Quick Thoughts: TWTR 3Q14 – It’s Always Something

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–        TWTR posted 3Q14 results that either met or beat consensus for every reported metric, including 23% growth in users, 14% growth in timeline views, and 114% growth in revenue

–        Nonetheless, shares traded off 10%+ after hours, leading reporters to speculate the cause – 4Q sales guidance? Views per user? Whisper numbers? Decelerating QoQ MAU growth?

–        The worst number in the report was a 7% sequential jump in stock based compensation expense, which wiped away the benefit of record EBITDA margins, and then some.

–        4Q compares are relatively easy on MAUs, engagement and sales. 4Q guidance could be a low ball –3Q sales were 6% above the high end of guidance. Perhaps TWTR will answer the skeptics.

In its fourth quarter of reporting earnings as a public company, Twitter once again reported generally strong results that were either in line or beat consensus. Top line revenue was a clear beat at $361M against the $352 expected by consensus, growing 114% YoY. EBITDA came in at $68M, well above the consensus target of $54M, on operating margins that were, again, well above analyst expectations. EPS was on target at a penny, but save for some extraordinary expenses including forex and increased interest expense on a convertible note offering, it would have been $0.02.

Monthly Active Users (MAUs), 284M, were up 13M from last quarter and 52M from last year, representing YoY growth of 23%, in line or ahead of analyst projections that had been quoted in the press. Timeline views by logged in users reached 180.6B, up from 158.8B last year, growing at 14%. The company had phenomenal success monetizing mobile, with the category now representing 85% of revenue, up from 70% last quarter. The “data licensing & other” category was up 171% to $41M driven by MoPub. Its international user monetization more than doubled in value as the company now has a presence in 60 countries, and is aggressively targeting certain growth markets. BAM! The stock is trading down more than 10% after hours. What happened?

Business reporters, writing against deadlines, were flailing. Some glommed onto Twitter’s 4Q revenue guidance, the midpoint of which was below the $448M consensus. Maybe, but the company just topped the high end of its 3Q guidance by $21M or more than 6%. Many companies get away with conservative revenue guidance. Others hit on a slight deceleration in the percentage sequential increase in MAUs – up 6.3% QoQ in 2Q and 4.8% in 3Q – even though the MAUs were fully in line with expectations in a summer quarter where fewer new smartphones are sold. A few others called out timeline views per MAU – a measure of user engagement – which were down 7% globally YoY (-6% in the US, and -8% internationally). This sounds good, but the metric was essentially flat vs. the universally lauded 2Q, and up nicely YTD after a sharp drop from 4Q13 into 1Q14. On the call, CEO Dick Costolo reminded listeners that more recent cohorts of new users have lower than average engagement, but observed that over time these users become more engaged. This rationale makes sense, as new users don’t become power users checking Twitter timelines 10x a day right away. Still, it may have spooked some investors.

Stock based compensation (SBC) is also growing at Twitter, up 288% YOY and up 7% sequentially to $169.6M. We can assume this included some transaction related SBC, as the company closed three deals in the quarter: payment infrastructure provider CardSpring, mobile advertising company TapCommerce, and video editing platform SnappyTV. Still, guidance on SBC was revised downward for the full year from a range of $640-690M to a narrower $630-$640M range – this is actually good news and may add to earnings next quarter.

Strategically, Costolo and his lieutenants have been anything but idle this quarter and have been laying the groundwork for the company’s aspiration to build the largest daily audience in the world, a goal that was articulated back in July. On the call and on an appearance on CNBC just after the announcement, Costolo likened Twitter’s addressable audience to 3 concentric circles with MAUs in the core circle, followed by not logged-in timeline views, which represent 1-2x the level of MAUs in the second largest circle, and syndicated viewing via embedded tweet as the largest circle. Costolo is confident in monetizing the first two circles through the core Twitter product.

Head of Product Daniel Graf has been on the job for 6 months and his fingerprints are becoming visible with easier onboarding for new users and better organized content. I still believe that a redesigned Twitter App is in the works, and that it could resolve many unnecessary obstacles to bringing in new users and getting them engaged. Twitter has also been able to get some exclusive content related to new TV shows like “Homeland” and is one of the few media entities that is able to leverage and monetize content from the NFL at no cost. Costolo assures the “#nfl” initiative will have a live score capability soon.  With respect to the largest circle encompassing syndicated and network audiences, Twitter last week unveiled the new “Fabric” SDK, allowing developers to leverage the MoPub platform on top of apps running on iOS and Android, effectively taking on Google’s Admob and Apple’s iAd. Twitter’s “Digits” service removes barriers for app makers in authenticating mobile users via SMS text for free.

Still, haters gotta hate. Perhaps the stock’s run from $32 post 2Q earnings to the recent $50 high gave a few investors itchy sell trigger fingers. Perhaps Twitter just didn’t do enough to shake the skepticism around its ability to grow users and sustain engagement. Perhaps investors are put off by Costolo’s insistence that he can monetize “phantom” users who don’t log in. I don’t really know, but if the stock is trading in the low to mid $40’s tomorrow, I would buy some.

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

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