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Summary

Snap released its quarterly earnings early November, and the Spectacles – the wearable sunglasses, released last year, that stream video to the Snapchat app – have been severely underperforming compared to the matured expectations set by the company. The company has only sold about 150,000 pairs of the $130 Spectacles, due largely to the artificial scarcity approach delaying immediate satisfaction of consumer demand.

Snap’s loss-heavy hardware play has a silver lining

There are hundreds of thousands of unsold pairs of Spectacles left over which have led to a non-recurring $39.9m charge consisting of excess inventory reserves ($19.5m), inventory purchase commitment cancellations ($17.9m), and asset impairments ($2.5m) in 3Q17 against the quarterly revenue of $162.7m. Considering the lifetime revenue generated from the Spectacles was just under $20m, this is quite a blow to the company. Furthermore, Snap has only sold 50% of their stock ($19.5m in excess inventory reserves) and has cancelled the manufacture of even more devices. Snap also reported that less than half of Spectacles users utilized the product after four weeks, cementing the novelty aspect discussed in Ovum’s 2016 piece “Snapchat vows to make wearables cool for its 300 million young users.”

It is important to note that initial sales numbers exceeded Snap’s expectations, but the company’s subsequent large-scale production and distribution methods outside of the Snapbots (e.g. online, in-store) were too late to meet the initial widespread consumer demand. The company’s summer expansion of the sunglass wearables in Europe was also disappointing. This was due to the lack of a strong Snapchat presence in the continent compared to the US – 57 million 3Q17 monthly active users in Europe compared to 77 million in the US.

Snap made quite a costly mistake in stocking up on Spectacles inventory too late to capitalize on its initial hype, which has dropped their stock prices considerably. In summary, this was a poor follow-up execution of a successful initial distribution strategy. But this is not the end for the Spectacles. The company has plans to release a second iteration of the device, tying in with augmented reality capabilities that have become increasingly present on the Snapchat app. The silver lining for the company is that their first foray into hardware yielded a lot of solid experience in the space, including FDA compliance navigation, inventory management strategies, contracting manufacturing, internal infrastructure and talent for software/hardware development and integration, product demand seasonality, over 100,000 Spectacles’ worth of visual data to be analyzed, and more. The company will see some modest revenue from the first-generation Spectacles sales over time, but nowhere near enough to make up for the losses experienced in the year since launch. While investor confidence is low, Snap does have the room to bounce back from this costly mistake with growth in the Snapchat user base and in advertising spend as well as a strong product showing from the second-generation Spectacles.

Appendix

Further reading

Tech Watch Wearables: Apple, Snap Inc., and Xenoma, TE0004-001150 (March 2017)

"Snapchat vows to make wearables cool for its 300 million young users," ME0002-000712 (September 2016)

Author

Rishi Kaul, Analyst, Consumer Technology

rishi.kaul@ovum.com

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