Bloomberg tech newsletter on Snap IPO

Hi all, it’s Eric. The Snap IPO prospectus is finally public! The company’s secrets are revealed. Go ahead, gorge yourself. Here’s the important stuff:

The losses. Snap lost $515 million on $404 million in revenue in 2016. In the prior year, it lost $373 million on sales of $59 million. Of course, I’m going to mention that first. While the goal of companies is to throw off cash and return money to shareholders over time, that day looks very far away for Snap. But it’s not just the red ink that troubles me…
Cost of revenue. This is supposed to be low for a software company. Yet Snap reported $452 million for 2016. Cost of revenue is the expense that’s most likely to grow with a company as it grows. For Snap, that includes expenses from third-party infrastructure (cough, Google). Also “revenue share payments to our content partners, content creation costs” and “inventory costs for Spectacles.” The worry is that Snap attracts advertising by helping advertisers create ads that are more expensive to craft than they should be. That implies that more Snap makes, the higher its cost of revenue. Spread over 158 million monthly active users, that’s $2.86 per person. When Facebook went public its cost of revenue was about $1 per user, according to my friend Tom Dotan who thinks this is a measure we should be tracking.
Snap users grew 48 percent in the fourth quarter. They went to 158 million at the end of 2016 from 107 million a year earlier. Sequential growth has slowed, however. The number of users climbed 7 percent to Q3 from Q2, slowing to 3.3 percent in Q4.
Here’s the Facebook party line: Instagram is going to destroy Snapchat. This argument is best articulated by Facebook whisperer Josh Constine. The social network will continue to cannibalize Snapchat’s best features and better monetize users. Mark Zuckerberg has said he plans to update his founder statement from when Facebook went public five years ago. Evan Spiegel didn’t even have one in his prospectus.
Spiegel will retain absolute control, selling shares into the IPO with no votes, as I reported with Alex Barinka. Thomas Ivey, partner at Skadden, Arps, Slate, Meagher & Flom, told us: “My own sense is you’ll continue to see this trend happening until there is something really negative as a result of this—a company that goes public that is perceived to be run very poorly and normally you’d have made a CEO change but the CEO has installed himself as someone who can’t be fired.”
Something you might have missed: Spiegel has reportedly told people he might someday leave the company.
Benchmark and Lightspeed made out like bandits. Benchmark owns 12.7 percent and Lightspeed 8.3 percent. Imran Khan, Snap’s chief strategy officer, is a rich, rich man. He got $145 million worth of shares in 2015 for leaving Credit Suisse. Spiegel and Bobby Murphy each own the same chunk of Snap: 21.8 percent. Reggie Brown, the ‘ousted founder’ who sued, received a $157.5 million settlement.
Revenue growth was better than expected. From Sarah Frier’s piece on her top 5 takeaways: “Dazzling sales growth doesn’t come cheap. Snap’s 2016 revenue, driven by advertising, was $404.5 million, almost seven times its sales a year earlier.”
Don’t forget all the bro-y, terrible, off-color stuff Spiegel has done over the years. He’s modeled in Italian Vogue. He sent terrible emails to his Stanford fraternity. He told Businessweek that things were “off the f—— record.” Though his leaked emails in the Sony hack didn’t look that bad. He’s engaged to Miranda Kerr. She has an Instagram account.
This has got to be my favorite footnote: “Amount reported includes $890,339 for security for Mr. Spiegel.”
Here’s a link to the S-1.

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