Quick Thoughts: Twitter – Yes, but …

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–        The good news: TWTR blew out 4Q sales and EPS on HUGE ad sales – sales/month/user up 50% QoQ and 72% YoY – turning an unexpected profit and raising guidance well above consensus

–        The bad news: Investors are disappointed with user growth – MAUs up just 9% QoQ to 241M, far short of expectations for 250M, with engagement off 10% QoQ to boot.

–        Slow user growth and weak engagement is a product of VERY poor marketing of the service to consumers, a condition that could be countered easily with effective management action

–        Meanwhile, TWTR has been very successful in positioning with advertisers, accelerating sales growth in the quarter, and poised to deliver serious upside to expected 2014 sales and EPS.

Market sentiment seems to have made Twitter’s 4Q13 results into a referendum on the size of the service’s potential user base. Twitter management seems not to have gotten the memo. 241M individuals reached the monthly active user (MAU) threshold in the quarter, up 9% QoQ and 30% YoY, but far short of well publicized analyst expectations for 250M. User engagement, as measured by the number of timeline visits per MAU in the quarter, was a bigger embarrassment, off 10% QoQ. Going back, the MAU and engagement statistics have been bouncing around with periodic fits and starts, and 4Q could either be the start of a trend or an anomaly, but the erratic performance hardly inspires confidence. Investors, who sold the stock off hard after hours, are concerned that a tree is falling in the forest without nearly enough MAUs on hand to hear it.

Why is this happening? One obvious factor is Twitter’s marketing to consumers, or lack thereof. Ironically, a service that is the hottest thing in delivering digital advertising is woeful at reaching out to potential users on its own behalf. Nearly every high end smartphone and tablet sold in western markets ships with the Twitter app pre-loaded, yet less than one in three US smartphone owners is a monthly active user on their device. In comparison, Facebook engagement is nearly ubiquitous. Unlike Facebook, Twitter is largely a read-only service without the peer pressure of friends and family proselytizing laggards to join the party. Many outside of the tech savvy demographics have a poor understanding of the value of Twitter, having seen it described as yet another “social” network rather than a channel for consuming unique and timely content. Others have the impression of the app as confusing and difficult to use, a perspective that is needlessly true for many.

Famously, Twitter took its time to establish a viable business model – it was originally conceived as a group texting tool rather than the information dissemination engine that it became. It didn’t sell advertising for the first four years of its existence, and even then, didn’t seem to have gotten serious about it until a few quarters ago under the pressure of the pending IPO. Now it needs to get serious about marketing itself and in making the app painlessly easy for newbies to get started. I am a true believer in the value of Twitter for both my professional and personal life, and given the awesome variety of content available, I believe that most consumers, properly informed and given a easy on-ramp to the service, would become active users.

Exh 1

Exh 2

Now that we’ve discussed the elephant in the room, let’s move on to more pleasant topics. First, ad sales were awesome. Facebook and Google gave a glimpse at what seems to be a watershed quarter for digital advertising, with the marketing community showing surprising confidence in incorporating on-line elements to broader campaigns. Twitter was in the middle of this, with bells on. In 4Q, the company introduced a new rich media timeline format that enhanced ad content. It launched a bevy of partnerships with traditional media players, with rafts of new coordinated video and rich media ad content showing up in user timelines. In cooperation with Nielsen, Twitter announced new tools to let television partners measure user engagement on the service. All of this helped to drive a whopping 50% QoQ growth in advertising dollars per MAU (Exhibit 1). This more than covered for the weak user count and engagement numbers (Exhibit 2) to push both sales and profits WAY above street consensus for the quarter and prompted management to offer new, higher than expected guidance for 2014, that I still think the company will handily beat.

So Twitter has solved the revenue side, and for most Internet companies, that is the hard part. Now all it has to do is get out there and sell, sell, sell to consumers. With all of the media company partnerships in its back pocket, I would think Twitter would have this covered. The ball is in your court Dick Costolo and company – GET IT DONE!

For our full research notes, please visit our published research site.

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