the Action Bar at the bottom of the Snapchat app. Management believes Snap is only monetizing one part of the total engagement in the Action Bar—Stories/Discover.

Maps, Communications, Camera, and Spotlight remain virtually unmonetized. Management laid out its plan for each of these screens, including strategies for monetizing each.   

Source: Snap Investor Day Presentation Slides

Roadmap for Growth

Looking ahead, executives believe Camera is the company’s biggest opportunity. The key area for investment will continue to be augmented reality. CEO Evan Spiegel said Snap plans to take product innovations like augmented reality Lenses and develop them into platforms by building tools for creators and developers, and providing distribution so these creations reach the Snapchat community:

“In the past few years, our substantial investments against our vision for augmented reality have put us in a position to lead the industry, and we’re doubling down on this strategy in 2021. Augmented reality has evolved from something fun and entertaining into a real utility. Our camera can solve math equations; scan wine labels to find ratings, reviews, and prices; tell you the name of the song you’re listening to; and so much more… And we’ve barely scratched the surface of what’s possible.”

Snap’s goal is to transform its camera so users can experience the world around them in a new way. Executives plan to achieve this goal through the use of augmented reality. The company’s augmented reality platform is driven by three major efforts:

1.  Innovating in technology to unlock new capabilities in the camera.

2.  Exploring creatively to design exciting and informative experiences.

3.  Supporting a growing community of AR consumers and creators.

Executives expect the growing momentum for AR in smartphones will provide a tailwind for Snap’s AR efforts. The future of Snap’s camera includes a fully integrated AR application, which will provide ample opportunities for more effective monetization as the technology progresses. Management anticipates the advertising inventory potential for a fully integrated AR camera application within Snapchat will be enormous.

As previously mentioned, Stories is the company’s largest driver of revenue. Snap generates the vast majority of its revenue from Snap Ads inserted in between Stories. This is Snap’s most mature monetization screen, but CFO Derek Anderson noted that Stories is still not even close to realizing its full potential. Snap continues to see high demand for advertisers in this function, and Anderson expects Stories to continue to be the largest revenue driver moving forward.  

Snap also sees a lot of potential monetization opportunities in its Communications application. The company recently introduced two new offerings: Minis and Games. This is where users can engage with other members of the Snapchat community to play, learn, and have fun together. Currently, monetization of the Communications screen is predicated on the sharing of sponsored AR experiences among friends. Snap Games currently has around 30 million monthly active users and the company is beginning to roll out its monetization strategies for this function.

Snap’s strategy is to monetize Snap Games mainly with Snap Ads, similar to the Discover function within the Stories screen, with the potential to sell in-app purchases for incremental content. Snap Minis offers a plug-in platform for merchants to drive transactions. Potential examples of this include movie theater tickets, restaurant reservations, food delivery/orders, etc. As Minis and Games expand and become more popular in the Snapchat community, management believes it will become another billion-dollar platform over the long term.      

Management sees Snap Maps as a sizable opportunity moving forward. More than 250 million users engage with Snap Maps each month to find their friends and see what’s happening around the world.  The company has begun integrating businesses in Snap Maps and sees this as a tremendous opportunity for small businesses to build relationships with the Snapchat audience. There are now 35 million businesses integrated on Snap Maps. In 2021, Snap plans to focus on building utility for local businesses to begin to lay the groundwork for future monetization. The company believes that Snap Maps will ultimately be a multibillion-dollar platform and that it represents “a logical on-ramp to Snap’s advertising platform for millions of small businesses around the world.”

Late last year Snap launched Spotlight, a platform that highlights the most creative and fun snaps from the Snapchat community. The company is currently seeing 175,000 submissions per day, with more than 100 million monthly active users on Spotlight. Snap is excited about the potential of Spotlight to drive advertising revenue moving forward, as the platform is already attracting a large and engaged audience.   

