Shares of Snap Inc. (NYSE: SNAP) were up over 4% in morning hours on Friday. The stock has gained 18% since the beginning of the year and has skyrocketed over 270% in the past 12 months. The social media company benefited during the COVID-19 pandemic last year in terms of high engagement levels and has kicked off 2021 on a strong note.
Snap reported better-than-expected earnings results for the first quarter of 2021 a day ago and managed to deliver its highest year-over-year growth rates for revenue and users in over three years during the period. It also achieved positive free cash flow for the first time as a public company. Looking ahead, Snap expects to see an improvement in its operating environment and a stable growth in its user base.
Strong Q1
Revenues rose 66% year-over-year to $770 million, beating market expectations. The company managed to break even on adjusted profits which was again better than analysts’ projections. The top line benefited from strength in advertising. The highest revenue growth of 75% came from North America followed by a 49% growth in Europe and 46% in Rest of World.
User base
In Q1, Snap’s daily active users (DAU) grew 22% YoY to 280 million, mainly driven by the company’s investments in improving its features across various regions and devices. Snap’s efforts in rebuilding its Android application paid off as the company now has a larger Android user base than iOS. This is a key milestone as the majority of smartphones around the world run on Android.
In North America, DAU grew 5% YoY to 93 million while in Europe, it grew 9% to 77 million. In Rest of World, DAU grew 57% YoY to reach 111 million. Average revenue per user grew 66% in North America and 36% in Europe.
The company is seeing continued growth in its user base outside the US and it is working on supporting this growth by offering features and content that are suited to each region. Snap remains optimistic on its engagement levels even as restrictions begin to ease. In late March, the company saw an increase in new friendships as people began to socialize in larger groups. Looking into Q2 2021, Snap expects DAU to grow approx. 22% year-over-year to 290 million.
Augmented reality
Snap sees vast growth potential in augmented reality (AR) and the company continues to invest heavily in this space. The number of Snapchatters who use augmented reality Lenses daily grew over 40% in Q1. The company sees massive opportunity for AR within ecommerce, particularly in areas such as apparel and accessories, which is the largest shopping category among teenagers in the US. AR helps customers find the right size and fit by allowing them to see how they look in the product of their choice thereby improving their shopping experience and driving revenue for sellers.
Advertising
Snap witnessed more advertising activity on its platform as its active advertiser base approx. doubled on a year-over-year basis during the quarter. The company believes it has vast opportunity to expand its share in the global digital ad market, which is $340 billion and growing. Over half of Snap’s ad revenue comes from direct response campaigns and the company’s top performing verticals include retail, entertainment, restaurants, streaming and gaming.
Snap’s largest and fastest-growing revenue base is in North America and the company’s significant investments in this region have paid off in terms of higher growth levels. It is also investing heavily in its video advertising business, which is its largest revenue driver. As the consumption of mobile content increases, the demand for video ad products such as Commercials is also seeing a spike.
Snap expects the current momentum in advertising to continue this year and the company has already seen a 50% increase in upfront commitments for 2021 compared to 2020.
Outlook
For the second quarter of 2021, Snap expects total revenue to grow approx. 80-85% to a range of $820-840 million.
Click here to read the full transcript of Snap’s Q1 2021 earnings conference call