Snap reported quarterly financial results for its first time as a public company on Wednesday, posting revenue that missed estimates and slower-than-expected user growth.
Shares plummeted more than 20 percent on Thursday. The company spent $2 billion on stock-based compensation expenses after its initial public offering, widening net losses for the quarter to $2.2 billion.
CEO Evan Spiegel got a $750 million bonus for taking Snap public. He told analysts on a conference call that the company was focused on improving quality for users during the first quarter, especially for those with Android mobile phones.
Despite the steep loss during the quarter, Snap is "still in investment mode," the company's chief financial officer, Drew Vollero, said on a conference call with analysts.
The Numbers
Revenue: $150 million reported vs. $158 million expected by a Thomson Reuters consensus estimate.
Global DAUs: 166 million reported vs. 167.3 million expected by StreetAccount.
ARPU: 90 cents reported vs. 90 cents per share expected by StreetAccount.
Loss of $2.31 a share including compensation expenses.
Analysts at Thomson Reuters estimate an adjusted loss of 20 cents per share, wider than the 19 cents expected.
That's compared with revenue of $38.8 million in the year-ago period.
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Amid trouble at Facebook and Google, unprofitable underdog Snapchat aims for engagement
As the company behind the viral ephemeral messaging app and Spectacles glasses, Snap's IPO was the biggest technology offering since Alibaba.
And it's growing at an extraordinary rate: Revenue rose 286 percent year over year in the first quarter. Daily active users rose 36 percent from the year-ago period, and average revenue per user grew 181 percent.
More than 3 billion Snaps were made daily in the first quarter, the company said, up from 2.5 billion in the third quarter of 2016. Users spent an average of 30 minutes a day on Snapchat, the company's chief strategist, Imran Khan, said on the conference call, and cited Nielsen data showing that many Snap users could not be reached by traditional TV channels.
Khan told CNBC.
"We made good progress this quarter improving the performance and quality of our Snapchat application, especially on Android, which has helped result in increased net user adds and engagement. We still have a lot of work to do, and are excited about the potential from continued performance improvements."
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But since its IPOin early March, Snap has faced an uphill battle to convince Wall Street it can make money with advertising, even with Facebook and Googledominating the market.
Spiegel said that automation will help the company make more money for advertisers.
Facebook, in particular, has pushed aggressively into Snap's turf. Boss Mark Zuckerberg told analysts that Instagram Stories has 200 million daily active users, and WhatsApp Status has more than 175 million daily active users.
As a whole, Facebook has 1.28 billion daily active users, nearly eight times as many as Snapchat.
Other revenue sources, like Spectacles, have hardly made a dent in the company's business. Analysts surveyed by Thomson Reuters expect Snap to post a per-share loss through the end of 2018.
Snap has not made great gains in the markets, trading mostly below the high of $29.44 in its first week of trading. Indeed, the stock fell as low as $17.07 after hours, just 7 cents above its IPO price, as shares changed hands in heavy volume.
Snap should have set its expectations lower, Art Hogan, chief market strategist at Wunderlich Securities, told CNBC's "Closing Bell" on Wednesday. He explained that a company's first earnings report as a public company is "really dependent" on executives giving realistic guidance. But that's just part of the growing pains of becoming a public company, Hogan said.
COMMENTARY: I won't lie to you, I am not a fan of startups with unproven or unsustainable business models and no evidence of profitability. In my opinion, Snap Inc has many similarities to Twitter: 1) user growth slowing down at time of IPO filing, 2) lack of profitability and 3) small market focus (primarily Millennials). Snaps has positioned itself as a "camera app" that allows Millennials, its core user demographics, to share photos that automatically disappear.
In a blog post dated October 10, 2016, I commented on Snap Inc's proposed $25 billion IPO. Like Twitter before it, I had a lot of reservations about the Snap IPO, because there were already strong signs that user growth was slowing down, and many analysts like myself, felt that Snap's business model, which depended almost entirely on advertising, was unsustainable. Furthermore, Snap derived the majority of its ad revenue from the U.S., so in order to sustain growth, this required expanding its user base internationally.
Snap is very slow in providing advertisers with the tools they need to target potential customers, and this is the same thing that plagued Twitter's ad revenue growth. On May 4, 2017, Snap announced a suite of tools to help advertisers market to its users more effectively. If you ask me, they should've done this much sooner.
For those of you who like reading the minutes of Snap Inc's Q1 2017 earnings conference call with investors, you will find it all below:
Snapchat is opening itself up to advertisers of all sizes with new buying tools
According to an announcement on May 4, 2017, starting this June, Snap is going a step further by flinging wide its gates to advertisers of all sizes and budgets with a new suite of self-service tools. The move could help considerably grow Snap's fledgling ad business, which is expected to reach $1 billion in revenue this year.
Releasing a self-service ads manager is intended to erase any friction that may be keeping advertisers off Snapchat, a company spokesperson told Business Insider. Snap expects larger buyers to still go through one of its auction partners, which offer more custom targeting like timing ads to run alongside TV campaigns or during specific weather conditions.
Snapchat's new ads manager will let any advertiser buy, manage, and view reporting for their campaigns. All ad formats,including app install ads, sponsored geofilters, and fullscreen video, are available alongside existing targeting capabilities like goal-based bidding. The manager is free to use and requires no minimum ad spend.
A new mobile dashboard will also allow marketers to see their ads like a normal user, view analytics, and get notification updates about their campaigns directly from the Snapchat app. Over 20 brands are testing these new tools now as part of a private beta, and Snap plans to make them available to everyone in June.
Below is the Snap Inc Q1 2017 Earnings Report Press Release:
On Monday the carmaker's market cap exceeded that of General Motors: $51 billion. This is about $15 billion more than where Tesla was valued for much of 2016. And it's about $7 billion more than Ford.
None of this makes any sense. Tesla's business fundamentals haven't changed substantially since late last year, and its first-quarter deliveries — 25,000 vehicles — set a sales pace for 2017 that will see Tesla produce about only 100,000 cars in 2017, an improvement of 20,000 over 2016.
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One explanation for Tesla's most recent surge could be that short sellers (traders who had bet against Tesla) are finally throwing in the towel and covering their positions. That, by definition, would have them buying the shares.
This does make sense, as Tesla is one of the most heavily shorted stocks on Wall Street, and those short sellers have been suffering lately. The financial-analytics firm S3 Partnersestimates that the shorts have lost $3.2 billion this year.
But given that Tesla was already heavily overvalued based on its core business — building and selling luxury electric cars — and that it has only a few billion dollars of assets to claim, it would be logical for investors to start discounting the value of Tesla's future.
Now that it's on a massive upward trajectory, its first-quarter 2017 earnings loom as an opportunity for a more rational outlook on the company's valuation to take hold and could put new investors at real risk of being flushed out.
An alarming increase
But the manner in which Tesla spikes in the absence of real news and in defiance of the numerous challenges it faces over the next year becomes more alarming as the company's paper value climbs ever higher. Tesla bulls argue that Elon Musk's enterprise will be legitimately bigger than GM's and Ford's in the future because electric transportation will displace gas-powered mobility over the next few decades and Tesla has the best brand and largest head start.
Bears insist that Tesla is a sucker's game and a capital-obliteration scheme. They point to the company's inability to make money a decade into its existence, and to Musk's steady refusal to consolidate the business, preferring to push forward and, for example, launch a mass-market electric car (the Model 3) later this year. Or create an energy-storage business. Or buy the struggling, debt-laden SolarCity for over $2 billion. If the stock indeed represents a claim on future cash flows, they point out that those future cash flows could be zero.
Both angles overlook the company's most glaring problem, which is that Tesla is a carmaker that still isn't very good at making cars. The cars that it does make are impressive (at Business Insider, we've test-driven them all). But Musk expects to be delivering 500,000 vehicles by 2018 and 1 million by 2020 — the former represents a fivefold increase over projected 2017 production, and the latter would require Tesla to either double the capacity of its Fremont factory or build a new plant.
Nonsensical valuation
Viewed in this context, Tesla trading at $311 is flatly insane. Even if it were to sell 1 million vehicles by 2020, most of them would be lower-margin small cars. The most profitable market segments — big SUVs and large pickup trucks — would still be owned by the three Detroit automakers (GM, Ford, Fiat Chrysler Automobiles) that the markets have decided are worth less in the future than Musk's operation.
The situation with Tesla's valuation will probably get worse before it gets rational.
The rally that began early this year occurred after another money-losing fourth quarter. Anyone who is a hardcore Tesla short simply needs to take solace in that Tesla's stock chart has always looked like a roller coaster; shares always go down, typically taking billions in market cap with them. (GM, Ford, and FCA charts, by contrast, look boring.)
A larger question is why Tesla has in the past three months so wildly outperformed even growth-driven stock indexes, such as the Nasdaq. Yes, the markets overall have enjoyed a rally since President Donald Trump won the election. But Tesla has enjoyed a mega-rally — one that's actually out of character with what shares generally do at the beginning of a year, as investors recalibrate their expectations and, if they've owned Tesla for a while, grab some profits.
Beyond trader dynamics — longs versus shorts — Tesla's surge isn't driven by the company's actual performance, and that's exactly what anyone calling a speculative Tesla bubble would latch on to. But that's also old news because Tesla's fundamentals have been analyzed to death, with the obvious conclusion that a $300-plus stock price demands a level of execution that the company hasn't yet reached.
At this point, a Tesla bubble looks obvious, and it looks as obvious as it has since early this year. The difference now is that it's grown so large that it's become terrifying.
COMMENTARY: According to its announcement of January 3, 2017, Tesla (NASDAQ: TSLA) produced 24,882 vehicles in Q4, resulting in total 2016 production of 83,922 vehicles. This was an increase of 64% from 2015.
Tesla delivered approximately 22,200 vehicles in Q4, of which 12,700 were Model S and 9,500 were Model X. When added to the rest of the year, total 2016 deliveries were approximately 76,230. Our Q4 delivery count should be viewed as slightly conservative, as we only count a car as delivered if it is transferred to the customer and all paperwork is correct.
Tesla said the transition to new Autopilot hardware resulted in the company’s vehicle production being “weighted more heavily towards the end of the quarter than we had originally planned.” In total, about 2,750 Tesla vehicles missed being counted as deliveries in the fourth quarter of 2016, which the company ascribes to “last-minute delays in transport or because the customer was unable to physically take delivery.”
Tesla said that even though those sales were counted toward 2016, the deliveries were not because the customers did not physically take possession of their cars. Tesla says about 6,450 vehicles are still in transit, and that their deliveries will be counted toward the first quarter of 2017.
