Snap Q2 FY 2021 Earnings Report Preview: What to Look For

Snap Inc. (SNAP), parent company of the Snapchat app, has been feeding off of momentum set off by the increase in online traffic last year, as people sheltered at home amid the COVID-19 pandemic. While digital ad spending initially took a hit in the early stages of the pandemic, it bounced back in the latter half of 2020. Rising ad spending, Snap’s primary revenue source, helped it to finally post a small profit in recent quarters after years of losses.

Investors will focus on whether Snap has been able to build on that performance when the company reports earnings after the market on July 22, 2021, for the second quarter of fiscal year (Q2 FY) 2021. While they expect the company to post its first adjusted loss per share in four quarters, it is estimated to be a small loss. The promising sign is that revenue is expected to rise at its fastest pace in at least 14 quarters.

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 another strong quarter of growth in average DAUs, maintaining last year’s momentum. They also estimate dramatic growth in another key metric: Snap’s global average revenue per user (ARPU). ARPU is expected to jump 53.2% year over year (YOY) in Q2, illustrating how well Snap is monetizing its existing user base.

Snap’s shares have outperformed the broader market over the past year, reflecting the company’s improving financial performance. The stock underperformed during the latter half of last summer, but it surged after the company reported strong revenue growth and positive adjusted earnings per share (EPS) in Q3 FY 2020. The stock continued to climb until February 2021, when it began to trade largely sideways through July. Shares of Snap have provided investors with a total return of 146.7% over the past year, well above the S&P 500’s total return of 32.9%.

Snap Earnings History

Snap reported Q1 FY 2021 adjusted EPS and revenue that beat analysts’ expectations. Adjusted EPS was $0.00, a significant improvement from the adjusted loss per share of $0.09 in the year-ago quarter. Revenue rose 66.4%, marking the fastest pace of growth in at least 13 quarters. The company said that it achieved its highest YOY revenue and DAU growth in more than three years. Snap also said in February that it was in a position to grow revenue by 50% or more for multiple years.

Snap also posted adjusted EPS and revenue beats in Q4 FY 2020. Adjusted EPS rose 208.3% compared to the same three-month period a year ago, marking the second straight quarter of positive adjusted EPS. Revenue was up 62.5%, the fastest rise for any quarter in at least the past three years. While Snap reported an adjusted loss per share in FY 2020, the company pointed out that it achieved its first full year of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability. It also noted that it was looking forward to continuing to invest in augmented reality, mapping, and content for future growth.

Analysts expect the strong momentum to continue in Q2 FY 2021. While Snap is forecast to post an adjusted loss per share, it is expected to be relatively small. Revenue is expected to surge 86.8%, which would be the fastest pace of growth since at least Q1 FY 2018. For full-year FY 2021, analysts are forecasting adjusted EPS to be $0.20, the first positive annual adjusted EPS in at least four years. Annual revenue is expected to expand 55.9%, the quickest rise in at least four years.

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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.

After falling 0.5% to 186.0 million in the last quarter of FY 2017, Snap’s average DAUs have increased and the pace of growth has accelerated. Average DAUs rose 17.2% in FY 2019 and 21.6% in FY 2020, reaching a total of 265.0 million by the end of the year. The first quarter of FY 2021 saw growth accelerate to 22.3%, as average DAUs hit a total of 280.0 million. Analysts expect Snap to keep up that pace of growth in Q2 FY 2021. For full-year FY 2021, analysts forecast that average DAUs will increase 14.5%, surpassing the 300-million mark.