Twitter’s Earnings Disappoints On User Growth, Leading To Fall In Stock Price
Twitter (NYSE:TWTR) delivered a lacklustre quarter in Q2 2015, leading to 14% fall in its stock price. Even while its top-line growth surpassed its prior guidance, its user growth came in way below market expectations. In addition, the company expects its user growth levels to stay depressed in the coming quarters. With over-70% growth in the ad business (in FX-neutral terms) during the quarter, the company’s troubles with respect to direct response ads seem to have ended (at least for now). However, these earnings make us quite skeptical on the future of the micro-blogging platform. In addition to the management uncertainty (which remains due to the ongoing search for CEO), it remains to be seen whether the new efforts being undertaken will help in accelerating new user growth on the platform. Also, in the event these features make the platform less attractive for power users, it could also lead to lower engagement levels on the platform. [1]
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Ad Business Showed Strong Growth During The Second Quarter
Despite the poor performance on user growth, Twitter delivered strong growth in its advertising business during the second quarter. Its advertising revenue rose by 63% annually to $452 million during the period. Excluding the impact of foreign exchange movement, the revenue growth came in higher at 71%. Promoted tweets including video, mobile app downloads, and website cards led the this growth during Q2, with mobile platform accounting for around 88% of the overall advertising revenue.
In terms of the breakup between ad engagements and cost per ad engagement in Q2: Ad engagements rose by 53%, helped by an increase in ad load levels and user base, together with the addition of new ad formats (such as autoplay videos). In turn, the average cost per ad engagement strengthened by 6%, bolstered by both higher ad pricing as well as shift towards higher-priced ad formats. [2] International revenue growth at 78% outpaced rise in U.S. revenue, which came in at 53%.
During the earnings call, Twitter’s management indicated that ad load levels (which indicates the number of ads per 100 tweets) on the social platform remain at around ‘one-third’ of the metric’s long-term potential. Though this indicates high potential for advertising business on the social platform, we think Twitter must also accelerate user growth and engagement, to realize this potential. Secondly, it seems Twitter is seeing lower engagement as compared to the levels that were recorded last year — the ratio of daily active users (DAU) to monthly active users (MAU) for the top 20 markets was seen at 44% in Q2 2015, as compared to 48% for the first nine months of last year. [3]
However, Dismal Performance On User Base Growth Dampened Market Expectations
The key takeway of the earnings report was negative news on user base growth. Twitter’s MAU is actively tracked by Wall Street as it directly impacts the future outlook of the social network. Twitter’s MAU (excluding SMS fast followers) rose to 304 million in the second quarter, which represented an addition of just 2 million users during the quarter. We admit that the user base inclusive of SMS fast followers was seen at 316 million. However, since the monetization potential of SMS fast followers is limited, we believe the fast growth in this user group will not lead to a proportional impact on top-line growth in the future.
In addition to these downbeat numbers, Twitter’s management indicated that user growth could remain slow on the micro-blogging platform in the next few quarters. The company aims to undertake a slew of measures to reinvigorate user growth, such as making the platform simpler for newer users and bolstering its marketing activities to highlight the platform’s value proposition. These efforts could take a long time to show progress, in our view. Accordingly, we will also be keeping an eye out on the impact of these new features on the engagement of power users (technology enthusiasts who are heavy users of the platform). In the event, these new features do not resonate with this audience, we could also see an impact on the overall engagement levels of the platform.
We are in the process of revising our 48.37 price estimate for Twitter’s stock.
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Notes:- Twitter Reports Second Quarter 2015 Results, Twitter Investor Relations, July 28, 2015 [↩]
- Twitter’s (TWTR) CEO Jack Dorsey on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, July 28, 2015 [↩]
- Twitter’s (TWTR) CEO Jack Dorsey on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, July 28, 2015 [↩]