Twitter reported its Q1 earnings today, and they’re not great. On the back of 310 monthly active users, the company posted revenues of $595 million, with Q1 GAAP diluted earnings per share of ($0.12) and non-GAAP diluted EPS of $0.15. This is a big miss on revenues but a beat on EPS.
Click Image To Enlarge
On top of this, the company issued very weak guidance for Q2, and currently Twitter’s stock is trading more than 13% down in the immediate aftermath of the results coming out. We’ll update this as it moves.
Twitter (NYSE:TWTR) shares declined 16.2% between the close of trading on April 26 (the day it announced its Q1 2016 earnings the price was $17.71 per share) and April 27 ($14.86 price end of trading) (Click Image To Enlarge)
Analysts’ expectations for non-GAAP EPS averaged out at $0.10, while the average estimate for revenues was $608 million. The company remains unprofitable with the net loss it reported this quarter coming in at negative $79.7 million. GAAP EPS was expected at negative $0.17. Twitter itself provided revenue guidance of $595 million to $610 million.
The company also issued new guidance on Q2 that spells bad news for the quarter ahead (or at least much lowered expectations). Twitter expects revenues between $590 million and $610 million, but this is a huge step down from $678 million, which is what analysts had estimated before today’s release. Ebitda is also taking a big hit: with Twitter estimating between $145 and $155 for Q2, while analysts had expected $173 million.
Twitter’s 310 million MAUs is not great user growth, although it is up a bit. But this graphic with nearly-identically sized bars, from Twitter itself, sort of says it all when it comes to the topic of stagnating growth.
Monthly Active Users (MAU's) Comparison Twitter vs Facebook, Instagram and Snapchat (Click Image To Enlarge)
As a recap, last quarter (Q4), Twitter disappointed on revenues of $710 million and adjusted EPS of $0.16 per share, with monthly active users 305 million, essentially flat on a year ago and notably a decline from the previous quarter. And a year ago, the company’s stock dropped 18% on poor revenue and user growth.
A year ago, monthly active users were 302 million, with 80 percent of them using Twitter on mobile.
The thing about Twitter is that it is growing in some of the key areas where it hopes to as a business, but just not enough, at least not right now. The company said that advertising revenues were up 37% over a year ago, representing sales of $530 million. But that number was down by quite some way on last quarter, when ads brought in $640 million in revenues.
Part of this is because Twitter is still not pulling in as many big ad dollars as they expected or hoped to. The company noted.
“Year-over-year revenue growth from large brand advertisers was softer than expected,although brand advertising remains our largest overall contributor to revenue.”
The company in the last quarter has made some waves to try to extend out its position as a media engagement platform, such as its deal to stream NFL games earlier this month, tapping both into its ambition to do more in video as well as sports content. Its early move with Periscope, however, is now facing competition from the likes of Facebook with its new Live product, and potentially Google, which reportedly is also building a live video service.
The company said in its report.
“As we outlined last quarter, we’re focused on what Twitter does best: live. Twitter is live: live commentary, live connections, live conversations. Whether it’s breaking news, entertainment, sports, or everyday topics, hearing about and watching a live event unfold is the fastest way to understand the power of Twitter. Twitter has always been the place to see what’s happening now and our continued investment in live will strengthen this position. By doing so, we believe we can build the planet’s best daily connected audience. A connected audience is one that watches together, and can talk with one another in real time.”
Earlier in the quarter, there was a lot of commotion around the company’s move to play around with the algorithm that serves Tweets to surface them non-chronologically, although we’re hearing a lot less about this more recently both from Twitter and users.
Internationally, it’s made some moves to potentially monetise its audiences outside the U.S. a bit better. In the UK, Germany and Japan (and soon France), Twitter is now working with Yelp to power location services (similar to the deal it has with Foursquare in the U.S.), although a recently appointed a new head of China has been spotted with controversy.
COMMENTARY: It's become increasingly apparent that Twitter (NYSE:TWTR) is in trouble. Its user base is stagnant, its management is leaving in droves and its financials, as compounded by the company's most recent release, continue to miss the mark. Twitter's current market capitalization is a little over $10.2 billion - 60% down on its 2013 IPO cap. A number of analyses have addressed each of these points individually, but none have as yet put forward the real issue. That is, Twitter is essentially valueless. This conclusion may come as a shock, but it shouldn't be. Twitter's HQ is on fire, and key members of its management team, have bailed out. That is the most important evidence. Why Twitter is valueless will be discussed in more detail shortly, but first, let's note some of the arguments put forward by proponents of the company and its long shareholder base.
