Why Snap lost $2.2 billion in its first quarter as a public company

Source: Market Watch

May 10, 2017 at 21:50

That figure is more than four times the total revenue Snap SNAP, -1.46% had brought in before the recent quarter, when it reported $149.7 million in revenue.

Snap Inc. stock plummeted in late trading Wednesday after the Snapchat parent’s first earnings report as a public company revealed a gigantic quarterly loss of $2.2 billion.

That figure is more than four times the total revenue Snap SNAP, -1.46% had brought in before the recent quarter, when it reported $149.7 million in revenue. That brought the seven-year-old company to more than $500 million in total revenue over those seven years. Even fellow hot tech startup Uber Technologies Inc. doesn’t lose money at that fast a rate, which is really saying something.

So how did Snap manage to lose that much money in just three months? Well, the bulk of it has to do with the blockbuster initial public offering that Snap enjoyed in March. Because the company went public in the quarter, it realized a gargantuan amount of stock-based compensation to employees whose options vested at IPO time, which accounted for nearly $2 billion of that total.

However, as former Twitter Inc. employee Jim Prosser pointed out, that total was far greater than the stock-based compensation claimed in the post-IPO quarter for Facebook Inc. FB, -0.13% , which had a larger IPO than Snap, as well as fellow social-media company Twitter. TWTR, +0.93%

@MikeIsaac $521m for Twitter first quarter out. https://t.co/eTms5rLxCX
— Jim Prosser ? (@jimprosser) May 10, 2017

The difference with Snap was a special stock award given to the company’s chief executive and co-founder, Evan Spiegel. Snap gave Spiegel a “CEO award” in its IPO, which Chief Financial Officer Drew Vollero said in Wednesday’s conference call was fully realized in Snap’s first-quarter earnings, even though it will be paid out quarterly over three years.

Spiegel’s CEO award equaled 3% of all Snap shares after the IPO. According to a March filing with the Securities and Exchange Commission, that ended up being 37.45 million shares that Snap valued at the time at nearly $1 billion: $974,017,720.17, to be exact.

Those shares will be worth much less when trading begins Thursday, as Snap shares dove in after-hours trading to lower prices than they have ever traded for on the open market. Snap stock closed at $22.98, 35% higher than its $17 IPO price, but fell to less than $18 in late trading.

Don’t expect the issue to go away, though it will be less of an issue in future quarters. Vollero said in Wednesday’s call that $1.3 billion in restricted-stock-unit expenses remain, and more than half will be recognized through the remainder of 2017.

Even after subtracting stock-based compensation and other factors, Snap still lost more money than expected in the first quarter. The company reported an adjusted Ebitda loss of $188.2 million, more than its revenue total and higher than the average analyst estimate of $180.7 million.

Snap did not provide a forecast for its financial performance going forward, so nobody knows how much it expects to lose in its first full year as a public company after starting off with a $2.2 billion deficit. Analysts on average were expecting a full-year loss of $2.86 billion going into the report, according to FactSet, though the average estimate for GAAP losses in Wednesday’s report was off by nearly $200 million.

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