Snapchat parent’s IPO paperwork, annotated

It’s official: Snap Inc., the parent company of Snapchat, has filed paperwork for an initial public offering, which means the public is getting a look inside the notoriously secretive company’s business for the first time. Seeking a $25 billion valuation and trading on the New York Stock Exchange, all eyes will be on Snap to prove that it’s worth the hype. 

Here’s what it’s telling potential investors in its S-1 filing, and what it really means:

Don’t call Snap a social network. It wants to be the way you use your phone
What they said: “Snap Inc. is a camera company…In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones.”

Translation: When Snapchat released Spectacles, camera-equipped smart sunglasses, the company also changed its name to Snap Inc., and it has been eagerly positioning itself as a camera company ever since. However, it has clear designs on becoming the portal, or lens, through which people view mobile phone activity. This past August, it acquired a mobile search startup called Vurb for a cool $110 million, which would likely allow its users to do things like search for businesses, order food, and search for things, all without leaving Snapchat.

It makes sense for a company with high IPO ambitions to have more than one product — Facebook is more than just a news feed, after all. But almost all of Snap’s business is still inside Snapchat, which means this is more of a dream than a reality.

User growth on Snapchat is slowing down
What they said: “Our flagship product, Snapchat, is a camera application that was created to help people communicate through short videos and images. We call each of those short videos or images a Snap. On average, 158 million people use Snapchat daily, and over 2.5 billion Snaps are created every day.”

Translation: User growth is slowing down. Last June, Snapchat passed Twitter by hitting 150 million daily active users. Seven months later, the number has only grown by 5 percent. This will become a big problem for Snap, which will need to show Wall Street that it can grow users at a healthy rate. Otherwise, the company will be the Next Twitter, not the Next Facebook. (For what it’s worth, Instagram has 400 million daily active users.)

Snapchat users are heavily engaged
What they said: “We benefit from the frequency with which our user base communicates with one another because each message invites a user back to the application when they receive a push notification. On average, our Daily Active Users visit Snapchat more than 18 times each day…Our community spends an average of 25 to 30 minutes on Snapchat every day.”

Translation: Please don’t look at the stagnating user growth; there’s a far rosier picture if you focus instead on the engagement stats. In the run-up to the filing, Snap had been boasting about its engagement stats to bankers. But let’s face it, in digital media, you only talk about engagement when you can’t show reach.

Snapchat’s international growth will be limited by external factors
What they said: “Due to the nature of our products and business, our ability to succeed in any given country is largely dependent on its mobile infrastructure and its advertising market. These factors influence our product performance, our hosting costs, and our monetization opportunity in each market. Our products often require intensive processing and generate high bandwidth consumption by our users. As a result, our users tend to come from developed countries with high-end mobile devices and high-speed cellular internet. These markets also tend to have cheaper bandwidth costs, meaning that it is less expensive to serve our community in these countries.”

Translation: Snapchat is not for poor people.

Snapchat is in no hurry to become profitable
Last year, Snapchat generated over $404 million in revenue, more than six times what it generated the year prior. But it also more than doubled its R&D expenses to $183 million, and its cost of revenue also more than doubled, to $451 million. As a result, even though profits grew, its losses widened considerably (a substantial investment in marketing contributed as well), and it appears set to spend considerable sums to continue innovating. “We use the revenue we generate to fund future product innovation to grow our business,” the S1 reads.

Translation: Snapchat isn’t going to be profitable for a long time. Unlike Facebook, which had billion-dollar profits to show investors when it went public, Snap appears to be telling investors they will have to be patient.

It’s Evan Spiegel and Bobby Murphy’s show
What they said: “Mr. Spiegel and Mr. Murphy, and potentially either one of them alone, have the ability to control the outcome of all matters submitted to our stockholders for approval, including the election, removal, and replacement of directors and any merger, consolidation, or sale of all or substantially all of our assets. If Mr. Spiegel’s or Mr. Murphy’s employment with us is terminated, they will continue to have the ability to exercise the same significant voting power and potentially control the outcome of all matters submitted to our stockholders for approval.”

Translation: Snap’s IPO will be the first time a U.S.-based company has gone public by only offering non-voting stock on a U.S. stock exchange. Snap acknowledges the risks in this approach as CEO Evan Spiegel and CTO Bobby Murphy will be able to make decisions without needing the approval or support of stockholders. But why expect any different from a company that has an almost extreme culture of secrecy, where even employees are barred from communicating with employees in other departments?

Snapchat plans to offer advertisers better metrics
What they said: “In the past we have relied on third-party analytics providers to calculate our metrics, but today we rely primarily on our analytics platform that we developed and operate. Errors or inaccuracies in our metrics or data could result in incorrect business decisions and inefficiencies.”

Translation: Snapchat is aware that lack of metrics is a major reason why many brands are still hesitant to advertise on the platform. It seems that Snapchat wants to beef up its analytics capabilities by itself rather than depend on third-party companies.

Yuyu Chen and Max Willens contributed to this report.

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