Since its listing on 7 Nov 2013, Twitter’s (NYSE:TWTR) stock price had almost tripled at its peak of $74.73 from its issue price of $26, in a span of less than 2 months. However, post market hours on 5 Feb 2014, Twitter’s Q4 earnings release jolted investors out of the power nap they’d been enjoying since its IPO. Twitter’s revenue and non-GAAP EPS beat analysts’ estimates. Yet, the Twitter stock price in after-hours trades tanked by close to 18% and looks all set to roll further down the hill.
Twitter managed yet another stellar performance in terms of revenue growth, with revenues at $242.7 million vs estimates of $217 million. This of course, with due credit to Twitter, people have come to expect from it. Another thing that wouldn't have surprised too many people is a negative operating income. This quarter saw their operating losses mount to twice the revenue, owing largely to stock based compensation expenses. However, Twitter recorded its first quarter of positive non-GAAP earnings per share (EPS) in the last 8 quarters. Non GAAP net income for Twitter is GAAP net profit/loss after excluding stock based compensation expenses, amortization of intangible assets and tax effects of acquisitions. The company also added 9 million users to take its tally of Monthly Active Users (MAUs) to 241 million.
|Key Financials||Q4 2012||Q3 2013||Q4 2013||QoQ %||YoY %||FY 2012||FY 2013||Growth|
|Revenue & Costs||Q4 2012||Q3 2013||Q4 2013||QoQ %||YoY %|
|Cost of Revenue (in %)||33||37||46||10||14|
|R&D (in %)||36||52||163||111||127|
|Sales & Marketing (in %)||26||36||73||37||47|
|General & Admin (in %)||13||13||28||15||14|
|Operating Costs (in %)||108||138||310||172||202|
|Net Loss (in %)||0||-38||211||249||210|
While we are still hunting for the positives, it would be apt to mention that the company’s international revenue as a share of the total revenue moved up from 17% in FY 2012 to 26% in FY 2013. On the cash flows front too, though this quarter ended with negative operating cash flows, FY 2013 as a whole ended with a positive operating cash flow, which has been rather hard to come by.
Twitter’s revenue came from advertising which contributed 90% of the revenue at about $ 220 million and data licensing which accounted for the rest at $ 23 million. Twitter’s mobile MAUs remained about the same at 76% of its total MAUs with mobile advertising accounting for about 75% of total ad revenues.
Twitter MAU addition rates drop!
Despite its strong revenue growth and its first ever positive Non GAAP EPS, shareholders were largely scared off by the inertia in user (MAUs) growth. It is often seen that growth rates shrink when the base increases, but in this case, not only have the MAUs addition rates dropped, but so have the absolute number of users added per quarter. User addition being the key driver for an advertising oriented revenue model, this has hit investor confidence hard and re-iterated fears that existed among certain sections about Twitter’s limited potential for scalability.
Given that Facebook user base is close to 5 times that of Twitter, the fact that their QoQ MAUs addition rate is identical does not augur well for the latter if this turns out to be an ongoing trend.
To help expand its user base (MAUs), Twitter has taken up measures to improve its user experience by launching a number of product enhancements like Twitter Alerts, custom timelines, facilitating exchange of pictures via direct messaging and focus on development of its private messaging function with a view to eat into a market that chat messengers and apps have created. The company has provided a revenue guidance of $230 - $240 million for Q1 2014.
After its rollicking revenue growth, at a stock price of $65 per share, Twitter now trades at a Price to Sales ratio (P/S) of about 54 as opposed to an earlier P/S of 67, and remains grossly overvalued as we had discussed in our earnings preview a couple of days ago. There is however, some good news for potential investors. In our Q4 earnings preview for Twitter, we had concluded by saying that for investors to consider Twitter as an investment, either its share price would have to lose two thirds of its weight or its revenues would have to grow 3 fold. From the looks of it, work has begun in both directions, albeit with a long walk ahead.
To see Twitter’s latest stock price movement, click here (NYSE:TWTR)