Twitter Earnings Preview: Monetization Will Jump But User Growth Still Raises Questions

April 25th, 2014 by Trefis Team
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Twitter

Twitter (NYSE:TWTR) will release its Q1 2014 earnings on April 29. The stock has fallen by roughly 30% since the company’s last earnings announcement, primarily due to weakness in its user base growth. Despite the fact that Twitter did exceedingly well in terms of improving its monetization, the decline in user engagement and a slowdown in new user additions has disappointed the investor community. Taking cues from companies such as Netflix (NASDAQ:NFLX), Sirius XM (NASDAQ:SIRI), LinkedIn (NASDAQ:LNKD) and eBay (NASDAQ:EBAY), it is easy to see that stock’s performance is highly related to how the user base trends, especially when there are little doubts about the monetization strategy. It will be interesting to see how the figure trends in Q1 2014. Nevertheless, we believe that Twitter’s revenues will see solid year-over-year and sequential growth. Here is what you can expect from the upcoming earnings.

Our price estimate for Twitter stands at $28, implying a discount of about 40% to the market price.

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See our complete analysis for Twitter

Excluding The Impact Of Seasonality, Monetization Will See An Improvement

Twitter posted strong financial results for Q4 2013 even as its user base growth faltered. The revenue and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) surpassed our expectations. The full-year revenues stood at $665 million with adjusted EBITDA climbing to $75 million. This represented year-over-year growth of 110% and 256% in these metrics respectively. The advertisers are finding the platform useful for engaging potential customers, which is evident from the growth in ad revenue per 1,000 timeline views. The figure totaled $1.49 for Q4 2013, up 54% sequentially and 76% year-over-year. We expect the figures for Q1 2014 to remain strong too. Here is why we think so.

Twitter is still in the process of ramping up its ad business which implies that even in the absence of meaningful subscriber growth, it can still manage to increase the number of ad impressions as well as ad pricing. A study conducted by Resolution Media suggests that advertisers spent 127% more on Facebook as compared to Twitter in 2013, which indicates that there is still room for growth for the latter. [1] The same study also mentioned that click through rates are higher for Twitter, which implies higher ad pricing. [1] The company is also working on a number of product enhancements that will help it sustain ad revenue growth.

For instance, Twitter has big ambitions from its integration with TV.  The Twitter Amplify program allows content companies to distribute videos on Twitter’s platform, with a short advertisement embedded. The revenues from this advertisement are shared between Twitter and the content partner. The company has built several such partnerships in the recent quarters. Some of the notable content partners include NFL, Viacom, Fox, Bloomberg TV, MLB.com and Discovery. The company is increasingly becoming a part of the  TV viewing experience as users tend to engage in conversations about TV shows while they are watching them. To leverage this trend, Twitter has partnered with Nielsen to formulate Nielsen-Twitter TV ratings, a metric which will measure the social engagement around TV viewing. If this metric is widely adopted, it will encourage content partners to put more content on twitter to drive engagement. This will open up more revenue opportunities in form of promoted tweets and the  Twitter Amplify program. Twitter recently acquired TV analytics firms SecondSync and Mesagraph to strengthen its efforts in this area.

Big Question Mark On User Growth

Given Twitter’s performance in the last quarter, we will be keenly watching how its user growth trends this time. The company hit a bump in Q4 2013 as its monthly active user base in the U.S. grew by just 1 million sequentially and the year-over-year growth stood notably below that for its overall user base. This has made investors wary of Twitter’s long term prospects, and is one of the reasons why the stock pulled back significantly in the last few months.

In addition to the above, the total number of timeline views also declined in Q4 2013 for the first time in the last eight quarters. While the U.S. business saw a decline of about 5%, the figure for the international business fell by 8%. This happened despite the growth in the active user base, which suggests that the usage declined on per user basis. That’s not really an encouraging sign and represents a sudden reversal in the growth trajectory. It remains to be seen whether this was a one time decline or the beginning of a trend.

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Notes:
  1. Social Trends Report [↩] [↩]