Twitter Q2 Loss Narrower than Expected; User Growth Robust - Analyst Blog

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Shares of Twitter Inc. ( TWTR ) surged 28.5% ($10.98) in after-hours trading, after the company reported impressive second-quarter 2014 results driven by strong user growth. Twitter's monthly active users (MAUs) grew 24% year over year and 6.3% quarter over quarter to 271 million in the quarter.

Twitter reported loss of 24 cents per share, wider than 32 cents posted in the year-ago quarter and slightly wider than 23 cents incurred in the previous quarter. Loss per share was much narrower than the Zacks Consensus Estimate.

Including stock-based compensation, amortization of acquired intangible assets and income tax effects related to acquisitions, Twitter reported earnings of 21 cents in the quarter.

Revenues

Revenues soared 124.1% year over year and 24.6% quarter over quarter to $312.2 million, which comfortably beat the Zacks Consensus Estimate of $280.0 million. The strong year-over-year growth was driven by 129% surge in advertising revenues (89% of revenues).

Robust growth in advertising revenues was driven by 250% year-over-year and 4% quarter-over-quarter surge in ad engagements. Timeline views increased 15% year over year and 11% sequentially to 173 billion.

Advertising revenue per thousand timeline views jumped 100% year over year and 11% sequentially to reach $1.60 in the reported quarter.

Mobile advertising revenues were 81% of total advertising revenue in the quarter, up from 67% in the year-ago quarter. Mobile MAUs (78% of total MAUs) jumped 29% year over year to 211 million.

Strong advertiser demands were seen during FIFA World Cup in Brazil. Twitter enjoyed a larger and more involved audience not only around the world but in the U.S. as well. Twitter included many features to cater to soccer fans: real-time scoring, push notifications, event and match timelines and a voting ballot feature.

To boost customer engagement, Twitter launched features such as new web profiles and allowed users to send private messages within Vine.

Data licensing and other revenues soared 90% year over year to $35.0 million. This was driven by robust performance by MoPub, Twitter's integrated ad exchange and the Gnip data licensing business.

Twitter earned 33% of revenues from international markets. Revenues rose a phenomenal 168% year over year and 45.7% quarter over quarter to $102 million in the reported quarter.

Twitter launched a number of new products for advertisers that include mobile app promotions and website cards. The company expanded its advertising tools in international markets by launching self service ad platform for small and medium sized businesses in Spain, Israel and South Africa.

Margins

Adjusted earnings before interest, tax, depreciation & amortization (EBITDA) were $54.1 million compared with $9.6 million in the year-ago quarter. EBITDA jumped 46.5% sequentially.

Total cost & expenses (excluding amortization of acquired intangible assets) surged to $454.0 million from $175.0 million in the year-ago quarter. This massive year-over-year growth in costs was primarily due to higher research & development (up $112.7 million), sales and marketing (up $92.8 million) and general & administrative expense (up $26.6 million) in the quarter.

Sequentially, total cost & expenses (excluding amortization of acquired intangible assets) increased 21.6% due to higher R&D (18.6%), S&M (32%) and G&A (15.4%).

Twitter reported operating loss of $141.8 million (including stock-based compensation but excluding amortization of acquired intangible assets) compared with the loss of $35.6 million in the year-ago quarter and $123.2 million in the previous quarter.

Net income (excluding stock-based compensation, amortization of acquired intangible assets and income tax effects related to acquisitions) was $14.6 million or 2 cents compared with a loss of $16.4 million or 12 cents in the year-ago quarter and $0.2 million or break-even in the previous quarter.

Balance Sheet & Cash Flow

At the end of Jun 30, 2014, cash and cash equivalents (short-term investments) were $2.10 billion compared with $2.18 billion at the end of Mar 31, 2014. Cash flow from operating activities was $81.7 million compared with $7.0 million at the end of the last quarter.

Outlook

Twitter project revenues to be in the range of $330.0 to $340.0 million for the third quarter of 2014, much better than the Zacks Consensus Estimate of $322.0 million.  Adjusted EBITDA is projected to be in the range of $40.0 to $45.0 million for the current quarter.

Revenues are projected to be in the range of $1,310 to $1,330 million (up from $1,200 to $1,250 million) for fiscal 2014. The mid-point of the guidance is higher than the Zacks Consensus Estimate of $1,256.0 million.

Adjusted EBITDA is projected to be in the range of $210 to $230 million (up from $180 to $205 million) for the full year. Capital expenditures are projected to be in the range of $330 to $390 million.

Our Take

We believe that new products and services will continue to attract users in the long run. Twitter's ability to attract more advertising revenues, despite facing significant competition from Facebook ( FB ), Yahoo! Inc. ( YHOO ) and market leader, Google ( GOOGL ), will be something to watch out for in the near term.

We believe that the acquisitions of Cover, Gnip, TapCommerce, Namo Media and CardSpring will expand Twitter's product portfolio and monetization capability. Twitter's recent foray into e-Commerce by testing the 'Buy Now' button is a significant positive, in our view.

Moreover, as spending on online advertising is expected to increase manifold compared to traditional media, we believe that Twitter has massive growth opportunity, due to its strong mobile products. However, higher costs and continuing investments on product development will hurt profitability.

Currently, Twitter has a Zacks Rank #3 (Hold).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: YHOO , FB , TWTR , GOOGL

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