Quick Thoughts: Twitter Stops the Bleeding

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–        TWTR answered its doubting investors with a strong analyst day, offering new detail on its operations, articulating its long term strategy, and setting ambitious long term financial goals.

–        Management revealed that its 284M MAUs are buttressed by an additional 500M+ unregistered users generating 185B impressions/quarter. TWTR expects to monetize this.

–        TWTR plans extensive enhancements to its core product to drive registered user growth and engagement, and to add new separate apps, like TWTR’s micro video service Vine

–        New CFO Nota saved the best for last, laying out a scenario of user growth, heavier ad loads, growing engagement, and new monetization to justify a 10x growth target over the next decade

A little over a year after its IPO, TWTR welcomed investors and analysts to the Four Seasons in San Francisco for its first analyst day. The stock has had a wild ride since the IPO and most recently investors punished the stock for a modest sequential deceleration in user growth, after an otherwise respectable earnings report for 3Q14. Frustrated TWTR executives have struggled to communicate the reasons for their confidence and have reacted defensively to criticisms of its shortcomings. The turmoil around the stock has been matched by the turmoil in the management ranks. After a 6 month tenure as head of product, former Google Maps leader Daniel Graf was recently demoted as criticism of the service built. Earlier in the year, Twitter had replaced its COO, CFO and Chief of Engineering. The shuffle has contributed to the skittishness of investors. Going into the analyst day, expectations were all over the place. Arguably, Twitter management beat them all.

The analyst day gave investors unprecedented detail into the company’s operations and strategic plans over the course of 7 hours and 13 executive presentations. Critically, TWTR clarified its strategy to “build the largest daily audience in the world,” despite being a fraction the size of its larger social media rival, Facebook. Costolo’s concentric circles of user engagement appeared in the presentation and the company gave more detail around size. With over 784M unique users accessing timelines each month, and 185B quarterly impressions via embedded and copy/pasted tweets, the company’s reach could very well rival Facebook, though engagement remains a significant hurdle and TWTR has not yet shown its ability to monetize its unregistered users. TWTR has often been criticized as being difficult to use for new users given the result is often an empty timeline after signing up. As a result users sign up, but do not use the service.

With the problems well understood, TWTR executives went into detail outlining how it they plan on addressing user growth, engagement, and monetization. For starters, there is the newly announced “Instant Timeline,” which populates a timeline to create an immersive experience for users who sign up, rather than a blank page with no content. The onboarding process is also dramatically improved as users are shown screens that explain how users can use Twitter to keep up with interests and friends. The screens also prompt for interests and allow new users to upload contacts. Twitter claims the new process increases the number of people new users follow by 190%. For more advanced users there are tweaks to video, which has been a focus for the company ever since it acquired Vine just over 2 years ago. Rather than 6 second clips, users will be able to upload, edit, and share longer form videos in real-time on Twitter and be available within the main app. TWTR also took note of Facebook’s focus on messaging with its acquisition of Whatsapp and separation of messaging functionality into a separate mobile app, by enhancing direct messaging features such as the ability to privately share a tweet. While politicians can rejoice, the feature could boost messaging activity and dialogue between users who may not ordinarily tweet publicly. Another feature touted by the company is “while you were away” which injects the missed tweets onto timelines. All well needed enhancements to the platform.

Then there is the logged out and syndicated audience. In addition to giving the 500M+ unique monthly visitor number, TWTR disclosed that another 200M logged outs visit the profiles of celebrities and public figures, while some 75M users engage with individual tweets via search. CFO Anthony Noto emphasized TWTR’s strategy is not to bounce off or force logged outs to join, but to keep engaged and serve additional content. Noto believes the value of a logged out user may be at least $2.50, taking the opportunity from logged outs to $1.3B if TWTR can keep them engaged.

To this end, Chief Revenue Officer Adam Bain talked about the Twitter Publishing Network (TPN), which would allow TWTR ads to be distributed around the web much like tweets. Noto suggests the $1.3B opportunity excludes the impact of TPN. The syndication is another massive opportunity. TWTR’s Fabric is gunning for the mobile ad businesses of Google, Facebook, and Apple as it gives developers the tools to monetize apps via advertising across platforms. New innovative ad formats like website cards, mobile app install ads, video, and off network ads generated $93M of revenue in the last quarter up from nothing a year ago. TWTR has been successful in cultivating advertising partnerships with a variety of marketers and content owners. With network advertising now a focus, expect this to represent a sizable revenue category for TWTR.

Wrapping the analyst day, Noto delivered closing remarks that threw out some juicy numbers. According to Noto, simply increasing ad density, or what TWTR terms “ad load factor” from 1.3% to 5% could add an additional $5B in revenue. TWTR believes MAUs can grow 2x in the intermediate term to 560M resulting in incremental revenue of $4.6B if it can maintain an ad load factor of 5.0%. Next there is engagement as measured by daily active users (DAUs) as a % of MAUs. Boosting this could add $0.5B in incremental revenue, while the logged out opportunity could be $1.3B assuming $2.50 in ARPU. There wasn’t much guidance on what the syndicated potential is, but TWTR is gunning for $14B in revenue in 10 years, and believes the opportunity is $11.4B in the intermediate term with the core business, ambitious for a company that just hit a $1B run rate the last quarter.

TWTR execs were confident if not defiant during the presentations. User growth, engagement, and monetization are priorities and the analyst day presentations outlined a compelling use case for TWTR. We remain bullish on the company given the uniqueness of TWTR’s service and its substantial monetization opportunities.

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

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