Just last month, Snap (NYSE:SNAP) CEO Evan Spiegel spoke at Vanity Fair‘s New Establishment conference. Among other topics, the chief executive admitted that he needs to communicate with investors better. Running a public company is a completely different ballgame than running a private one, and comes with incredible regulatory burdens surrounding communications and disclosures. It also comes with significantly increased public scrutiny, but the benefit is greater exposure and liquidity in capital markets.
That might all sound noble, but then why did Spiegel lie to investors on the very same day?
A little white lie that led to a lot of red ink
It was at the same conference that Spiegel confirmed Spectacles unit sales had exceeded 150,000 since launching in late 2016. After making a comparison to the original iPod, Spiegel proclaimed that — here’s the important part — this figure exceeded Snap’s internal expectations. That was just over a month ago.
This appears to have been a lie. Snap reported third-quarter earnings last night, which included a $39.9 million charge related to Spectacles inventory and canceling purchase commitments. This was largely expected after reports surfaced that Snap had “hundreds of thousands” of units of unsold inventory collecting dust in warehouses. It’s worth noting that a $39.9 million charge is dramatically higher (about three times as much) than the $13.7 million in Spectacles revenue that Snap generated in the first half of 2017.
CFO Drew Vollero made it abundantly clear on the conference call:
Unfortunately, we misjudged strong early demand for Spectacles and purchased more inventory than we now anticipate being able to sell. As a result, we recorded a $39.9 million non-recurring expense primarily related to excess inventory and purchase commitment cancellations. Moving forward, we will continue to be in the market place with Spectacles and expect modest revenue from the product line.
Snap can’t have it both ways. Sales cannot exceed expectations if the company overshot this badly on inventory purchases because it expected to sell a lot more.
Snap did not mention hardware purchase commitments in its first-quarter 10-Q, so it’s unclear when these purchase commitments were made. It’s possible the hardware purchase commitments were included in total purchase commitments, which primarily relate to cloud infrastructure and hosting costs through 2021, but not broken out. Snap had $29 million in hardware purchase commitments at the end of the second quarter.
But Spectacles sales definitively fell sequentially in the second quarter, and Spiegel’s claim that sales exceeded expectations was just a month ago. It’s not as if the Spectacles business’s prospects had radically changed over the course of a month, or that Snap bought all that excess inventory within the past month.
The only way that Spiegel wasn’t fibbing is if Snap bought all that inventory with the intention of writing it down, which is an absurd notion. Spiegel is right about one thing, though: He needs to communicate better with investors. The SEC tends to look down on misleading investors, and I’ll be submitting an official complaint.
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