The company said.
“We were ultimately able to recover and hit our production goal, but the delay in production resulted in challenges that impacted quarterly deliveries, including, among other things, cars missing shipping cutoffs for Europe and Asia. Although we tried to recover these deliveries and expedite others by the end of the quarter, time ran out before we could deliver all customer cars.”
While it fell short on delivery, Tesla was able to beat its production rate for 2015. Tesla said it produced 24,882 vehicles in the fourth quarter of 2016, resulting in a total of 83,922 vehicles produced in 2016. This was an increase of 64 percent from 2015.
Vehicle demand in Q4 was particularly strong, Tesla says. Net orders for Model S and X, which were an all-time record, were 52 percent higher than Q4 2015 and 24 percent higher than the company’s previous record quarter in Q3 2016.
Early last month, Tesla announced that it will begin charging owners who leave their cars at Supercharger stations after they have completed charging. The new fee is an attempt to increase turnover at the charging stations, which have become increasingly congested as more Teslas are sold.
Tesla Lithium-ion Battery Gigafactory
Deep in the Nevada hinterlands, under the scorching desert sun, Elon Musk is quietly building a $5 billion, 5.8 million square-foot battery plant that will forever change the auto industry.
Now, most of the attention Tesla receives has to do with its cars. And perhaps justifiably so. Just last week, Motor Trend announced that Tesla's Model S P100D can go from 0-60 MPH in a record-breaking 2.2755 seconds. (That level of torque puts Tesla on par with Ferrari, by the way.)
But the major focus should not be the actual vehicles Tesla is producing. Rather, it's about something much bigger, and, in my view, infinitely more important for Tesla's long-term success: The Gigafactory.
In partnership with Panasonic, Tesla's Gigafactory is building lithium-ion batteries - the same type of battery that's been popular for use with personal electronics but deemed too expensive for electric cars. The Gigafactory is changing that.
As of January 2017, Tesla has begun mass production of the cells, and by 2018, the Gigafactory will "reach full capacity and produce more lithium ion batteries annually than were produced worldwide in 2013," the company says. The facility will be staffed by 6,500 full-time Reno-based employees and "single-handedly double the world's production capacity for lithium-ion batteries," according to Bloomberg.
The company also plans to be producing one million electric cars by the end of the decade.
Now, let's take a step back. Why is the Gigafactory such a big deal, you ask?
Well, two main reasons: Cost and storage.
Batteries for electric vehicles are historically not very cheap, nor do they hold a very good charge. But Musk wants to change that. Specifically, he wants to drive down the per kilowatt hour (kWh) price of the battery pack by more than 30 percent to make it suitable for electric cars, while increasing the amount of energy storage in the battery pack. Must sai at a January 2017 event.
"It really comes from the first principles of physics and economics. That's the way we try to analyze everything."
As stated in a January 2017 investor presentation, Musk announced that the drivetrain for Tesla's much-anticipated $35,000 Model 3 will be built at the Gigafactory 1 in order to vertically integrate the battery production with car production. In a subsequent Q&A session, Musk "compared the concept of the Gigafactory's vertical integration to Ford's effort 100 years ago at River Rouge Complex, the largest integrated factory in the world at the time," Electrek noted.
The big question for investors, however, is whether or not the Gigafactory will pay off in the long-term.
My belief is that yes, it will.
Let me explain.
The Gigafactory Will Push Tesla's Cars Costs Down And Increase Demand For EVs
There's a whole host of reasons why electric cars are the future (fewer greenhouse gases, unstable oil price, a smaller amount of serviceable components, etc.) but the purpose of this article isn't to prove why electric cars are the future. That's just the reality.
By 2040, about 23 years from now, analysts at Bloomberg predict that electric cars will account for 35 percent of all new vehicle sales. Some have even rosier predictions for the EV market: The Argonne National Laboratory predicts that electric cars will make up 58% of the light vehicle market by 2030.
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Right now, what's holding back the sale of EV cars is battery cost and quality.
By owning the production of low-cost batteries with the Gigafactory, the thinking goes, Tesla will establish itself as the king electric vehicle automaker in the long run.
It should be noted, too, that Tesla already has an enormous position on the incumbents in the market, meaning that when the factory is fully up-and-running, they will be best-positioned to target consumers interested in electric vehicles.
Best-selling all-electric cars in 2016
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Tesla is forgoing short-term profits to invest $5 billion into a battery factory (a decision some in the market have criticized) the long-term rewards are well-worth it.
David Keith, an MIT professor studying automotive technologies, told Quartz recently.
"The cost of batteries is so critical in all this that it justifies (Tesla) having this control. No one else is going to push as hard as they want to bring down the cost of batteries, and to push the market as fast as they need it to go."
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The Gigafactory is Opening To Europe - Taking Tesla With It
In November 2016, Tesla announced that they'll be building Gigafactory 2 in Europe.
Since then, plenty of country officials have thrown their hat in the ring, practically begging Musk to choose them. The Dutch Minister of Finance, for instance, officially expressed his country's interest, while Cyprus began a social media campaign to attract Musk. Portugal, however, is perhaps the most gung-ho about the Gigafactory. As DW reported:
"Euphoria has nevertheless gripped many Portuguese over a possible Tesla investment. There's even a Facebook group called 'Bring Tesla Gigafactory to Portugal.' It has only been online since mid-November, but just one month later, it already has nearly 70,000 members. Whether that will help sway Elon Musk as he considers his options for siting Europe's first Gigafactory remains to be seen. It's expected that he will make the siting decision sometime in 2017."
Tesla Stock Bubble
I haven't tracked Tesla shares since late last year, so was very surprised to discover that the shares had increased +104.99 or +53.43% since mid-October 2016. However, the bad news is that Tesla's share price has risen because short sellers have had to buy shares t o minimize their losses. This is a type of "forced demand" that has, for lack of a better word, "artificially drivenup" the price of Tesla Shares, and the increase has been so significant, that retail buyers and speculators have come in and drivenup the price even more. The result is a price per share that is not inline with its financial performance. Tesla's CAP is now higher than General Motors, which is ridiculous since they are both in the same market category. If you are going to invest in Tesla, you must realize that Elon Musk is a high risk taker, who gambles big. Tesla is bigger than fancy electric cars with the latest technology, but about a far bigger mission -- insuring the health of our planet and reducing greenhouse gases. It is a race against time, and this requires rolling the dice. Musk has done this with Space-X, Solar City and Tesla. Forget shortterm profits and look at the bigger picture If investors believe in the bigger picture and true mission for Tesla, then maybe, just maybe, the current valuation is justified on the basis of future potential and not current unit sales of electric cars. If they can grasp the true vision that Elon Musk has for Tesla, then things will sort themselves out. Sure, there may be stock price adjustments, every public company has them, but I truly believe in Tesla's future potential.
Courtesy of an article dated April 10, 2017 appearing in Business Insider and an article appearing in EVVolumes.com and an article appearing in InsideEVS.com and an article dated February 17, 2017 appearing in Seeking Alpha
Twitter reportedits 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.
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On top of this, the company issued very weak guidance for Q2, and currently Twitter’s stock istrading 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 withcontroversy.
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 hearingthat 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 (hereare threeexamples, 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.
Courtesy of an article dated April 26, 2016 appearing in TechCrunch, an article dated April 26, 2016 appearing in CNBC and an article dated April 26, 2016 appearing in SeekingAlpha
The most anticipated technology initial public offering of 2015 is in the books and Square finished its first day of trading on the New York Stock Exchange up more than 45% from its $9 per share IPO price. In the aftermath, there will be plenty of talk of unicorns, ratchets and the disparity between public and private valuations. But who actually came out on top and who was hurt in the San Francisco-based company’s IPO? FORBES assesses the winners and losers from Square’s big day.
Winners
Jack Dorseyturned 39 on Thursday, the day of the IPO, and now holds the unique position of being CEO at two multibillion-dollar public companies. While most wouldn’t envy his task, Dorsey seems to relish the fishbowl-like scrutiny that comes with running both consumer-facing tech firms, Square and Twitter. Yes, his net worth fell $730 million because Square went public below its last private valuation, but Dorsey has never been in it solely for the money. He has returned shares to his companies in the past, most recently handing one-third of his Twitter stake back to the social media firm in October. In the Square IPO prospectus, Dorsey committed to give 40 million shares, or about 10% of the company, to a foundation. He’s also not struggling at the moment with a net worth of more than $1.4 billion. It remains to be seen if he can manage the dual-CEO roles, but Dorsey has established himself as one of the leading entrepreneurs of his generation and he’s not even 40.
Square CEO Jack Dorsey receives kiss from his mother, Marcia Dorsey, outside the NYSE (Click Image To Enlarge)
Square CEO Jack Dorsey poses for photo outside NYSE (Click Image To Enlarge)
Square CEO Jack Dorsey with co-founder Jim McKelvey (Click Image To Enlarge)
With Square pricing its offering well below its expected range at $9 per share, Square merchants, some of whom were able to buy in at the IPO price, benefited greatly. Through a special program, certain merchants who use Square products were able to purchase some of the 1.35 million shares that were donated by Dorsey. Dorsey told FORBES on Thursday.
“Sellers want to own Square and be investors in our success.”
It was also a win for retail investors, who were in a frenzy as the stock shot up in its first hour of trading. More than 47 million shares exchanged hands on the first day of trading, according to FactSet data, and those who bought early and held on through Thursday were able to feel the full extent of the stock’s pop. Among those investors was Tod Wilson, a pie maker whose company was used as an example of a successful Square business in IPO filings and on the company’s roadshow video. Wilson “missed the program” that allowed him to buy shares at the IPO price, but bought in on Thursday and is still holding that stock.
As an investor in the company’s late-stage Series E round, Goldman Sachsand other participants in that financing were protected by a provision known as a “ratchet.” While those investors bought shares at a price of $15.46, the company guaranteed them at least a 20% return on that investment. In order to make that happen when it priced its shares at $9 each, Square was required to issue an estimated 10.3 million shares–valued at nearly $93 million at the IPO price–to those investors. Those shares were worth a collective $135 million when the market closed on Thursday.
Losers
Goldman Sachs saw gains on Thursday as an investor, but as underwriters along with Morgan StanleyMS -3.03%and JP Morgan overseeing the IPO process, it certainly left money on the table for its client, Square. This of course opens up a debate as to what constitutes a “good IPO” with companies weighing the benefits of a first-day stock pop to drive investor interest versus taking in as much cash as possible. Publicly bankers often say pricing an IPO is more an art than a science, with the general understanding that a 15%-20% first-day trading pop is optimal in terms of maximizing proceeds and allowing buyers to feel like they got a deal. Had the underwriters priced Square’s shares at $12–in the middle of its suggested $11 to $13 range–the company could have taken home an additional $77 million in cash. Some argued that because of Goldman’s role as a Series E investor and its ratchet preference, the bank may have had an incentive to price the IPO as low as possible.
