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Snap CEO Evan Spiegel Makes A Case For Slow User Growth

August 11, 2017, 12:08 AM UTC

Snap CEO Evan Spiegel doesn’t want Snapchat to become more of a global hit, at least not yet.

The social messaging company’s CEO tried to reassure analysts who are worried about Snap’s failure to add as many users as Wall Street had hoped by using an unusual argument. In essence, he’d be happier if the service grew slower, not faster like what the CEOs of most hot companies want.

In its second quarter earnings on Thursday, Snap (SNAP) said that it had 173 million daily active users versus the 175.2 million that Wall Street had forecast. Partly because of the shortfall, Snap’s stock tumbled nearly 17% in after-hours trading to $11.44.

It didn’t help that quarterly losses quadrupled to a whopping $443.1 million in the latest quarter from $115.9 million during the same period a year earlier.

Investors look at Snap’s new user numbers as an important metric to gauge the company’s future growth. It’s also used to compare Snap to its rival, Facebook’s (FB) competing year-old Instagram Stories feature, which now has 250 million daily active users and appears to be stealing much of Snap’s thunder.

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Spiegal explained to analysts in a conference call that Snap pays more attention to how much revenue each individual user brings in rather than the mere total number of daily active users. In the current quarter, Snap collected $1.05 in revenue per user, up 109% year-over-year. But that was still slightly below analyst expectations of $1.07.

For every user Snap adds, it must pay more money to its cloud-computing providers that Snap’s service is built on top of. But because the company only takes in a small amount of money for every user, adding more creates bigger cloud bills—and ballooning losses.

A sudden influx of users is “just not appealing at this stage of the business,” Spiegel said. He didn’t say what cloud hosting providers he was referring to in terms of the big bills, but Snap has previously agreed to spend $1 billion over the next five years on Amazon Web Services (AMZN). This is on top of the $400 million it is spending to use Google’s (GOOG) competing cloud computing services over a five-year period.

Because of the revenue per user problem, Spiegel said he is taking a “wait and see” approach in terms of expanding much outside of the United States and Canada. It “doesn’t make sense now, but may make sense in the future,” he said. Snap brought in $148 million in North American sales in the second quarter, followed by $22 million in European sales, and $12 million for the rest of the world.

Spiegel is hopeful that the company’s nascent advertising business, on which Snap depends, will eventually become a big hit. Investing more in overseas markets will “become more appealing as the mobile [advertising] markets improve,” he said.

For many investors, that improvement couldn’t come too soon.