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5 things we learned from Snap's first earnings report

Snap CEO Evan Spiegel isn't afraid of Facebook. He really believes in the power of puppy face filters.

Now playing: Watch this: 3 things we learned about Snapchat

The hype train for Snap is experiencing some signal problems.

On Wednesday, Snap's first earnings report was a halting look at the company's strategy when it comes to competing against Facebook, Instagram and Twitter. CEO Evan Spiegel discussed his strategy for taking on Instagram's imitations, its struggles with Android, and just how the hell the company managed to lose $2.2 billion in its first quarter as a public company.

Here are the five big takeaways from Snap's first earnings report:

Spectacular flop

When Snap first announced its camera-glasses, the hype surrounding the shades stretched across the country. With its guerrilla marketing strategy, Snap would randomly drop vending machines that dispensed the new Spectacles, causing large crowds and a fervent hunt for the glasses.

If you own a pair of Spectacles, congratulations. Snap just revealed how rare you are.

Jaap Arriens, NurPhoto via Getty Images

The prices on eBay soared to nearly $1,000, despite only costing $130 at retail, while lines snaked around city blocks with people rushing to buy Spectacles. On Wednesday, Snap showed why that strategy probably didn't pay off.

The company sold about $12.5 million worth of Spectacles since it debuted two quarters ago. At $130 a pop, that means that about 96,000 Spectacles -- out of Snapchat's 166 million users -- were actually sold. If you own a pair of Spectacles, congratulations, you are one of the 0.05 percent of Snapchat's users that do.

While Snap rebranded itself as a camera company, the Spectacles were not mentioned at all in its first quarterly report. Snapchat boasts that there are 3 billion Snaps created daily -- but in total, there have only been 5 million Snaps posted from Spectacles, less than 0.1 percent.

"It's a modest program for us right now," Andrew Vollero, Snap's chief financial officer said.

Create, don't imitate

Snap is very aware of the elephant in the room -- Facebook's copycat strategy.

While Snapchat jumped to 166 million daily active users in the first quarter, Instagram Stories surged to 200 million users in less than half the time. Facebook's "Stories" might be a knock-off, but it's hitting Snapchat where it counts, with people preferring to use Instagram's Stories.

When an investor asked Spiegel if he was afraid of Facebook, the CEO laughed it off, and then said he was focused on creating more tools for Snapchat, not more users.

"You gotta get comfortable with the fact that people are going to copy you if you make great stuff," Spiegel said. "At the end of the day, just because Yahoo has a search box, it doesn't mean they're Google."

He told investors that the focus of Snap's strategy was "creativity to our business," putting its effort in tools like lenses, filters and drawings on the videos and pictures. Spiegel said he'd prefer for the app's fan base to grow organically, through people wanting to use Snapchat's features -- that Instagram may or may not eventually steal.

"It's about removing friction from the creative processes," Spiegel said about Snapchat's lenses. "It really lowers the barrier to creation, because people really enjoy looking like a puppy."

While Spiegel may have preferred to focus on creativity, analysts weren't buying it; they repeatedly hammered him on user growth.

Twitter vs. Snapchat

There's a reason why. While Snapchat has always had a healthy rivalry with Instagram, its growth rate puts it more in the ballpark of Twitter.

Twitter had a similar beginning to Snapchat's: a fiery startup that had a booming IPO with bright potential, but it eventually fizzled out as it struggled to grow its user base. It's still too early to tell which way this will end up for Snap, since it's the company's first quarterly report.

But comparing the last three months between Twitter and Snapchat, the 140-character based social network has something to chirp about. Twitter gained more than 9 million more monthly active users since the end of 2016, which beats out the 8 million daily active users that Snapchat gained in the first quarter.

Spiegel said he wanted to avoid "growth hacking," accusing his rivals of spamming users with push notifications and prompts to request their friends to join.

"While that's the easy way to grow users, we don't think that's very sustainable in the long term," the CEO said.

Yet if you broaden the scope, Snapchat is still far ahead of Twitter. Year-over-year, Twitter gained 18 million users, while Snapchat added 44 million new users.

Android antidote

With 9 out of 10 smartphones running on Android, you would think Snap would have a better app for non-iOS users. In its SEC filing, Snap noted that the majority of its users are on iPhones, so it prioritized their development for iOS instead of Android.

The company is realizing its mistake now. Snap focused a lot of development toward improving the experience on Android, where the camera and audio quality suffers, as well as the app's speed. It paid off, with Android users nearly doubling for Snapchat in the last quarter, jumping from 20 percent of its new users to 30 percent.

But Snap is still struggling to win over Android users, a massive market that is cutting into its growth.

"We had a really tough time with Android. That's still showing up in the numbers," Spiegel said. "We're making progress, but it's taking time."

He said that Snap would be making significant structural changes to the app that would drastically improve the experience on Android.

How does it keep losing money?

Any company that loses $2.2 billion in its earnings debut can't be having a good day.

That massive number is largely from its stock-based payouts, but Snap was also hit heavily from its expenses. It costs Snap about 60 cents per user to host its videos and images, adding up to a total $99 million spent in the first quarter on cloud services.

Snap also spent $196 million on operating expenses, the majority of which goes to improving its app and hardware. The company spent $78 million on research and development, more than its entire operating expense last year.

In its IPO filing, Snap revealed that it hadn't been profitable since beginning commercial operations in 2011, with an accumulated deficit of $1.2 billion. Snap makes most of its money from advertising, but also told investors that it "may never never achieve or maintain profitability."

Spiegel noted that Snap's focus during the first quarter was improving the app's performance, quality and automation.

"90 percent of our new hires were in engineering and sales," Vollero said.

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First published May 11, 5 a.m. PT.
Update, 10:05 a.m. PT: Adds more details about Snap's earnings.
Correction, 8:53 a.m. PT: Clarifies a mix-up between Snapchat and Instagram Stories.