Snap’s CFO Derek Anderson made the most important revelation of its investor day when talking about the company’s future projections:

“We believe that based on the monetization platform we’ve built, and the product roadmap we have discussed today, that we can responsibly grow our topline revenue at 50% or better YoY for at least the next several years.”

Conclusion

To deliver on its product road map, for the next several years Snap executives expect to continue to prioritize revenue growth over short term profits and margins. The company sees sizable potential monetization opportunities in each of its five screens. As it currently stands, Snap derives most of its revenue from just one of those five screens. 

The key takeaway from Snap’s Investor Day is the company’s roadmap, and management’s projections for sustained growth of 50% or more. The monetization opportunities for Snap’s Camera, Games, Maps, and Spotlight functions represent potentially large drivers of future revenue.  If Snap can successfully execute on its roadmap in each of these functions, the 50% growth rate over the next several years that management is forecasting is achievable.    

 

Consensus estimates for Snap are for 52% YoY growth in 2021, 44% YoY growth in 2022, and 44% YoY growth in 2023.  If Snap is able to successfully implement its monetization strategies in each of its untapped applications, there is potential for an upside surprise on current consensus revenue projections.     
  

Pinterest and Snap Show V-Shaped Recovery; Cloudflare Guns for Zero-Trust

Posted on by io-fund

2020 earnings from ad-tech stocks have shown us that digital advertising has rebounded sharply from the pandemic recession lows.  Pinterest’s growth rate dropped to 4% YoY in Q2 but has since rebounded to +77% in Q4.  SNAP’s growth rate bottomed at 17% in Q2 and has recovered to +62% in Q4. 

In total, global digital advertising spend grew less than 5% in 2020 but is expected to accelerate with 17% YoY growth in 2021 as we head into a higher GDP environment.

Global digital ad spend now makes up 52% of all ad spend, the first year it has eclipsed over 50% share.  Over the next 4 years, global digital ad spend is expected to grow 61% from its current total and will exceed 60% of all advertising dollars.  The industry growth we are expecting to see will provide a powerful tailwind for digital ad stocks.  Pinterest and Snap have proven to be two of the industry’s leaders, with both companies announcing record results in Q4. 

Pinterest

Pinterest reported Q4 results on February 5th, beating estimates on both the top and bottom lines.  Revenue of $706M (+77% YoY) came in 9% above the consensus projection of $647M.  Adjusted EPS of $0.43 exceeded the street estimate of $0.33 while adjusted EBITDA of $299M far outpaced estimates calling for $226M. 

The company announced that Global Monthly Active Users (MAUs) grew 37% YoY to 459M vs. 450M consensus, US MAUs were 98mm vs. 97M consensus, and International MAUs were 361M vs 360M consensus. 

Management also indicated that it is expecting revenue to grow in the low 70% range YoY for the March quarter.

In its Q4 earnings call, Pinterest CFO, Todd Morgenfeld, attributed the strong Q4 to the investments the company has made in technology and the expansion of their sales coverage:

“Over the last year, we’ve invested in our ability to better deliver returns [through] accountable performance advertising, including scaling, conversion optimization, ads, shopping, ads, and building improved automation to help advertisers of all sizes more easily onboard and realize the value of being on Pinterest…We also expanded our sales team in Western Europe to monetize our engagement there.”  One of the standouts from the company’s Q4 results is the international growth they saw.  Pinterest grew international revenue 146% YoY, international MAUs 79% YoY, and international ARPU 67% YoY.  All three metrics represent record results for Pinterest.   

On the technology front, Pinterest has created value for advertisers through the onboarding of catalogs and automation tools to make spending on the platform easier. The investments Pinterest has made in improving their technology to deliver more value to advertisers paid off with record numbers in Q4. 

Management’s commentary and guidance indicate that they expect this momentum to continue in Q1: “we expect positive trends from our investments in ad tools like shopping and automation, and sales coverage expansion to continue. We plan to expand our international coverage further in existing geographies, and also expand monetization into Latin America in the first half of the year.” 