While investors with ratchets benefited from the provision, Square’s employees did not. Because the company was obligated to issue more stock to those Series E investors, the entire share pool was diluted. At a Silicon Valley tech firm, where employees are often attracted to companies based on the type of equity packages they receive, that won’t sit well with a mid-level engineer or designer who may have given up a cushy job at GoogleGOOGL +2.32% for Square and its equity. Come the expiration of the lockup period, which prevents investors and those inside the company from selling, employees may find themselves in a tougher market if they want to offload their shares.
Perhaps one of the more curious things on Square’s IPO prospectus was the disclosure of two unnamed investors who bought $30 million worth of Series E shares last month. The company said those backers included one existing investor and one new investor, though a Square spokesperson declined to say who they were. Whoever they were, they bought a total of 1.9 million shares at a price of $15.46 each and waived their right to maintain a ratchet. With shares closing at $13.07 apiece today, that holding is still underwater to the tune of about $4.5 million.
COMMENTARY: Square, known for its small, white readers that plug into smartphones and tablets, now has a market value of about $3 billion compared to the $5 billion value implied in its fundraising a year ago.
The steep markdown could foreshadow trouble ahead for venture capitalists and other investors who have been pouring billions of dollars into technology startups in recent years.
The IPO discount also leaves Square with less money to draw upon as it strives to turn a profit for the first time in its six-year history. Before paying its investment bankers and other fees, Square raised $231 million in the IPO, instead of the $282 million to $346 million that the San Francisco company had been seeking.
According to Square's S-1 filing, which I described in detail in a blog post dated October 16, 2015, a total of 185,361,631 class B shares are held by outside investors, insiders and directors. The percentage of total class B shares held by major shareholders include Jack Dorsey (24.4%), Khosla Ventures (17.3%) and Director James McKelvey (9.4%).
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Square had to discount its IPO shares at the $9 per share late Wednesday, below a target of $11 to $13 that Square set the week before. The price is 42 percent below the $15.46-per-share price that Square fetched a year ago when it raised $180 million while it was still a privately held company. In my opinion, this was just a strategy by the IPO underwriters Goldman Sachs, JP Morgan and Morgan Stanley to line their pockets at the expense of Square. Shame on Jack Dorsey for letting them get away with this. Don't let Jack Dorsey ever give you advice on bluffing while playing poker. He left a lot of money on the table
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The initial public offering of Square was supposed to be a sign of doom for unicorns (startups with pre-IPO market values of $1 billion or more), a proof that you can't make money investing in pre-IPO tech companies any more. On the other hand, here is how much money Square's investors have actually made, by funding round:
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Those are paper profits, based on Square's $9 per share initial public offering price, and on a $13.50 per share trading price as of about 11 a.m. Here they are in table form:
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If you invested in Square at any point, from its Series A round in 2009 through its IPO last night, you've made at least a 20 percent return on your money as of this morning, or about a 7 percent compound annual growth rate. And if you got in early enough, or late enough, your returns were way better. In aggregate, Square's investors have tripled their money; its pre-IPO venture capital investors have almost quadrupled theirs. Everyone can breathe easy now! Unicorns are fine again.
Obviously there were some bumps along the way. Thursday's IPO priced below the Series D round, leaving the Series D investors with a paper loss. It priced even farther below the Series E round, but the Series E investors had negotiated for themselves a "ratchet," in which Square essentially guaranteed them a 20 percent return in the IPO. Their shares were worth only about $87 million at the IPO price, so Square had to give them another 10.3 million shares -- worth another $93 million -- to make up for it.
WHAT TO MAKE OUT OF SQUARE'S IPO
The stock market guru Ravi Bala of Seeking Alpha really know how to sense out of the Square IPO. Ravi took the time to compare the financials for Square Inc and Twitter, and I agree with his conclusions. Seeking Alpha says.
"Square (NYSE:SQ), like most IPOs, runs on stories. How an unprofitable company got into the market is beyond me. There are parallels between Dorsey's new company and his older one, Twitter (NYSE:TWTR), that makes me believe that Square is on track to cause major headaches to investors who will focus on the future and not pay attention to current results.
Square was founded in 2009 and just went public. It is approximately six years in business and is unprofitable. Twitter was founded in 2006 and went public in 2013. Interestingly, both went public in November in their respective years. Both companies are very young. Just as Twitter has shown, I would say that Square needed to stay private for a bit longer until it showed signs of profitability before entering the public markets.
Take a look at the two financials below. The first table is Square and the second is Twitter. Notice the general similarities. Net income and cash flows are negative despite increasing revenues. What struck me as interesting is that both companies had increasing revenues and increasing negative free cash flow in their respective years as they finished their IPOs. Everyone in the investment world touts the philosophy of Warren Buffett, but no one seems to apply his sage wisdom. You just do not invest in companies that have not proven themselves out. Like Twitter, Square is still trying to prove its concept out. There is no moat established. For GARP investors, what did Peter Lynch say? He said that you need to see a tendency in growing earnings. Square shows the complete opposite.
Square Inc Financials
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Twitter Financials
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Here is where things get much more interesting. Below I extend the table and show you how worse off Twitter has been since it went public. Revenues have been increasing, but it has become very obvious that the net income and free cash flow numbers are accelerating in the wrong direction. I do not want to draw any conclusions but based on the youth of Square and the fact that it may be losing one of its biggest customers, Starbucks, I think Twitter's performance foreshadows Square's future.
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I took a look at both companies' S-1 filings to see if there were any similarities. Four of the banks who underwrote Twitter's IPO underwrote Square's. I'm very curious to know why these banks would want Square to go public given that its financials going into the IPO were much worse off than Twitter's. It may not mean much to some people, but I would not trust their judgment this time for their poor judgment last time."
SQUARE IS A LOSER IN SHEEPS CLOTHING
I don't think that Ravi Bala is not too far off in his assessment of the Square IPO. I don't think we will have to wait more than a year or two to realize that the Square IPO never should've happened. There is just too much shit going on right now that is likely to affect stock prices in the immediate future, not including rising interest rates, ISIS terrorism, Square's unproven and unprofitable business model, geo/political problems like a possible confrontations with China, North Korea and Iran. When you add the weakness in the IPO market, the underwriters rushing (more like RUNNING) to get this IPO in the books before the end of the year before stocks lost their luster, it would not surprise me if there is a shareholders revolt somewhere along the way, when this thing collapses due to some or all of the above.
I keep reading that Jack Dorsey was the only logical choice that Twitter had, so they kept him to serve as permament CEO. It's quite a challenge to fix the problems of a bad and underperforming company, let alone two simultaneously. If you ask me, I think Twitter's board of directors should've hired Snoop Dogg. He offered to serve as CEO, and I think they should take him up on it.
In my blog post (see above) about Square's IPO filing, I made the following comments about Square's IPO which you should note.
"I am always concerned when a startup that has never generated a profit since it began operations, that startup competes in a mature and highly competitive industry (credit card payments) and that industry is dominated by larger and more established players, and that startup is led by a CEO (Jack Dorsey) who splits time between two troubled companies (Twitter and Square), and then that CEO thinks its time for an intial public offering when stock market indicators say otherwise, then it makes me wonder about the wisdom of that CEO. This is the case with Square, Inc. and CEO Jack Dorsey.
Jack Dorsey has his work cut out for him, not only with Square, but especially with Twitter, a social network which has never generated a profit, has lost numerous executives since the start of this year, whose monthly active users has stalled, and advertisers are questioning Twitter's viability as an advertising platform.
Dorsey recently announced that Twitter would layoff about 10% of its workforce or about 336 employees, mostly from its engineering staff. This will cost the company about $20 million in severance payments and other separation entitlements. Even after you factor the savings from in wages, payroll taxes and employee benefits due to these layoffs, this will not make a substantial dent in their operating losses to date. This makes you wonder if Square will require some staff pruning after the IPO.
Even if you adjust Square's earnings for the money that it is losing from the Starbucks deal, the company is still losing a substantial amount of money. Unfortunately, Square will continue to lose money off the Starbucks deal until October 2016."
Courtesy of an article dated November 19, 2015 appearing in Forbes, an article dated November 20, 2015 appearing in Bloomberg, an article dated November 19, 2015 appearing in Forbes, an article dated November 19, 2015 appearing in Seattle Times, an article dated November 19, 2015 appearing in The Wall Street Journal, an article dated November 19, 2015 appearing in QZ.com, an article dated November 19, 2015 appearing in Newsweek, and an article dated November 19, 2015 appeariong in ABC News
Facebook stock hit an all-time high after-hours after the company reported its Q3 earnings, beating analyst expectations on the top and bottom line.
Here are the most important numbers:
Revenue: $4.5 billion vs. analyst expectations of $4.37 billion, up 41% year-over-year.
Adjusted EPS: $0.57 vs. analyst expectations of $0.52.
MAUs: 1.55 billion monthly active users vs. 1.52 billion expected.
The after-hours stock was up nearly 5% initially, dipped down to +2%, and settled around 4% after the earnings call. At about 107.7, Facebook's stock is at a new all-time high and shares are up roughly 25% since mid-August.
Facebook (FB-NASDAQ) Shares climbed from 104.00 to 108.76 on Thursday, November 5, 2015, a gain of 4.82 following stellar Q3 2015 earnings call. (Click Image To Enlarge)
None of the numbers reported in the release were hugely surprising. Its expenses were up 68% year-over-year, but the company had previously said that it plans to invest heavily this year. Also as expected, Facebook saw an increase in the percentage of its revenue coming from mobile.
One of the most mind-blowing numbers came in the earnings call, though, when the company shared that Facebook now has 8 billion video views per day. That's double the 4 billion daily views the company reported in April. Those views come from the 500 million users who are watching videos every day.
CEO Mark Zuckerberg said when asked about video on the call.
"We're just so early in this right now. It's pretty amazing how quickly it's growing. But there's a lot more to do."
Here are the other important numbers:
1.01 billion daily active users on average for September, which is up 17% year-over-year, and 894 million people use Facebook on their phone every day.
Of Facebook's 1.5 billion monthly active users, 1.38 billion are accessing the site on mobile, and 727 million are mobile-only users. That's up 37% year-over-year, likely driven by Facebook's adoption in emerging markets like India and Africa, where people primarily access the internet on smartphones.
