Quick Thoughts: TWTR is Doing Just Fine in the US, Thanks for Asking

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–          TWTR’s original S-1 showed 2Q13 US MAUs up just 2% QoQ, raising some concerns that US penetration was stagnating

–          An amendment filed tonight showed US user growth re-accelerating in 3Q13, up 8.2% QoQ and 32.5% YoY, not far off of the 38.9% overall growth in MAUs.

–          US ad sales per MAU were up sharply in 3Q13 to $2.11, from $1.79 last quarter and $1.38 in 3Q12, driving total US ad revenues up 26.4% QoQ and almost 100%YoY.

–          We believe TWTR can continue to increase the density of ads in US timelines. TWTR’s big media deals, w/ high CPM video ads, will kick in beginning in 4Q13.

The 3Q13 numbers posted with Twitter’s amended S-1 should go a long way to settling the nerves of investors perseverating over what had appeared to be a slowdown in the adoption of the service amongst American smartphone users. That slowdown – US monthly average users rose just 2% QoQ to 49M in 2Q13 – had Twitter bears hypothesizing that, perhaps, the service was relatively narrow in its appeal. If so, 2Q13 could be an early warning of major sales disappointment just over the horizon. 3Q13 suggests that 2Q13 was an anomaly rather than an omen.

Twitter gained 4M new US monthly active users in the September quarter, an 8% QoQ jump that returned annualized American user growth to a robust 32.5% trajectory. Growth outside of the US remained strong, up almost 41% YoY, so the user acquisition story is fully back on plot. As smartphones proliferate, so should Twitter – it is designed to be mobile and the app ships pre-installed on most leading devices. Big time media partners, signed on to Twitter’s Amplify programs, are promoting the heck out of the service and have pledged to tweet exclusive content like instant NFL highlights and preview trailers that ought to bring new users on board and get existing users checking their timelines more often.

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The good news didn’t stop with user growth. Twitter served $2.11 worth of ads on average to each American MAU, up 17.9% vs. the previous quarter. I believe this is almost entirely driven by a decision by management to simply sell and insert more ads into user timelines. Twitter has only been selling ads since mid-2010, and revealed in its initial S-1 that the advertising density had been restricted. After Facebook proved that its users would accept a big slug of additional ad insertions to their newsfeeds, Twitter has released the hounds.

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4Q13 ought to be even bigger. First, December is the big quarter for all advertising driven businesses, and Twitter is no exception. Last year, Twitter’s 4Q12 US ad revenues were up 41% sequentially, and, overall, 4Q12 ad sales were 37% of the year total. Second, Twitter has signed partnerships with a murderer’s row of media companies – NBC Universal Comcast, CBS, Fox, ESPN/Disney, the NFL, MLB, etc. – who have committed to promoting Twitter within their content and funneling exclusive content and advertising onto the service. These deals are only starting to hit the public consciousness now with the launch of the new TV season, and the video advertising, carrying CPMs that are typically 10-15 times those for display ads, won’t begin to hit results until the 4Q13 numbers.

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I think all of this will have long legs. The natural symbiosis between TV and Twitter will bring new users, induce existing users to visit more often, and convince advertisers to cleave off a piece of their budgets for the service. Nielsen’s new Twitter metrics will also help on the last point. Beyond Amplify and those high priced video pre-roll spots, the ad market is also finally getting its hand around mobile advertising. Here, Twitter, with its easily digested timelines and compelling rich media cards, is ideally positioned. The amended S-1 gives me more confidence that my projection of $2.6-3.0B in 2016 revenues will prove conservative.

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

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