- Perhaps the foremost argument for Twitter's bright future is the vast swathes of user data it holds, and - perhaps more importantly - the real-time data its platform generates. As we will discuss, these are two very different things, and their value (especially in the case of the former) is overrated.
- Twitter's large user base is often used to justify its multibillion-dollar market capitalization. A base of more than 300 million monthly active users is nothing to be ashamed of, and while growth is modest, any company should be able to effectively monetize such a large base of users. Twitter is failing to do so - again we will get to why shortly.
- Twitter's utility as a news broadcasting platform. As stated by CEO Jack Dorsey: "Twitter is the most powerful communications tool of our time. It shows everything the world is saying...10 to 15 minutes before anything else."
There are more arguments in support of Twitter, but these seem to be the primary reasons behind an investment in Twitter as things stand - aside from the fact that optimists might regard its current price (78% cheaper than its 2013 highs) as a discount entry. We hope, however, that the debasing of the three mentioned support points will, by proxy, debase this latter fourth.
We can debunk the above three arguments why Twitter is a worthwhile investment below:
Data - We will look at the data Twitter holds on its users as individuals first, as this is far more relevant to its ability to generate revenues (as things stand). This is the data Twitter uses to target its advertisements - its sales pitch to potential ad clients, if you will. Fake profile data aside, it also knows how old we are, where we live and - in many cases - what we do for a living. Aggregate this data and any company worth its salt should be able to offer up a pretty targeted campaign for a client. Not Twitter, apparently. We know this through two primary pieces of information. The first, through a statement made by the company's head of U.S. ad sales back in February. In an interview with Digiday, Twitter's Matt Derella discussed the company's new strategy of serving advertisements to users that aren't logged into the platform. To quickly explain this, in previous incarnations, Twitter would only display advertisements to a user that was logged in. If a non registered, or non-logged in user, was browsing the Twitter feeds of other users, it would be an ad free experience.
It's reasonable to assume that Twitter should be able to serve far more effective advertisements to users that are logged in than it can to users that aren't (read: anonymous browsers). Not so. Here's what Derella said:
"We can provide the same level of deliverable results that we can with logged-in users."
This means that the data Twitter holds on its users doesn't actually translate to any deliverable benefit to its advertisers. How this can be the case is anyone's guess. The most logical assumption, however, is that Twitter's advertising is equally ineffective for both logged in users and for anonymous browsers, and that the former simply aren't responding to the ads being served across the platform. The second piece of information relates to a shift of ad clients away from Twitter, and is something we'll address in the second part of this piece - the part that relates to Twitter's ability to monetize its userbase.
Let's move on now to the real time data. Back in October, Twitter's said that the hashtag, and the text-based communication, made for far easier aggregation than, say, Instagram or Snapchat's images. At the time, Twitter had just closed deals with IBM and Bloomberg - deals that looked to mark a shift in focus toward the data side of the business that, for so long, analysts had been screaming at Twitter to take advantage of. Fast forward to the present day, however, and neither of these supposedly pivotal deals look to have progressed into anything game changing and if latest management-investor communications are to be believed, the company has once again shifted towards trying to redesign its ad offerings (vertical video load, DoubleClick integration, etc.) rather than package and sell its data. The latest news in this arena is that Twitter is targeting Japan as a data customer. There are only 35 million MAUs in Japan (about half the US equivalent figure). If the company struggles to sell its data to US businesses to the extent that advertising still accounts for the vast majority of its revenues, chances are it won't do a whole lot better in Japan. Another example, in this author's opinion, of a Hail Mary from Twitter. To put it another way, another example of the company talking big, but when it comes down to it, not being able to deliver.
Large User Base - let us now address the second argument in favor of a bullish twitter thesis - the company's user base and its monetization. 310 million MAUs, as mentioned, is a good number. When compared to Facebook (1.59 billion MAUs), it obviously falls considerably short, but to say that a company should be able to effectively monetize 310 million active individuals is not being too hard on Twitter. For some reason, however, it hasn't been able to. Most reading will already be aware that the company generated $595 million revenues during the first quarter of 2016. Of this number, $530 million came from advertising. Although now we are hearing that the big-ticket advertisers are shifting away from Twitter and toward fresher alternatives such as Snapchat. This isn't a surprise. Twitter has far surpassed the point where it can be considered an experimental advertising platform for the big-name brands.
