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HolidayBuyer's Guide
Tech Industry

Snapchat continues to sputter

The social network saw growth slow as it took a loss of $40 million to account for unsold Spectacles. CEO Evan Spiegel promises a big redesign ahead.

Snapchat's growth just slowed to a crawl.

Snap, the company behind the social network, saw daily active users climb by 5 million in the third quarter -- just 3 percent growth from the second quarter and 17 percent from a year ago -- bringing the total to 178 million.

That trails the 300 million daily users on rival Instagram stories. Instagram's parent, Facebook, boasted a year-over-year 16 percent growth rate, but off a base of more than 2 billion users.

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Snap takes a huge tumble posting a $443 million loss in the third quarter.

Getty Images

The numbers illustrate the fact that Snapchat still faces stiff competition from Facebook and Instagram. While Snapchat has been successful in attracting younger users, it remains a mystery to a broader audience. Its array of filters and the idea of disappearing messages presents an intimidating barrier for people trying it out. 

On the other hand, Facebook's Instagram Stories continues to grow at an impressive clip. 

"One thing that we have heard over the years is that Snapchat is difficult to understand or hard to use, and our team has been working on responding to this feedback," Snap CEO Evan Spiegel said Tuesday in a prepared statement, adding that the company is planning a redesign to make the application easier to use.

"We don't yet know how the behavior of our community will change when they begin to use our updated application," Spiegel said. "We're willing to take that risk for what we believe are substantial longterm benefits to our business." 

More bad news: Snap also took a $40 million charge to write down unsold Spectacles. Spiegel said the company made the "wrong decision" based on the early sales traction. "We're learning from it and plan to avoid a similar mistake in the future," he said during an earnings call with analysts.

The company reported a loss of $443.2 million, or 36 cents a share. Excluding one-time items, Snap lost 14 cents a share, narrower than the average analyst estimate of a loss of 15 cents a share, according to Yahoo Finance

A year ago, the company lost $124.2 million, or 15 cents a share.

Snap's revenue rose more than 60 percent, to $207.9 million, but still fell far below analysts' expectations of $239.5 million. Despite that, Spiegel said the company now reaches 70 percent of the key 13- to 34-year-old population in the US, UK, France and Australia.

"Our audience may not be the largest today, but we feel that it is the most strategic, and that's a really strong base to grow from," he said. "We're not afraid to make changes in the best interest of growing the user base."

Last month, research firm eMarketer anticipated Snap's global advertising revenue would hit $774.1 million this year, markedly down from its previous estimate of $900 million. However, eMarketer expects revenue to grow about 90 percent to $1.47 billion in 2018.

"Despite all of its improvements in ad products and measurement, Snapchat remains in the experimental bucket for many marketers," the firm said. "They give it high marks for its creative possibilities and its ability to attract a youth audience, but many have yet to make it a must-buy."

Meanwhile, Snap's stock remains well below its post-initial public offering peak price of $29.44 as shares have declined nearly 40 percent since going public. Shares fell more than 18 percent to $12.40 in after-hours trading.

First published Nov. 7, 1:38 p.m. PT
Update, 5:04 p.m.: Adds comments from Evan Spiegel.

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