Twitter Earnings Takeaways: User Base Weakness, But Better Ad Engagement Drives Earnings Beat
Twitter (NYSE:TWTR) again disappointed investors with quarterly results that failed to meet expectations on user growth as well as future guidance. The company’s average monthly active users (MAUs) grew 9% year-over-year (y-o-y) to 320 million in Q4 2015 but were flat compared to the prior quarter. In fact, if we exclude users who receive tweets via text messages (SMS Fast Followers), Twitter’s average MAUs actually declined from 307 million in Q3 2015 to 305 million in the fourth quarter. To ward off investor fears of a declining user base, management stated that MAUs had reached Q3 2015 levels by the end of January 2016, showing positive active user growth. Twitter’s struggle to grow its active user base was the primary investor concern through 2015, and that is unlikely to change this year. [1] [2]
On a positive note, Twitter reported a 48% y-o-y increase in revenue in Q4 2015 to $710 million, which was roughly in line with market expectations. In terms of the bottom line, the company reported adjusted earnings of 16 cents per share in the fourth quarter, easily beating analyst consensus estimates of 12 cents a share. For the first quarter ending March 2016, the company expects revenue to be in the range of $595 to $610 million, missing the consensus estimate of $629 million. ((Twitter Earnings Report Q4 2015, Feb 10 2016))
We are in the process of updating our $34 price for Twitter’s stock.
See our complete analysis for Twitter
User Growth Woes Continue
Twitter’s average monthly active user base was flat quarter-over-quarter at 320 million in Q4 2015 compared to 292 million in Q4 2014. Excluding SMS Fast Followers, the MAU base was 307 million, which represented a sequential decline of 2 million users. These metrics failed to match the already low expectations of about 1 million new users a month, considering other social networks such as Facebook and Instagram have seen much stronger growth. It is somewhat disappointing that none of Twitter’s recent acquisitions or initiatives – including Periscope and Moments – have helped in significantly expanding the company’s user base.
Jack Dorsey and his recently restructured management team will have to answer some fundamental questions about Twitter’s existential purpose and usability to appeal to new users. Twitter recently introduced a new timeline feature which would enable users to see the “best” tweets first. It is one of the many new features Twitter is expected to introduce to improve user experience; we will be watching closely to see how they are received and how they impact user growth and engagement. [3]
Revenue Growth Driven By Rise In Ad Engagements
Twitter’s overall revenues rose by 48% y-o-y to $710 million during Q4 2015. Advertising revenue increased by 48% y-o-y and 25% over the prior quarter to over $640 million. This was primarily driven by a 153% y-o-y increase in the number of ad engagements due to growth in auto-play video ads. However, the average cost per ad engagement dropped by 41% y-o-y as the cost per view of auto-play video ads is significantly lower than click-to-play ads.
Going forward, we believe growth in overall ad engagement 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. ((Twitter’s (TWTR) CEO Jack Dorsey on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 10 2016)) [4]
Video Usage Continues To Go Up
Video consumption has been growing tremendously on Twitter over the past few quarters with the launch of auto-play videos. Native video views increased by 220 times across the Twitter, Periscope and Vine platforms over the past twelve months. As a result, video ads have gained much more prominence on Twitter. Recent new features such as the Promoted Video ad format, conversational video ads and ads on Periscope are likely to help expand video views, and consequently ad revenues, going forward.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
Notes:- Selected Metrics- Twitter Q4 2015 Results, Twitter, Feb 10 2016 [↩]
- Twitter Q4 2015 Earnings Presentation, Twitter, Feb 10 2016 [↩]
- Never miss important Tweets from people you follow, Twitter Blogs, Feb 10 2016 [↩]
- Twitter’s (TWTR) CEO Jack Dorsey on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, October 27, 2015 [↩]