Recently, Microsoft attempted to buy Pinterest according to news sources. At $51 billion, Pinterest is twice the valuation of LinkedIN at the time of acquisition. Last year, Microsoft put in a bid for Tiktok.

Snap

Snap announced Q4 results on February 5th, topping consensus estimates on both the top and bottom lines although guidance for next quarter came in under expectations on adjusted EBITDA. 

In Q4, revenue grew 62% YoY to $911M, topping Wall Street’s estimate of $855M by 7%. 

Adjusted EPS of $0.09 beat by $0.02 while adjusted EBITDA of $166M comfortably exceeded expectations calling for $142M. 

Global daily active users (DAUs) rose 22% YoY to 265M, surpassing expectations for 258M. Daily active users exceeded expectations across all geographies, including North America, Europe and ROWS.

For Q1, Snap sees revenue of $730M at the midpoint and adjusted EBITDA of -$60M. The adjusted EBITDA guidance came as a surprise as analysts were expecting positive EBITDA for Q1.  Still, -$60M would be an improvement over -$81M in Q1 2020.    

In its Q4 earnings call, Snap CFO Jeremi Gorman discussed the rebound the company observed after Q2: “in Q3 and Q4, we saw many existing advertisers return to Snap and so many new ones leverage our innovative ad formats and bidding capabilities to drive real business value on our platform. This drove active advertisers to an all-time high.” 

Snap currently has an average of 200 million people engaging with AR on Snapchat every day. The company noted that they will continue to invest heavily in AR to create new cutting-edge tools and capabilities that allow advertisers to reach their audience in new ways.

Snap believes there is tremendous value in giving advertisers the ability to engage with their audience directly via the camera.  Management disclosed that businesses leveraging AR as one component of a larger multi-product campaign on Snapchat tend to achieve stronger results. 

Another key area for investment moving forward for Snap is video advertising and the growth of Spotlight: “We see more opportunity over time to grow video inventory particularly via the growth in viewership of Spotlight and Stories.” This is the primary way Snap monetizes its users, but the company believes there will be even more opportunity here in the future. 

Snap has invested in content to support the launch of spotlight and plans to continue to make this a focus area moving forward.  These investment areas are the main reason for Snap’s adjusted EBITDA target coming in below consensus. 

Snap management tempered expectations for 2021 when discussing how the iOS platform policy changes could affect their business: “We anticipate that the iOS platform policy changes to be implemented later this quarter will present another risk of interruption to demand in the period immediately after they are implemented. It is not clear yet what the longer-term impact of those changes may be for the top-line momentum of our business, and this may not be clear until several months or more after the changes are implemented.”

Snap showed tremendous growth in Q4 and continues to be a key tool for advertisers that are trying to reach a younger audience. On average, DAUs opened the app 30 times a day in the fourth quarter with an average of over 5 billion snaps created each day.  CEO Evan Spiegel indicated that he expects Snap to accelerate its full year growth rate in 2021 to above the 46% number the company recorded in 2020. 

Cloudflare

Cloudflare (NET) announced Q4 earnings results on February 11th.  Adjusted EPS of ($0.02) beat consensus estimates by $0.02 while adjusted operating margin of (7.9%) improved 1.7% on a YoY basis.  Revenue of $126M grew 50% YoY, topping consensus expectations by $7.6M. 

Gross margin declined slightly on a YoY basis to 77.6% from 78.2% a year ago.  Management attributed this decline to the fact that they did not raise prices because they did not want their customers to end up with a surprise bill during the pandemic.  FCF was negative $23.5M, representing a FCF margin of (18.7%).    

For Q1, Cloudflare sees $130.5M in revenue at the midpoint, coming in above the $126.2M consensus. Loss per share is expected between $0.02-0.03 vs. the $0.03 loss estimate. Full year 2021 guidance also topped analyst estimates with management expecting revenue of $591M versus a $561M consensus. On the bottom line, Cloudflare is expecting a loss per share of $0.08-0.09 for the FY21 versus the $0.09 loss estimate.   

