Snap Inc. Stock Plummets 17% as Ad Revenue Growth Slows to 3%

Snap Inc., the company behind the popular social media platform Snapchat, has reported a significant slowdown in its advertising revenue growth for the second quarter. The company's stock price experienced a sharp decline during after-hours trading following the release of its earnings report. The slowdown in advertising revenue growth is partly due to technical issues with its advertising purchasing tool earlier this year.

Snap Inc. reported second-quarter sales of 13.45 billion, which was slightly below the average analyst expectation of 13.5 billion. During a conference call with investors, the company revealed that its advertising revenue, which grew by 9% in the first quarter, is now increasing at a rate of 3% to 4%. The company's stock, which had already declined by 13% year-to-date, fell by more than 17% in after-hours trading.

The revenue compression in the second quarter was attributed to an update in Snap Inc.'s advertising auction system. This update inadvertently allowed marketers to purchase ads at significantly reduced prices. The company has since resolved the issue and assured investors that advertising revenue growth has improved. Snap Inc. generates approximately 90% of its revenue from advertising and anticipates that its total sales for the current quarter may exceed analyst expectations.

Snap Inc. has been undergoing a comprehensive overhaul of its advertising technology to enhance user targeting and drive direct sales. These changes have helped the company exceed revenue expectations in six out of the past eight quarters. In its letter to investors, Snap Inc. highlighted its Sponsored Snaps advertising division, which places paid content in users' message inboxes, mimicking messages from friends. These new ads, launched last autumn, represent a significant amount of ad inventory as the company seeks new ways for marketers to reach users within the Snapchat app.

Given the new ad inventory, Snap Inc. emphasized the need to focus on increasing demand to raise ad prices. To reduce its reliance on advertising, the company has developed a rapidly growing subscription business. This move is aimed at stabilizing revenue during economic uncertainty, as marketing budgets may fluctuate. Snap Inc.'s monthly subscription product, Snapchat+, has nearly 16 million paying users, surpassing the previous quarter's 15 million and exceeding analyst expectations. These subscriptions make up the majority of Snap Inc.'s "other revenue" category, which reached 1.71 billion in the second quarter, a 64% increase.

Snap Inc. is also restructuring its engineering team to better align with its business priorities. As part of this reorganization, the company's senior vice president of engineering will be leaving the company. This restructuring is aimed at improving the company's operational efficiency and better supporting its business goals. The company's focus on innovation and user experience continues to drive its growth and success in the competitive social media landscape.