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TWTR: Perfectly Played (4Q14)

Takeaway: We played this release wrong, and management played it perfectly. Our short may be long in the tooth, but TWTR isn't out of the woods yet.


  1. 4Q14 LOOKED MUCH BETTER: Outside of the sputtering MAU growth metrics, we saw some marginal improvement across the metrics that were concerning us the most.  TWTR is not out of the woods by any stretch, but it doesn’t appear to be getting worse.
  2. AND MANAGEMENT PLAYED IT PERFECTLY: Management explained away the MAU weakness, while pointing to a positive inflection 1Q15.  Management also managed consensus expectations by explicitly quantifying its non-recurring 2014 tailwinds (e.g. World Cup). 
  3. SHORT MAY BE PLAYED OUT, BUT TREAD CAREFULLY: We still do not believe TWTR can hit 2015 estimates without M&A support, and the additional $1.8B raise suggests that may be the plan.  But without a hard catalyst in site, it may be time to walk away from this one.  We'll be monitoring consensus estimates, and reassessing our position from here.



The biggest blemish from the quarter was the lack of US user growth.  Outside of that we did see some marginal improvement in some of the key metrics that we concerning us the most. 


We also saw a widening spread between ad engagements and timeline views, which suggests improved targeting ability or increased ad load (management suggests both).  We also saw both ad engagements and pricing both accelerate on a sequential basis (at the same time) for the first time in TWTR’s reported history; suggesting that TWTR may not be as dependent on surging ad load to drive its model (at least this quarter).


TWTR: Perfectly Played (4Q14) - TWTR   Ad vs. user engagement 4Q14

TWTR: Perfectly Played (4Q14) - TWTR   Ad Engagement vs. Pricing 4Q14



The MAU weakness was explained away by pointing to the iOS 8 integration that essentially cut third-party MAU metrics by 4M, while at the same time, pointing to a positive inflection in MAU metrics in 2Q15 to-date.  Further, management approached 2015 guidance by quantifying the non-recurring tailwinds in 2014 (e.g. the World Cup essentially doubled its sequential revenue growth rate in 2Q14).  


TWTR: Perfectly Played (4Q14) - TWTR   Ad Rev Ex



Management essentially guided inline, with revenues at the midpoint of $2.33B vs. consensus of 2.30B.  We were expecting $2.17B, and really haven't seen much to dissuade us form our estimates.  


Despite the marginal improvement we highlighted above, TWTR still really hasn't shown us much to suggest that it's found an answer to comping past the 2Q13 Supply Shock; especially since we now realize how much of its 1H14 ad revenues were juiced by one-time events


TWTR: Perfectly Played (4Q14) - TWTR   Growth Drivers 4Q14


However, the big variable is M&A.  TWTR essentially doubled its cash balance after raising an additional $1.8B last quarter.  With $3.6B in cash, mgmt attempt to fill the void inorganically.  We're not sure the street will be willing to pay up for that (e.g. its 3Q14 release).


But without a hard catalyst in site, it may be time to walk away from this one.  We'll be monitoring consensus estimates, and reassessing our position from here.



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


Hesham Shaaban, CFA


February 6, 2015

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Anything Can Happen Here

Client Talking Points


While the no volume ramp in equity futures (total U.S. equity volume -22% vs 1 year average yesterday) provides for a nice narrative, most of that was driven by a massive counter-TREND move on Down Dollar; on a bad jobs report (Dollar Down, Rates Down), will they rip again?


A) good jobs report = 1.89%, B) bad jobs report = 1.64% - we’ll take B) only because every jobs data point we have for the last 6 weeks has been bearish, on the margin. Since the government makes up the number, anything can happen here - remember, jobs are late-cycle, and accelerated at the end of the cycle (slowing now).


The Shanghai Composite was down another -1.9% overnight, down 8 of the last 9 days, and -4.9% year-to-date  – so the China ramp won’t be followed by mainstream media anymore, but leaves one to wonder what central plannings really do for markets after their short-term pops as economies continue to slow...

