Twitter Outperforms During Fourth Quarter, Driving Stock Price Higher

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TWTR: Twitter logo
TWTR
Twitter

Twitter (NYSE:TWTR) delivered better-than-expected results on both the top-line and bottom-line during the fourth quarter, with annual revenue growth at 97% and non-GAAP EPS at 12 cents. Bolstered by these strong earnings and the discussion of recent partnerships with Yahoo Japan, Google and Flipboard, investors pushed the company’s stock higher by around 20%. We expect Twitter to post about 70% revenue growth in 2015 driven by an increase in ad load level (which is presently very low), growth in mobile and international ad revenues, and the addition of new ad products.

Though user base growth slowed down during the fourth quarter, we expect it to improve going forward taking into account the recent trends and product enhancements being rolled out by Twitter. Additionally, we expect margins to continue to move higher with operating leverage and productivity initiatives. We will be closely tracking the success of recent product enhancements by the company, since these could provide further upside potential to the company’s financial performance by spurring user engagement metrics on the platform. On the other hand, if user base growth continues to under-perform in the coming quarters, then it would raise serious concerns regarding the company’s growth model (in our view).

We are in the process of revising our $39 price estimate for Twitter’s stock.

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See our complete analysis for Twitter

User Growth Slowed Down During Q4, But Outlook More Favorable

Twitter’s monthly active user (MAU) base rose by 4 million sequentially to 288 million in Q4 2014. This represented a slowdown as user additions were seen at 14, 16 and 13 million respectively during Q1, Q2 and Q3 respectively. The rollout of iOS8 (the latest mobile operating system to be offered by Apple) did not go down well for Twitter, as integration issues led to loss of as many as four million MAU’s, with almost three-fourth of this impact on third-party MAUs. Additionally, since the fourth quarter is a seasonally soft quarter for Twitter, user base growth was less than anticipated on the platform.

On a positive note, the management indicated user base growth in Q1 2015 to be close to the levels seen during the first three quarters in 2014. We believe the recent slowdown in user base addition is concerning, since a significant portion of Twitter’s valuation is tied to solid user growth on the platform. For illustration, if we forecast Twitter’s monthly active user base to rise to 430 million by 2021 as compared to our current estimate of over 540 million, then it would represent about 20% decrease in our price estimate. Timeline views per MAU grew by 3% year-over-year, better than our prior expectations, reflecting higher engagement on the platform.

Ad Monetization Outperformed

Advertising revenue rose by 97% annually during the fourth quarter, driven by a roughly 60% increase in ad revenue per 1,000 timeline views and 23% rise in timeline views. Mobile advertising revenue, which rose by about 130% to comprise 88% of overall advertising revenue, helped fuel this growth. Various advertising products, including promoted photo tweets, website cards, mobile app downloads, and promoted videos, showed promising growth during the quarter.

In terms of the breakup between total ad engagements and cost per ad engagement – overall ad engagements rose by 78%, because of an increase in the ad load on the platform, which remains very low as compared to other more mature social networks. [1]In an encouraging sign, cost per ad engagement, which had been falling over the past few quarters, rose by 10% in Q4, due to a change in ad mix to higher price ad formats as well as rise in same format ad pricing. The robust increase in advertising demand during the holiday season outpaced the limited supply Twitter made available on its platform during Q4, partially contributing to the increase in pricing. However, the demand-supply dynamics remain unfavorable for Twitter, considering that ad load levels can easily be increased on the platform resulting in excess supply.  Hence, this will limit ad pricing growth on the platform.

Future Outlook Looks Strong

Earlier we had discussed the strong monetization potential that exists from over 500 million visitors who come to Twitter-owned properties but don’t login.  Hundreds of billions of tweet impressions are accessed through syndication across the web quarterly , in fact.  At last, it seems that the company has begun taking steps to tap this opportunity. Recently, Twitter signed partnership agreements with Flipboard and Yahoo Japan to syndicate its ads across their respective web properties. A deal with Google was also signed recently to include tweets in Google search results. We expect these partnerships will meaningfully impact data licensing revenues in the coming quarters.

Rapid growth in international ad revenue, which rose by 141% year to year in Q4 as compared to 78% increase in U.S. ad revenue, is another driver in Twitter’s business model. The company is actively expanding its sales presence across the globe and is also enhancing the reach of its self-service advertising platform across international markets. During Q4, the company extended its sales presence across 13 markets.  Hence, we think the share of international sales in Twitter’s overall sales will rise from the 36% level seen in Q4. Another factor that could propel Twitter’s outlook during 2015 revolves around the product developments being undertaken to enhance the value proposition for both the logged-in and the logged-out user base. During the earnings call, the management discussed new features such as instant timelines (for new users), logged-out homepages, richer private messaging features, and enhancements in video-sharing on the platform. We will be closely tracking the impact of these strategies on user base growth and engagement on the Twitter platform, as we think there could be a significant upside to Twitter’s outlook in the event these product enhancements gain traction with users.

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Notes:
  1. Twitter’s (TWTR) CEO Dick Costolo on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Feb 5, 2015 []