Snapchat launches redesign as growth disappoints Wall Street

(Reuters) - Snap Inc (SNAP.N) is redesigning its disappearing-message app Snapchat in an attempt to reach a broader audience, going back to the drawing board after being clobbered by Wall Street for another quarter of slowing user growth.

The Venice, California-based firm, which had the hottest debut of any tech stock in years in March, reported revenue and user growth for the third quarter well below Wall Street expectations as it struggles to compete with Facebook Inc’s (FB.O) Instagram.

The disappointing financials and announcement of the redesign sent shares down as much as 20 percent in after-hours trading. They rebounded partially to $12.57, still well below the initial public offering price of $17 in March.

Snap’s user growth in the last three months was about half what investment analysts expected. Daily active users rose to 178 million in the third quarter from 173 million in the second quarter. Analysts had expected 181.8 million, according to research firm FactSet.

Chief Executive Evan Spiegel said the company was launching the redesign after hearing for years that Snapchat was difficult to understand or hard to use.

“We are going to make it easier to discover the vast quantity of content on our platform that goes undiscovered or unseen every day,” Spiegel, 27, said in written remarks prepared for a call with investment analysts.

He said that there was a “strong likelihood” the redesign would be disruptive in the short term, but that Snap was willing to take the risk for long-term gain.

Such a radical change so soon after an IPO is unusual. But Snap is not the only social media company looking to revive growth by changing its look. Microblogging service Twitter Inc (TWTR.N) said on Tuesday it would roll out 280-character tweets to users across the world, double the length of its iconic 140-character tweets.

Asked on the analyst call what the redesign would look like, Spiegel offered no details but said the company had been studying the evolution of mobile content feeds such as Twitter streams and the Facebook News Feed.

“There’s a really exciting opportunity here for another evolution,” he said.

REVENUE MISS

Revenue, the bulk of which comes from advertisements, rose to $207.9 million from $128.2 million. Analysts on average were expecting revenue of $236.9 million.

Snap’s average revenue per user rose to $1.17 in the latest quarter, from 84 cents a year earlier, but missed analysts’ average estimate of $1.30.

Snap Chief Strategy Officer Imran Khan said revenue was affected by a shift toward a software-based auction system for selling ads - a method employed by Facebook and Alphabet Inc’s (GOOGL.O) Google - which has driven down the average price.

The auction system hit revenue in the short term but “builds the foundation for long-term scalable revenue,” Khan said in written remarks.

The amount of ads in Snapchat compared to non-ad content, known as “ad load,” remains very low, Spiegel said.

Snap recorded a $39.9 million charge in the quarter related to inventory of its hardware product “Spectacles.” The company said it “misjudged strong early demand” and ended up buying more of the product than it could sell.

Snap’s Spectacles, at $129.99 a pair, are sunglasses with a video camera on one corner. They allow users to take 10-second videos with the press of a button on the frame, which are then saved to users’ Snapchat account.

INVESTORS SOUR

In its third earnings report since the company went public in March with a $3.4 billion valuation, Snap posted a net loss of $443.2 million, or 36 cents per share, compared with a loss of $124.2 million, or 15 cents per share, a year earlier.

Wall Street had expected a loss of 32 cents per share, on average, according to Thomson Reuters I/B/E/S.

Snapchat, popular among millennials for the bunny faces and floral tiaras that people can add to pictures, allows users to chat through a series of disappearing photos and videos. Users can also post images and videos as “stories” - ephemeral posts that can be viewed in chronological order and that disappear after 24 hours.

Investors’ view of Snap has soured since its IPO.

Before the quarterly release, Snap’s share price was already down 39 percent from its close on March 2, its first day of trading on the New York Stock Exchange. Facebook’s shares were up 32 percent over that time.

Facebook’s Instagram said in September that it had 500 million daily active users.

As of June, Instagram Stories - a replica of Snapchat’s synonymous feature - had 250 million daily users, up from 200 million in April, according to the company.