Costs and expenses of $3.04 billion, which is up 68% year-over-year, with R&Dmore than doubling year-over-year to $1.27 billion. That's also up significantly from $2.76 billion in costs and expenses last quarter.
The adjusted operating margin was 54%, down from 57% year-over-year.
About 78% of advertising revenue came from mobile, up from 66% at this time last year and 76% last quarter.
Free cash flow was $1.41 billion in the third quarter.
Most of Facebook's revenue comes from North America and Europe, with only about 25% ($1.1 billion) coming from Asia-Pacific and the rest of the world. But those areas account for 65% of its monthly active users. The average revenue per user in those regions is still tiny, compared to in the US — $1.39 and $0.94, respectively, vs. $10.49 and $3.47 in the US and Europe.
Facebook recently made a big press push around its efforts in emerging markets,and how it's optimizing its content and, importantly, its advertising to work well in areas of the world. But it seems those efforts haven't shifted the average revenue-per-user numbers yet.
Here's a look at where Facebook's revenue comes from:
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And you can see that Facebook also makes more per user in the US than it used to, likely attributable to the rollout of video and Instagram ads:
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And here's Facebook's state of the union as far as the size of its various products:
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Some highlights from the earnings call
Zuckerberg and COO Sheryl Sandberg shared some stats on the call:
There are 8 billion daily video views on Facebook. That's up from 4 billion a few months ago.
Lots of those views are coming from the 500 million people who are watching video on FB daily.
Over 1.5 million small businesses posted a video — organic posts and ads — on Facebook in September.
1 billion people use Facebook on Android.
925 million people use Groups — and in some countries, more than half the population use them.
People share 80 million photos a day on Instagram.
1 in 5 of the minutes that people spend on their phones per day is with Facebook and Instagram.
More than 9.5 billion photos are now sent on the chat app Messenger.
Zuckerberg also said that Facebook-led Internet.org, which aims to spread connectivity to parts of the world that don't have it, has made significant progress in places like Africa.
Sandberg also gave some updates on its ad products, including that there are 2.5 million active advertisers on the service. The price per ad was up 61% in Q3, though total ad impressions fell 10%.
She also subtly burned YouTube:
"People come to Facebook and Instagram because we have the best-performing mobile-video ad products."
The company added 1,000 new employees this quarter for a total of 12,000 employees, up 44% year-over-year.
Facebook also said that it expects its total 2015 capital expenditures to be between $2.5 billion and $2.7 billion.
When asked about Facebook in China, Zuckerberg said it was a "complex situation."
He said.
"You can't have the mission of wanting to connect everyone in the world and leave out one of the biggest countries. We need to try to figure out a way forward on that issue."
He did say that people who think that Facebook isn't in China at all are wrong, though. Although the app isn't allowed in the country, China is "one of the biggest advertising markets" that Facebook has. Big Chinese companies use FB as one of their primary tools to spread info about what they're doing to people outside the country, he said.
COMMENTARY: The complete transcript of Facebook's Q3 2015 earnings call with analysts can be found HERE:
The Instagram Effect
There is one important part of Facebooks business that has not been revealed: Instagram. During the Q3 2015 earnings conference call, Facebook CEO Mark Zuckerberg did not reveal how much of its advertising originated through Instagram. The standalone photo-sharing app has more than 400 million users now and Instagram advertisers now have many of the same targeting capabilities that they get on Facebook.
For Instagram, this was a busy quarter. The community celebrated its five-year anniversary and reached a new milestone of 400 million monthly actives. More than 80 million photos are now shared on Instagram every day, and the pace of adoption among public figures, organizations and people around the world continues to grow really well. When President Obama visited Alaska in September, he used Instagram to document his trip, and this is a great example of how Instagram is changing the way that people see the world.
The result is what many believe will be a very sizable business for Facebook moving forward. Analyst firm MoffettNathanson believes Instagram will bring in $1.8 billion in annual revenue in the next two or three years. SunTrust analyst Robert Peck agrees. He wrote in his pre-earnings report that he believes Instagram’s annual revenue will be greater than $2 billion by 2017.
That’s a lot of revenue considering Facebook isn’t saying much about Instagrams contribution to advertising revenues. But investors are definitely interested, and any news on that front would definitely be good news. The social network has consistently appeased investors of late with significant quarter-over-quarter revenue and growth results.
Mobile continued to drive Facebooks growth. At the end of the third quarter, approximately 1.39 billion people accessed Facebook on mobile devices, up 23% from last year. It is becoming more apparent that Facebooks mobile appls will represent a major source of advertising revenues with numbers like thse: Instagram, Messenger and WhatsApp now exceeding 400 million, 700 million and 900 million monthly actives respectively.
This argument is further strengthened with the fact that Facebook now has more than 2.5 million active advertisers and more than 45 million small and medium-sized businesses actively using Facebook pages. During the third quarter 2015, Facebook continued to focus on helping marketers achieve results using video and carousel ads as well as on Instagram.
Facebook COO Sheryl Sanderg said.
"On Instagram, we think that with Facebook and Instagram, we now have the two most important mobile platforms out there. And what we bring to this is a common ad infrastructure. So Instagram ads, now that we've rolled out as we have this past quarter and gotten to a really good product offering, combined the creative format of Instagram which is very visually compelling and has a lot of engagement from people with the back-end infrastructure and marketer base that Facebook has.
Yeah. To the Instagram question, what we see in the short run is that some of the spend on Instagram is incremental to Facebook and some isn't. Some clients are comfortable with Instagram and bringing a new budget to bear. Some clients are shifting some of their Facebook budget. For us in the medium to long run, we believe that we're not competing between Facebook and Instagram. We're competing with other forms of media. And if you want the most eyeballs and we think the highest ROI, over time we think that will benefit Facebook and Instagram.
The average American adult spends 25% of their media time on mobile, and Facebook and Instagram together continue to account for over one minute in five minutes on mobile in the U.S. Businesses are lagging behind consumers in making this shift to mobile, and we believe we're well positioned to help them catch up.
We're also capitalizing on the shift to mobile by expanding ads on Instagram. This quarter on Instagram, we introduced new ad formats and objectives, opened up our API and launched self-serve ad capabilities. Instagram ads are now available in all countries where we offer Facebook ads, and marketers can manage campaigns across both platforms with the same targeting. We're really pleased with the marketer demand for Instagram ads."
Courtesy of an article dated November 4, 2015 appearing in Business Insider and an article dated November 4, 2015 appearing in RE/CODE
Twitter shares are crashing in after-hours trading after the company reported another quarter of disappointing user growth and a weak revenue forecast for the last three months of the year.
Here are the key Q3 numbers:
Monthly active users: 320 million, versus the 324 million expected by analysts, and compared to 316 million users in the second quarter.
Monthly active users, excluding SMS followers: 307 million users, compared to 304 million users in the second quarter.
Revenue: $569 million, up 58% year-on-year, compared to the $559.6 million expected by analysts. Twitter had already pre-announced that revenue will be at or above the top end of its forecast range of $545 million to $560 million.
Adjusted EPS: $0.10 versus the $0.05 expected by analysts.
Net loss: Another huge loss of $132 million, compared to a net loss of $175 million in the year-ago period.
Q4 Revenue Guidance: $695 million to $710 million, versus analyst expectations of $739.7 million.
Twitter shares plunged roughly 13%, or $4.04, to $27.30 in after-hours trading Tuesday.
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It's not a great debut for Jack Dorsey, who was appointed CEO earlier this month. He previously served as interim CEO, and will be hosting his first earnings conference call with investors as the company's new chief later Tuesday. Wall Street will be looking for answers about how Dorsey intends to revitalize the company's flagging user growth and reverse the growing impression that Twitter could become a social-networking also-ran.
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To put Twitter's stalled user growth in perspective, the company added a total of 4 million new users this quarter. Facebook, more than four times the size of Twitter, added 49 million new monthly users during its second quarter.
Twitter also appears to have suffered a steep and sudden drop in the prices that it charges marketers to run ads on its service. Twitter revealed that its "cost per ad engagement" fell 39% year-over-year.
Dorsey said in prepared remarks that the company has simplified its "road map" and organization around a few big bets across Twitter, Periscope. and Vine that it believes represent the largest opportunities for growth.
Busy Period
It's been a busy few months for Twitter. In addition to appointing a new CEO, the company launched the new Moments feature, which tries to make it easier for new users of the service to follow live events, such as sports and presidential debates. And the money-losing company recently slashed 8% of its workforce.
While Twitter eliminated some of the uncertainty about its management by completing its CEO search, the appointment of Dorsey to the role creates more questions. The 38-year-old Twitter cofounder also serves as the full-time CEO of digital-payments company Square, which is in the process of preparing for an IPO.
Twitter's stock has plunged 41% from its 52-week high of $53.49, though it has rebounded from recent lows when shares were trading below the company's IPO price.
Twitter warned investors last quarter that they should not expect any meaningful user growthfor a "considerable" amount of time. The question now is whether Dorsey has a plan to change that.
You can also view Twitter's press release regarding their Q3 2015 earnings report by clicking HERE
COMMENTARY: Twitter's third quarter 2015 earnings failed to meet investor expectations on user growth and guidance for the fourth quarter 2015, driving down its stock price. More specifically, Twitter continues to struggle in attracting and retaining new users to its platform, and its advertising business is facing challenges with respect to direct-response advertising.
In addition, while ad engagement and videos have recently snowballed on the platform, the average cost per ad engagement continues to decline substantially. Notwithstanding these challenges, we think it’s too early to expect results from the new leadership. Product changes have recently accelerated on the platform (for both users and advertisers), and if successful, these initiatives could meaningfully drive growth over the coming quarters.
Key Takeaways From Twitter’s Third Quarter Earnings
User Growth Failed To Impress: Twitter’s total average monthly active user base was 320 million in Q3 2015, as compared to 316 million in the prior quarter. Excluding SMS fast followers, the MAU base was recorded at 307 million, which represented a sequential rise of 3 million users. These metrics failed to match expectations, as other social networks such as Facebook FB +0.00% and Instagram have seen much stronger growth. We believe the recent product innovations undertaken at Twitter should start to yield results (in terms of user base growth) going forward.
Guidance Came In Below Expectations: Twitter’s management guided for revenues of $695 million to $710 million for the fourth quarter of 2015. This came in significantly below average analyst estimates of $739.7 million. We believe this weak outlook indicates continued challenges in the company’s advertising business (most prominently in its direct response ad units).
