18.02.2025

After Spectacles, Snap still spending millions on research and development

Though the company reported $255.7 million in research and development costs in the June quarter, digging deep into the financial statements reveals that $164 million of that costs was related to stock-based compensation. From the year earlier quarter Snap has nearly tripled its R&D spend, logging $91.7 million, up from $36.1 million.

When Snap Inc. debuted on the public markets, it was championing its Spectacles as a hardware product that could diversify its revenue beyond just Snapchat advertising, but those face cameras are apparently not a huge seller anymore. If Snap is developing new hardware or products to deliver on its promise of being “a camera company”, it hasn’t said anything about them, but research and development spending could provide a clue.

It’s something of an accounting puzzle to determine how much cash the company is actually spending on its research and development costs, though. The reason the company’s R&D costs require a bit of math to drudge up: those pesky stock options, which is also why the company took a $2.2 billion loss in the first quarter of the year. Stock options granted to engineers and others working in the company’s secretive hardware lab were worth millions-potentially billions-while Snap was a private company, options which employees have begun to exercise since the company’s initial public offering in March.

Spending growth decelerated significantly between the first and second quarters, though, rising just $3.9 million, compared with the previous period’s $22.8 million increase in R&D spending. That $22.8 million increase coincided with the company’s launch of its first hardware product, Spectacles. Snap Chief Executive Evan Spiegel said publicly that the hardware has sold more than 150,000 units, which he said is more than the company expected.

For the third quarter, analysts model R&D spending to accelerate again, increasing to $102.9 million, according to analysts polled by FactSet. Likely a significant chunk of that outlay is for the company’s rumored new version of Spectacles, but executives have not made any announcements on exactly when the product will ship, or even its existence.

It was not immediately clear whether developing the company’s $80 dancing hot dog costume, launched on Oct. 18, would be included in third-quarter R&D spending or the marketing and sales item in the company’s financial statements. Snap did not return an email request for comment.

The company also conducted a round of layoffs in its hardware unit-of which some of the spending would likely be in the R&D line item-sometime in the September quarter, according to media reports, which could impact the results the company reports on Nov. 7 after the close.

Here’s what to expect

Earnings: Analysts model Snap’s adjusted third-quarter losses at 32 cents a share, widening from 8 cents a share in the year-earlier period, according to FactSet. Losses have narrowed after the company’s massive $2.21-a-share write-down in the first quarter, largely due to employees vesting stock options, which continued in the second quarter but to a lesser extent. Estimize, a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, hedge-fund managers, company executives, academics and others, estimates adjusted losses of 14 cents a share.

Revenue: Wall Street estimates third-quarter sales of $237 million, up from $123 million in the year earlier period. The Estimize consensus also calls for sales of $237 million.

Stock movement: Snap SNAP, +4.95%  stock is down 30.8% in the last six months, trading at nearly half its intraday high of $29.44 set March 31 and below its IPO price of $17 a share. The S&P 500 SPX, +0.31%  has gained 15.2% this year. Investors value the company at about $18 billion, according to FactSet.

What else to watch for: Snap has been busily acquiring companies to augment its ad sales technology, such as the acquisitions of Placed and Zenley, companies that collect location-based data about consumers. More recently, Snap acquired a company called Metamarkets for $100 million, a privately held tech startup that offers programmatic ad-related services, according to a tech trade press report. If the acquisition occurred in the third quarter, executives will likely discuss it and any other acquisitions on the call with analysts.

Snap executives will also likely discuss Spectacles on the call, the company’s only hardware product. Despite Spiegel’s pronouncement that it has sold more of the gadgets than it expected, there are several media reports of a massive amount of unsold inventory-suggesting Snap may have to address that. Sales of Spectacles, which is included in “other” revenue, also appear to be slowing.

Monness, Crespi, Hardt & Co. analyst James Cakmak wrote in a note to clients that Snap offers a “much needed” alternative for advertising clients from the likes of Alphabet Inc. GOOGL, +0.67% GOOG, +0.67%  and Facebook Inc. FB, +0.00%  That fact leads him to avoid putting much emphasis on Snap’s user growth, a problem that has plagued the company on Wall Street similarly to Twitter Inc. TWTR, +0.96%

“What’s best for these niche platforms, in our opinion, is to fully embrace they are niche platforms and to give up on the monthly active user story”, Cakmak wrote. “It’s better to maximize and extract the most value from the most engaged users rather than to try to be everything to everyone.”

Moness has a hold rating on the stock with a price target of $15.44.

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