Video Business And Ad Revenues In Focus For Twitter Q2 Earnings

  • Twitter will report its Q2 earnings on Tuesday after markets close.
  • Ad revenue growth, video business progress, merger hints and the annual outlook are in focus.
  • After disappointing earnings last quarter, investors should be cautious going into Q2 earnings.

Social networking and micro blogging giant Twitter (NYSE:TWTR) will report its Q2 2016 earnings results on Tuesday amidst the management’s attempts to increase monetization of its market leadership position while handling increased scrutiny and regulation from US government officials. The list of negative factors is getting longer and has dragged the stock price by almost 50% in the last year and 20% year-to-date.

TWTR_chart 1_072516

Twitter was one of the first players to introduce an embedded live streaming feature; however, it seems that Facebook (NSDQ:FB) outplayed Twitter on that front and is currently the first go-to app in live video streaming as we witnessed lately in the news. Turkish President Erdogan’s interview through Facebook live video and other recent news events (US shooting, Germany shooting, etc.) were captured on Facebook instead of Twitter, showing that Facebook has positioned itself better than Twitter as a live streaming offering.

Live video streaming is an emerging trend in social media and relative newcomers like Snapchat are also participating in the race to dominate the niche. What's more, Snapchat outpaced Twitter as well when it surpassed the latter and attracted more daily active users than the micro blogging site. Of course, each platform is targeting different audiences; however, the decline of Twitter and its inability to compete is an alarming sign for investors. Moreover, the fact that Jack Dorsey is still in charge while he is also managing the high-profile e-payment company Square (NYSE:SQ) makes many uncomfortable, as both companies seem to decline together.

If the business problems were not enough, Twitter received harsh criticism for keeping terrorists' accounts active and encouraging terror by doing so. Twitter started a quick cleanup process to identify and close accounts related to terrorism; however, there have been claims remain that Twitter does not do enough. Government officials in the US and around the world have stated their opinions on this subject, pointing to Twitter as a preferred platform for terrorists. The increased scrutiny and finger pointing at Twitter creates an enormous wave of bad PR that the company works very hard to shake off. I doubt if Twitter will ever admit that this bad PR impacted ad revenues, but I’m sure it has some impact worldwide.

As has happened many times before when a promising tech company rapidly loses most of its value, Twitter became an attractive takeover target. Many companies were named as probable candidates to take over Twitter: Alphabet Inc-C (NSDQ:GOOG), Apple (NSDQ:AAPL), Amazon (NSDQ:AMZN), Microsoft (NSDQ:MSFT), Verizon (NYSE:VZ) and more. Acquisition rumors have driven the stock price up a few times since the beginning of the year, but now it seems that with the Yahoo (NSDQ:YHOO) deal on the verge of closing and Microsoft acquiring LinkedIn (NYSE:LNKD), Twitter might be the next company to get taken over. Investors will monitor the call for any slight reference to a merger deal of some kind to reaffirm the latest stock price appreciation.

Having said all of that, Twitter's turnaround efforts remind me of Yahoo’s efforts a few years ago. Twitter is signing many new agreements to video stream content on its platform, from the NBA, to the NFL, college sports, Wimbledon tennis tournament, CBS and more. This might not be content that excites a wide audience, but this content should attract advertisers and will only be the start. It will be interesting to see whether this initiative can enable Twitter to increase its revenue outlook for the year, which it trimmed last quarter.

After the previous earnings release – in which Twitter missed on revenues, and lowered the annual guidance – the company should at least meet the guidance it provided last quarter. A slower growth in MAUs (Monthly Active Users) and ad revenues might indicate an imminent decline and trigger a temporary plunge in the stock price, that could be quickly offset if a new acquisition rumor makes the rounds. Beyond ad revenues and MAUs, investors should pay attention to any new deals and strategic partnerships that Twitter has closed in its emerging businesses – the video streaming business and the data-licensing business. The upcoming Olympics and US national elections are two major opportunities that Twitter should seize, to support future growth. After the company lowered its annual outlook in the previous quarter – outlook changes, and the drivers for such changes will receive greater focus than before.

These are the comparable figures to follow in this earnings release:

Q2 2016 Consensus Estimate Q2 2015 (Year Ago) Actual
EPS $0.096 -$0.21
Revenue $606.8M $502.4M

After disappointing earnings last quarter, investors should be cautious going into Q2 earnings.

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