Revenue Growth Driven By Rise In Ad Engagements: Twitter’s overall revenues rose by 58% annually to $569 million during Q3 2015. Advertising revenue increased by 60% in dollar terms and by 67% in FX-neutral terms. This was primarily driven by a 165% annual increase in the number of ad engagements, due to growth in both auto-play video ads and off-network advertising business. Off-network advertising revenue (which includes advertising through TellApart, TapCommerce and MoPub Network) contributed about 13% of overall ad revenue during the quarter. The average cost per ad engagement dropped by 39% annually, due to a shift towards lower-cost auto-play video ads. Going forward, we believe growth in overall ad engagements will continue to drive the company’s advertising business, as there is still significant potential to increase ad load levels on the micro-blogging platform.
Video Usage Has Gone Up Significantly On Twitter: Video consumption has been growing tremendously on Twitter of late with the launch of auto-play videos. Native video views have risen by up to 150 times across the Twitter, Periscope and Vine platforms over the past six months. As a result, video ads have gained much more prominence on Twitter over the past few months. Moreover, the company plans to pilot Promoted Moments (video-focused ads) across the U.S. during Q4 2015.
Innovation Has Accelerated On The Platform: One positive that we have noted of late is that product changes have accelerated under the leadership of Jack Dorsey. With new features such as Highlights on Android, Polls, and recently launched Moments, the company aims to step up engagement levels on the platform. Additionally, changes have also been made on the Vine and Periscope platforms, such as introducing music on Vine. While it’s too early to measure the precise impact of these changes, we believe these recent initiatives could drive growth in the coming quarters. Twitter’s efforts to simplify its service will be central to its long-term goal of drastically expanding its audience base, and we will be keeping an eye on its progress in meeting these goals.
Conclusion
I don't know about you, but I don't see Jack Dorsey turning around Twitter anytime soon. The fact that Twitter will fail to exceed Q4 2015 guidance should give you a good hint. All these wonderful things that Jack has implemented since he took over the helm as CEO (I actually consider him part-time CEO since he splits duties with Square) will do very little to increase new users, monthly active users, revenues and profitability.
Twitter is very troubled company whose original business model has become outdated and has lost its luster. It is no longer an exciting and fast growing social network when Dick Costolo came on board as its CEO in June 2010. Since the beginning of 2013, Twitter quarterly MAUs have been growing at single digit rates, and have remained this way ever since. Year-to-year growth rates have also been on a steady decline when Dick Costolo took over. The following charts make this point very clearly.
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I find it unforgiveable that Twitter's stock was rewarded with a nice "bump" (opened at $28 and ended the day at $48) when it went public in November 2013. MAU quarterly growth rates were in single digits and the company has never generated a profit since it was founded in 2006. Fast forward to today, and nothing really has changed. MAU growth remains stagnant and another huge loss.
Twitter really needs to make radical changes and this does not leave out the possibility of making a huge pivot in its business model. When I say radical, I men possibly rebranding. This might include a name change, getting rid of the blue bird logo, and getting rid of "tweets."
Twitter also needs to consider transitioning from a pure online microblogging site to a true social network. This means giving Twitter a completely new look that's modern, slick, and cool, and offers more functionality and customization.
I would also consider eliminating the ad-based revenue model, and going to a subscription based model for larger users. I would not mind paying $4.95 to $9.95 per year depending on the number of followers and tweets and retweets I post. If these changes are too radical for you, then I would recommend a mix of subscriptions and advertising.
Bottomline, Jack Dorsey needs to make Twitter easy and fun to use. This is the only way to increase usage and engagement. Increasing the length of tweets doesn't do it. You need RADICAL changes to Twitter. Sleep on that. Comments gladly encouraged.
Courtesy of an article dated October 27, 2015 appearing in Business Insider, an article dated October 29, 2015 appearing in Forbes, an article dated October 27, 2015 appearing in Marketing Land, an article dated October 27, 2015 appearing in Fortune, and an article dated October 27, 2015 appearing inSeeking Alpha
Can McDonald's new CEO Steve Easterbrook lead the company through a franchisee rebellion? (Click Image To Enlarge)
According to a new survey, McDonald's franchisees believe the brand is in a "deep depression" and could be facing its "final days."
One franchisee wrote in response to the survey by Nomura analyst Mark Kalinowski.
"We are in the throes of a deep depression, and nothing is changing. Probably 30% of operators are insolvent."
Another wrote,
"The CEO is sowing the seeds of our demise. We are a quick-serve fast-food restaurant, not a fast casual like Five Guys or Chipotle. The system may be facing its final days."
More than a dozen franchisees expressed frustration with McDonald's management, saying that CEO Steve Easterbrook's turnaround plan — which includes initiatives like all-day breakfast and a shift to digital ordering kiosks — is a distraction from the core issues of McDonald's, like food quality and customer service.
One franchisee wrote.
"The lack of consistent leadership from Oak Brook is frightening, we continue to jump from one failed initiative to another."
A second wrote.
"I have been in this business since the early 1970s but have not seen us this leaderless in all my time."
The company's reaction to their frustration, one franchisee claimed, is for operators to "get out of the system" and quit the business.
Several franchisees complained about all-day breakfast, saying that it has complicated kitchen operations and goes against Easterbrook's repeated promises to simplify the menu.
One franchisee wrote.
"The system is very lost at the moment. Our menu boards are still bloated, and we are still trying to be too many things to too many people. ... Things are broken from the franchisee perspective."
Franchisees also criticized the "Create Your Taste" program, which allows people to customize their burgers with premium ingredients.
One franchisee wrote.
"They are throwing everything they can against the wall to see what will stick."
Kalinowski interviewed 29 US franchisees covering about 226 restaurants for the survey. McDonald's has more than 14,000 restaurants in the US.
In response to the survey, McDonald's said it's hearing a different story from franchisees — specifically pertaining to all-day breakfast.
A company spokeswoman told Business Insider.
"We’re hearing from customers and the overwhelming majority of our 3,100 franchisees that all-day breakfast is a hit! In fact, since the launch, McDonald’s has reached its highest brand score in two years according to YouGov BrandIndex."
McDonald's is trying to revive business following seven straight quarters of same-store sales declines in the US.
In addition to adding all-day breakfast and "Create Your Taste," McDonald's has also made some changes to its core menu items.
There are at least a few franchisees who are on board with the changes.
Among the myriad negative responses to Kalinowski's survey, several franchisees expressed hopeful attitudes.
One wrote.
"I think our leadership is headed in the right direction. It will take time."
Another said.
"The CEO seems to be doing OK so far!"
COMMENTARY: Although McDonald's new CEO Steve Easterbrook does not have the confidence of a lot of franchisees, there seems to be a disconnect between how McDonald's shareholders perceive Easterbrook's leadership and how the franchisees feel about him. Proof this lies in the performance of McDonald's share price.
McDonald's Stock Up 10% For Year
McDonald’s has been the target of relentless analyst fire for all of 2015; yet here we are in mid-October and McDonald’s shares are up 10% for the year. This week they hit a new all-time high of $103.84.
McDonald's Corporation Share Prices Last Five Years - Jan 2011 Through Oct 2015 - Google Finance (Click Image To Enlarge)
McDonald's Brand Stronger Than Ever
The naysayers mistakenly aim at the small target, but they miss the big picture: McDonald’s formidable brand recognition and performance-oriented culture virtually guarantee long-term success.
On the former, McDonald’s is a top 10 global brand, according to Interbrand, a brand management consultant. McDonald’s ranks ninth on Interbrand’s list, with a $42.3 billion market value. Strong brands have the same effect on consumers that magnets have on metal shavings – they draw them in.
McDonald’s magnetism is especially strong on kids, and not just kids in the United States. Here, I speak from experience. On a weekday road trip from Antibes, France to Geneva, Switzerland, my wife and I stopped at a McDonald’s near Digne, France. We stopped not because of hunger, but because of curiosity. The parking lot was packed. When we walked in, we found a restaurant overflowing with middle-school-aged kids. So much for indomitable French cuisine.
McDonald's Culture Remains The Same
But it’s really McDonald’s culture that magnetizes the brand. As Steve Wynn, chairman and CEO of Wynn Resorts (NASDAQ: WYNN), said in a 2014 Wall Street Journal interview,
“You got the culture, you got the problem solved.”
McDonald’s has the culture, and has had the culture for decades, so the problem always gets solved.
Franchisee Rebellion Is A Distinct Possibility
After much anticipation, the newly installed chief executive officer of McDonald's, Steve Easterbrook, has announced a sweeping turnaround plan aimed at cutting annual costs by around $300 million at the struggling fast-food behemoth. Wall Street was unimpressed: the stock fell after Easterbrook made his announcement.
But a far important constituency is also grumbling: the franchisees who own most of the outlets. Many have already expressed skepticism about Easterbrook's leadership, complaining that McDonald's was imposing new burdens, products and obligations without any understanding of the strain the changes will place on franchise owners.
There's little evidence that Easterbrook's plans to turn McDonald's into a "modern, progressive burger company" -- which include selling 3,500 of the restaurants it owns -- allayed the concerns of the franchise owners, who have experienced falling sales in many parts of the world.
Easterbrook's plan seemed largely aimed at creating value for shareholders, not helping franchisees. The vexed history of franchising suggests it may be a mistake to disregard this constituency.
After World War II, McDonald's and other fast-food restaurants introduced "business format" franchises. Unlike conventional franchises, this wasn't a way to delegate distribution; it was a means to sell an entire way of life to aspiring small-business owners. McDonald's founder Ray Kroc described this as an "updated version of the American Dream," and his company, along with Howard Johnson's and other restaurants, made it a mainstream phenomenon.
In business-format franchising, the parent company maintains a rigorous level of control over franchisees, holding them to standards of appearance, cooking times, the dress of employees, accounting methods, and just about anything else that can be standardized and controlled. McDonald's went so far as to create its famed "Hamburger University" in 1961.
In principle, this insured success for both the corporation and the franchise owners. But in practice it relegated franchisees to a genuinely subordinate position. Harold Brown, a lawyer and critic of business format franchising claimed in 1970 that "numerous franchisors have stated that their franchisees are like children, demanding constant discipline and control."
This attitude didn't always sit so well with franchisees. The control imposed from above was fine so long as the decisions made at corporate headquarters worked well on the ground, but that wasn't always the case. In the late 1960s, a number of high-profile franchising ventures ended in revolts.
Domino's Pizza, for example, expanded its franchise operations throughout the 1960s, but failed to deliver sufficient support, financing and training. Profits plummeted and the company almost went bankrupt in 1969. Two years later, enraged franchise holders sued Domino's, alleging that the corporation had imposed obligations on outlets without providing the necessary support. There was much anger as well at Domino's insistence that outlets only purchase supplies from the parent company or an approved supplier. Eventually, Domino's bought out the embittered franchisees, increasing the number of outlets under direct ownership.
