Snapchat (NYSE: SNAP) reported Q2 2019 performance yesterday, turning a corner from recent lackluster performance by beating expectations on user growth (13M vs 2M), revenue ($388M vs $360M), and losses per share (19¢ vs 22¢).

We took a trip down memory lane and looked at Amenity data on Snap from the company’s IPO in 2017 to today. We demonstrate below that our models do a solid job tracking the shift in sentiment.

#nofilter: Amenity Data Tracks Snapchat's Turnaround

The summary view of Snap’s recent history over the last four quarters offered in our Viewer (see below) provides a quick gauge of the recent directionality of positive and negative sentiment.

Snap’s 2Q19 call yields an Amenity Score of 67, posting a quarter-to-quarter gain of +47. The Amenity Score captures the overall sentiment within an earnings call transcript and represents a weighted average of extracted events within the text with a possible range between -100 and +100.

Over the past three quarters, we identify moderating deceptive language, improving positivity around guidance and market position, diminishing focus on the cost-price equation, and some recently emerged net positivity on headwinds and tailwinds facing the company. These favorable trends in net sentiment related to key fundamental drivers help to paint an objective picture of the tides turning in Snap’s favor.

Deception in Focus

Looking at the full timeline since Snap’s IPO, we see deceptive language peak during the 1Q18 results call and moderate substantially in the following quarters with a lower bound hit during the 3Q18 call. The figure below portrays the number of events our model classifies as deceptive and details Amenity’s deception score on a quarterly basis.

While slightly up on a quarter-to-quarter basis, the 2Q19 deception count and score are in line with the moderating trend we observe since the 1Q18 results. This moderation suggests improving clarity and directness on the part of management, which may well represent a deeper righting of the ship.

For illustrative purposes, we highlight below the highest ranked deceptive language events as scored by our Deception Model in the peak quarter of 1Q18 and most recent quarter of 2Q19:

Management was asked about product changes and the impact on daily active users (DAUs):

SNAP (1Q18): Evan Spiegel, CEO

• "...I don’t think we can give you any specifics on the earlier DAU question, but we’re excited about the progress we’re making."

Managment was asked about the potential path of free cash flow generation:

SNAP (2Q19): Derek Andersen, CFO

• "I’m not going to give you a time line here, but certainly, you can see that we’ve been making significant progress. It’s been fairly consistent quarter-to-quarter for a couple of years now and looking forward to being able to get to that milestone at some point. Not a specific date, but pleased with our progress, and it is a priority for us for sure."

Cost-Price Net Positivity in 4Q18

We highlight the spike in cost-price positive sentiment in 4Q18, which we believe would have warranted close real-time examination by an analyst given the magnitude of the ramp up. The dissipation of the topic over the following two quarters in the context of moderating deceptive language in the same period may be indicative of a leading set of fundamental drivers.

We present an illustrative example below that portrays how a concerted, positive focus on the cost-price in 4Q18 is bookended by positive outcomes on the same lines.

Selected cost-price extractions from 4Q18 by speaker:

SNAP (4Q18): Jeremi Gorman, Chief Business Officer

• "...advertisers will see efficiency even as prices increase, showing our commitment to performance advertisers is paying off."
• "...Snapchat drove a 33% lower cost per acquisition than competing paid channels." (citing a customer)
• "Adding advertisers allows our marketplace to show more relevant and engaging ads to our users, which increases ad engagement rates overall and subsequently helps the ad platform as a whole, simultaneously raising prices on a per-impression basis but decreasing cost per outcome for advertisers."

SNAP (4Q18): Lara Sweet, Interim CFO & CAO

• "...pricing was down 48% year-over-year and was up 3% sequentially."
• "Importantly, cost of revenue as a percentage of revenue declined meaningfully year-over-year and sequentially from 64% to 52%."
• "In 2018, we achieved tens of millions of dollars in cloud infrastructure cost reductions."
• "Infrastructure cost savings initiatives are a continuous, daily activity and can be achieved by executing client or server optimization that reduce our overall cloud infrastructure costs. These improvements in our cost structure resulted in leverage in our infrastructure costs in Q4 2018, and we remain focused on operating efficiencies and unit cost economics over the long term."
• "Our operating expenses are primarily driven by employee-related costs, which represent about 2/3 of our operating expenses. We saw fixed cost leverage in employee-related costs, which declined 10% year-over-year and decreased 1% sequentially. Operating expenses as a percentage of revenue improved meaningfully to 61% compared with 91% in Q4 2017."

Selected cost-price extractions from 2Q19 by speaker:

SNAP (2Q19): Evan Spiegel, CEO

• "Our accelerating top line growth in daily active users, engagement and revenue is translating into significant improvements in our financial performance. Our total cost structure per daily active user grew less than 1% year-over-year, meaning that nearly all of our revenue growth flowed through to the bottom line…"

SNAP (2Q19): Derek Andersen, CFO

• "We continue to make significant progress in driving down our underlying unit costs over time, including the cost to deliver a Snap, the cost to deliver an impression and other key drivers of infrastructure costs."
• "Operating expenses were $259 million in Q2 2019, up 5% year-over-year and 4% sequentially. The growth in operating expenses in Q2 was driven primarily by investments in support of our sales organization."

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This communication does not represent investment advice. Transcript text provided by S&P Global Market Intelligence.

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