- Twitter earnings beat expectations on revenue and non-GAAP earnings, as well as user growth.
- 80% of that growth came from users on SMS, and 70% of the 316 million users are outside the U.S.
- The numbers still got the hype machine rolling again.
Twitter (NASDAQ:TWTR) managed to beat expectations with its second quarter report last evening, with non-GAAP earnings of seven cents per share, against an expected four cents and a “whisper number” of five cents, on $502.3 million in revenue. The latest revenue number beat expectations of $481 million.
The most important number in the report, however, was the number of active users, which came in at 316 million, up 15% over the last year, against an expected 310 million. This sent the stock up $1.86/share, a gain of almost 6%, in trading before the numbers came in.
The shares then rose another 5.6%, to $38.65, in early after-hours trading. The after-hours trading gave Twitter a market cap of over $24.5 billion.
What no one discussing the earnings mentioned, however, was that the earnings were not based on Generally Accepted Accounting Principles (GAAP), but represent Twitter’s own accounting. Under GAAP, the company posted a loss of $136.7 million, 21 cents per share, only slightly less than the $146.6 million lost during the same period a year ago.
Things like GAAP don’t matter to investors playing Twitter, or other new technology stocks, because the bulls say it doesn’t capture the dynamic environment these companies live in. What they’re looking for is momentum – top-line momentum and user momentum – on which they base an assumption of what the company may be able to do when its user base is “fully monetized” – when ads are plentiful and commerce revenues start coming in.
So it’s also important to look inside the numbers, and these don’t paint such a pretty picture. Some 80% of new Twitter users during the latest quarter were what it calls “SMS Fast Followers,” in other words, people just taking texts, very likely on feature phones. CFO Anthony Notto said in April the company would begin counting these users in its total user number, starting with the current quarter.
While a lot of Twitter bulls talked about how “everybody had dumped” on Twitter, because the shares are flat for the year, it’s still a pricey stock for now. Take four quarters of $500 million in revenue and the stock is trading at 12 times revenue. There is still enormous growth – the June quarter’s sales were 60% ahead of those a year ago, and six-month revenue of $978 million is 67% ahead of last year’s $563 million. So assuming that growth is maintained you’re buying it at 10 times revenue, and without earnings? The fact is you’re still buying hope, not performance.
A lot of that hope comes from outside the U.S., where 70% of Twitter users tweet from. That’s probably also where most of its SMS-only customers reside. How do you push ads to a feature phone? How do you get the kind of deep interaction, and tweet response, on a flip phone that you can get on a smart phone? Twitter bulls don’t even ask that question.
Instead, the bulls talk about what Twitter can do when it “tweaks” things so that users see what Twitter wants them to see, whether that’s coverage of fast-breaking news or cultural events, or just advertising, rather than the notes from friends and acquaintances that users get Twitter for.
Given that interim CEO and co-founder Jack Dorsey is also in the process of taking Square public and thus is engaging in a high-profile search for a CEO replacement at Twitter, the old saw needs to be repeated. Hope is not a plan. Twitter, while growing quickly, has yet to really grow profitably, which is why even many of the analysts who profess to be “fans” are quick to say they are not invested in it.
I’m a user, too, but not a buyer.