TWTR: Has the Story Changed?

Takeaway: 2Q14 results would suggest as much, but there are still too many question marks to believe that this type of upside is sustainable.

 NOTE SUMMARY

  1. What We All Know: 2Q14 was a monster quarter, with accelerating revenue growth across both segments.  The guidance raise was equally impressive.  
  2. What No One Really Knows: How much of its 2Q14 strength was driven by the World Cup, and how much of its guidance raise was tied to its recent string of acquisitions in its Data Licensing segment.  
  3. What the Data Suggests: Users are starting to fade twitter ads at an increasing rate, which would suggest that TWTR's growth strategy of rampant increases in ad load isn't sustainable.  
  4. What We're Expecting: A marked acceleration in data licensing revenue growth in 3Q14, alongside a marked deceleration in 3Q14 advertising revenue; a setup that may take the street by surprise.  

WHAT WE ALL KNOW

2Q14 was a monster quarter.  TWTR beat revenue estimates by 37M (14% upside) with accelerating revenue growth across both segments, alongside accelerating US user growth (bots included).  The company raised guidance by $100M, even after backing out the 2Q14 upside, it's still a considerable raise relative to prior implied 2H14 guidance of $700M at the midpoint.  

WHAT NO ONE REALLY KNOWS

How much of its 2Q14 strength was driven by the World Cup, which is a month-long event without a comparable event in the prior-year period.  Management made multiple comments citing World Cup as a tailwind, but without any detail to quantify the impact.  What we do know is that Global Timeline views saw its sharpest q/q increase since 2Q13, and that doesn't include TWTR's tailored content around the event, where ads were naturally served.  

The other thing to consider is how much its recent acquisitions factored into its guidance raise.  TWTR spent $132M on 7 acquisitions in 2Q14, all within its Data Licensing segment, which saw its sharpest sequential increase in revenue growth since TWTR closed the MoPub acquisition.  The company has since announced 3 more acquisitions in 3Q14.  The question is how much of an impact will these acquisitions have on TWTR's revenues in 3Q14 after contributing a full quarter of revenue.  

TWTR: Has the Story Changed? - TWTR   Data 2Q14

WHAT THE DATA IS TELLING US

For the first time in TWTR's reported history, its sequential growth in ad engagements lagged that of user activity (global timeline views); meaning that users are starting to fade twitter ads at an increasing rate.  Remember that TWTR's reported timeline views do not include the tailored content around the World Cup, so the 2Q14 inflection is worse than the chart below suggests.  

TWTR: Has the Story Changed? - TWTR  Timeline vs. Ad Engagements

It's important to note that TWTR generally only gets paid when users engage with its ads, so it's a concern if users are fading them at a higher rate; especially since our analysis suggests that TWTR's growth over the LTM has been driven primarily by surging ad load more than anything else (see note below for detail).  

If TWTR can't get its users to engage with its ads at historical rates, then it means it needs to introduce a disproportionately larger number of ads to deliver the results the street is expecting.  That runs the risk of pushing the less loyal users away, especially since TWTR is largely dependent on mobile (smaller screen) to drive its ad revenues.

We recommend reading the note below for context.

TWTR: What the Street is Missing

05/19/14 09:09 AM EDT

http://app.hedgeye.com/feed_items/35420  

WHAT WE'RE EXPECTING

We continue to expect a marked 2H14 deceleration in advertising revenue growth; the impetus being the inability to comp past the 2Q13 ad supply shock that we discuss in the note above.  However, we could still see upside to 2H14 revenue estimates, albeit inorganically, from its recent string of acquisitions in its Data Licensing segment.

However, we don't believe that is what the street is expecting, or is willing to pay for.  The growing sentiment from many of the bulls that we're speaking with is that TWTR is becoming the next FB as the #2 option for growing social media ad budgets.  If TWTR's 3Q14 results reflect our expectations above, it would case serious doubt on the story, and we would expect the street to sour on the name.  

Let us know if you have any questions, or would like to discuss in more detail.

Hesham Shaaban, CFA

@HedgeyeInternet