Twitter, Inc. (TWTR) reported third quarter loss of 27 cents per share, narrower than a loss of 45 cents posted in the year-ago quarter. Loss per share was in line with the Zacks Consensus Estimate. Excluding stock-based compensation, amortization of acquired intangible assets and income tax effects related to acquisitions, Twitter reported earnings of 29 cents in the quarter.
Shares fell 2.78% ($1.39) to close at $48.56 on Oct 27 following the release of the earnings.
Revenues
Revenues soared 114.3% year over year to $361.3 million, which comfortably beat the Zacks Consensus Estimate of $352 million. The strong year-over-year growth was driven by a 109% surge in advertising revenues (88.6% of revenues). Product-wise, the prime contributor to the year-over-year revenue growth was “promoted tweets”.
Robust growth in advertising revenues was driven by a 150% year-over-year surge in ad engagements, which in turn reflected higher quality ads, improved prediction and targeting and media forward. Timeline views increased 14% year over year to 181 billion.
Advertising revenue per thousand timeline views jumped 83% year over year to reach $1.77 in the reported quarter. Mobile advertising revenues were 85% of total advertising revenue in the quarter.
Average monthly active users (MAUs) were up 23% on a year over year basis to 284 million in the third quarter. Average mobile MAUs represented around 80% of total MAUs. Twitter added 13 million net new users in the reported quarter, up 4.8% on a year over year basis. However, this growth rate was less than the prior quarter growth rate of 6.3%.
Data licensing and other revenues soared 171% year over year to $41 million. This was driven by robust performance by MoPub, Twitter’s integrated ad exchange and the Gnip data licensing business.
Twitter earned 34% of its revenues from international markets. International revenues rose a phenomenal 176% year over year to $121 million in the reported quarter.
The company launched a number of advertiser tools in the quarter including the likes of a promoted video beta, which streamlines video playback and brings a one-tap viewing experience to users’ timelines.
During the quarter, Twitter continued with the international expansion of Twitter ads to 12 additional markets in Central, Continental and Eastern Europe. Moreover, the company extended its footprint into 12 new nations including the likes of Argentina, Chile, Colombia, Ecuador, Guatemala, Mexico, Peru, Belgium, France, Italy, Luxembourg and Netherlands. With this expansion, Twitter’s self-serve ad products currently serve marketers in 20 countries.
Acquisitions
During the quarter, the company completed the acquisitions of Cardspring, TapCommerce and SnappyTV in order to diversify its product offerings to enhance its user base.
Margins
Adjusted earnings before interest, tax, depreciation & amortization (EBITDA) were $68 million compared with $9 million in the year-ago quarter.
Total cost & expenses (excluding amortization of acquired intangible assets) surged to $510.8 million from $228.1 million in the year-ago quarter. This massive year-over-year rise in costs was primarily due to higher research & development expenses (up $95.5 million), sales and marketing expense (up $100.3 million) and general & administrative expense (up $30.0 million) in the quarter.
Twitter reported an operating loss of $149.6 million (including stock-based compensation but excluding amortization of acquired intangible assets) compared with a loss of $59.6 million in the year-ago quarter.
Net income (excluding stock-based compensation, amortization of acquired intangible assets and income tax effects related to acquisitions) was $6.9 million or 1 cent compared with a loss of $17.2 million or 13 cents in the year-ago quarter.
Balance Sheet & Cash Flow
At the end of Sep 30, 2014, cash and cash equivalents (short-term investments) were $3.6 billion compared with $2.1 billion at the end of Jun 30, 2014. Cash used in operations was $88 million in the reported quarter while capital expenditure amounted to $101 million.
Outlook
Twitter projects revenues to be in the range of $440 to $450 million for the fourth quarter of 2014.The Zacks Consensus Estimate for fourth quarter revenues is pegged at $451 million.
Adjusted EBITDA is projected to be in the range of $100 to $105 million in the current quarter. Capital expenditure is expected to range between $120 million to $150 million.
Given the expected seasonal strength in advertising demand in the fourth quarter, Twitter’s management expects sequential growth of approximately 28% to 30% in ad revenue per timeline view in the said quarter.
Revenues are projected to be in the range of $1365 to $1375 million (up from $1310 to $1330 million) for fiscal 2014. The Zacks Consensus Estimates coincides with the lower end of management’s guidance.
Adjusted EBITDA is projected to be in the range of $260 to $265 million (up from $210 to $230 million) for the full year. Capital expenditure is projected to be in the range of $360 million to $390 million.
Management will continue to focus on adding functionality to its direct messaging service in order to enable users to move fluidly between public and private conversations on its platform. The company also intends to eliminate all the impediments to consumption going forward so that it can have the largest audience worldwide.
Our Take
We believe that new products and services will continue to attract users in the long run. Twitter’s ability to attract more advertising revenues, despite facing significant competition from Facebook (FB), Yahoo! Inc. (YHOO) and market leader, Google (GOOGL), will be something to watch out for in the near term.
We believe that the acquisitions of Cover, Gnip, TapCommerce, Namo Media and CardSpring will expand Twitter’s product portfolio and monetization capability. Twitter’s recent foray into e-Commerce by testing the ‘Buy Now’ button is a significant positive, in our view.
Moreover, we believe that Twitter’s initiatives that include the tagging of photos for Apple’s iOS and Google’s Android devices will increase customer engagement, going forward.
However, slowdown in the user growth rate during the reported quarter poses a major concern for the company. Moreover, Twitter is likely to increase its expenditure on product development to lure more users to its platform going forward. This, in turn, will affect profitability in an adverse manner.
Nevertheless, as spending on online advertising is expected to increase manifold compared to traditional media, we believe that Twitter has massive growth opportunity, due to its strong mobile products.
Currently, Twitter has a Zacks Rank #2 (Buy).
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