Q4 was a strong quarter for Cloudflare despite the initial 6% decline in the stock on Friday following the announcement of these results. NET shares were up 20% YTD coming into the earnings report, creating a potential profit-taking scenario following Q4 results. 

CEO Matthew Prince highlighted the company’s growth in paying customers accounts and large customer accounts in Cloudflare’s Q4 earnings call: “Our paying customer accounts grew to over 111,000, up 10% quarter-over-quarter and our strongest quarterly growth in several years.

Large customers, those that spend over a hundred thousand dollars per year with us, continue to be our strongest growth area adding 92 new customers in Q4 and bringing our total large customer account to 828. Revenue from these large customers increased sequentially to 49%, up from 47% in Q3 as our sales team continues to close larger and larger enterprise accounts.” 

Cloudflare announced that their Dollar-based net retention of 119% improved 3% sequentially, driven by continued strength from large enterprise customers. Management attributes the growth in large enterprise customers to the company’s expanded product portfolio.

The company has launched a number of products and features that are important to customers, including its zero-trust network security solution, Cloudflare 1, and Magic Transit. CEO Matthew Prince believes Cloudflare’s zero trust solution is the best in the industry, noting that Cloudflare “is the only company with a zero-trust solution that really understands and is built for the needs of developers”.  Cloudflare’s mission is to provide value for developers in a way that other companies do not. 

Cloudflare management highlighted a few significant customers wins in Q4.  They attributed these customer wins to the platform’s ease of use, technical innovation, and the way multiple products fit together into a unified solution. CEO Matthew Prince believes his company is on the path to more significant customer wins in the future: “Developers are the future of IT and having won their trust we expect will help us win, retain and expand more and more customers over time.”    

Looking ahead, Cloudflare management believes the strong business momentum they observed in Q4 will continue into Q1 and throughout 2021.  The company raised its outlook on both these numbers.  Management noted that in 2020 companies were simply trying to survive. 

In 2021, management believes there will be a big shift from a traditional hardware-based security approach to a much more modern zero trust approach.  The company is confident that Cloudflare will be one of the leaders in enabling companies to make that transition. 

Unity Earnings & What’s Next

Posted on by io-fund

Hope everyone had a nice weekend!

I wanted to drop a quick note about Unity as my next earnings premium blog is coming out later this week and this is probably one you should hear from me on sooner rather than later. 

You can expect more detailed analysis on Voyager Digital by Tuesday. As you can imagine, we go through many stocks before we find ones that we like, so the process can be a bit involved when recommending new momentum names.

Regarding QCOM, I’m not worried about supply issues as I continue to see this as the best way to invest in 5G along with Marvell. However, I’ll elaborate more by the end of the week in a more detailed write-up.

Next week, you’ll get my H1 2021 cloud report. This is one of my favorite reports because it can bring a lot of clarity to the space. Plus, cloud has taken a back seat so a good time to make sure we are well-positioned. 

Also, we are getting close on the new website. Definitely February for ETA and could be as soon as end of next week for the live demo. 

Here are my thoughts on Unity:

Unity was hit hard following the Q4 2020 earnings report with the stock down nearly 15%. This company is bound to polarize investors as it has a valuation on the higher side and is now guiding low for fiscal 2021 for full year revenue of $950 million to $970 million, or 23% to 26%, compared to growth of 43% in fiscal 2020.

We have a 1% allocation to Unity and are very comfortable with this allocation. Primarily, we think Unity will exit this year with the XR story out in front and we are not as concerned with any impact from the IDFA changes in the short-term. This isn’t a stock that I care to time as the company has a near monopoly on XR development across all verticals. 

So, why is Unity guiding lower? I think the company needs to sort through quite a few things and is being cautious while doing so. First, covid created a pull forward for gaming companies. Second, IDFA is taking effect in the spring. Third, the market for AR/VR development has not taken off yet (keyword yet).

Unity is in a similar position as Nvidia or AMD a few years ago – gaming is a nice foundation but the real story is that gaming has placed Unity in a unique position for the next wave of app development. 

