What To Watch Out For In This Twitter Inc. Earnings Release

  • Twitter might beat analyst estimates on 26 April and trigger a short term rally.
  • Twitter's attempt to monetize logged out users holds the key, but growth risks persist.
  • Profit margins and stock based compensation expenses should be watched closely.

Microblogging site Twitter is expected to report its earnings for Q1 2016 on 26 April 2016 post market hours. Analysts expect Twitter to report revenue and Non-GAAP Earnings Per Share (EPS) of $607.9 million and $0.10, translating to a YoY growth of 39.5% and 42.9% respectively. The upcoming earnings release promises to be an interesting and potentially pivotal one for the severely battered stock. For starters, we’re keen to know more about how Twitter’s attempt to monetize logged out users is progressing given that it’s critical for future growth. There are also some key factors that could possibly drag Twitter’s revenue growth, which we will discuss in this post. Twitter has also managed to curb losses in the recent quarters. So, that’s another key number to watch, given the aggressive employee retention strategy to dole out stock based compensation.

Monetization Of Logged Out Users A Critical Experiment

We all know that Twitter’s sales growth has slowed significantly and not many of us are betting on the platform adding hordes of users this quarter. That’s what makes Twitter’s work-in-progress attempt to monetize logged out users extremely critical. Twitter, at the last count, had about 500 million logged out users, way more than its registered user base of 320 Monthly Active Users (MAUs). If Twitter manages to do a great job on this, it could potentially turn things around and accelerate growth, and going by the pilot test, the initial signs were encouraging. Quoting from Twitter’s management commentary from Q4 2015 earnings:

“Although the test was small, the early results are encouraging. Initial performance from the pilot has shown that video view and click through rates for logged-out ads are similar to logged-in performance.”

So Where’s The Problem?

What’s not looking great for Twitter though, is that advertisers might be losing interest in the platform, if reports by RBC capital turn out to be representative of the consensus. Based on a survey it conducted, RBC capital recently reported that only 32% of survey respondents planned to increase their ad spends on Twitter, down from 54% in Feb 2015 (a year ago). Further, 23% of the respondents planned to cut their spend on the platform.

The saving grace is that about 29% of marketers reportedly believed that their ROI (return on investment) on the platform had improved, and these respondents could possibly increase their spends on the microblogging site. The news is disturbing from Twitter’s perspective because it could potentially disrupt its attempt to monetize logged out users. If the overall spends on the platform were to decline, it could offset any benefits from this attempt.

Cuts in ad-spends could not only depress revenue for Twitter in the near term, but also force the company to lower CPE (cost per engagement) prices, and this could then become a vicious cycle, dragging medium term growth as well. Even as it stands, Twitter has seen its CPE rates plummet since Q4 2013 which is the first time period from which this metric has been made available. Twitter’s CPE at the end of FY 2015 stood at 20% of its value two years ago.

Twitter’s growth has been propelled solely by an increase in ad-engagement, and the problem with that is that it’s not solely because of an increase in engagement on the platform. The increase in ad-engagement is also a product of increased ad-load, which of course, can’t be bumped up indefinitely without damaging the user experience. So, clearly, there’s a cap on this source of growth. Twitter’s best bet is to deliver some impressive numbers with reference to logged out users to lure advertisers and stall the decline in CPE rates. Otherwise, things do look like they’re going to get tougher.

Profitability Now Becomes Key

Under current CEO Jack Dorsey, Twitter has done a great job cutting losses in the last few quarters. The company has gone from reporting an average net loss of 43% in 2014, to an average net loss of 25% in 2015. While losses are still sizeable, a lot will depend on Twitter’s ability to sustain this improvement in 2016. If Twitter isn’t going to grow at the stellar rates it did, margins become even more important.

Just when things seemed to be getting better though, Twitter has reportedly embarked on an aggressive talent retention initiative, by sweetening the compensation with restricted stock and cash bonuses. One should watch out for stock-based compensation expenses and operating and net margins over the next couple of quarters.

Closing Thoughts

Analyst expectations of revenue are not too aggressive, coming in marginally lower than the higher end of Twitter’s own guidance for the quarter. Based on its track record of beating estimates nearly each time, it won’t be surprising if Twitter does come out and beat expectations yet again. However, key problems still persist for Twitter.

There are a number of analysts who see an upside potential for Twitter from its current price, with a mean target price of $21, and a median price target of $19 per share as per Yahoo Finance. However, there are others like Morgan Stanley, for instance, which recently reiterated its underweight rating on Twitter, also lowering its price target from $18 to $16 a share. The company’s stock has been battered badly and is now down 22% YTD and 66% in the last twelve months. So, even a marginal surprise could drive the stock higher. However, until there’s more clarity on growth and profitability, one would do well to sit out of the action on this counter.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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