Quick Thoughts: TWTR – Not Surprised That User Growth Issues Haven’t Been Resolved … YET


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Quick Thoughts: TWTR – Not Surprised That User Growth Issues Haven’t Been Resolved … YET

–          TWTR’s strong ad sales and surprise pro forma profit were overshadowed by the relative lack in growth of active users, continuing a trend established in 4Q and precipitating a sell off

–          TWTR’s user problem relates to poor app design and underinvestment in marketing. This will take more than 3 months to resolve. Meanwhile, monetization has been outstanding

–          The hire of former GOOG Maps boss Daniel Graf to head the consumer product was a BIG move that should pay off, but it’s unrealistic to expect results before year end.

–          I believe TWTR is inherently attractive and that the “problem” with user growth and engagement will be resolved. Look for a significant reacceleration in 2h14.

Given the skittishness of tech investors these days, it is no surprise that Twitter’s 1Q14 numbers precipitated an after-hours shaming, but in the context of a substantial beat on both top and bottom lines, the scale of tonight’s carnage was nonetheless a shocker. Clearly Twitter management has had monetization and profitability at the top of their post IPO list, as the company delivered on both metrics. Sales came in at $250.5M, vs. the $241.7M consensus, up nearly 120% YoY and a modest acceleration from the 116% annual growth delivered in 4Q13. Ad revenues per 1000 timeline views was up 94% to $1.44, a slight slip QoQ due to seasonality. With the top line beat, leverage to the bottom line allowed for the company’s first quarterly profit, albeit on a non-GAAP basis, defying expectations for a $0.03/share loss.

So what was wrong? Once again, the culprit was monthly average users. 1Q14 MAU’s came in at 255M, up 25% YoY and 5.8% QoQ but short of a widely circulated whisper number of 257M. This came on the back of a more significant MAU disappointment in 4Q13, when QoQ growth slumped to 4%, and prompted the 10% after market sell-off. In the current market environment, Investors may feel the need to sell first and ask questions later, but it is hard to see how a modest acceleration in MAU growth merits a 10% downward reset, particularly since Twitter has had so little time to implement the changes needed to revive user growth.

For the past several years, one of Twitter’s major struggles has been creating a cohesive consumer product strategy. As CEO Dick Costollo noted, user growth was just something that happened. Without emphasis on finding and keeping users, the Twitter App remained a confusing and poorly designed detriment to engagement, while the company did nothing to explain its use case or attract users. Monetization surged, but the user base sagged. Since the 4Q13 shocker, Twitter has shown signs of getting more serious. A couple of weeks ago, it announced the hiring of Google Maps honcho Daniel Graf to head its consumer product efforts – great hire, but it is unrealistic to expect miracles in his first 12 days on the job. The App needs to be redone – Graf certainly knows this, and work is probably underway to make it easier for newbies to get started in navigating the fire hose of content on the service. Once Twitter fixes its ease of use issues it can then market the hell out of the service and drive those user numbers up, but the solution will require a bit of patience.

Aside from the user number, there is A LOT to like about this company. Twitter has been able to monetize its MoPub acquisition and integrate an OS agnostic platform to sell in app ads. The acquisition of Gnip earlier this month brings in house an important function that can add immense value to marketers. Twitter data is extraordinarily useful for gathering consumer insights and sentiment and while its licensing product currently drives just under 10% of revenue, Gnip can be a significant value added feature that could drive more advertising. The company indicated its advertiser rolls are growing and it plans on adding head count to sell ads internationally. International revenue per 1,000 views stands at only $0.60 versus the $3.47 in the US. Twitter’s planned launch of an integrated bidding system with a single interface will make advertising buys easier for media buyers and marketers, co-opting some of the value third party ad tech companies have been able to muster.

Ultimately, Twitter’s important strategic decisions to improve product, drive user growth, and increase advertiser spend will take longer than a single quarter to play out. Some investors may not have the patience for this, and the after-hours sell off is a good indication of this. Still, I see the collapse as a significant opportunity to get in on a company that is likely to keep surprising to the upside on both sales and earnings, and that will likely crack the code on reviving subscriber growth sooner rather than later.

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

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