What Does Twitter Need To Be Profitable?
Twitter (NYSE:TWTR) posted a net loss of $0.25 per share for Q1 2015, slightly higher than $0.23 per share for the same period last year. The company’s costs continue to exceed its expenses and it is yet to turn profitable. Growth in its monthly active users is slowing and the company is facing stiff competition globally, primarily from other social media platforms like Facebook and from Google in terms of advertising spending. However, we feel that monetization and growth opportunities exist for Twitter and it could turnaround in the future.
See our complete analysis for Twitter
Significant Reduction in Marketing and Research and Development Expenses
Below is a comparison of Twitter’s revenues and expenses between 2012 and 2014.
We note that while Twitter’s revenues increased by 350% in the last two years, its sales and marketing expenses jumped more than 600% (including stock based compensation). Currently the company is spending heavily to generate higher revenues. In the longer term, as it attracts more users, sponsors and increases engagement levels, we expect operating leverage to kick in. In 2014, 94% of the revenues were spent on sales and marketing and research and development (including stock based compensation). On a Non-GAAP basis, these expenses were around 65% of total revenues.
We expect these percentages to reduce significantly and come down to as low as 20% and 10% of revenues respectively at the end of our forecast period (on a Non-GAAP basis). This expected reduction is a significant factor for Twitter to move towards being profitable.
International Revenues Could be the Key
For Q1 2015, Twitter reported 302 million Monthly Active Users of which around 60 million were in the U.S. Despite the number of users being higher in international markets, U.S. Advertising comprised a majority of Twitter’s revenues. While this can partly be attributed to the fact that the company recognizes revenues in the billing region of the advertiser, it also indicates the highly untapped international market. In Q1 2015, the company reported a 109% increase in international revenues year on year, which account for 34% of its total revenues. We expect Twitter’s international revenues to increase to nearly 4 billion and constitute nearly 42% of its total revenues by the out-year of our forecast (2022). Although the company is facing regulatory issues in several regions and is completely absent from China, it expects strong user growth in international markets such as Argentina, Brazil, India, France, Germany and Japan. With increase in user engagement, these markets provide potential for sales growth.
As Twitter enters into several partnerships and acquisitions to improve its product offering and expand advertiser base, we expect it to improve its top line without a significant increase in its marketing and research expenses. Once benefits of its current investments in product innovation are visible, there is a high possibility of the company becoming profitable.
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