A month has gone by since the last earnings report for Snap (SNAP Quick QuoteSNAP - Free Report) . Shares have lost about 15.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Snap due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Snap Q4 Earnings Beat Estimates, Revenues Rise Y/Y

Snap reported fourth-quarter 2019 earnings of 3 cents per share, beating the Zacks Consensus Estimate of break-even and better than the year-ago quarter’s loss of 4 cents.

Revenues surged 43.9% from the year-ago quarter to $560.9 million, narrowly missing the consensus mark by 0.02%. The revenue figure was slightly higher than the guided range of $540-$560 million.

Geographically, revenues from North America (68.1% of revenues) soared 42% year over year to $382 million. Revenues from Europe (16.4%) jumped 48.4% to $92 million. Rest of the World (ROW) revenues were $87 million, up 50% year over year.

Average revenue per user (ARPU) increased 23.4% year over year and 21.7% sequentially to $2.58. On a year-over-year basis, North America, Europe and ROW ARPUs increased 30.8%, 31.7% and 8.9%, respectively.

User Engagement Improved in Q4

Daily active users (DAU) at the end of the reported quarter were 218 million. Snap added 31 million DAUs on a year-over-year basis and 8 million sequentially. The growth was broad based, with year-over-year and sequential growth in both iOS and Android platforms.

North America DAU was 86 million, up 7 million year over year and 2 million sequentially. Europe DAU was 67 million, which increased 7 million on a year-over-year basis and 2 million on a sequential basis.

ROW DAU was 64 million at the end of the reported quarter, up 17 million year over year and 3 million sequentially. The growth was primarily driven by the strong adoption of Snap’s redesigned Android application. The company is increasing efforts to improve user experience in these markets through local content and local partnerships.

Snap is benefiting from improved user engagement. It stated that each DAU uses Snapchat over 30 minutes per day on average.

Notably, the company launched Lens Studio 2.0 that introduced Landmarkers, a new tool for overlaying AR on the world, and a variety of other features. By the end of the reported quarter, more than 735,000 Lenses had been created by Snapchat members through Lens Studio, with Community Lenses achieving significant popularity.

The company stated that more than 20% of the Snaps sent every day with Lenses now feature Lenses made by Snapchatters using Lens Studio.

Snap is investing heavily in Lens Studio to help creators build AR experiences. Solid adoption of products like Scan is driving the usage of AR-based lenses, providing significant growth opportunities to the company. Notably, Scan was adopted by McDonald’s (MCD) and Coca-Cola during the quarter.

Further, Snap is helping advertisers reach Millennials and Gen Z audience, who are more active on immersive mobile platforms like Snapchat. The company stated that more than 75% of 13-34-year olds and 90% of 13-24-year olds in the United States are active on Snapchat.

The company stated that advertisers focused on consumer end markets like beauty products, beverages and grocery are selecting Snap to penetrate the 13-34-year old demography. This popularity provides the company with a competitive edge over the likes of Facebook, Google and Twitter in attracting ad dollars.

Premium Content Drives Ad Impressions

Total impressions doubled year over year in the fourth quarter, driven by growth in Snap Ads, which benefited from strong demand for bid optimization products such as app installs and premium ad units such as Commercials.

Snap stated that the combination of Snap Ads with AR and Creative Tools products are helping advertisers achieve higher ROI. Notably, the company witnessed year-over-year revenue growth of 21% from AR Lenses and Filters in the fourth-quarter, driven by robust adoption of Self-Serve Reach and Frequency Lens products.

Cost per ad impression declined 24% year over year. However, Snap benefited from growth in user engagement, as well as optimizations to its self-serve platform to utilize inventory more efficiently.

Notably, in the reported quarter, more than 50 Discover shows reached a monthly audience of more than 10 million viewers. The company added 78 new channels internationally across eight markets.

Snap stated that the number of media partners distributing content on Discover has doubled. It has also strengthened relationships with larger partners. Notably, total daily time spent by Snapchatters on Discover grew more than 35% year over year. Moreover, time spent on premium content internationally increased more than 50% year over year.

Snap stated that its comic series Bitmoji Stories reached more than 125 million users since its launch in November 2018.

Further, the company launched Bitmoji TV, a fully animated cartoon series. Additionally, the company launched three new multiplayer games called Find My Friends, Slide the Shakes, and Ready Chef Go exclusively on Snapchat.

Operating Details

In fourth-quarter 2019, the cost of revenues on a non-GAAP basis increased 22.3% year over year to $247 million. Infrastructure costs, revenue sharing costs and other expenses increased 17.2%, 48.7% and 17.9%, respectively, on a year-over-year basis.

Infrastructure costs per DAU in the reported quarter were 72 cents, flat year over year and up 2 cents sequentially.

Gross margin on a non-GAAP basis increased to 56% from 48% in the year-ago quarter.

Operating expenses were $271 million, up 13.9% year over year. Sales and marketing expenses jumped 28% year over year to $96 million while general and administrative expenses grew 1.3% year over year to $96 million.

Adjusted EBITDA was $42.3 million against a loss of $50.4 million in the year-ago quarter.

Balance Sheet and Cash Flow

As of Dec 31, 2019, cash and cash equivalents and marketable securities were $2.1 billion, down from $2.26 billion as of Sep 30, 2019, due to investments in working capital as well as cash investments related to merger and acquisition activity during the period.

Net cash used from operating activities was $66.8 million compared with $126 million used in the year-ago quarter.

Free cash outflow was $75.9 million compared with an outflow of $148.8 million reported in the year-ago quarter.

First-Quarter Guidance

For the first quarter of 2020, Snap expects revenues between $450 million and $470 million.

DAUs are expected between 224 million and 225 million, up 18% year over year.

Adjusted EBITDA loss is expected between $70 million and $90 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month. The consensus estimate has shifted -9.56% due to these changes.

VGM Scores

Currently, Snap has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Snap has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.