Snap is struggling in an area where it must succeed

Snap Inc.'s user number was not as bad as expected in Tuesday's earnings report, but the Snapchat parent company is suddenly struggling in one area where it must succeed.

snapchat

SNAP, + 3.99%

reported less than expected losses in the first quarter and 4 million new users from the end of the year, 2 million more than Wall Street had expected. But Snap also reported that a carefully monitored number – average per-user income, or ARPU –[ads1]; fell in succession across all geographic regions, to $ 1.68 per user, down from $ 2.01 in the fourth quarter. Snap already has the lowest ARPU among public social media, which CNBC pointed out last month. In the fourth quarter, Snap is $ 2.01 in ARPU compared to $ 7.37 for Facebook Inc.

FB, + 1.29%

and $ 9.48 for Twitter Inc.

TWTR, + 15.64%

.

As Twitter has proven over the past few years, a social media service can survive without consistently adding many users, as long as it increases the amount of money it does on each user. Before Tuesday the bulls can at least point to a tremendous growth in Snaps ARPU, especially in Europe and the rest of the world, where Snap desperately needs a boost.

But that changed in the first quarter, when the ARPU growth hit record lows outside North America. In Europe, Snap reported collecting 77 cents per user, up 47% from last year, and it was 97 cents in the rest of the world, up 68%. It is the first time that ARPU growth in the rest of the world has fallen below three percentages, and the growth rate in Europe fell from 57% in the previous quarter and 120% a year ago.

Snap's shares, which first increased by more than 10% on earnings news, fell back before the earnings conference began. The stock ended after-hours increase of 2.5%.

Snap has hoped for growth outside the US on a redesigned app for Alphabet Inc.s

GOOG, + 1.34%

GOOG, + 1.26%

Android operating system, completing the latest rollout last month. The updated app will be the key to continuing to grow wider among young foreign users who often have cheaper smartphones with slower connections.

"There are billions of Android devices in the world that now have access to an improved Snapchat experience and we look forward to growing our Snapchat community in new markets," said co-founder and CEO Evan Spiegel on Tuesday. and later added that the company was excited about what it saw from the Android rollout.

Investors must see that the ARPU growth rates go back outside the US thanks to the Android app, but managers also noted another concern on that front – one slower-than-expected transition in Europe to several self-service ads, ARPU growth slowed in North America last year, and Snap owed the transition to self-catering ads, which is still happening across the pond while North America bounces back – North America was the only region where ARPU growth increased in the first quarter, up 34%.

"Europe … really delayed North America and shift to self-service, so the effect is more pronounced in our annual turnover and ARPU trend is, while the rest of the world started at the auction, Tells temporary CFO Lara Sweet at the conference call.

Since its IPO, Snap has been clouded by the view of Wall Street that the biggest growth in the user base was over and that it went public after growth had peaked. The company now needs to make money from its users better, especially overseas, to get that type of growth Wall Street looking for, and the enhanced Android app and overcome layers of transition to self-serving ads are the key to the potential.

If Snap wants to be seen as a promising investment again, it needs to revive the growth of either users or average revenue per user, and preferably both.

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