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Snap's sales signal it may not be snapping back anytime soon

The social network posted big disappointments in sales and losses in its first quarter earnings. A poorly thought out redesign may be to blame.

Snapchat Parent Snap Begins Trading On New York Stock Exchange

Investors had a rosier outlook when Snap went public last year. Its shares plummeted Tuesday minutes after posting results that missed Wall Street's expectations.

Drew Angerer / Getty Images

Maybe it was the February redesign of Snap's social messaging network that put off users, advertisers and publishers. Whatever the reason, Snap on Tuesday posted revenue well below analysts' expectations while reporting a wider loss than Wall Street expected. 

The social media company, which also brands itself as a camera company, said it took in $230.6 million in sales during the first three months of 2018, well below analysts' estimate of $244.5 million. It also posted a net loss of $385.8 million. Analysts had anticipated a loss of $204.7 million. 

Those earnings represent big misses, even as the growth in daily active users slowed to 2 percent from the previous quarter. It was the company's slowest rate of user growth. Ever. 

"Snap delivered a massive miss across the board which will further ignite fears that this company has major challenges ahead with its app redesign and business model in limbo," Daniel Ives, an analyst with GBH Insights, told investors in a note immediately after Snap posted results. "The confluence of the app redesign and backlash from core power users was a gut punch to Snap during the quarter, with signs more speed bumps could be on the horizon."

That earnings report from February was the only time Snap's results were positive, with the company's CEO Evan Spiegel claiming the company "really came together" and finally found its footing.

With Tuesday's announcements, Snap appears to have lost that footing.

Snapchat has felt the sting of multiple mistakes during the last quarter, including a redesign that had major social media influencers like Kylie Jenner disappointed with the app. Things got even worse for the company after a controversial ad on Snapchat made light of domestic abuse and involved the pop star Rihanna.

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Spiegel acknowledged the redesign's effects on Snapchat's growth, but said it was better for its long-term goals.

"As we have mentioned on our past two earnings calls, a change this big to existing behavior comes with some disruption, especially given the high frequency of daily engagement of our community," Spiegel said on a conference call. 

The redesign hit Android users the worst, he said. The CEO said the changes contributed to a "disproportionately negative impact" for Android users. Snap said it was continuing to improve the Android version of its app with more redesigns, as well as promising future changes for the iOS version of Snapchat. 

"One of the great things about our software products is that we can modify and update them any time," Spiegel said. 

Analysts from Wedbush felt the redesign leading to the company's weak results, noting that the company had a lot of work to do, especially for its Android version. 

Snapchat's redesign didn't just hurt the company's user growth, it also hurt the company's wallets, Imran Khan, the company's chief strategy officer, said.

"The rapid pace at which we changed the core product introduced increased volatility into our ads marketplace," Khan told investors. 

He said the company had many challenging conversations with advertisers regarding the redesign, but chose to overlook the issues, calling them short-term flaws.

The earnings report comes just days after Snap announced an update to its Spectacles -- sunglasses that double as cameras to shoot videos and pictures for Snapchat. The new Spectacles are a follow-up to the original device, which were considered a major flop as less than 42,000 people actually bought the devices months after its release. 

Investors were definitely unhappy with the results. Shares plunged as much as 16 percent in after hours trading. By Wednesday morning, its shares had plummeted by nearly 20 percent.

First published May 1, 2 p.m. PT.
Update, 2:05 p.m. PT: Adds earnings details and analyst's comment. 
Update, 2:09 p.m. PT: To include remarks fro Snap CEO Evan Spiegel. 
Update, May 2 at 7:30 a.m. PT: Adds that Snap's stock dropped even further.
Update, May 2 at 11:34 a.m. PT: Adds details about Snap's future redesigns for its Android app.