Unity Ads must navigate changes from Apple on the IDFA – however, I don’t think they’ll have any trouble doing so. The IDFA changes from Apple are aimed at companies that essentially perform surveillance on the mobile device under the guise of behavioral ad targeting, such as Facebook and Google. 

I’ve maintained that I think the demand side will get hit harder here than the supply side as they do not own the relationship with the publisher. Unity is on the supply side and owns this relationship. Per Unity management, they will see about a $30 million hit from IDFA changes.

Gaming is primarily contextual advertising rather than behavioral targeting. By contextual, I am referring to the fact that advertisers buy gaming audiences based on the fact the gaming content is enough to target the audience. Advertisers can target adult men by certain games, adult women by certain games and children by certain games. Contextual advertising does not require IDFA. 

As far as contextual advertising goes, gaming is a leading category for this type of advertising. Finance is a good one too because advertisers can target based on content (Fidelity doesn’t need to know your behavior to target you inside of finance content – you’ve already qualified yourself as a target customer by reading stock news). This is why Unity’s exclusive focus on gaming should do well relative to their peers.

Unity has 2.7 billion monthly active users (MAU) across its platform. This is A LOT of data (the MAU rivals Facebook). They are allowed to package this data into publisher segments without violating privacy. Net retention rate is 138%.

We don’t have a larger position (2-3%) in Unity because the real thesis is not fully baked yet. I’m guessing that in the next 2-3 quarters, we will be increasing our position size as Unity will likely navigate IDFA better than its ad-tech peers and the XR development story should start to reveal itself. 

The management said they see the company being FCF positive by 2023 – so we should be fully allocated by 2022 at the latest, I would imagine. 

The lock-up for Unity expires mid-March. Unity employees have been able to sell 15% of their vested shares since the company began trading. 

I’ll send this out as a blog update to make sure everyone sees it. 

Thanks! Beth

Smoke and Mirrors: How Snap and Pinterest Hide User Attrition

Posted on by io-fund

Social media companies today are using smoke and mirrors to hide an important key metric. I’m going to pick on Pinterest first because the social media company recently revealed these issues in its S-1 Filing, and meanwhile, Pinterest stock saw a 25% pop on the day of its public debut. To be fair, this 25% IPO pop pales in comparison to Snap’s 135% stock price increase from December lows.

My best guess is that investors are hoping for the next Facebook, or perhaps they aren’t reading beyond the financials, which are on page 13 of the prospectus, compared to the social media metrics located on page 70. This is one reason I recommend following an unbiased tech analyst, such as myself, to avoid reading long S-1 filings 

As important as the financials are to the value of the stock, they can be misleading when not accompanied by scrutiny of the underlying business. For example, there are a couple of terms that are important to social media growth. I italicized growth because I presume investors will demand growth at both Pinterest and Snap’s outsized valuations. The first is monthly active users (MAU) or daily active users (DAU). The second is average revenue per user (ARPU). On the surface, Pinterest has healthy MAU numbers with 265 million monthly active users in the most recent quarter. For comparison, Snapchat has about 300 million MAU and Twitter has just over 325 million as of Q4 2018.

In regards to ARPU, a company with a healthy metric would be Twitter, for example, which has an average revenue per user (ARPU) of $9.48 and the revenue is split roughly 50/50 between international users and domestic users in the United States. For instance, in the most recent quarter Q1 2019, Twitter generated $317 million globally and $363 million in the United States. Contrast this with Pinterest and Snap with ARPU in the $2-$3 range. Investors in both Pinterest and Snap are speculating these social sites can increase ARPU significantly – meanwhile, there are issues of attrition in Pinterest’s and Snap’s user base.

(See more on Snap below, which reports earnings today.)

PINTEREST – CAN’T MONETIZE GLOBALLY

One issue with looking at ARPU holistically is that not all regions are created equal. This is especially true for monetizing on mobile. The United States spends a lot of money on social media compared to other regions, while Europe spends a reasonable amount of money. Other regions, such as India, spend very little money and can actually cause a social media company to lose money as providing a free service to users who do not monetize well – by advertising or purchases – creates low to negative operating margins. (You may be able to tell that I am foreshadowing here.)