Chicken Delight, founded in 1952, expanded over the course of the succeeding decade, but then failed to deliver the necessary support to franchise owners, despite forcing them to pay the corporation higher prices for everything from paper plates to batter for the chicken. A number of franchisees eventually sued the company, setting in motion a chain of events that led to what the Wall Street Journal described in 1972 as "the virtual dismantling of the Chicken Delight organization."
Shakey's Pizza, Mister Donut and other companies faced similar revolts around the same time. Some, notably Mr. Donut, mended fences with their franchisees, granting them increased control over local decision-making, financing, accounting, and even the expenditure of ad dollars. Others moved away from top-down decision-making, setting up venues where franchisees could express their concerns. Still others sought to curtail the number of franchises, bringing stores back under corporate control. All of this worked: many companies turned around, and the reputation of business-format franchising eventually improved.
McDonald's, which sailed through this period without problems, might want to take a page from the past as it tries to right the ship. It's suffering from many of the same problems. In a recent survey, franchisees struck much the same tone as their disgruntled predecessors of the 1960s, citing an out-touch management that seems more interested in off-loading costs onto franchisees than fixing the problems that beset the chain.
Unfortunately, Easterbrook's turnaround plan made almost no mention of the franchisees that are the public face of the company. Worse still, is his vow to increase the number of stores in the hands of franchisees from 81 percent to 90 percent — which some franchisees believe will make the company even more remote from the concerns of the owners on the front lines.
Easterbrooks Turnaround Plan
In May 6, 2015, McDonald's CEO Steve Easterbrook announced a restructuring plan to help it compete with fast-casual restaurants like Chipotle Mexican Grill. To foster a quicker reaction to changing trends, McDonald’s is restructuring its units into four groups based on the maturity of its presence in the particular market, where previously the business was segmented by geography.
The flagship U.S. market.
Established international markets such as Australia and the United Kingdom.
High-growth markets such as China and Russia.
The rest of the world.
McDonalds also said that 90 percent of its more than 36,200 restaurants around the world will be franchised over the next four years. This is up from 81 percent currently, and will mean the company will rely more heavily on franchising fees and move away from the daily running of restaurants. The organizational changes will contribute to 300 million dollars in cost-cutting targeted by McDonald's, most of which will be realized by 2017.
The company is working on streamlining its menu recently cutting seven items including the Deluxe Quarter Pounder burger and six chicken sandwiches, while at the same time working on improving perceptions about the quality of its food with a trio of new sirloin burgers being added.
Standard and Poors were left underwhelmed by the plan and subsequently downgraded their rating on McDonalds to A-, while Moody’s put their rating on review for downgrade. Both rating agencies showed concern over McDonald's plans to return between 8 and 9 billion to shareholders in 2015 and to hit the high end of its 18 to 20 billion 3-year goal by the end of 2016, worrying that any stock repurchases will be at the expense of higher debt levels than initially anticipated.
The fast food chain in April reported first-quarter comparable sales down 2.3% and revenue of 5.96 billion, falling short of the 6.02 billion analysts had expected. Unfortunately for McDonalds shareholders, the quarterly results were a familiar tale, which for nearly two years has seen its share price fall and same-store sales crumble in the U.S. market and abroad.
Conclusion
Having served as the CFO for a tanning salon franchise, I was at the forefront of a franchisee rebellion. This taught me some valuable lessons: 1) Do not deviate from your core franchise principles and vision, 2) Always deliver on your franchise promises, 3) Select the most qualified and experienced franchisee owner/manages, 4) Location, location, location, select the best franchisee locations, 5) Invest in adequately training and providing marketing support to your your franchisee network 6) Don't let unresolved problems and differences vent themselves into an allout franchisee rebellion.
It would not surprise me if McDonads top management has ignored or strayed away from some of the above franchise must-do's. In many businesses the customer comes first, but in a franchising business environment, the franchisees come first, because they are the face of McDonalds. It is doubtful that the vast majority of McDonalds customers know who McDonald's CEO is. They don't care either. They want their Big Mac sandwich made exactly the same each time they visit and served as quickly as possible.
By paying more attention to the bottom line and improving shareholder value, McDonalds top management may have violated one of the most important covenants of franchising. Take care of the franchisees, and they will take care of you.
Courtesy of an artricle dated August 9, 2015 appearing in Bloomberg, an article dated October 19, 2015 appearing in ETF Daily News, and an article dated October 16, 2015 appearing in Business Insider
People aren’t using Facebook less, according to its new earnings report. Facebook recovered from last quarter’s miss, beating the street’s estimates in Q2 2015 with $4.04 billion in revenue and $0.50 earnings per share. Facebook now has 1.49 billion monthly users, up 3.47 percent quarter over quarter, which was a bit slower than Q1’s 3.6 percent growth.
Analysts had predicted $3.99 billion in revenue with 47 cents EPS. However, GAAP net income year-over-year, the measure of Facebook’s real profit, is down from $791 million to $719 million. That seems to be contributing to the current 1.39 percent dip in Facebook’s share price to $95.53 in after-hours trading.
But in terms of the long-term health of the social network, the most important stat is that Facebook held strong at 65 percent stickiness, or DAU divided by MAU. That’s the representation of how engaged users are, and the fact that it’s not slipping is a good sign as the service competes for attention with Snapchat and Twitter.
FACEBOOK COMMUNITY UPDATE
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REVENUES AND NET PROFITS
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EARNINGS-PER-SHARE
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Mobile now makes up a huge 76 percent of advertising revenue, up from 73 percent last quarter.
MOBILE AND NON-MOBILE AD REVENUES
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Mobile monthly users grew 4.8 percent to 1.31 billion from 1.25 billion, and mobile daily users grew 5.76 percent to 844 million from 798 million, both a little slower than last quarter. Daily active users hit 968 million, up 3.41 percent from 936 million.
For comparison, Twitter’s user count grew just 2.6 percent this quarter, or just 0.66 percent if you don’t count “SMS Fast Follow” users that don’t see ads.
Another important point discussed was Facebook’s playbook for monetizing Messenger and WhatsApp. Like how Facebook delayed ads in the News Feed in favor of first allowing voluntary interactions with business Pages, Facebook wants people to connect organically to businesses over chat before it lets companies pay to reach customers.
Zuckerberg also ran through the stats for Facebook’s family of apps, including 800 million WhatsApp users, 700 million Messenger users, 300 million Instagram users, 850 million Groups users, and 40 million small businesses using Pages.
REVENUE BY USER GEOGRAPHY
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Facebook spent the quarter aggressively improving its advertising and e-commerce options while trying to pull content inside its walled garden, including videos and Instant Articles.
It’s added buy buttons and auto-filled email sign-up forms to News Feed. With well over 4 billion video views per day, it’s begun selling video ads with guaranteed 10-second views, compared to the option to just buy three-second video impressions.
Meanwhile, Messenger has grown into a behemoth chat app, now hosting 700 million users. The recent rollout of friend-to-friend payments and an app platform could help Facebook deepen loyalty among its users, while relying on its core app’s News Feed ads to earn money.
Improved Instagram ad targeting and formats mean it could start producing big revenue from its photo sharing app. Facebook still isn’t saying much about Instagram or WhatsApp in its earnings report. Unofficially,eMarketer estimates Instagram will hit $595 million in revenue this year.
AVERAGE REVENUE PER USER (ARPU)
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Facebook seems to have solved the ad revenue issue in its “rest of world” region, which includes many developing nations in South America and Africa. The ability to monetize users with slower network connections and older phones is critical to Facebook’s long-term revenue growth, since it’s already saturated user penetration in its key Western markets.
Facebook Lite for Android App Screenshots (Click Image To Enlarge)
The recent launch of the stripped-down Facebook Lite Android app could make surfing the social network and seeing its ads even easier for people around the planet.
Facebook is only just beginning to see the fruits of its quest to absorb the Internet. In 18 months, it’s gone from hardly showing any videos to becoming a massive host of viewership. Organic clips from users and businesses provide cover, masking the intrusion of auto-play video ads.
With Instant Articles, it’s found a way to turn a giant hole in its garden wall into a new way to earn money. Instead of users slipping out to read articles on news sites or closing the app in frustration as they load, Instant Articles keep users bouncing around inside Facebook’s app where they see ads.
If not for last quarter’s miss that it blamed on foreign exchange fluctuations, this would have been Facebook’s 12th straight beat. And while many were sure Snapchat’s rapid growth would take a big bite out of Facebook’s, the company has continued steady growth. 11 years in, and people still can’t get enough of Facebook.
COMMENTARY: It is my belief that Facebook is rapidly reaching a critical inflection point where user growth and revenue growth reaches zero. Facebook really needs to transform itself so that it is less dependant on the advertising model. It must diversify in a similar fashion as Google and Microsoft have done in from search and software respectively.
In the above article, TechCrunch states that Facebook has solved the "revenue problem" it has always had with the "rest of the world" countries, namely Africa and parts of South America (see map below). Whether Facebook is ultimately able to monetize these underdeveloped markets depends on whether users can access the internet using cheap WIFI. Facebook is working on the latter by developing solar-powered WIFI drones that would beam down free WIFI signals so that users could connect to the internet around the clock.
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Web-enabled cellular phone prices also need to come down substantially so that users in these very poor nations can afford them. Household incomes in these depressed areas of the world are less than $200 per year, so cellphone affordability is a huge issue. Many villages in Sub-Saharan and Central Africa use one cellphone per village which is shared by the villagers.
A whole slew of things need to happen which is a huge challenge. Healthcare and education need to improve substantially. Only then will these poor countries be able to grow their economies to create industrial expansion and employment opportunites and ultimately increased household incomes to make purchasing smartphones a reality in these nations.
Having said this, monetizing users in these "rest of the world" economies is going to be very slow. Revenues will continue to be just a trickle compared to users in developing and developed countries.
Courtesy of an article dated July 29, 2015 appearing in TechCrunch
While the company beat expectations for revenue and earnings, iPhone sales were softer than expected, leading to stock falling over 7% in after hours trading.
Here are all the big numbers:
Revenue: $49.6 billion, up 33% annually, versus analyst expectations of $49.4 billion
EPS: $1.85, up 45% versus analyst expectations of $1.81
iPhone units: 47.5 million, up 35%, versus analyst expectations of 48.8 million (the whisper number was 50 million)
iPad units: 10.9 million, down 18%, versus analyst expectations of 10.9 million
Mac units: 4.8 million versus 4.9 million
Cash: $203 billion
Revenue guidance: $49 billion-$51 billion versus $51.06 billion
Overall, the numbers are good. But, analysts were getting all geeked up for a monster iPhone number, which didn't happen.
