Snap Q1 FY2022 Earnings Report Preview: What to Look For

Snap Inc. (SNAP) is coming off one of its best financial years in recent history. The company reported its fastest revenue growth and its first positive annual adjusted earnings per share (EPS) in at least three years. The strong performance has come despite major challenges. Snap has faced disruptions in its digital advertising sales due to Apple's recent software changes in its mobile operating system, which make it harder for social media companies to target their ads. In addition, global supply chain issues are affecting Snap's advertising partners.

Investors will be watching to see whether Snap can maintain its growth when it reports earnings on April 21, 2022 for Q1 FY 2022. Analysts expect Snap's adjusted EPS and revenue to rise compared to the year-ago quarter.

Investors will also focus on Snap’s daily active users (DAUs), a key metric indicating the size of the company’s total user base. Snap needs to grow its user base to attract more ad spending from advertisers. Analysts expect the company's average DAUs to rise, but at a slower pace than in recent quarters.

Snap's shares have underperformed the broader market over the past year. The stock oscillated between underperformance and outperformance throughout the first half of the past year. But it plunged after the company reported earnings for Q3 FY 2021 in October. It has underperformed ever since. Shares of Snap have provided a total return of -46.5% over the past year, well below the S&P 500's total return of 6.5%.

Snap Earnings History

Snap reported Q4 FY 2021 earnings that beat analysts' expectations. Adjusted EPS rose 157.8% compared to the year-ago quarter, marking the sixth straight quarter of positive adjusted earnings after two consecutive quarters of adjusted losses. Revenue rose 42.4% year over year (YOY), continuing a deceleration trend that began in the previous quarter. The company said that it continued to onboard new advertisers, driving its active advertiser count to a new all time high. However, labor-related issues and other supply chain disruptions facing its ad partners had an adverse impact on its brand advertising business.

In Q3 FY 2021, Snap's earnings beat while revenue just matched consensus estimates. Adjusted EPS increased 17-fold compared to the year-ago quarter. Revenue grew 57.3% YOY, a significant slowdown from the 116.3% pace recorded in the previous quarter. The company said that new headwinds threatened to slow its growth. Those negative developments included Apple's policy requiring apps on its iOS platform to ask iPhone users if they will accept being tracked for ad purposes. Snap also cited global supply chain issues and labor shortages impacting its ad partners.

Analysts expect an increase in Snap's Q1 FY 2022 earnings and revenue. Adjusted EPS is expected to rise $0.01 off of the year-ago quarter's $0.00. Revenue is expected to grow 39.0% YOY, its slowest pace since the second quarter of FY 2020. For full-year FY 2022, adjusted EPS is expected to be positive for the second straight year as annual revenue expands 37.1%. It would be the slowest pace of revenue growth in at least four years.

^{Source: Visible Alpha}

The Key Metric

As mentioned above, investors will also focus on Snap’s DAUs, which are defined as any registered Snapchat user who opens the Snapchat app at least once during a 24-hour period. Average DAUs for any specific quarter are calculated by summing the number of DAUs on each day of that quarter and dividing the total by the number of days in the quarter. The metric provides a snapshot of the size of Snap’s total user base. Snap generates the majority of its revenue through selling ad space to advertisers. The bigger the user base, the more attractive Snap’s platform is to potential advertisers. But to create an attractive platform for users, Snap must continually invest in providing more engaging features than its competitors.

Snap's average DAU growth has picked up over the past two years amid the pandemic as people sheltering at home spent more time online and on social media platforms. In the final quarter of FY 2019, average DAUs rose 17.2% YOY. That pace accelerated to 20.5% YOY in Q1 FY 2020, the first quarter impacted by the pandemic. Growth slowed to 17.2% YOY in the second quarter before accelerating to a pace of 18.6% YOY in the third and again to 21.6% YOY in the fourth. Growth in average DAUs continued to accelerate through the first half of FY 2021, reaching a pace of 23.1% in the second quarter. It then decelerated through the last half of the year, slowing to 20.4% in the final quarter of FY 2021. Analysts expect a further deceleration in Q1 FY 2022, forecasting an 18.1% increase in average DAUs.