Twitter Posts Solid Performance In Q3, But Investors Are Not Impressed
Twitter (NYSE:TWTR) posted annual revenue growth of 114% to $361 million in Q3, outperforming its initial guidance by more than $20 million. Profitability also came in above expectations with adjusted EBITDA margin of 19%, exceeding its initial forecast of 12-14%. However, the company’s stock price has fallen by more than 10% after the earnings report. So what caused the share price to drop in the face of this stellar growth?
Two aspects of the earnings unnerved investors: First, revenue guidance for Q4 stands at between $440 million to $450 million, which represents an annual growth rate of around 85%; this forecast represents a deceleration in revenue growth against 124% and 114% levels seen in the first two quarters. Second, concerns surrounding usage growth pulled down the stock as the number of average monthly active users (MAUs) rose by 4.8% sequentially in Q3 to 284 million; this represented a slowdown compared to quarter-over-quarter growth rates of 5.8% and 6.3% seen in Q1 and Q2 respectively. Moreover, user engagement as captured by timeline views per MAU declined by 7% annually during the quarter. [1]
We believe the recent investor reaction stems from unrealistic expectations which had raised the market valuation to very high levels, and not due to any weakness in the company’s business model. Twitter actually raised its guidance for revenue and adjusted EBITDA in Q4 as compared to its previously implied estimates. Twitter’s long-term growth potential remains huge, as its total usage extends much beyond the 284 million MAUs; over hundreds of millions of users come to the platform just to search or access tweets through syndicated networks, and the company hasn’t even begun to monetize this user base. Additionally, ad load coverage on Twitter is low and the company is still testing and coming up with new ad products, including video-based ads. Hence, we see strong opportunity for Twitter to increase its monetization in the long-run.
We are in the process of revising our $32 price estimate for Twitter’s stock.
See our complete analysis for Twitter
While Ad Revenue Growth Was Impressive, New Ad Products And Increased Coverage Will Maintain Momentum
Twitter’s advertising revenue grew by 109% annually to $320 million in Q3 2014. This was primarily driven by ad revenue per 1,000 timeline views growth of 83%, as timeline views increased only by 14% during the period. Rising mobile monetization, which contributed for 85% of total advertising revenue, helped drive this revenue growth. Several ad products, including promoted tweets, promoted video ads, website cards and mobile app downloads, saw increased uptake with marketers during this period.
In terms of breakup between cost per ad engagement and total engagements – cost per ad engagement fell by 17% and total ad engagements grew by 150% on an year-over-year basis. [1] Twitter’s ad load coverage is still low and the company has a long way to go in terms of selling its ad inventory, and this is why the number of ads are growing. Additionally, it appears that currently there is oversupply which explains the decline in the average ad pricing. Twitter is still testing new ad products such as promoted video ads and is in the process of expanding its self-service advertising platform across international markets.
We believe that there is huge opportunity for Twitter to raise its monetization levels – in the latest earnings call, Twitter’s management outlined that apart from the 284 million monthly active users on its platform, there are more than twice as many users who come to Twitter but don’t login or access tweets through syndication across the web. While Twitter does not monetize this user base currently, we believe the company will tap this opportunity in the future to enhance its top-line. In addition, it has also introduced a new software development platform ‘Fabric’ for app developers, which if successful, could greatly boost Twitter’s reach across the entire mobile ecosystem.
International Growth Will Fuel Top-Line Growth In The Future
We expect the rapid rise in international sales to be a source of long-term growth for Twitter. International ad sales rose by 176% during the third quarter, which was much higher than U.S. ad revenue growth of 88%. [1] The share of international sales in overall sales has increased from 28% in Q1 2014 to 34% in Q3 2014 and we expect this proportion to continue to rise. Huge growth in international ad revenue per 1,000 timeline views is partly fueling this growth – this figure rose by 132% in Q3 compared to 66% increase for the U.S. [1] Twitter is expanding its sales presence across the globe and during the third quarter, it added 12 new countries taking the total number of countries, where it has a sales presence to 60. In addition, it is also enhancing the reach of its self-service advertising platform (which primarily caters to small and medium-sized businesses) across additional markets and we expect these initiatives to propel sales growth in the coming quarters.
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- Twitter’s (TWTR) CEO Dick Costolo on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 27, 2014 [↩] [↩] [↩] [↩]