On the call, CEO Tim Cook explained, in part, why iPhone sales were below analyst expectations.
He said the company had 600,000 fewer iPhones in channel inventory. If those phones had been in the channel, then Apple would not have missed on iPhone units as badly. It would have also led to an extra $396 million in revenue, since the average selling price of the iPhone is $660.
Why did Apple have lower channel inventory? Just because. Cook said the company tries to avoid having unnecessary inventory when possible. If he wanted to smash expectations, he would have shipped the extra 600,000 units, but he doesn't run the company to the 90-day drumbeat of earnings expectations, he said on the call.
Even with 600,000 extra iPhone sales, Apple would have missed expectations.
Despite iPhone sales coming in short of expectations, it was still a strong quarter, with sales up 35% year over year.
On the call, Cook was optimistic about the future of the iPhone. He said Apple had its highest switcher rate from Android ever. He also said that only 27% of the people that owned iPhones before the iPhone 6 launched had upgraded to the iPhone 6 or iPhone 6+. The iPhone has loyalty rates above 86%, which means there's lots of room for growth from upgraders.
Also, sales in China were up 87%, CFO Luca Maestri said on the call.
The other thing of note from the call was information on the Apple Watch. Apple didn't provide any specific numbers, but it did say that sales were above internal expectations. It said the watch sold better in its first 9 weeks than the iPad sold in its first 9 weeks.
The watch was reported as part of the "other" category, but it says the watch was more than 100% of the annual growth in the "other" category. It says iPod, and other accessories dragged down growth in that category.
Overall, it was another good quarter from Apple, despite the fact that investors decided to sell.
Below are tables, charts, and our live blog of the call.
FINANCIAL STATEMENTS
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PRODUCT UNIT SALES
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TOTAL REVENUES
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REVENUES FROM SERVICES
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OTHER PRODUCT REVENUES
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COMMENTARY:
Notes from the Call
Tim Cook said.
"It's been a busy and exciting quarter."
Apple achieved record results despite reducing channel inventory.
iPhone unit sales grew over 35% and gained share in all geographical segments. Apple saw highest Android switcher rate ever as well.
Tim Cook said.
"Tremendous record quarter for Mac."
App Store revenue grew 24% in the quarter, reporting highest results ever.
Apple Watch demand immediately exceeded supply and Apple delayed the availability in their own retail stores until mid June. Apple has now caught up with demand and Apple Watch is now available in 19 countries. Apple is very happy with customer satisfaction and usage statistics. Apple's own market research shows that 94% of Watch owners wear it and use it every day.
Tim Cook said.
"It's a rare and special privilege to launch a new platform with such promise and potential."
25 leading publishers have been signed for Apple News, including CNN, Bloomberg Business, The Daily Telegraph, and ESPN.
"Millions and millions" of customers are already using Apple Music. 15,000 artists have signed up for Connect. Millions of listeners are enjoying Beats 1.
American Express will add Apple Pay support for corporate cards next month. 700 universities in the US will soon accept Apple Pay. Apple is on track for Apple Pay acceptance in 1.5 million locations in the US by the end of 2015.
Apple doesn't participate in the low end of the tablet market, saying CFO Luca Maestri.
Services revenue has increased 12% over the past year. Services growth was strong in China where App Store revenue doubled year over year.
Apple Watch revenue accounted for over 100% growth in the Other category for the quarter.
Tim Cook is very bullish on iPhone growth in the future given the headroom for Android switchers.
The iPhone 6 Plus is doing well in Greater China and other Asian markets.
The Apple Watch sell-through was higher than the same period for the original iPhone and iPad launches.
Tim Cook said.
"We're convinced that the Watch is going to be one of the top gifts of the holiday season."
Tim Cook talked about the iPad.
"It's not like people have forgotten iPad or anything. It's a fantastic product."
Tim Cood had this to say about China.
"China will be Apple's largest market at some point in the future."
Apple Watch sales have been higher in June than April or May.
If you would like to review the entire Apple earnings conference call with analysts click HERE.
CONCLUSIONS
What stands out clear as mud in the Unit Sales - 4 Quarter Moving Average (5th chart in the Product Unit Sales section) is that Apple is too dependent on sales of the iPhone. iPad and iPod sales are declining as they approach the end of their product life cyles. Although Mac sales were up, growth has been relativelyy flat for the last five quarters.
In my opinion, Apple must have a new hit product because sales of the Apple Watch are not sizzling. The Apple Watch is supposed to be that new hit product, but many forecasters are already saying that the watch will be a flop, in spite of what Tim Cook claims. My gut tells me that the watch is not going to be the runaway must-have product that Apple customers will lust after.
With over $200 billion in cash or convertible investments, you would think Apple would dedicate Manhattan Project resources to developing new products. We keep reading about an Apple TV, and the latest rumor to surface is an Apple electric vehicle. We have designed bigger and faster, more feature-packed smartphones, and a nearly endless parade of mobile apps, but I haven't seen that blockbuster product. Apple Music could become a major revenue contributor, not on the same level as hardware. So Apple better start innovating like crazy or their shares will really nose-dive if there is any hint of a slowdown in iPhone sales.
On a positive note, with only 27% of the iPhone installed base having upgraded to the iPhone 6/6 Plus at the end of Q3 2015, I have a strong feeling that Apple iPhone replacement sales will rebound strongly in the second half of 2015. Most of the future iPhone growth will be from China which represented 26% of Apple's revenues during the quarter.
Courtesy of an article dated July 21, 2015 appearing in The Wall Street Journal, an article dated July 21, 2015 appearing in MacStories, and a press release dated July 21, 2015 issued by Apple,
Twitter CEO Dick Costolo (far right) with Twitter co-founders Jack Dorsey, Biz Stone and Evan Williams (left-to-right) during happier times during its successful IPO on November 7, 2013 (Click Image To Enlarge)
After years of user-growth struggles, Twitter announced that its CEO Dick Costolo has chosen to step down effective July 1, though he’ll remain on the board. Twitter co-founder and Square CEO Jack Dorsey will be the interim CEO.
The stock market initially responded favorably to the change, with Twitter’s share price up 7 percent in after-hours trading, but it now declined to just 3 percent up. That’s after its stock plummeted 18 percent six weeks ago following an earnings miss in Q1. User growth was up just 4.86 percent since the previous quarter to bring Twitter to 302 million users.
Twitter (TWTR|NYSE) shares rose 7% on Friday, June 12 the day after Twitter CEO Dick Costolo announced his resignation effective July 1 (Click Image To Enlarge)
Twitter held a conference call after close of the market with stock analysts right after Costolo's resignation announcement and said he initiated internal conversations about leaving at the end of last year, and that following discussions in Feburary and his decision to step down, Twitter decided to begin the CEO search. Costolo said he chose to leave now because he thought staying on through the CEO search would cause scrutiny to intensify. During the Q&A, Twitter execs said that since Costolo voluntarily stepped down, there will be no severance package.
Dick Costolo the outgoing CEO and Jack Dorsey the interim CEO held an exclusive interview with CNBC on June 12th 2015.
And on the topic of whether Twitter would consider being acquired, an exec said it wouldn’t rule that out, but that “we see no reason why we can’t [succeed] as an independent company." However, legally it can’t rule out acquisition offers and must review them, so that’s not really news.
Jack Dorsey, Square CEO, and Twitter Chairman and co-founder, will serve as interim CEO at Twitter until a permanent replacement can be found (Click Image To Enlarge)
Costolo, a former standup comedian, sent a tongue in cheek tweet“Welcome back, Jack.” Jack Dorsey, meanwhile, tweeted“Calling my parents.” Twitter hired notorious crisis PR management firm Sard Verbinnen to handle the transition.
Dorsey will continue to be Square’s CEO, but will fill in for Costolo until Twitter finds a replacement. Dorsey was previously Twitter’s CEO before being forced out and replaced by co-founder Ev Williams in 2008. Dorsey became Twitter’s executive chairman in 2011 when Costolo became CEO.
The CEO search committee is being chaired by the Twitter Board’s Lead Independent Director, Peter Currie, and includes early investor Peter Fenton and Williams. Earlier this year, there was speculation that Twitter’s head of revenue and partnerships, Adam Bain, would take over if Costolo left the position. Others belive CFO Anthony Noto might make a good big bird.
“I am tremendously proud of the Twitter team and all that the team has accomplished together during my six years with the Company. We have great leaders who work well together and a clear strategy that informs our objectives and priorities. There is no one better than Jack Dorsey to lead Twitter during this transition. He has a profound understanding of the product and Twitter’s mission in the world as well as a great relationship with Twitter’s leadership team. I am deeply appreciative of the confidence the Board, the management team and the employees have placed in me over the years, and I look forward to supporting Twitter however I can going forward.”
Pressure on Twitter to get its product and leadership straightened out has intensified lately. That culminated last week in an 8,000 word essay by Chris Sacca@sacca, one of Twitter’s biggest investors, which detailed potential improvements that could boost growth and recover users who ditched the service due to poor onboarding.
Costolo will be remembered for many things, including a wildly successful time for Twitter’s monetization. However, last-quarter performance doesn’t a future cashflow make. But unable to ensure user growth, investors worried about its long-term potential to offer the scale advertisers want.
Product innovation was considered painfully slow until Costolo recently promoted Kevin Weil to SVP of Product. He’s helped build fixes for some of the company’s biggest problems, including an easier onboarding flow and Highlights, which shows the best tweets you missed. But those changes could take time to produce real growth improvements.
Twitter CEO Dick Costolo tendered his resignation on Thursday, June 11, 2015, and will stay on board until June 30, 2015 when he will join the Twitter Board of Directors (Click Image To Enlarge)
Thursday’s announcement may have materialized recently, considering two weeks ago at the Code conference, when asked if he was worried about keeping his job, Costolo said
“I don’t worry about that at all. The board and I are completely in sync. Believe me, I don’t worry about that at all.”
That was a sly way to word it, because he knew he planned to step down.
Internally, sources say many employees loved Costolo. He brought order to Twitter when it was still in its chaotic adolescence, and turned it into a serious business. Whoever comes next will have to transition Twitter from something for news junkies and public figures to a service the average person can love. At its best, Twitter can make anyone as smart as everyone, and that shouldn’t be a niche product.
