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Snap confirms massive job cuts, reveals unexpected sales growth; social media stocks earn

Shares of Snap Inc. jumped as much as 15% on Wednesday after the social media company confirmed a sharp cut in jobs as part of a ‘broader strategic redefinition’ to cut costs and create cash flow positive available, and revealed better than expected revenue growth.

Snap SNAP,
-3.61%,
which began notifying affected employees on Wednesday, said in a regulatory filing that the organizational overhaul will result in pretax charges of between $110 million and $175 million for severance and related costs, termination costs contract and other impairment charges primarily in the third quarter.

“We are restructuring our business to focus more on our three strategic priorities: community growth, revenue growth and augmented reality,” chief executive Evan Spiegel said in the filing Wednesday. “Projects that do not directly contribute to these areas will be discontinued or receive significantly reduced investments.”

On the chopping block are mobile music app Voisey, which Snap bought in 2020, and Zenly, a social mapping app it acquired in 2017. Additionally, Snap is halting investments in shows, games and other areas. .

The drastic job cuts and restructuring come after Snap released a disappointing quarterly earnings report in late July. Like its social media brethren Twitter Inc. TWTR,
+0.03%,
The parent company of Facebook Meta Platforms Inc. META,
-3.05%
and PIN Pinterest Inc.,
-2.95%,
Snap has been hammered by a drop in digital advertising during the economic downturn. Shares of other social media companies also jumped on Wednesday morning, then fell slightly, as optimism for better-than-expected third-quarter growth spread through the sector – Pinterest stock rose 8 .8% and Meta stock rose 6.8. %.

Opinion: As Snap melts, its founders are making sure to protect the people who matter – themselves

“We view the Snap update as a modest near-term positive for the online advertising platforms under our coverage, including Meta and Pinterest,” Baird analyst Colin Sebastian wrote.

Snap revealed in an investor presentation that sales were growing even slower in the current quarter than they had in the disappointing prior quarter, when revenue was up 13% year over year. . Revenue is up about 8% so far in the third quarter, executives said, which would actually beat expectations — analysts on average expected flat year-over-year growth, according to FactSet — and Wall Street analysts jumped on this nugget on Wednesday morning.

“Clearly the headline is tracking third quarter growth prior to previous disclosure, alongside preserving cash, obviously helps as well,” RBC analyst Brad Erickson wrote, while adding that the he inability of Snap’s executives to properly predict earnings is an ongoing problem that could suggest weakness against its rivals.

“We continue to struggle with the speed and magnitude of results that differ from the company’s disclosed intra-qtr performance – while this update is positive, for us it once again reinforces the lack of visibility of business, which we believe is a function of being a lower priority/more discretionary advertising channel.”

More important to Wall Street is the opportunity for the perpetually unprofitable social media company to generate cash. With the cuts, some analysts believe Snap could break even next year, with some caveats.

“We expect FCF equilibrium by mid-2023, albeit dependent on near double-digit revenue growth ’22E/’23E, from large FIs currently,” the analyst wrote. ‘Oppenheimer Mark Zgutowicz after The Verge first reported the scale of the layoffs, while lowering his price target to $12 from $15 but retaining a ‘Buy’ rating. “That said, given the strength of Snap’s [intellectual property] and nearly locked in to Gen Z audiences (Tik Tok aside), we suspect the public/private interest isn’t far from the actions.

From July: Why Snap’s Pain May Not Be Over Yet

Spiegel’s restructuring plan is highlighted by the creation of a chief operating officer to “more closely align” the engineering, advertising product and sales functions. Spiegel recommended Snap’s board appoint Jerry Hunter, senior vice president of engineering since late 2017, as chief operating officer.

Hunter’s promotion coincides with the departures of Jeremi Gorman, Snap’s chief commercial officer, and Peter Naylor, Snap’s vice president of advertising sales for the Americas, to Netflix Inc. NFLX,
-1.71%,
which is launching an ad-supported platform for its video streaming business. Gorman’s last day at Snap is September 16, according to the filing.

Read more: Two of Snap’s top advertising executives move to Netflix ahead of ad-supported tier launch

Insider Intelligence analyst Jasmine Enberg, who follows Snap closely, believes that by “going back to basics and focusing on its core product, Snap has a good chance of getting through this, even if it will take time. “.

Snap shares were up 15.8% in Wednesday’s morning session, though gains fell to less than 8% by noon Eastern time. The stock has plunged 77% so far this year, compared to losses of around 16% for the S&P 500 SPX index,
-1.07%.

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