Snap layoff (SNAP): Why is Snap laying off 20% of its employees?

It has been a bad year for Snap amid high inflation and economic headwinds ravaging the advertising industry. In 2022, Snap share price has fallen more than 75%. However, this week, the Snap share has gained some momentum. On Thursday, Snap share price jumped 7% after it announced its layoff and restructuring plans. 

The company will restructure and its business will have three strategic priorities: community growth, revenue growth, and augmented reality.

Snap layoff plan

• Snap CEO Evan Spiegel announced that the company will reduce its workforce by 20% as part of a larger restructuring. It translates to around 1,280 Snap employees. They have an over-6,400 workforce.
• Snap estimated that the layoff will save $500 million in cash expenses on an annualized basis relative to Q2'22. It includes a $50 million estimated reduction in fixed content costs with the elimination of Snap Originals.

Amid layoffs, Two of Snap's top ad sales executives - Chief Business Officer Jeremi Gorman and Vice President of ad sales Peter Naylor - are leaving to join Netflix and build its ad business.

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Other measures to cut cost

• Snap will try to mitigate costs by slowing production on Snap-funded originals, minis and games, hardware, and standalone apps Zenly and Voisey.
• Other than shutting down Snap Originals, they will shift games and mini-apps into maintenance mode with substantially reduced investment.
• Snap appointed Jerry Hunter, previously SVP of engineering, to the position of COO. He will lead monetization efforts, as well as growth, partnerships, and content.
• The company said the restructuring costs will be approximately $110 million to $175 million, with about $95 million to $135 million expected to be incurred within adjusted operating expenses.

Slowing advertising business:

Advertising business has been on a downtrend as companies are reducing their ad spends to cut costs amid rising inflation. Snap along with Facebook and Google also suffered from privacy updates that Apple introduced on iPhones last year. These have made it difficult for digital ad sellers and advertisers to target ads to relevant audiences and measure their sales results.

Analysts Review:

Based on 50 Wall street analysts offering stock ratings for Snap, currently,44% are recommending Buy, 50% are recommending Hold while 6% are recommending 'Sell'. Recently analyst Credit Suisse has maintained its Outperform rating on Snap however, lowered share price target to $29.

Despite the fall in share price and other negativity, the positive for Snap investors is that its products are continuing to grow as DAU jumped 18% on-year for the second quarter.

Snap share price fell more than 30% after the company reported disappointing Q2 results. Also, the company withheld EBITDA and revenue guidance for the next quarter due to uncertainties related to the operating environment. Check Snap's recent quarterly results here.