This reduced spending harms the bottom lines of companies that rely on digital advertising for most of their revenues. Most of these companies are social media companies, typically free to join and generate virtually all of their revenue from advertising.
One such social media company is Snap (NYSE: SNAP), which has suffered more than most during 2022; the company’s stock is down over 75% YTD due to slowing revenue growth and rising costs. The company has spent the last few years embarking on several projects designed to boost user engagement, including original shows and a self-flying camera drone.
Unfortunately, the future profitability of these projects came into question once advertising revenue began to fall. Now, these projects and several others in development are being cancelled. The company will now focus on three priorities: community growth, revenue growth and augmented reality.
In addition to cancelling projects, Snap is also looking to reduce spending by laying off approximately 20% of its employee base; the company expects to save $500 million annually due to staff reductions.
Source: CNBC Television YouTube
Snap CEO Evan Spiegel commented on the restructuring: “Unfortunately, given our current lower rate of revenue growth, it has become clear that we must reduce our cost structure to avoid incurring significant ongoing losses…While we have built substantial capital reserves and have made extensive efforts to avoid reductions in the size of our team by reducing spend in other areas, we must now face the consequences of our lower revenue growth and adapt to the market environment.”
In addition to the layoffs and cancellation of developmental projects, Snap is also cancelling several currently operational products. Stand-alone apps Zenly and Voisey, acquired by Snap in 2017 and 2020, respectively, are being shut down, while the company is also discontinuing support for in-app applications from outside developers.
Such major restructuring should save the company a significant amount of costs each year while having minimal impact on revenue generation. Whether these moves are enough to right the ship or not won’t be known for some time. However, the stock is up 8% on the news of the restructuring, so the market believes Snap can make it work. Or at least that is what management is hoping for.
Shares of Snap are currently trading at $11.25 per share, up +3.4% on the day. YTD, SNAP stock is down -75.85%.
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Disclaimer: Wealthy VC does not hold a position in any of the stocks mentioned in this article.