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road


In today's Early Look "Alternative Market Medicine" I explain what to do once you see the jobs report



The two most powerful warriors are patience and time.



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YELP: Shot Itself in the Foot (4Q14)

Takeaway: Today’s sell-off will pale in comparison to the one coming the first time YELP doesn’t raise guidance, likely on the 2Q15 release


  1. DIRTY, DIRTY, POOL: YELP will be pulling its Active Local Business Account metric in favor of a new one focusing only on businesses contributing to its Local Advertising Revenue.  The customer repeat rate and reported account base will now be an apples-to-oranges comparison.  There is no other reason to do this other than to mask its rampant attrition issues. 
  2. SHOT ITSELF IN THE FOOT: Management needed to rebase expectations, but chose to guide inline with lofty consensus estimates instead.  What’s interesting is that YELP thinks it can somehow hit numbers while scaling down the rate of sales rep hiring...when its sales rep productivity is currently on the decline.
  3. WHAT HAPPENS FROM HERE: Revenue guidance is back-weighted, and consensus is going to raise the bar further. The first time that YELP doesn’t raise guidance, the stock craters.  That likely comes on the 2Q14 release (3Q14 guidance). 



YELP beat 4Q14 top-line estimates by ~1%, but we’re not sure if/how much its two international acquisitions contributed.  Net account growth slowed to 44% (ex Qype account transition) from 51% in the prior.  The slowdown was largely due to a sharp deceleration in new account growth to 30% from 40% in the prior quarter (also ex Qype).  YELP’s attrition rate improved to 18.5% from 19.1% in the prior quarter, but absolute attrition accelerated as it has for every quarter for as long as we can track the data. 


YELP: Shot Itself in the Foot (4Q14) - YELP   New  Net  Lost 4Q14


The major red flag from the quarter was that YELP will be pulling its Active Local Business Account metric in favor of a new one focusing only on accounts contributing to its Local Advertising Revenue.  The customer repeat rate and its reported account base going forward will now be an apples-to-oranges comparison.  There is no other reason to do this other than to mask its rampant attrition issues.  Management is trying to buy some deniability to our attrition thesis, but skewing the numbers doesn't change anything. 


 YELP: Shot Itself in the Foot (4Q14) - YELP   Account Mix 4Q14



We expected YELP to guide light; our mistake was thinking management would approach guidance rationally.  Instead management basically guided inline to estimates that we estimate are well out of reach.  We have stated repeatedly that YELP will need to produce both accelerating new account growth and record low attrition to hit consensus estimates.  For perspective, YELP averaged 34% new account growth (y/y%) and 18.5% quarterly attrition in 2014.


YELP: Shot Itself in the Foot (4Q14) - YELP   2015 Consensus Scenario   Feb 2015


The risk to our thesis, at least in 2015, was that YELP was going to accelerate its sales rep hiring in 2015 to stuff the channel as much as possible.  Instead, YELP plans to slow the pace of sales rep hiring to a rate of 40% y/y in 2014 (vs. an average growth rate of 53% in 2014


Remember, YELP’s business model is predicated on aggressive sales rep hiring to drive enough new account growth to offset its rampant attrition.  So by choosing to scale down hiring when it can't produce new account growth in excess of its sales rep hiring is a suspect move.


YELP: Shot Itself in the Foot (4Q14) - YELP   New Acct vs. Sales 4Q14


1Q15 revenue guidance is roughly 20% of its 2015 revenue guidance, which essentially means guidance is back-weighted.  Consensus will likely raise the bar further to reflect the marginal upside to guidance, and may do so again following the 1Q print if YELP produces some upside on the heels of its international acquisitions and/or the YP partnership. 


But remember that YELP must consistently beat and raise to sustain its multiple.  The first time that YELP doesn’t raise guidance, the stock craters.  That likely comes on the 2Q14 release (3Q14 guidance).




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


Hesham Shaaban, CFA



CHART OF THE DAY: Alternative Market Medicine


CHART OF THE DAY: Alternative Market Medicine - 02.06.15 chart

Alternative Market Medicine

“The traditional point of view doesn’t explain everything.”

