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Snapchat Thought People Would Want to Wear Its Sunglasses. It Was Wrong

November 7, 2017, 11:29 PM UTC

If you’ve seen more ads for Snap spectacles than people wearing a pair on the street, you’re not alone.

Snap, the parent company of disappearing photo app Snapchat, revealed that it had overestimated demand for its $130 sunglasses-and-camera hybrid Tuesday. During the company’s third quarter earnings report, the company revealed $39.9 million in losses stemming from unsold Spectacles.

“Because we were so excited, we made I guess the wrong decision,” CEO Evan Spiegel said during the company’s Tuesday earnings call, saying that Snap overestimated demand for the glasses, and overbought parts from suppliers to make those glasses.

Drew Vollero, chief financial officer of the company, noted in prepared remarks that the near $40 million charge factors in both the cost of canceling orders from Spectacles’ suppliers, and the cost of storing the unsold Spectacles—including warehouse rent for example.

“Moving forward, we will continue to be in the market place with Spectacles and expect modest revenue from the product line,” said Vollero in prepared statements.

That came as Snap’s stock shed almost 20% in after hours trading Tuesday. Snap disappointed investors after revealing worse-than-expected earnings in the third quarter of 2017. The company’s overall loss was $443.2 million or 36 cents a share on revenue of $207.9 million per share. Wall Street had anticipated loss of $393.8 million or 32 cents a share on revenue of $235.5 million.

Notably, the Spectacles accounted for about 9% of Snap’s losses in the quarter.

Though the company has dubbed the losses related to the Spectacles as a non-recurring expense, the company could still post a loss in the future in relation to the product if it again misjudges demand.

The company will continue to sell Spectacles. But its potential consumer base is not growing as fast as expected, with Daily Active User base of 178 million in the third quarter versus 181.8 million expected.

The loss stemming from Spectacles is also a reversal for CEO Evan Spiegel. In an October interview at the Vanity Fair new Establishment Summit, Spiegel said that he believed hardware would be the future.

“Our view is that hardware is going to be an important vehicle for delivering our customer experience maybe in a decade,” he said at the time, saying roughly 150,000 Spectacles had been sold — above the firm’s estimates. “But if we believe it’s going to be important in a decade, we don’t want to be starting a decade from now.”

Today, Spiegel gave analyst a more sobering outlook.

“We plan on avoiding a similar mistake in the future,” Spiegel said.