Twitter’s Stock Jumps On Strong Q1 User Growth, Decline In Operating Losses
Twitter (NYSE:TWTR) reported surprisingly positive first quarter results Wednesday, with both the top line and bottom line beating estimates and monthly active users surging by 9 million over the prior year quarter. The company’s total revenue declined by 8% year-over-year (y-o-y) to $548 million on the back of a decline in U.S. advertising revenue, partially offset by a 2% increase in international revenues. However, this was still above the consensus estimates of $512 million for the quarter.
Despite the decline in overall revenue, Twitter’s operating loss declined about 32% to slightly over $40 million and its net loss declined 23% to $61.6 million on the back of a decline in R&D and marketing costs due to a lower headcount, partially offset by an increase in cost of revenue reflecting higher content revenue share and depreciation. Adjusting for several items including stock-based compensation expenses of $117 million, Twitter reported earnings of $82 million or 11 cents per share, beating consensus estimates by 10 cents.
In terms of users, Twitter’s average monthly active users (MAUs) grew 6% y-o-y to 328 million in Q1 2017, adding a solid 9 million users over the previous quarter. The company was also enthused with the consistent rise in daily active users (DAUs), which increased 14% y-o-y in Q1 2017 after reporting growth of 11%, 7%, 5% and 3% in the prior four quarters, respectively. Owing to the better than expected results, Twitter’s stock jumped about 14% following the earnings release before settling down at about 8% up from Tuesday’s close.
The company’s struggle to grow its active user base has been the primary investor concern for the past two years, and the relatively strong growth in Q1 is surely a good sign. However, Twitter needs to continue this growth going forward to be able to get back to positive revenue growth. In terms of profitability, there is still a long way to go but strong user growth numbers could help investors overlook that metric in the near term.
Revenue Declines On Lower U.S. Advertising
Twitter’s overall revenues declined by 8% y-o-y to $548 million during Q1 2017. Advertising revenue slightly declined 11% to $474 million, owing to a decline in the U.S. advertising business offset by a 2% rise in international ad revenues. This was primarily driven by a 139% 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 63% y-o-y as the cost per view of auto-play video ads is significantly lower than click-to-play ads.
Video consumption has been growing tremendously over the past few quarters on Periscope as well as on the Twitter platform with the launch of auto-play videos. It will be interesting to see if this also translates into higher advertising revenue growth going forward.
Stock-Based Compensation: Declining But Not Fast Enough
Twitter has not been able to turn a profit in its history and one of the primary reasons for that has been its high stock-based compensation expenses. It is fairly standard for tech companies to partially compensate their employees in the form of stock options both to save cash and incentivize loyalty by tying a part of employee compensation with the company’s fortunes. However, such compensation expenses generally decline gradually as a share of revenues as the company grows and matures. However, this hasn’t happened for Twitter as swiftly as shareholders would have liked.
In fact, Twitter ranks second among the larger tech companies (annual revenue > $1 billion) in terms of stock-based compensation expenses, which were equal to about 24% of the company’s total revenue in 2016. [1] Although they have consistently declined over the last three years and stood at 21% in Q1 2017, that figure is still quite high compared to companies such as Facebook and Salesforce, whose stock-based compensation expenses are currently about 16% and 9% of revenues, respectively.
Twitter expects its stock-based compensation expenses to remain around 20-21% of revenue by the end of 2017 (revenue expectation inferred from FY 2017 EBITDA and EBITDA margin guidance given by the company). Going forward, the company should look to bring its stock-based compensation expenses down to around the mid-teen levels.
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Notes:
- Why Twitter Is Actually a Media Company, WSJ, Oct 16 2016 [↩]