How Snapchat Makes Money

Snapchat generates nearly all of its revenue from ads

Social-networking giant Snap Inc. (SNAP), describes itself as a camera company. That's because its flagship product is a camera app called Snapchat that allows users to connect with family and friends, exchange photos ('Snaps') or videos ('Stories'), and chat. Snap, which was founded in 2010 and went public through an initial public offering (IPO) in March 2017, generates substantially all its revenue from Snapchat advertising.

Snap faces significant competition from other companies focused on mobile engagement and advertising. That includes technology companies with digital platforms as well as traditional media companies. Major competitors include Apple Inc. (AAPL); Facebook, Instagram, and WhatsApp, which are owned by Meta Platforms Inc. (META); Alphabet Inc. (GOOGL) subsidiary Google; and Twitter Inc. (TWTR).

Key Takeaways

  • Snap offers a mobile-phone camera application that allows users to take photos and videos, exchange them with family and friends, and chat.
  • Snap generates substantially all of its revenue through advertising.
  • Snap reported its first quarter of positive net income as a public company in Q4 FY 2021.
  • In May 2022, Snap warned Q2 2022 revenue and adjusted EBITDA would fall short of the low end of the range it forecast a month earlier. Its share price plunged 43% the next day.

Snap’s Recent Developments

On May 23, 2022, Snap said it expects to report Q2 2022 results below the low end of its previously forecast range for revenue and adjusted EBITDA. When it reported Q1 2022 results on April 21, the company had projected Q2 2022 revenue growth of 20% to 25% year-over-year and adjusted EBITDA between breakeven and $50 million. In its warning in May, Snap said "the macroeconomic environment has deteriorated further and faster than anticipated." The stock fell 43% the next day.

On March 1, 2022 Snap announced it was halting all advertising on its platform in Russia, Belarus, and Ukraine as part of an attempt to curb media disinformation amid Russia's recent invasion of Ukraine. The company said that it was also stopping its advertising sales to all Russian and Belarusian entities as well as complying with all sanctions imposed on Russian businesses and individuals.

Snap's Financials

In April 2022 Snap announced financial results for Q1 2022, the quarter ended March 31. The company said its net loss widened to $359.6 million, from a net loss of $286.9 million in the year-ago quarter in FY 2020. Quarterly revenue grew 38% from a year earlier to $1.06 billion. Three months earlier, in its report for Q4 2021, Snap posted its first quarterly profit as a public company.

Just over 70% of the company's Q1 2022 revenue originated in North America, a region in which it includes Mexico, the Caribbean, and Central America. The U.S. accounted for more than 68% of Q1 2022 revenue. Another 15% of the revenue came from Europe including Russia and Turkey, while the world beyond North America and Europe accounted for the remaining nearly 15% of Q1 2022 sales.

Snap's daily active users (DAUs) as well as its average revenue per user (ARPU) grew in Q1 2022 compared with the year-ago quarter. The company had an average of 332 million DAUs in the three-month period, up 18% year-over-year. ARPU increased 17% year-over-year to $3.20.

Snap's Business Segments

Snap does not break out in its financial metrics by business segment. Advertising sales accounted for 99% of the company's $4.1 billion in revenue in FY 2021, as they did the prior year. The company says it generates a small and "not material" share of revenue from hardware, including its Spectacles product. Spectacles are glasses that connect to the Snapchat app and allow users to make Snaps and record videos. The latest version provides an augmented reality (AR) overlay for the user's view.

Snap's Snapchat app can be downloaded to mobile devices free of charge. All of its features can be accessed for free, including creating Snaps, conversing with family and friends, and finding friends' Stories on the Discover feature. These features are designed to drive user engagement, which in turn helps to attract advertisers.

Snap Ads let advertisers tell stories in a format comparable to that provided for Snap's users, while including additional features such as long-form video, links to an advertiser's website, or to a download of an advertiser's app. AR Ads include Sponsored Lenses and Sponsored Filters. Sponsored Lenses provide branded augmented reality experiences. Sponsored Filters offer entertaining overlays that allow users to interact with an advertiser's brand.

How Snapchat Reports Diversity and Inclusiveness

In keeping with our commitment to diversity, here's a look at how Snapchat pursues transparency, inclusiveness, and social responsibility. The company's third annual diversity report, published in 2022, expands Snap's commitment "to inspire empathy, redesign systems, and drive accountability through our people, products, partners, and our wider tech ecosystem."

The report lists steps the company has taken and plans to take to train employees and educate Snapchat users on diversity and inclusion, and to ensure Snap's workforce and leadership reflect those values.

In 2021 the proportion of female Snap employees increased from 32.8% to 34.9%, while the proportion of Black employees increased from 4.9% to 5.2%, and that of Whites fell from 46.6% to 42.3%. Women made up 40% of Snap's 10-member board of directors in 2021. One director was Black and another identified as multiracial. The board diversity percentages were unchanged from 2020.

Whites accounted for 84.6% of executive leadership and 76.3% of management at the level of vice president or above in 2021, little changed from the prior year. The proportion of women in technology jobs at the company increased from 16.4% to 19.4% in 2021, while that of tech employees of Asian descent rose from 49.5% to 52.6%.

Snap's diversity goals—which the company aims to achieve by 2025—are to increase the proportion of under-represented U.S. racial and ethnic groups in its workforce to 20% from 17.4% in 2021, to increase the proportion of women in tech roles to 25% from 19.6% in 2021, and to increase representation of women and under-represented minorities in leadership to 34.5% and 19.5% respectively, from 26.5% and 12.3% respectively in 2021.

Article Sources
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