Still, figure leads to reasonable doubt regarding Snapchat's current valuation of $15-19B USD

The last two years has brought seemingly spectacular success for mobile messaging service Snapchat.  It scorned bids from $3B and $4B USD, respectively, from Facebook, Inc. (FB) and Google Inc. (GOOG).  And while it weathered a data loss storm in early 2014, by late in the year users seemed to have forgiven and forgotten (aptly the premise of the service itself).  Now it's raising venture capital at a valuation of a cool $15B USD.  Depending on how the financing round -- launched in March of this year -- goes, Snapchat may wind up valued at anywhere from $15-19B USD.

I. Financial Reality Hits Snapchat

That dreamlike vision is dealt a serious blow, however by the financial realities of Snapchat's balance sheet.  While Snapchat's lack of revenue was long the subject of insinuation and innuendo, we never had anything close to definitive numbers.  But now thanks to a whale of a leak obtained by Gawker, for the first time Snapchat's purported balance sheet is on display.

Snapchat logo

It's pretty ugly.

To understand these numbers, first note that last year Snapchat at long last began advertising last year.  Analysts had long predicted this move as the messaging service's pathway to monetization noting Facebook and Twitter, Inc. (TWTR) followed similar paths to profitability.  Speculation dating back to 2013 suggested that Snapcht could in theory pull in a couple of hundred million dollars in profit or more per year if it turned the ad crank.  With its large base of millions of active users, many have bought that as plausible.

But the results of Snapchat's first year of advertising are far less impressive.  According to the leaked balance sheet it made only $3.1M USD in the first 11 months of the year.  However, a major caveat is that earnings comes from only the first month and a half of advertising, as ads launched on Snapchat in mid-October 2014.

Meanwhile for that 11 month period it had expenses of $82.8M USD.  The figure includes payroll of $15.7M USD; "product" costs of $47.0M USD (a category which may include some of the cost of scaling its server backend to keep up with user growth); $2.0M USD for travel and entertainment; $3.7M USD for "Rent and Overhead" (presumably rental for employee offices, the server farm  space, and the power consumed by respective locations); and $13.8M USD for "outside services" (temporary employees from placement agencies, lawyers, consultants, etc.).  With the basic expenses, Snapchat was looking at a loss of around $79.7M USD.

Snapchat balance sheet

It did earn over $262,000 USD in interest income in its cash from investors.  However, even in that category there was cause for pause, as Snapchat saw depreciation in excess of $343,000 USD on its warchest.  In other words, however Snapchat is investing its hundreds of millions in venture capital, it isn't managing to make any interest income to tide it through its struggles to monetize via ads.  At best it's breaking even, in reality, its cash pile shrunk imperceptibly due to mediocre return on its investments.

There's one more item of interest -- an "extraordinary expense" of $48.6M USD.  This figure likely comes in part from the cost of the Jan. 2014 data breach.  It likely also includes the undisclosed Sept. 2014 settlement with cofounder Reggie Brown, who claimed fellow cofounders CTO Bobby Murphy and CEO Evan Spiegel stole his idea, after kicking him out of the company.  Another interesting note is that Snapchat loaned $2.5M USD to its "officers' -- presumably Murphy and Spiegel.

Evan Spigel and Bobby Murphy
"Snapchat billionaires" CTO Bobby Murphy and CEO Evan Spiegel were given a $2.5M USD loan, according to the leak. [Image Source: Bloomberg]

Given these extra expenses the full loss for the year Snapchat stood at $128.5M USD. 

Snapchat earnings

The good news, of sorts, is that Snapchat, as of the Nov. 2014 date of the balance sheet, has $320.6M USD in cash and other liquid assets, and roughly $50M USD more in less liquid investments.  

Also on the plus side the company is basically debt-free.  And another small piece of good news is that it spent only around $600,000 USD on advertising last year,  reflecting that even relying mostly on free word-of-mouth advertising it can sustain aggressive user growth.

Extrapolating to twelve months is problematic given the volatility of startups and the fact that this is the first financial figures we've seen.  But if you assume a steady rate of revenue and expenses, you could estimate that for the whole of 2014 Snapchat likely made $3.25-3.5M USD and spent around $85-95M USD.  Adding in the one time expense likely attributable to the data loss and you get a full year loss of around $135-150M USD.

Looking ahead, at its current earnings rate, you could estimate it might pull in around $25M USD for the year bringing its estimated losses per year to around $60M USD, roughly speaking.  If it avoids unexpected expenses, that rate of losses buys Snapchat plenty of time -- possibly 5-6 years with its current cash pile.

Some, like Mike Dempsey, an analyst at venture capital firm CB Insights, say that while ugly the numbers aren't an absolute dealbreaker.  He comments to Gawker Media regarding the numbers in the leak:

[The red ink is] big for 11 months, but not outrageous.  If Snapchat is at a similar point right now in its business lifecycle as 2012-2013 Twitter, the new funding probably gives them a multi-year runway.

But if the leaked numbers alone aren't enough cause for serious concern for investors -- both those onboard and those considering to jump in -- other more recent developments might be.

