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Here's How Snap's Spectacles Charge Was Broken Down

Snapchat operator Snap (NYSE: SNAP) ate a $39.9 million charge related to Spectacles last quarter, due to the company grossly overestimating demand and ordering way too many units. Many of those units were reportedly collecting dust in warehouses, making a writedown all but inevitable. It was initially unclear how that $39.9 million charge was split between inventory impairments and fees associated with canceling purchase commitments.

Thanks to the subsequent 10-Q, investors now know how this charge was broken down.

Image source: Snap.

But at what cost?

Here are all of the parts of the charge, per the regulatory filing:

Category

Amount

Excess inventory reserves

$19.5 million

Inventory purchase commitment cancellation charges

$17.9 million

Asset impairments

$2.5 million

Total

$39.9 million

Data source: 10-Q.

Most of the charge was related to excess inventory on hand that had to be written down, but nearly half of it was due to canceling purchase commitments that Snap had already made beyond all of the excess inventory it was sitting on. Not only did Snap order too many units, but it was on the hook to order even more.

Snap had $29 million in hardware-related purchase commitments at the end of the second quarter. These commitments have now been wiped out after paying that $17.9 million in cancellation fees and charges, which represents a substantial bulk of what Snap was committed to anyway. "As of September 30, 2017, there are no material hardware inventory commitments," Snap writes in its most recent filing.

So much for hardware

Snap's history with hardware is limited to Spectacles, and so far its track record is terrible. At this point, the company should step back from hardware for a little while as it focuses on overhauling its most important product, the core Snapchat app, both in terms of interface design as well as algorithmic curation.

After a recent restructuring, Snap's hardware team reportedly now has approximately 150 employees, or about 5% of the company's total head count. Snap finished the third quarter with approximately 3,000 employees, and management said 80% of these are "front of house," which presumably means are focused on the primary Snapchat platform and ad business.

Add in the fact that Snap just lost its engineering chief, and the company already has its work cut out for it. Hardware should be the absolute last thing on CEO Evan Spiegel's mind right about now. Spiegel said last month that hardware was a long-term goal in order to have greater control over the Snapchat user experience, but in the short term Snap should be focusing on its ongoing transition to its auction-based, self-serve ad platform while redesigning Snapchat in the hopes of spurring user growth.

Hardware can wait.

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Evan Niu, CFA has the following options: long April 2018 $17 puts on Snap Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.