You can see the full statement to investors below:
Dan Niles from Alpha One Capital discussed the resignation of CEO Dick Costolo with CNBC:
Aljazeera discussed the resignation of Twitter CEO Dick Costolo, its failure to meet stockholder expectations, the turmoil within the company, comparisons to Facebook, and prospects of Twitter becoming an acquisition target:
COMMENTARY: I would've lied if I told you that Dick Costolo's resignation took me by surprise. In fact, I could've predicted this outcome. If you followed my previous posts about Twitter, you know I was very "Twitter-unfriendly," to put it mildly. I could give you my reasons why the resignation was good news to me, but then I would've gotten into one of my crazy rants. Having said this, numbers don't lie, and here are four good reasons illustrated in charts as to why Costolo's days were numbered.
What went wrong at Twitter in four charts
Twitter’s share price proved to be the most reliable indicator of what investors want from Jack Dorsey as he returns to the top spot at Twitter, following the news that Dick Costolo, CEO, is going to step down from his post on July 1.
Shares jumped between 6 and 7 per cent following the announcement of Costolo’s departure, but moderated to just 2 per cent higher after Dorsey stated that there would be no change in strategy.
Ever since Twitter went public in November 2013, investors want reassurance that Twitter can grow its $23.5 billion market cap.
They’re looking for the next Facebook – but up to now, it’s not been clear that Twitter will take that mantle.
The pressure is on for Twitter to build products that will snag more sign-ups.
Facebook, Twitter and Instagram Comparison by Monthly Active Users (MAUs) as of May 2015 (Click Image To Enlarge)
Twitter has 300 million monthly active users – around the same number as Instagram, but both are dwarfed by Facebook, which has 1.4 billion active users. It still has more active users than Google+, Instagram and LinkedIn – but only just.
Investors also want users that are engaged.
Facebook leads YouTube, Twitter and Instagram in Engagement (Active Users) As A Percentage of Total Internet Users (Click Image To Enlarge)
Over half of all internet users are signed up to Twitter – though less than half that amount are active users. Over 80 per cent of internet users are signed up to Facebook, by contrast, and about half of these are engaged.
Twitter still generated user growth for the year ending 2014, but they are less engaged than Pinterest, Tumblr, Instagram, LinkedIn and YouTube (Click Image To Enlarge)
Over the last year, Twitter’s growth has been far outpaced by smaller sites like Pinterest and Tumblr – leading some to believe that if it doesn’t get its act together, it may yet be overtaken by its fast-growing competitors.
However it’s possible to be too focussed on user-growth as a key measure of Twitter’s worth.
Richard Windsor, a technology analyst at Edison Investment Research, said the biggest problem for Twitter is that it only serves a limited function for internet users. Edison research suggests that users can spend just 9% of their time with Twitter because Twitter has no service for many of the other activities that users carry out on their smartphones.
Windsor said.
“For Twitter, the monetisation opportunity is fundamentally limited unless it can spread its wings wider and encourage users to spend more time in its services.”
Twitter seems to agree with this view. In his last quarterly earnings call, Dick Costolo said Twitter’s objective is to “build new applications and services in order to increase Twitter's utility around the world”.
Twitter missed revenue expectations for the Quarter ending March 31, 2015 and its shares tumbled by 18% following its earnings conference call with analysts (Click Image To Enlarge)
What Twitter Needs To Do Next
Having closely followed and blogged about Twitter before it went public, then analyzed Twitter's earnings and profitability since its IPO, and having been in the corporate world as a former CFO, it's not easy to produce a quick turnaround. Having said this, Twitter needs to ask some hard questions about itself and implement strategies to increase user growth, user engagement, advertising revenues, and profitability. Here are a few of those hard questions and some ideas.
Why haven't big advertisers taken Twitter seriously as an advertising platform?
Twitter's problem all along as has been convincing advertisers that it is a viable advertising platform. Twitter is not a pure-play social network like Facebook. It's a newsfeed site. Advertisers have continually compared Twitter to Facebook, and this is a mistake. Twitter also has difficulty demonstrating to advertisers that they can generate a positive ROI from their marketing. Marketers want proof that an ad on Twitter can drive the results they need -- whether it's having someone visit a website or go to a local store to place an order.
The engagement problem: Twitter users are not very engaged. At the end of 2014, Twitter had an estimated 950 million registered users, but only about one-third or 302 million are active monthly users(tweet at least once per month) as of Q1 2015. There were 65 million monthly active users living in the US, its largest ad market. The U.S. market generated 66% or $241 million in ad revenues in Q1 2015, yet Americans represented only 21.5% of worldwide monthly active users. In another key Twitter metric, the US leads in average revenue per 1,000 timeline views at $5.85 compared to only $1.16 for international monthly active users in Q4 2014 (See Charts below).
Click Image To Enlarge
Click Image To Enlarge
In a study released in November 2013, it was found that only about 13% of monthly active users tweet at least once per month. This means that in the U.S. alone only about 8.5 million of US and 39.3 million of worldwide monthly active users actually tweet. Those are terrible numbers for a social network that had about 950 million registered users and 302 million monthly active users worldwide at the end of Q1 2015. Big advertisers have done the math and clearly see there are not enough eyeballs watching their ads on Twitter. No wonder big advertisers avoid Twitter. In a nutshell, Twitter is a terrible advertising platform.
In August 2014, Twitter openly admitted that up to 23 million of its monthly active users are automated tweeters. In otherwords, tweets, responses and retweets have been automated using social media management software like TweekDeck and Twitter For Mac, and many others. Since a real person is not reading tweets in the newsfeed, this creates a monumental problem for Twitter, and advertisers have to factor this out of Twitter's monthly active user stats.
Twitter Has A Content Relevance Problem
The vast majority of people using Twitter read posts by others. Unfortunately, according to some analyses, much of what flashes by is a waste, as the Washington Post has reported. Sorting through all the material to find what might be of interest can be a time-consuming challenge unless you have a feed open all the time, a time investment many aren't willing to make. Because it's in real time and voluminous, looking later at your leisure is difficult at best.
If Twitter is to improve user engagement, keep existing users and attract new ones, it must provide filters that users can set to display tweets that are the most relevant to users. Some users use the Twitter List feature to gather tweets from specific users, but this can also be a time consuming activity. I read somewhere that a user had over 1,000 lists. Unless you have a lot of time on your hands, scrowling through hundreds or thousands of tweets and reviewing lists are not the solution. Filters are a better solution.
Where are the ads?
I have just shown you that Twitter is a terrible advertising platform, so it should come as no surprise why you don't see that many ads on Twitter. Compounding this problem are Twitter's advertising products which to say the least are a bit confusing. They are not called ads, but promoted tweets, promoted trends and promoted accounts. In my opinion, if you are going to run ads in a users newsfeed, you should have ADS, not something called "promoted....." Ads should be unmistakeable and clear as mud. Cutout the "promoted..." ad bullshit. Twitteer should stick with banners (static or rich media), display, classified or video ads. This is the language and ad formats that are familiar with advertisers. In my opinion, Twitter tried being a bit too cutesy with this "promoted..." ad bullshit so as not to irritate users and this has added to advertiser confusion.
Although Twitter has 237 million international monthly active users at the end of Q1 2015, the social site continues to have an international advertising problem. Twitter has been slow to monetize its international userbase, selling ads in only about 28 countries to date. This may help explain why its average revenue per 1,000 timeline views was only $1.16 for international monthly active users compared to $5.85 for the U.S. in Q4 2014. It should be obvious that Twitter needs to sell more ads in its international markets.
Why doesn't Twitter offer classified ads?
Everybody is advertising something on Twitter, many of these ads are in the form of tweets selling followers or other useless crap you don't need. These ad tweets clutter up the newsfeed and are quite irritating. These are CLASSIFIED ADS, and Twitter should begin making money from these ads. It should ban ads in the newsfeed and setup a separate classified ad section with product categories by major geographic location like those offered on Craigslist. Classified ads should stay within the 140 character limit of regular tweets. With 302 million monthly active users, I think Twitter can give Craigslist, with 60 million monthly active users, a run for its money.
Why can't Twitter generate a profit?
Twitter began selling ads about five years ago when it launched promoted tweets in November 1, 2010. Twitter lowered its estimate for 2015, but says that it can generate $2.1 to $2.2 billion in revenues for the full year 2015. This is serious money. Any company that can generate billions in revenues should be profitable or at least breakeven. In 2011, five months before Facebook had its IPO, it generated $3.7 billion in revenues and net income of $1 billion. Twitter's CFO should take a long hard look at its operating expenses bring them more in line with revenues.
The CFO should be asking these questions: Why do I need to spend this? Can we afford to spend less? Should I spend more on advertising and promotions to increase Twitter brand awareness and increase registered users? Do we need to cut staff? How can I generate more revenues from existing users? No where in the press release that Twitter issued on Friday, June 12 following Costolo's resignation did I read about its strategy to turn the company around and make it profitable or at least breakeven. Jack Dorsey, agreed with the current strategy left by Costolo. The current strategy is NOT working Jack. This is time for strong decisive action. Jack needs to start cleaning up this mess. Lay out a plan to stop the red ink. Don't wait to hire that new CEO. Okay, you don't want to do it? Give me a month, and I will do it. Call me now.
The New CEO Must Change The Corporate Culture and Have Free Hand At Making Changes
As I pointed out earlier, I don't think that Jack Dorsey is a good interim solution for the reasons previously earlier. He already has his hands full as the CEO at Square. He's no Elon Musk. The existing Board of Directors were all brought in by Dick Costolo, and the culture that now exists must be changed. There is only one female (Marjorie Scardino) on the BOD. The new permanent CEO must have a free hand at making needed policy and strategy changes, bring in new management as needed, and replace members of the Board of Directors with trustworthy indiviuals with successful track records building companies and getting them through difficult and challenging times.
It may be that Twitter will never have the inherent mass appeal of Facebook, as Vox notes. The design of the service is wrapped around power users and celebrities and doesn't seem to appeal to the average person the way a number of other social networks do. Twitter's decling market value may make it an attractive takeover candidate. The new CEO must take off the rose colored glasses and understand this coming in.
Courtesy of an article dated June 12, 2015 appering in Fortune, an article dated June 12, 2015 appearing in The Independent, an article dated June 11, 2014 appearing in MarketingLand, an article dated February 18, 2015 appearing in Heidi Cohen blog, an article dated June 15, 2015 appearing in Inc., an article dated June 15, 2015 appearing in CBS News, an article dated April 14, 2014 appearing in CBS News, an article dated April 30, 2015 appearing in The Wall Street Journal, an article dated November 14, 2013 appearing in Digital Trends, an article dated June 5, 2015 appearing in DMR, an article dated June 10, 2015 appearing in The Motley Fool, and an article dated August 11, 2014 appearing in Quartz
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