I read lots of corporate earnings conference call transcripts. In my line of work, it comes with the territory. Most earnings calls are — by design — bland affairs. There’s a lot of jargon; executives often dodge simple questions that might have unpleasant answers.
Occasionally, company managers fall back on talking points that have clearly been worked out beforehand. But sometimes, what’s said is a genuine surprise.
This leads me to the latest conference call from Snap (NYSE: SNAP). What I heard on the company’s July 22 call made me seriously question my long-term bullish stance on the company.
Here’s what I heard and why it left me baffled.
What was said
First things first: Snap had a terrible quarter. The company missed revenue expectations, failed to provide guidance for the third quarter, and noted significant weakening in the broader advertising market.
All of this, to some degree, was expected. Snap cut its second-quarter guidance all the way back in May. So when it missed its numbers, no one was shocked.
However, on the conference call, Snap chief financial officer Derek Anderson stunned me when he said the following regarding the company’s advertising: “It’s also very easy to turn off.”
Now, to provide some context, Anderson was talking about how Snap has made ramping up advertising spending very easy for their clients. He went on to explain that it’s also very easy for those same clients to turn off their advertising when times get tough.
Anderson wasn’t the only one falling back on this argument. Chief business officer Jeremi Gorman also noted, “We’ve spent a lot of time removing friction from buying and selling on our platform…It’s definitely easier to turn off.”
By my count, Anderson and Gorman used some form of this “easy to turn off” talking point four times during the call.
Why this is concerning
For me, this talking point raises two concerns: one technical and one philosophical.
The technical concern is this: Sure, adjusting ad spending should be straightforward for your advertisers. Building long-term trust is essential for long-term success. But this principle can be taken too far. Should the company really be “spending a lot of time removing friction“ so that turning off advertising is effortless? Sure, some advertisers might get miffed if they have to jump through some hoops to draw down their ad spending. Yet, that scenario might be preferable to Snap’s results this quarter.
Moreover, from a philosophical perspective, Snap’s management seems too comfortable being a “fair-weather” ad platform. Management repeating the “easy to turn off” talking point implies they thought it would be a comforting message. But I’m not comforted; I’m concerned. Snap seems to be signaling that consistent, accelerating ad revenue isn’t a top priority.
Right now, the economy isn’t great. As a shareholder, I want to see management fighting hard to keep all its ad revenue — not capitulating so easily.
What to do
I’ve been bullish on Snap as a long-term buy-and-hold stock. But I’ll be blunt: This quarter was a stinker. My confidence in the current management has been shaken.
Nevertheless, several key metrics remain strong. Daily active users (DAUs) increased to 347 million, up 54 million or 18% from a year earlier. Total time spent watching its Spotlight feature jumped 59% year over year. Moreover, the company announced a new premium service, Snapchat+, which should help generate some non-ad-related revenue.
I’m sticking with Snap, but investors should be wary based on what I’ve detailed above. Snap’s management is pleased to note how easy it is to turn off advertising on its platform; investors might retort that it’s even easier to sell a stock.