Snapchat filing shows biz tied to messages that fade

Snapchat may have been built on disappearing messages. But as the social media darling hovers on the cusp of becoming a public company, its parent is trying to show how durable its business is.

In its first public prospectus, Snap disclosed that it had built a nearly $405 million advertising business in just over two years. While the filing does not indicate a price for an initial public offering, Snap is expected to seek a market valuation of more than $20 billion from investors.

Snap is one of technology’s biggest success stories of late, and it is heading to the public markets amid a relative dearth of noteworthy offerings. Still, company executives are expected to face questions about whether Snap can maintain its enormous growth rate, particularly as Facebook’s Instagram unit copies many of Snapchat’s major features.

Potential investors may question the slowing growth rate of daily users, though Snap is likely to argue that it will continue to add new products that will accelerate growth. Others in Snap’s class of popular tech startups — like Uber, Airbnb and Dropbox — are not expected to begin selling stock on public markets for months or even years, as they are tied up with legal issues or are overhauling their businesses.

The filing formally pulls back the curtain on Snap’s meteoric growth. From 2011 to 2012, the number of people using the Snapchat app every day grew to 1 million from 1,000. By the end of last year, an average of 158 million people were using the app daily.

The average user opens the app more than 18 times a day, according to the prospectus, and the service’s users send more than 2.5 billion messages and images each day. Snap demonstrated in the prospectus that its business model is viable. Its annual revenue grew by about seven times in just a year, to $404.5 million last year, from $58.7 million in 2015.

Martin Sorrell, chief executive of advertising conglomerate WPP, recently estimated that his company spent $90 million on Snapchat last year. He called Snap a “rogue elephant,” even as WPP deployed $5 billion to Google and $1.7 billion to Facebook in 2016.

“I would say Snapchat is the one thing that people look at and say, ‘Maybe that’s a third force that can counter the domination,'” Sorrell said last month, speaking at a conference held by Citigroup.Still, Snap lost $514 million last year, compared with nearly $373 million in 2015.

One difference between Snap and its rivals Facebook and Twitter makes it hard to compare their financials side by side: Those older social networks own their own server farms, so the expense of operating them does not show up as a line item in the companies’ financial statements. By contrast, Snap rents storage and server space from Google. Started in 2011 in a Stanford dorm room, Snap has grown from a curio for millennials into a broad social phenomenon.

The startup, founded by Evan Spiegel and Bobby Murphy, was originally built for users to send self-destructing photographs and messages to their friends. But Snap’s ambitions have risen over time. It introduced ways for users to compile “stories” about their days and innovative filters that can transform faces to look like dogs or monsters — or, crucially, branded content like Taco Bell tacos.

“When we were just getting started, many people didn’t understand what Snapchat was and said it was just for sexting, even when we knew it was being used for so much more,” the company said, employing what is surely one of the few uses of the word “sexting” in a regulatory filing.While generally seen as a social media company like Facebook and Twitter, Snap declared in its prospectus that it “is a camera company.” And indeed last year, Snap introduced a line of camera-equipped sunglasses, Spectacles, which help funnel even more user content onto the platform. Snap also created Discover, allowing media companies to post content onto their own channels on the service.