Snapchat (SNAP) reported Q3 revenue of $298 million and eps of -$0.12. The company beat on revenue and earnings, yet the market was disappointed. SNAP sold off by 10%. I had the following takeaways on the quarter.

DAUs Continue To Slide

Heading into the quarter Snapchat had 188 million daily active users (“DAUs”), likely large enough to interest advertisers looking to reach millennials. The problem was that DAUs were down 2% from Q1 2018. The company recently revamped the app to separate friends’ photos and videos from content delivered by influencers. In a leaked memo CEO Evan Spiegel admitted the rushed re-design may have been off putting to several users. Snapchat’s Q3 DAUs were 186 million – a loss of another 2 million users. The company intimated the attrition was primarily among Android users.

Management also intimated DAUs would fall again in Q4. The question remains, “Will advertisers abandon Snapchat due to lack of DAU growth?” Over 85% of the company’s advertising revenue is derived via self-service, allowing Snapchat to scale its sales efforts and reach smaller advertisers.

This implies Snapchat could spur additional advertising revenue with its current DAU pool. It could also potentially grow ad revenue by reaching smaller advertisers without incrementally increasing SG&A costs. The company’s infrastructure has been built out. Now it needs to deliver new advertisers. This sounds easier said than done. Read more:

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