Quick Thoughts: TWTR 2Q14 – How Tweet it Is!

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–          TWTR crushed expectations on every important metric, in particular delivering 24% growth in monthly average users, reversing a deceleration that had previously spooked investors

–          Sales growth accelerated to 124% YoY, with ad $/MAU up 85% despite a disadvantageous mix shift toward non-US users. Guidance was well above consensus, portending sharp upward revisions.

–          Future user growth should see further acceleration with a redesigned app to improve user experience and more aggressive marketing to support it on the way.

–          TWTR is very well positioned to exploit ad industry paradigm shift to digital – on and off the TWTR site. Huge scale economies will drive margins much further and faster than expectations.

The naysayers will put this all on the World Cup. Yes, monthly average users were up 24% YoY and 6.3% QoQ, beating even the highest hopes of Wall Street analysts during 2Q14, but, hey, the last two weeks of June saw the start of the globe’s biggest sporting event. Indeed, during the final on July 14, Twitter bragged that its users had set a new record, hitting nearly 619,000 tweets per minute at the peak. Surely some of these new, football-crazed, MAUs will stop using the service now that the tournament is in the history books.

Well, maybe not. First of all, those World Cup users undoubtedly stayed on board for the finals, which occurred a full two weeks into 3Q14, and probably brought even more users to the app as the knockout rounds progressed, so there is no reason to expect any drop off for September. Second, the month long event gave those users a full immersion in Twitter’s compelling use case. Surely many of them will stick around for the club football season and to keep up with any other interesting topics they may have discovered along the way. Finally, a World Cup bump bought Twitter time to fix its cumbersome mobile app and to put together a serious marketing push for the Christmas season. There are more than 100M smartphone users world-wide that have the app but don’t regularly use it. Fix it so they can easily get started using it and explain the use case with a memorable ad campaign, and I’d bet the user number can move even faster than it did this quarter.

Meanwhile, Twitter blew the doors off on monetization. Total revenues were up 124% YoY. On a global basis, monthly ad revenue per user was $1.02, up nearly 85% YoY, with total ad revenues up 129% after factoring in that strong user growth. Even while investors were collectively kvelling about the sluggish MAU growth in the last few quarters, Twitter has established itself as an ad selling juggernaut – its interest graph offers unique and valuable targeting data, its new rich media advertising formats have proven effective in delivering messages to their audience, and its MoPub network opens the door to leveraging that expertise and data to sell mobile ads across the entire internet. At this point, the mobile ad game looks like a three horse race – Google, Facebook and Twitter – and with the $1T global ad industry in the midst of a significant paradigm shift that will emphasize digital over traditional media formats, the company is in an enviable position.

Twitter is trading up big after hours and will likely keep most of those gains as investors metabolize these numbers and as analysts eat crow with their big upward revisions. After this blow out, the September quarter is set up – the new guidance is substantially above consensus, but only a modest step up on a sequential basis. Meanwhile, I expect a newly revamped app to hit the market in 4Q, along with the company’s first concerted advertising program to explain the use case and get users on board. There really is no alternative to Twitter for distributing and discovering real time information, and I think the use case is FAR more universal than the market currently believes. I think that there may be more days like this one ahead for Twitter investors.

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