Pinterest has monetized the United States beautifully. The 80 million or so users in the United States generate $9 average revenue per user. We see evidence this is saturated, however, as the user growth has been stagnant for many quarters.

Venture capitalists like to see 10% month-over-month growth with mobile application users or website users. (Actually, the prefer to see 30% month-over-month growth). Pinterest has struggled to achieve 10% year-over-year growth in the United States with some declining quarters.

However, Pinterest has achieved a 10% QoQ benchmark globally – and this graph looks much better. But there’s a catch …

Here’s the problem. The international audience doesn’t monetize. The regions where Pinterest is growing are only monetizing at 25 cents per user annually, which is not enough for a profit margin let alone an operating margin.  Compare this to the $9 average revenue per user in the United States, and you can see why the average ARPU for Pinterest drops significantly to $2-$3 annually.

To put it simply: the high average revenue per user regions have flat to declining growth (United States) of 80 million to sometimes 75 million, while the regions with adequate growth are not contributing to profits. If you are invested in Pinterest, you are either:

  1. Betting the United States will monetize higher than $9 per user – which is possible as Facebook is peaking at $26-$28 per user but all other social media platforms have hit a ceiling at $9 per user. (Facebook also uses data in questionable ways, which I’ve covered extensively from an ad-tech level, and California has numbered those days by passing laws for 2020).
  2. Betting the global audience will monetize higher

In the last quarter, the global audience contributed $17 million to revenue compared to $273 million from the United States audience. Annually, this puts the global audience at $41 million in revenue and the United States at $715 million in revenue.

Takeaway on Pinterest: On one hand, you could congratulate Pinterest on monetizing the United States users very effectively – although I am not certain how much more they can squeeze out of this audience as the user growth has stalled. I like to keep things fairly simple – if the numbers don’t add up, then I don’t invest. In this situation, the average revenue per user (ARPU) of the growing audience (global) is too low to turn a profit at 25 cents ARPU and the audience that is monetizing (United States) is stalled.

SNAP – FLAT TO DECLINING USER BASE

My thoughts on $SNAP:

Snap is priced to perfection as the “largest U.S. company to have more than doubled in 2019” with a rise totaling 135% in the last six months from a low of $4.99 on December 21stto $11.75 going into earnings. The speculation around this stock is in sharp contrast to the declining user base from previous quarters in 2018.

You’ll see below that the user base has struggled to break out over 191 million daily active users and has declined to flat for three straight quarters. Meanwhile, the stock has outperformed the S&P 500 10x in the last three months. It bears mentioning the business of social media is virality and engagement, and therefore, the user base is a paramount metric.

On April 4th, Snap announced a programmatic offering called Audience Network, which copies Facebook’s strategy of selling user data for third-party ads across multiple applications (Snap even copied the name – that should be interesting for trademark attorneys). Snap’s Audience Network could revive revenue in future quarters, however, the user base will continue to be a problem as there is a competitor from China, TikTok, that is taking market share of the Millennial audience. For specific months last year, such as September 2018, TikTok beat Facebook, Instagram and YouTube as the number one downloaded app.

Keep in mind, Snap’s user base is more transparent for analysis purposes than Pinterest, as the latter hides their stagnant domestic growth with 25-cent global growth. Overall, attrition in the regions driving revenue typically doesn’t make for a good investment in mobile or internet companies where audience is everything.

Regarding Snap’s earnings today, I’d keep a close eye on the declining to flat user base – regardless if they beat or miss on revenue. In the future, Snap’s Audience Network may help revenue quite a bit, but it will be short lived as California passed the California Consumer Privacy Act that go into effect in 2020 – more on this later.

Update: On April 23rd, 2019, Snap reported 190 million DAU which is a 1 million user decline from year-ago quarter of 191 million DAU.