Snap earnings 'miss' shows misreading of analyst 'expectations'

By David Ingram

SAN FRANCISCO (Reuters) - A widespread view on Wall Street this week was that Snap Inc fell short of revenue forecasts when it posted its first quarterly results as a public company, triggering a big selloff in its shares.

In fact there were two distinct camps of forecasters, which suggests the earnings "miss" was a matter of interpretation, and other factors were behind the stock decline.

A Reuters review of 19 predictions heading into Snap's earnings report on Wednesday shows that analysts affiliated with the underwriters of Snap's initial public offering in March had far lower revenue expectations than investment firms not involved in the IPO.

Nine investment firms that were not underwriters predicted on average that Snap's revenue would grow slightly from the prior quarter to $168.4 million, even though the company in its IPO prospectus had estimated a decline due to the seasonal nature of its advertising business.

Analysts affiliated with 10 underwriters forecast on average that revenue would hit $138.4 million, $30 million below the estimate of the non-underwriting firms.

Thomson Reuters I/B/E/S, which like Reuters is a unit of Thomson Reuters Corp, published an analyst average of $158 million.

Just after 1 p.m. Pacific Time (2200 GMT), Snap reported $149.6 million in revenue, well below the average forecast but comfortably beating the estimates of the bullish analysts affiliated with the underwriters.

In principle, all analysts work from the same numbers. But analysts affiliated with Snap's underwriters, for example, may have followed the company for a longer period of time.

At investment firms, stock analysts are walled off from the investment banking business, and there is no evidence they shared information on Snap.

Analysts with "buy" ratings on a stock have an incentive to set quarterly estimates that the company is likely to beat, because upbeat results tend to boost stock prices. But a bearish analyst could be driven to put forward a high estimate that the company is likely to miss.

With the first-quarter reporting season nearly complete, 75 percent of S&P 500 companies' earnings per share beat analysts' expectations, while only 18 percent of companies missed, according to Thomson Reuters I/B/E/S.

"The volatility in the stock was the function of an incredibly difficult setup where the most bullish financial expectations corresponded with the most bearish sentiment," said James Cakmak, an analyst at Monness, Crespi, Hardt & Co. His firm, not an underwriter, expected revenue at $169.9 million.

Going into Snap's earnings announcement after the market close on Wednesday, anticipation was high about what kind of user growth the company's Snapchat messaging app would show and how much ad revenue it was bringing in.

Ahead of time, the Venice, California-based firm said in securities filings that it expected a seasonal decline from its $165.7 million in revenue during the final quarter 2016.

Not everyone believed Snap's warning, though.

"Some people may have taken these words more literally, and some less so," said Shebly Seyrafi, managing director at FBN Securities.

FBN was on the high end of the estimates, at $195.6 million, because "it is not uncommon for high-growth companies to grow through Q1," Seyrafi said in an interview on Thursday.

In Snap's case, it did not, and the stock plunged as much as 24 percent after hours on Wednesday to $17.58. On Friday, it rose 6 percent to $19.14.

But the share reaction cannot really be explained by missed forecasts, because a close reading shows that any shortfall was marginal at best.

Snap seemed to have missed a different kind of expectation, or maybe hope, that it would blow past forecasts. When that did not happen, the stock sank.

(Reporting by David Ingram; Additional reporting by Noel Randewich; Editing by Jonathan Weber and Richard Chang)