Snap Q4 FY2021 Earnings Report Preview: What to Look For

Snap Inc. (SNAP) has had a banner year thus far in fiscal 2021 as a surge in social media traffic has boosted the company's profits, revenue, and users during the COVID-19 pandemic. But the company in recent months has begun to face major headwinds that may slow its growth. That includes Apple's app-tracking policy introduced earlier this year and supply chain disruptions facing the company's advertising partners.

Investors will watch how much these headwinds are affecting Snap's strong financial performance when it reports earnings on Feb. 3, 2022 for Q4 FY 2021. Analysts expect adjusted earnings per share (EPS) and revenue to both rise at a healthy pace, but much slower than in recent quarters. Overall, analysts expect Snap to report its strongest profit and financial performance in at least four years for all of fiscal 2021.

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, but at the slowest pace in five quarters.

Shares of Snap have drastically underperformed the broader market over the past year. The stock oscillated between outperformance and underperformance from late January 2021 until late July 2021. It jumped following the company's Q2 FY 2021 earnings report and outperformed the market until its third quarter earnings report. The stock then plummeted and has continued to fall through late January of 2022. Snap's shares have provided a total return of -40.8% over the past year, well below the S&P 500's total return of 20.5%.

Snap Earnings History

Snap reported Q3 FY 2021 adjusted EPS that beat analysts' expectations, increasing 17-fold from the year-ago quarter. It also marked the fifth straight quarter of positive adjusted EPS after two straight quarters of adjusted losses per share. Revenue grew 57.3% year over year (YOY), matching consensus estimates. Despite the robust pace, it was the slowest revenue growth since the third quarter of FY 2020. 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.

In Q2 FY 2021, Snap reported Q2 FY 2021 earnings and revenue that beat analysts' expectations. Adjusted EPS came in positive, a significant turnaround from the adjusted loss per share reported in the year-ago quarter. Revenue rose 116.3% compared to the year-ago quarter. The company said that it was the fastest pace of revenue growth out of any quarter in the past four years. It also highlighted the progress being made on the development of Snap's augmented reality platform.

Analysts expect Snap's top and bottom line growth to slow in Q4 FY 2021. Adjusted EPS is expected to increase 24.5% YOY, significantly slower than the previous quarter's astronomic rise. Revenue is forecast to expand 31.4% compared to the year-ago quarter, the slowest pace since the second quarter of FY 2020. For full-year FY 2021, analysts expect the company to report its first positive adjusted EPS in at least four years as annual revenue grows 60.3%. It would mark the fastest pace of revenue growth 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.

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 Q3 and again to 21.6% YOY in Q4. The strong growth of users continued into FY 2021. Snap's DAUs rose 22.3% YOY in the first quarter, 23.1% in the second, and 22.9% in Q3. In the third quarter, average DAUs surpassed 300 million for the first time. But in Q4 2021, analysts expect average DAU growth to slow to 19.6% YOY, which would be the slowest growth in four quarters.