Twitter’s Stock Plummets On Disappointing Results
Twitter’s (NYSE:TWTR) earnings, after an inadvertent posting by NASDAQ, were leaked by a financial intelligence company ‘Selerity’, before the official results were declared. THe shares fell before trading was halted and in the wake of the call are down 23%. Quite significantly, Twitter’s revenue growth slowed down to 74% in Q1, as compared to the 97% increase during the prior quarter. This was caused by lower-than-expected monetization on some of the newer ad products. The company also reduced its guidance for the year based on the current trends.
Notwithstanding these negatives, we think the recent market reaction seems to be overblown, in our view. We think these results do not alter the long-term monetization potential on Twitter, which remains strong. There are various drivers which can propel monetization on Twitter in the long-term, including: 1) significant room for expansion in ad load levels; 2) an increase in user base on the platform; 3) improvement in ad products; and, 4) the monetization potential of the passive user base. Additionally, even though the company’s top-line disappointed in Q1, its profitability came in above expectations, with adjusted EBITDA margin at 24%. We will continue to monitor the impact of recent product initiatives being undertaken by Twitter’s management such as instant timelines, highlights, logged-out homepages, etc. on engagement and retention, as these could change the outlook for the company.
See our complete analysis for Twitter
Ad Monetization Performed Below Expectations Owing To Direct Response Products
Twitter’s ad revenue grew by 72% annually in Q1 2015 to $388 million; this came in below market estimates as some of the newer direct response ad products showed lower monetization. Specifically, an increase in ad pricing restricted the demand for advertising. Additionally, Twitter improved the quality of ads, which led to lower click-through rates and monetization. The management expects these headwinds to persist in the short term. As a result, the company lowered its guidance for full year revenues from $2,325 million to $2,220 million (at the mid-point).
In terms of the breakup between total ads and cost per ad engagement , overall ad engagements rose by 32% annually in Q1, driven by an increase in ad load and user base. At the same time, cost per ad engagement improved by 30% annually, owing to a change in mix towards higher priced ads, as well as rise in same format ad pricing. [1]These results marked a shift from an earlier trend, where the increase in ad engagements far outpaced the growth in ad pricing. Nevertheless, we expect ad engagements to continue to rise at a healthy rate over the coming quarters, owing to the significantly low ad load levels on Twitter. We believe demand will be the main factor that will influence future monetization growth rates, as ad inventory can be increased by a large extent on the micro-blogging platform.
International ad revenues rose by 103% annually during Q1 2015 to comprise for 35% of the overall ad revenues; in comparison, U.S. ad revenues increased by 59%. [1] We expect Twitter’s international ad revenues to continue to rise sharply over the coming years, as Twitter is aggressively expanding its sales presence and self-service ad products across global markets.
Though User Growth Was Strong In Q1, Its Outlook For Q2 Is Uncertain
Twitter’s average monthly active users (MAU) increased by 18% year over year to 302 million during the first quarter, as compared to 288 million in Q4 2014. This represented an acceleration in user base growth as MAU additions totaled only 4 million in the previous quarter. Going forward, Twitter aims to include SMS fast followers (those who sign-up and access Twitter solely through SMSes) in its total MAU count. The number of such followers was seen at about 6 million during the first quarter.
We believe the addition of SMS-only users in the total MAU figures will mainly help the company in reporting higher figures, since the monetization potential from such users is limited. In addition, it seems that user base additions could slow down during the second quarter, as the management indicated that user growth was off to a slow start in April.
We are in the process of revising our 49.30 price estimate for Twitter’s stock.
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Notes:
- Twitter’s (TWTR) CEO Dick Costolo On Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 28, 2015 [↩] [↩]