Shares of Twitter Inc. (TWTR) plunged 11.24% ($4.79) in after-hours trade, following first-quarter 2014 results, which highlighted intensifying investor concerns over the company’s growth prospects as user growth slows down.
Twitter’s monthly active users (MAUs) grew 25.0% year over year in the quarter, which slowed down from 30.0% year-over-year growth in the previous quarter. Moreover, declining engagement was a concern, as timeline views per MAU fell 8.0% from the year-ago quarter and remained flat sequentially at 614.0 million.
Twitter (including stock-based compensation and diluted effect of equity shares on outstanding shares) reported loss of 19 cents per share, wider than 18 cents posted in the year-ago quarter. However, loss per share was much narrower than the Zacks Consensus Estimate of a loss of 26 cents.
Excluding stock-based compensation, amortization of acquired intangible assets and income tax effects related to acquisitions, Twitter reported breakeven earnings in the quarter.
Revenues
Revenues soared 119.1% year over year and a modest 3.2% quarter over quarter to $250.9 million and were well ahead of the Zacks Consensus Estimate of $237.0 million. The strong year-over-year growth was driven by 125.0% surge in advertising revenues (90.2% of revenues).
Robust growth in advertising revenues was driven by 700.0% year-over-year and 28.0% quarter-over-quarter surge in ad engagements. Timeline views increased 15.0% year over year and 6.0% sequentially to 156.7 billion.
Strong advertiser demands were seen during live events such as the Super Bowl, Winter Olympics, the Oscars and the Grammys. Twitter’s TV product offerings such as Amplify, keyword targeting and TV conversation targeting also witnessed strong demand.
Mobile advertising revenues were more than 80.0% of total advertising revenue in the quarter, up from 60.0% in the year-ago quarter.
Advertising revenue per thousand timeline views jumped 96.0% year over year to reach $1.44 in the reported quarter. However, advertising revenue per thousand timeline views declined 3.0% on a quarter-over-quarter basis, primarily due to seasonality.
Data licensing and other revenues soared 76.0% year over year to $24.4 million. Sequentially, revenues increased 6.0% driven by robust performance from MoPub, Twitter’s integrated ad exchange, which is now used by more than 1.0 billion Apple’s (AAPL) iOS and Google’s Android users.
Twitter earned 28.0% of revenues from international markets. Revenues rose a phenomenal 183.0% year over year and 7.0% quarter over quarter to $70.5 million in the reported quarter.
Average MAUs increased 25.0% from the year-ago quarter and 6.0% on a quarter-over-quarter basis to 255 million. Mobile MAUs (78.0% of total MAUs) jumped 31.0% year over year to 198 million.
U.S. MAUs reached 57 million, up 19.0% from the year-ago quarter and 5.0% sequentially. International MAUs were 198 million, up 27.0% year over year and 6.0% quarter over quarter.
Twitter launched a number of new products for advertisers during the quarter. The company allowed marketers to create tailored audiences from email lists and customer relationship databases. Twitter also enabled advertisers to target TV conversations for Spanish-language television and connect with users through Promoted Accounts in search.
To boost customer engagement, Twitter launched new features such as push notifications. The company reduced the number of steps in the sign-up process for Android users, and allowed users to link their mobile address book with their Twitter accounts to find people they know on Twitter more quickly.
As a result, user interaction in the form of favorites and reTweets improved more than 26.0% year over year.
Margins
Adjusted earnings before interest, tax, depreciation & amortization (EBITDA) were $36.9 million compared with $11.7 million in the year-ago quarter. However, EBITDA declined 17.4% sequentially.
Total cost & expenses (excluding amortization of acquired intangible assets) surged to $373.7 million from $134.4 million in the year-ago quarter. This massive year-over-year growth in costs was primarily due to higher research & development (up $101.7 million), sales and marketing (up $71.9 million) and general & administrative expense (up $21.8 million) in the quarter.
Sequentially, total cost & expenses (excluding amortization of acquired intangible assets) declined 50.0% due to lower R&D (62.2%), S&M (40.7%) and G&A (42.7%).
Twitter reported operating loss of $123.2 million (including stock-based compensation but excluding amortization of acquired intangible assets) as compared with loss of $20.0 million in the year-ago quarter and $504.1 million in the previous quarter.
Net income (excluding stock-based compensation, amortization of acquired intangible assets and income tax effects related to acquisitions) was $183.0 million or breakeven as compared with a loss of $10.5 million or 8 cents in the year-ago quarter and $9.8 million or 2 cents per share in the previous quarter.
Balance Sheet & Cash Flow
At the end of Mar 31, 2014, cash and cash equivalents (short-term investments) were $2.18 billion compared with $2.23 million at the end of Dec 31, 2013. Cash flow from operating activities was $42.7 million as compared with cash outflow of $2.9 million at the end of the last quarter.
Outlook
Twitter project revenues to be in the range of $270.0 to $280.0 million for the second quarter of 2014, better than the Zacks Consensus Estimate of $269.0 million.
Adjusted EBITDA is projected to be in the range of $25.0 to $30.0 million for the current quarter. Twitter expects higher expenses in the second quarter due to additional costs related to recent acquisitions and continued investments in core business.
Revenues are projected to be in the range of $1,200.0 to $1,250.0 million (up from $1,150.0 to $1,200.0 million) for fiscal 2014. The mid-point of the guidance is slightly lower than the Zacks Consensus Estimate of $1,234.0 million. The higher forecast reflects better-than-expected first-quarter results, contribution from the Gnip acquisition and higher advertising revenues.
Adjusted EBITDA is projected to be in the range of $180.0 to $205.0 million (up from $150.0 to $180.0 million) for the full year. Capital expenditures are projected to be in the range of $330.0 to $390.0 million.
Our Take
Although user growth rate will remain a concern in the near term, we believe that new products and services will continue to attract users. Twitter’s ability to attract more advertising revenues, despite facing significant competition from Facebook (FB), Yahoo! Inc. (YHOO) and market leader, Google, will be something to watch out for in the near term.
Moreover, as spending on online advertising is expected to increase manifolds compared to traditional media, we believe that Twitter has massive growth opportunity, due to its strong mobile products. However, higher costs and continuing investments on product development will hurt profitability.
Currently, Twitter has a Zacks Rank #2 (Buy).
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