Twitter Q1 15A – 90 minute slip

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The core business of Twitter is looking mature.

• Twitter suffered a double blow as its investor relations website accidently disclosed weak Q1 15A results 90 minutes before the close of US trading.
• The shares were halted while Twitter formally released its results after which the shares fell by 18%.
• Q1 15A revenues / EPS were $436m / $0.07 compared to consensus at $456m / $0.04 and guidance at $440m-$450m.
• Monthly Active Users (MaU) came in at 302m which was exactly as the company had guided adding 14m during Q1 15A.
• MaUs are a bit of a grey area with many companies counting them differently.
• This, combined with Twitter’s abrupt adding of those that access Twitter via SMS in emerging markets and the weakening revenue picture raises uncomfortable questions.
• Twitter blamed the revenue shortfall on its direct response products where Twitter has increased the bar of what constitutes a click-through.
• The result is lower click through rates for Twitter but a higher value for advertisers as they are no longer paying for low quality clicks.
• In the long run this should allow Twitter to increase its pricing but for now the result is lower revenue.
• Twitter expects this value to come back to Twitter at the beginning of H2 2015E but I can’t help wondering if revenue is finally beginning to top out.
• The biggest problem Twitter has is its narrow focus as its services only cover a small part of Digital Life.
• This means that its monetisation opportunity is fundamentally limited unless it can spread its wings wider and encourage users to spend more time with Twitter.
• I have previously forecast, (see here), based on RFM’s estimates and its narrow focus, that Twitter’s revenues will flatten out at around $2bn annually.
• With Q2 guidance coming in at $470m-$485m rather than the $536m consensus estimate it looks as if Twitter is beginning to run out of growth.
• This makes me think that the new annual revenue forecast of $2.17-$2.27bn estimates may have further fall.
• Twitter is doing the right sort of things to expand its appeal beyond microblogging but these things take time.
• Consequently, I can see 2015E being a difficult year as Twitter ramps up new offerings to expand its reach while the core business stabilises.
• Hence, Q2 15E estimates look achievable but I suspect that the guidance for Q3 15E will reveal that the promised return to growth requires much more than a tweaking of the existing business.
• Consequently, with a high valuation and downside to H2 15E estimates, I think the shares will go further south.
• I would begin to be looking at Twitter with real interest in the mid $30s.