-Deepak Chopra


Need some alternative Macro Market Medicine to get you through your risk management day? With the help of my man Deepak’s evolving professional experience, oh does the Mucker have something non-centrally-planned, for you!


“Deepak Chopra used to be firmly entrenched in a very traditional field of medicine: endocrinology. During the 1980s he worked as the Chief of Staff at New England Memorial Hospital… back then Chopra chugged coffee in the morning, smoked cigarettes, and drank whiskey in the evening to relax.” (The Medici Effect, pg 155)


No, I don’t drink whiskey to relax – neither am I recommending it as a medicine for the 100 point Dow swings you now have to deal with every day. I’m simply asking you to realize what Chopra did before he wrote 3 dozen books and decided to change his #process. He “started to notice things that could not be explained by theory.” In our profession’s case, those things are Old Wall theories.


Alternative Market Medicine - a. deepak


Back to the Global Macro Grind


Some of the Old Wall types still operate on a theory that if the stock market is going up, the economy must be going up. Then you have this other camp of quacks like me who’d remind you that if the bond market (Long Bond) is going up, the economy is slowing.


You also have all the poor bastards out there just chasing charts, who wouldn’t know the 2nd derivative of growth and inflation cycles from their next shot of Fireball. And, of course, you have mainstream media, who is left-leaning about everything economic anyway.


But that’s what makes a market. Mr. Macro Market doesn’t care about any of our individual strategies or stimulus preferences. He is naturally setting it up to provide the most amount of people, the most pain, at the most inopportune time.


Is today one of those days? Simple question – with a not so simple answer. Here’s the setup:


  1. STOCKS: One week ago today, after a bad US GDP report for Q4, the SP500 closed at 1995
  2. BONDS: as GDP growth slowed, the 10yr US Treasury Yield hit fresh new lows at 1.65%
  3. Then, zoom… stocks rallied +3.3% off those lows and the 10yr has popped back up to 1.81%


But what was it that drove the “stocks” up – and what kind of stocks really went up?


  1. US Dollar Down has driven a massive counter-TREND move in all of the Correlation Risk trades
  2. Both Oil and Energy stocks related to Oil’s counter-TREND move led the zoom…
  3. And crazy macro guys like me just day-traded my way around the pylons, trying to stay in the black


Soh-rry. In Canadian hockey speak we call them pylons. In USA Hockey, they call them “cones.”


However you play the game, you do need to zig and zag when macro markets move like this. After all, inclusive of this week’s no-volume ramp (total US Equity market volume was -22% vs. its 1yr avg yesterday) the SP500 summary for the YTD = 0.19%.


Yeah, I know you know. But just a friendly reminder to your friends that don’t (please forward this to them) if you’re long the Long Bond (TLT, EDV, ZROZ, etc.) you’re already up +7-8% YTD by just staying the global #GrowthSlowing course.


“So”, what will today’s US jobs report bring?


  1. Rocketing wage growth, booming capex hiring cycles in Oil & Gas, puppy dogs & rainbows?
  2. Or, blah…


Blah. As in what always happens in the latest of late-cycle economic indicators (employment)… what if there’s just nothing, blah?


I don’t predict stock and bond markets will do nothing on that. Fully loaded with Dollar Down, Rising Gas Prices, and 2014 #Bubbles (GPRO, YELP and Pandora) Imploding, I predict #fun!


And if you can’t have fun playing this game, I don’t have any alternative medicine for that anyway.


Our immediate-term Global Macro Risk Ranges are now (giving you all 12 Big Macros today with our intermediate-term TREND view in brackets):


UST 10yr Yield 1.64-1.89% (bearish)
SPX 1 (neutral)

Nikkei 179 (bullish)

DAX 102 (bullish)

VIX 16.06-21.76 (bullish)

USD 93.05-94.52 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 116.27-117.99 (bearish)
Oil (WTI) 42.48-53.09 (bearish)
Natural Gas 2.54-2.74 (bearish)
Gold 1 (bullish)
Copper 2.40-2.63 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Alternative Market Medicine - 02.06.15 chart

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