Big Jump in Monthly Active Users Sends SNAP Shares Surging

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Shares of SNAP (NYSE:SNAP) skyrocketed nearly 15% after the company delivered solid earnings Wednesday that showed both a big jump in the number of Daily Active Users (DAU) as well as a smaller-than-expected loss for the second quarter.

SNAP said it had added 13 million daily active users to Snapchat during this last quarter, bringing the total number of active users to 203 million.

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The company reported revenue of $388 million for this quarter, up 48% compared to the same time last year. Looking ahead, SNAP forecasts third-quarter revenue of approximately $410 million to $435 million and puts its DAUs at around 205 to 207 million.

SNAP reported its Average Revenue Per User (ARPU) to be $1.91, a year-over-year growth rate of 42% but still low when compared to other social networks.

SNAP also reported that this prior quarter marked its latest big international push, as the company added support for eight new languages that are spoken by more than 750 million people globally.

Baby-Faced DAU

SNAP credits its jump in DAU to the popularity of its new face filters, which came out this last quarter. These filters -- the results of which went viral on the web -- allowed users to make their face look like that of an infant’s, or swap genders, in a photorealistic manner. SNAP says that between 7 million and 9 million of its DAUs joined the platform this quarter because of these new filters.

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CFO Derek Andersen is quoted as saying that this investment in enhanced Augmented Reality technology to create the filters not only brought in some new users to the platform, but increased engagement with existing users.

For software companies, DAU and its monthly counterpart MAU, are the most important metrics as they dictate another key metric -- ARPU. On any app store there are tens of millions of apps, but only a very few in comparison are used frequently. Because of this, the actual number of downloads of an app is much less relevant than the engagement via DAU/MAUs (of course this metric fails when looking at intentionally low usage/episodic usage apps like Uber and Airbnb). Thus, a higher number of DAU/MAU gives a company more opportunities to sell and thus more ways to up the ARPU.

Looking Ahead

SNAP’s next challenge is going to maintain its DAU growth trajectory. This past quarter is something of an anomaly: there are only so many types of filters one can add that gain the same viral popularity of the babyface and gender-bender filters it added. Instead SNAP needs to look for new types of monetization channels to boost revenue in the face of stagnant DAU growth (assuming that happens in a few quarters).

Paid filter and lenses are one thing, but those are tied directly to virality. To have something more evergreen SNAP says it is planning a roster of original video programming on Snap Originals, augmented reality experiences, and new social games. These will all be expensive endeavours but should help the bottom line in the long term as they would be sought after channels for advertising. In addition, SNAP’s long-planned Snap Audience Network (SNAP already has an internal ad product) -- an ad network that competes against the likes of Facebook, Google, and Linkedin -- should help.