II. Advertising Falls Flat of Lofty Hopes

First there is the talent loss.  As RE/Code first reported in April, Snapchat saw its veteran chief operating officer Emily White, jump ship to Facebook's Instagram in April.  It also lost sales chief Mike Randall in January.  He ended up working for White.  Also gone is HR chief Sara Sperling who departed for personal reasons.

Snapchat ex-COO
Wooed by Facebook's Instagram, Snapchat's long-term COO Emily White dumped the company in March, taking other high ranking employees with her to Instagram.

For tech giants such defections might be more business as usual, but Snapchat remains a relatively small, tight-knit operation, with approximately 330 employees.  Most of its staff share a single Bay Area office in San Francisco, Calif.  Thus losing 3 key executives not only represents a key loss of talent -- that was nearly 1 percent fo Snapchat's total employees.

Second, in terms of the monetization front there's the troubled "Discover" centerpiece of Snapchat's advertising initiative, which was hoping to deliver a windfall of ad cash.  In Jan. 2015, AdWeek reported that Snapchat was demanding $750,000 USD minimum per day from brands for a feature on "Discover".  The report quotes an anonymous ad agency executive source as saying:

They [Snapchat] have minimums, and they are very firm on them.  From a monetization perspective, they are looking for fewer, bigger, better [for brands to advertise].

The report concludes that the future of this premium push is uncertain.  It notes that Snapchat had an attractive demographic for some brands (basically, lots of teenagers), but the age range of that demographic excludes many potential advertisers (vice advertising, basically).  Further, while early campaigns such as animated ad/filter add-on to Snapchat from McDonald's Corp. (MCD) reportedly were well received by customers and delivered good return on investment, advertisers were still wary of the long term success prospects of delivering ads to user devices only to have them disappear after a day. The report offers an interesting piece of insight.  Snapchat's mid-October through November 2014 revenue indicates that only four advertising clients bit on its expensive proposition.

A source notes that Google's YouTube -- a much more established media hub with a broader demographic -- charges brands $500,000 USD per day at minimum, a third less than Snapchat.  The source concludes:

I'm a big fan of Snapchat, but they are going to market with rates that are significantly higher than what's competitive out there.  It is difficult to go forward with a deal with Snapchat at the prices they are quoting.

And if that was the picture three months into Snapchat's ad push, the outlook at the half year mark was decidedly worse.

A piece by top news service Bloomberg reports that as of the end of May, uncertainty has given way to flat out shortfalls.  It describes:

Snapchat may have overestimated the pull it has with advertisers. It started its program by charging about $100 per 1,000 views, or more than $750,000 for a day-long campaign, more than double the rates of YouTube or Hulu. Big advertisers with large experimental budgets chalked the rate up to research and development costs and fell in line, just to be first with a chance at wooing a millennial audience. Occasionally the ads do find a satisfying symbiosis with the content. Earlier this month, for example, spots from Coca-Cola and the jobs site congratulated students in ads that were interspersed in daily stories culled from snaps on college campuses during graduation day.

Other companies have balked at ponying up for ads on a service that still lacks some of the basic targeting and measurement tools now standard in digital advertising. The ads also don’t receive the crowd feedback that businesses are used to getting on other social media sites, because there’s no way to comment on spots or share them. Scott Varland, creative director at the ad agency IPG Media Lab, whose clients include Sony and MillerCoors, says none of the advertisers he’s pitched on Snapchat want to spend on something so expensive and untested. That’s even as Snapchat’s ad rates have declined rapidly. This month the company announced it would start to charge $20 per 1,000 views, a fraction of its earlier price, agencies say. The company declined to say where prices started.

Bloomberg notes that the ad rate is still higher than "some rivals", but the implication is that it's lower than YouTube or Hulu.  But that's to some degree immaterial.  If Snapchat got 4 advertisers at $750K USD per day ($100 USD CPM), that's ~$3M USD.  Get 40 at the current rate ($150K USD ($120 USD CPM)) and you'll make $6M USD -- twice as much.

Bloomberg cover
Bloomberg reveals Snapchat has cut its ad prices five-fold. [Image Source: Bloomberg]

The problem is that takes us back to the concerns voiced in the AdWeek piece about how age demographic narrows the kinds of brands that are suitable for Snapchat.  Thus it's unclear whether under its current model Snapchat can make much more than it is currently making -- even with its much more attractive prices.

III. Age and Usage -- Active Users are Overestimated by Some, It Appears

A final piece of data to add to the mix comes from an April report from the Pew Research Center.  The report estimates that 41 percent -- or roughly 2 in 5 -- U.S. teens ages 13-17 uses Snapchat.  That's less than use Facebook (71 percent) and its photo sharing site Instagram (52 percent), but it's more than use Twitter and Google's Android-tied social network service Google+ (33 percent for both).

41% of Teens are Snapchat Users

The U.S. Census Bureau reports that there are approximately 41 million U.S. residents aged 10-19, which gives a crude estimate of around 20 million teens aged 13-17.  That means that Snapchat's most vocal and active demographic likely consists of around 8-9 million teens age 13-17 use Snapchat daily.  (A demographic that can lead to a certain creeepy factor, as well, at times.)

