Key Takeaways From Twitter’s Third Quarter Earning Results
Twitter (NYSE:TWTR) recently reported earnings that failed to meet investor expectations on user growth and future guidance, driving down its stock price. More specifically, Twitter continues to struggle in attracting and retaining new users to its platform, and its advertising business is facing challenges with respect to direct-response advertising. In addition, while ad engagement and videos have recently snowballed on the platform, the average cost per ad engagement continues to decline substantially. Notwithstanding these challenges, we think it’s too early to expect results from the new leadership. Product changes have recently accelerated on the platform (for both users and advertisers), and if successful, these initiatives could meaningfully drive growth over the coming quarters.
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Key Takeaways From Twitter’s Third Quarter Earnings
User Growth Failed To Impress: Twitter’s total average monthly active user (MAU) base was 320 million in Q3 2015, as compared to 316 million in the prior quarter. Excluding SMS fast followers, the MAU base was recorded at 307 million, which represented a sequential rise of 3 million users. These metrics failed to match expectations, as other social networks such as Facebook and Instagram have seen much stronger growth. We believe the recent product innovations undertaken at Twitter should start to yield results (in terms of user base growth) going forward.
Guidance Came In Below Expectations: Twitter’s management guided for revenues of $695 million to $710 million for the fourth quarter of 2015. This came in significantly below average analyst estimates of $739.7 million. [1] We believe this weak outlook indicates continued challenges in the company’s advertising business (most prominently in its direct response ad units).
Revenue Growth Driven By Rise In Ad Engagements: Twitter’s overall revenues rose by 58% annually to $569 million during Q3 2015. Advertising revenue increased by 60% in dollar terms and by 67% in FX-neutral terms. This was primarily driven by a 165% annual increase in the number of ad engagements, due to growth in both auto-play video ads and off-network advertising business. Off-network advertising revenue (which includes advertising through TellApart, TapCommerce and MoPub Network) contributed about 13% of overall ad revenue during the quarter. The average cost per ad engagement dropped by 39% annually, due to a shift towards lower-cost auto-play video ads. [2] Going forward, we believe growth in overall ad engagements will continue to drive the company’s advertising business, as there is still significant potential to increase ad load levels on the micro-blogging platform.
Video Usage Has Gone Up Significantly On Twitter: Video consumption has been growing tremendously on Twitter of late with the launch of auto-play videos. Native video views have risen by up to 150 times across the Twitter, Periscope and Vine platforms over the past six months. [2] As a result, video ads have gained much more prominence on Twitter over the past few months. Moreover, the company plans to pilot Promoted Moments (video-focused ads) across the U.S. during Q4 2015.
Innovation Has Accelerated On The Platform: One positive that we have noted of late is that product changes have accelerated under the leadership of Jack Dorsey. With new features such as Highlights on Android, Polls, and recently launched Moments, the company aims to step up engagement levels on the platform. Additionally, changes have also been made on the Vine and Periscope platforms, such as introducing music on Vine. While it’s too early to measure the precise impact of these changes, we believe these recent initiatives could drive growth in the coming quarters. Twitter’s efforts to simplify its service will be central to its long-term goal of drastically expanding its audience base, and we will be keeping an eye on its progress in meeting these goals.
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Notes:- Twitter (TWTR) Stock Plunges, Revenue Guidance Disappoints, Jim Cramer’s View, The Street, October 28, 2015 [↩]
- Twitter’s (TWTR) CEO Jack Dorsey on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, October 27, 2015 [↩] [↩]