As Snapchat use soars during pandemic, infrastructure costs also climb

Snap has made progress improving the efficiency of its infrastructure, but the impact of higher engagement on infrastructure costs is expected to drive up overall expenses in the current quarter.

With people stuck at home during the COVID-19 pandemic, Snapchat saw daily usage soar in the first quarter, the company Snap reported on Tuesday. With that, its infrastructure costs climbed as well, even as the company slowly continues to bring down the cost of infrastructure per user. 

"We've done a lot of work to make our infrastructure extremely efficient," Snap CFO Derek Andersen said on a conference call Tuesday. "We've been able to hold the line on our cost per DAU." 

The company is not giving a Q2 outlook given the current economic uncertainty, but Andersen said Snap does expect expenses to grow year-over-year in Q2 at rates similar to those it saw in Q1. Like Q1, it expects those costs to be driven in part by the impact of higher engagement on infrastructure costs. 

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 In Q1, Snapchat had an average of 229 million Daily Active Users (DAUs) -- that's up 5 percent quarter-over-quarter and 20 percent year-over-year. On top of that, average time spent on Snapchat was up over 20 percent in the last week of March compared to the last week of January, with some larger markets like France and the UK seeing more than a 30 percent increase. 

"Our community has been incredibly engaged on Snapchat during this period across all of these areas," CEO Evan Spiegel said on the conference call.

Along with higher engagement, Snap reported solid revenue growth for the quarter. Sales increased 44 percent to $462 million. 

At the same time, it reported a net loss of $306 million. (This quarter's non-GAAP net loss was $114 million). A year prior, Snap reported a net loss of $310 million, while in Q4 2019, Snap's net loss was $240.7 million. 

Infrastructure costs per DAU came to 71 cents in Q1, down from 72 cents a year ago. On a non-GAAP basis, the total cost of infrastructure for the quarter came to $163 million, up from $136 million the year prior. 

"We continue to make progress against our goal of driving down our underlying unit costs over time, including the cost to deliver a Snap, the cost to deliver an impression, and other key drivers of infrastructure cost," Andersen said. 

While these gains are incremental, Andersen cited Snap's cloud-based infrastructure -- which allows it to scale seamlessly -- as a reason for optimism in the company's long-term prospects. 

Snap's cost projections for Q2 assume that daily active users will reach approximately 239 million, implying year-over-year growth of about 18 percent. 

While Snap expects to see its expenses grow in Q2, its executives also expressed optimism for its continued revenue growth. Spiegel said Snap's user base is especially appealing to advertisers because "our audience uniquely positioned to help businesses recover" from the current crisis. 

"In the medium term, we are helping our partners plan for the road to recovery, which we believe will be led in part by the younger generation," he said. "As people are sheltering in their homes, they are increasingly turning to digital behaviors across every aspect of their lives, including communication, commerce, entertainment, fitness, and learning. We believe that this will accelerate the digital transformation across many businesses, and that the heightened levels of activity we are seeing today will lead to a sustained uplift in the digital economy over time. The Snapchat Generation is digitally native and adopts new technologies quickly, which will help them continue to drive this transformation."