It's now at the point where advertising agencies and their clients have data on the efficacy of a Twitter campaign and are able to weigh this up against reallocating their dollars toward expanding campaigns on the other established platforms or initiating experimental campaigns on platforms that are at the stage Twitter was half a decade ago. In other words, Twitter has attempted to monetize its user base and to some extent has done so. But as advertisers shift from the platform, chances are we will look back and see the current circa $600 million - or around two dollars per monthly active user - as a peak.
Utility As Advertising Platform - Following on from Dorsey's quote above, and this time with reference not just to Twitter's fast paced, information breaking nature but also its shift into live streaming with Periscope, here's another quote (from the latest report):
"As we outlined last quarter, we're focused on what Twitter does best: live. Twitter is live: live commentary, live connections, live conversations. Whether it's breaking news, entertainment, sports, or everyday topics, hearing about and watching a live event unfold is the fastest way to understand the power of Twitter. Twitter has always been the place to see what's happening now and our continued investment in live will strengthen this position. By doing so, we believe we can build the planet's best daily connected audience. A connected audience is one that watches together, and can talk with one another in real time."
To offer up some credit, this statement is partially correct. Twitter's allure (for some) is that it offers a resource through which individuals looking for access to the latest breaking information can see what's happening. Twitter offers users a list of "what's trending" on a geographgic basis. There are a number of issues with this, however. First and foremost, credibility. There have been numerous studies undertaken (here are three examples, but a quick search reveals plenty more) that totally debase the credibility of Twitter users' response to any crisis or breaking news event. Yes, factual information will generally publish through Twitter before mainstream media channels publish it, but there is a reason for the delay in the latter, and the reason is credibility. With some exceptions, reputable media channels fact check, cite sources and hold accountability for what they publish. The average Twitter user does not, and this unreliability undermines Twitter as a go to news source altogether. How can a user determine what is fact and what is fiction? Further, even if individuals did go to Twitter to glean the latest information before it breaks anywhere else, the chances of Twitter being able to serve them effective advertisements in the sort of environment that requires instant and first look access to a crisis or breaking news event are minimal.
It's important to note that this is not some sort of bias-driven rant intended to discredit Twitter as an investment opportunity. The platform has its uses. I also have an admittedly small, personal and professional following, with whom I'm able to share my blog posts via my Twitter account: @turk5555 Twitter broke the recent Prince passing and I happened to see it there first as I was (likely) performing one of the two already mentioned Twitter related activities. Others no doubt, will have similar experiences with the platform. Some will use it far more.
When all is said and done, Twitter's advertising model has failed to generate an ROI for investors. Twitter has shown it is unable to deliver any (it has failed to generate a profit since it was founed in nearly 10 years ago) ROI, and any turnaround looks highly unlikely given current conditions.
As a mainstream information sharing platform, or as a forum through which individuals are able to keep tabs on the people that pique their interest, Twitter will probably be around for years to come. It's just not an investment opportunity, and it's not going to be long before even the most ardent Twitter bulls are forced to come to this realization and unload.
When Jack Dorsey returned to the helm as CEO in August 2015, he promised big changes would come, but with the exception of its Moments app, I have not seen any game-changing changes that would spark a turnaround in the number of monthly active users (MAUs) or advertising revenues. Revenues are up year-to-year, but the increase in video ads has come at the expense of promoted tweets. Advertisers have merely shifted ad dollars from promoted tweets to video ads.
The biggest problem that I see with Twitter is that it has become a "one trick pony" in the sense that people view it as a place to post your tweets and not much else. In my opinin, Jack Dorsey must make a huge pivot to redesign Twitter into a social network with features that existing users will fall in love with to increase engagement and new user signups. I have not seen evidence of either.
Twitter's failure to provide advertisers, especially large brands, with ad targeting tools based on demographic and online behavior attributes, has created an endless parade of promoted tweets and video ads that are irrelevant to users. I hope that the recent hiring of a full-time head of marketing, will correct this huge weakness and bring back big ad spenders.