Now, Snapchat tends to quote statistics in terms of number of messages sent, not number of users.  Estimates of the actual user base vary widely.  Mashable estimated in Aug. 2014 that it had 100 million active users per month.  A Jan. 2015 report by Business Insider's Alyson Shontell claims that the true number active per month is "closer to 200 million".  Whether or not that's accurate, she adds one juicy detail: according to leaked email conversations between Spiegel and a cohort, only 60 percent of active monthly users log in per day.

Snapchat app
Roughly 2 in 5 Snapchat users is between the ages of 13 and 17.

Also, Snapchat usage is increasingly global, as seen by its top app store ranking in many countries in Europe, the Middle East, Asia, and the Americas.  Adding up the populations of countries where Snapchat was the top app outside the U.S. gives an additional 480 million + people, or approximately 30 million teens ages 13-17, assuming similar population trends as the U.S.  If we assume that usage rates overseas are between half to two-thirds of the U.S. rate (accounting for various factors), that gives around 6-8.5 million more users age 13-17.

So Snapchat's user base could be crudely estimated to be around 16 million teens ages 13-17.  A 2013 report from the Pew Research Center also reported that 9 percent of U.S. cell phone users uses Snapchat and that 26 percent of those age 18-29 use it.  Another recent report states that 90 percent of Americans own a cell phone.  There's about 50 million 18-29 year old U.S. residents, so that equates to 12-14 million users.  And overall there's 316.5 million residents, so that works out to about 26 million total U.S. users.

So of the roughly 26 million U.S. users, an estimated four in five (or more) are teens age 13-17.  Those numbers are similar to those from a June 2015 Comscore report, which estimated that users age 18-29 outnumber users ages 30-65+ 2-to-1.  The report did not included underage users -- those younger than 17.

Age on social networks

Returning to the overseas question, if usage follows similar trends, it might be reasonable to estimate 6-9 million additional overseas users ages 18-29 and 3-5 million additional overseas users that are 30 and up.  All this gives a crude estimate of around 50 million active users, with a little over half of users living in the U.S. and with four-fifths being 29 or younger.

The 100 million estimate is vaguely in the ballpark, if we estimate that the 40 percent of users who don't use Snapchat daily might not respond that they use it on surveys.  Assuming that is generally true, Snapchat's monthly user total may be in the 80-100 million user range, while its daily total is likely closer to 50 million.  The 200 million estimate is far too high, based on this info.

III. Final Thoughts

To wrap up some conclusions on the state of Snapchat as told by these various revelations:
  • Snapchat Lost $128M USD in the first 11 months of last year
  • Loss includes ~$48 for one time expense, likely stemming from settlement from snubbed cofounder and from data loss impact
  • Snapchat made $3.1M USD in ad revenue in mid-Oct. through November 2014
  • Revenue likely came from four brand deals, which are known to be:
    • McDonald's
    • Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935)
    • Macy's, Inc. (M)
    • Electronic Arts Inc. (EA)
  • Thus Snapchat....
    • is making real money via advertising
    • is not making enough money via advertising to keep up with expenses
    • loses 3 to 4 dollars per every dollar it makes off from ads.
    • needs new kinds of advertising or other monetization strategies (e.g. in-app purchases, in-app cash transactions) in order to achieve profitability, let alone financial fortune.
  • Snapchat has an estimated...
    • 40-60 million active daily users
    • 80-110 million active monthly users
    • Of those users...
    • 2 in 5 are age 13-17
    • 2 in 5 are 18-29
    • 1 in 5 is either under 13 or is 30-65+
    • A little less than 1 in 2 resides overseas
The big picture, it appears is that Snapchat has real worth, but that it hasn't solved the monetization riddle yet.  It's fair to say that both its lack of revenue and its usage numbers may be overstated.


At a recent May 15 address at the University of Southern California's Marshall School of Business, the company's 24-year-old CEO told the audience:

Someone will always have an opinion about you. Whatever you do won’t ever be enough. So find something important to you. Find something that you love.

Clearly Spiegel and company are pleased with their labor of love (Snapchat), even if critics despise it.  As usual the truth appears to lie somewhere in between.

Snapchat may be overvalued, but unlike some failed messaging startups it's far from worthless.  And it's not going away anytime soon -- not for several years, at least.  While investors consider it a $15-19B USD, comparable acquisition prices (see: Instagram, WhatsApp) versus usage numbers and earnings indicate in reality it's probably worth $5-10B USD, assuming its problems are fixable in the long term.

In a best case scenario one might even speculate that the current valuation is reasonable.  But there's a lot of tough questions to answer for Spiegel to make that the case.  His work is far from over.  For Snapchat, getting around 100 million monthly users seemed all too easy.  But now the real challenge has begun.

Sources: Gawker, Pew Research Center, Bloomberg

"Nowadays, security guys break the Mac every single day. Every single day, they come out with a total exploit, your machine can be taken over totally. I dare anybody to do that once a month on the Windows machine." -- Bill Gates

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