The boom months of the pandemic suddenly look like ancient history for Snap, the US software company behind the Snapchat photo-messaging app used almost exclusively by people born this millennium. With advertisers growing more parsimonious, it expects sales to rise just 8% for the current quarter – down from 57% in the same period last year. That is "well below what we were expecting earlier this year," said Evan Spiegel, Snap's co-founder and CEO, in a letter to staff.

The implications for the unprofitable Snap are so nasty that Spiegel – otherwise famous on social media for being married to former Victoria's Secret model Miranda Kerr – aims to snip headcount by a fifth, he told employees in his letter. Snap's workforce has reportedly grown from 5,661 employees at the end of last year to around 6,500 today, implying that about 1,300 people will be leaving the company.

Figure 1: Snap's year-on-year revenue growth rate (Source: Snap)

Investors appeared to welcome the move, with Snap's share price up 8.7% when the New York Stock Exchange closed yesterday. But that is not much consolation for backers. At its high point in August last year, Snap was valued at about $76 per share. Today, it is worth less than $11.

Spiegel hopes the "restructuring," as it is euphemistically called, will slash costs by around $500 million, compared with the bill for the recent second quarter. Layoffs will, however, cost between $110 million and $175 million initially. Snap expects to incur most of those expenses during the current quarter.

The outlook would seem relatively bleak for the company, which acknowledged in a presentation to investors that competition for ad dollars has intensified. Policy changes have also "upended" the industry's approach, added Snap. As it noted in its financial report for the second quarter, Apple has restricted Snap's access to user data in its latest operating system updates, and Google plans similar changes to Android.

"This has resulted in, and in the future is likely to continue to result in, reduced demand and pricing for our advertising products and could seriously harm our business," said Snap in a filing with the Securities and Exchange Commission.

Crackle and pop

Snap's user base has continued to grow, however, with the number of daily active users hitting about 347 million in the recent second quarter, a year-on-year rise of 54%. Engagement with the Snapchat service is up significantly in all parts of the world, too. That is in marked contrast with the trend at Facebook, the world's biggest social-media platform, which has lost daily active users in both North America and Europe since mid-2020.

The risk is that staff and budgetary cuts send Snap into reverse. The company is discontinuing investments in a range of activities, including Snap Originals, its video-content business, and Snap Minis, a feature that allows developers to design simplified apps from within Snapchat. Its gaming business is going into what Snap calls "maintenance mode," while Zenly and Voisey, two standalone apps it acquired, are being shuttered.

Snap has said it will also reduce investments in Spectacles, its project to develop augmented-reality glasses, and abandon work on Pixy, a flying camera. Henceforth, funds will instead be channeled into three main strategic areas: community growth, revenue growth and augmented reality (software as opposed to hardware).

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An examination of Snap's last set of quarterly financials shows why such hefty cuts are needed. Despite a 13% year-on-year increase in revenues, to more than $1.1 billion for the second quarter, Snap's net loss widened to about $422 million from less than $152 million a year earlier, while its operating loss was about $401 million. But if third-quarter revenues grow by 8%, and it manages to slash costs by as much as $500 million, it would be looking at an operating profit of about $141 million (ignoring one-off restructuring costs), according to Light Reading's calculations.

Still, the company seems to have massively scaled back its ambitions at a time when rivals are doing the opposite. Facebook, now calling itself Meta, spent $16.3 billion on research and development over the first six months of this year, $5.1 billion more than it did in the first half of 2021, as it attempts to leap from social media into the extended reality world of the metaverse. TikTok, seen by many analysts as Snap's main threat, is reportedly forecast to generate about $12 billion in revenues this year, up from $4 billion in 2021. With an annual R&D budget of less than $1.6 billion and shrinking, Snap may struggle to keep up.

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— Iain Morris, International Editor, Light Reading