By David Ingram and Pushkala Aripaka
(Reuters) – Snap Inc surprised Wall Street on Tuesday with a rebound in user growth for its Snapchat messaging app, showing resilience amid competition with Facebook Inc’s Instagram and sending shares up nearly 30 percent.
Paired with higher-than-expected revenue and improved margins, the user growth signaled loss-making Snap could be turning a corner as it grapples with other social media companies adding Snapchat-like features, analysts said.
Snapchat’s daily active users rose to 187 million in the quarter ended Dec. 31 from 178 million in the third quarter, beating analysts’ average expectation of 184.2 million users, according to financial data and analytics firm FactSet.
Daily active users rose 18 percent from a year earlier, reversing a trend of slowing growth. The figure is closely watched by investors who hope user growth can be translated into advertising revenue.
Chief Executive Evan Spiegel credited improvements to the version of Snapchat that runs on Android phones, saying the retention rate of new Android users rose by nearly 20 percent compared to a year earlier
“Our business really came together towards the end of last year,” Spiegel said in remarks prepared for a conference call with analysts.
Shares traded at $17.73 after the bell, up 26 percent after trading even higher earlier. They had not traded above Snap’s initial public offering price of $17 since July 10.
“This was a monster quarter relative to bearish expectations,” analyst Daniel Ives of GBH Insights said, cautioning however that “competitive headwinds abound with Instagram front and center.”
Nearly a year after Snap’s March IPO, analysts and investors have been watching to see if Snap can boost user growth amid competition from larger rival Instagram, which has added photo filters and other Snapchat-mimicking features.
To make its app more friendly to users and advertisers, Snap launched a redesigned app in November, splitting “friends” from content feeds.
The Venice, California-based company posted a net loss of $350 million, or 28 cents per share, compared to a loss of $170 million, or 20 cents per share, a year earlier. It was Snap’s fourth quarterly earnings as a public company.
Excluding items, Snap reported a loss of 13 cents. Analysts on average expected a loss of 16 cents per share, according to Thomson Reuters I/B/E/S.
Advertising revenue rose 74 percent to $281 million, as companies advertised more in the key holiday quarter.
Overall revenue rose 72 percent to $285.7 million, beating analyst expectations of $253.2 million. Revenue per user rose 46 percent from a year earlier to $1.53, while cost of revenue per user rose 5 percent to $1.02.
The improved margin “shows that they can control costs of user acquisition and of providing service, and that should eventually lead to the leverage necessary to become profitable,” analyst Michael Pachter of Wedbush Securities said. “They have a long way to go, but this was a good first step.”
Spiegel said a transition of Snap’s ad business to an auction model helped boost revenue.
“We executed well on our 2017 plan to improve quality, performance, and automation, which removed friction from our advertising business and improved our application for the Snapchat community,” he said.
The company expects its year-over-year revenue growth rate to moderate in the current quarter compared with the fourth quarter, Chief Financial Officer Drew Vollero said.
It will also move many of its headquarters employees to leased facilities in Santa Monica, California, during the first half of the year, Vollero said.
(Reporting by David Ingram in San Francisco and Pushkala Aripaka in Bengaluru; Editing by Meredith Mazzilli and Anil D’Silva)