TWTR: Thoughts into the Print (1Q15)

Takeaway: We’re staying short, but this is a very tricky setup since this comes down to when mgmt rebases expectations (2Q15 guidance or release?)

KEY POINTS

  1. 1Q15 = MUTED UPSIDE: We’re expecting limited top-line upside on consensus estimates that are above the top end of 1Q15 guidance.  Further, any upside to estimates likely comes from the Data segment, with a limited upside to consensus advertising estimates that we believe are failing to adequately consider the non-recurring tailwinds from last year.  However, the big unknown here is ad pricing (see Point 3).
  2. A VERY TRICK SETUP: We believe TWTR is facing a precipitous slowdown in ad revenue growth with the company struggling to find an answer to comp past the 2Q13 Supply Shock, which had driven much of its recent success.  Mgmt will either have to own up to it, or try to acquire its way through it (or both).  However, we’re not sure if management concedes that point on the 1Q or 2Q print (2Q guidance or earnings).  The setup seems similar to 2Q14/3Q14 when TWTR guided high for 3Q14 revenues, then disappointed with inorganic upside and light advertising revenues. It's a tough setup, but we suspect Noto is more likely to manage expectations (he already tried last quarter).
  3. WHAT WE’RE KEYING IN ON: Ad Pricing (CPE), which is the biggest risk to our Short thesis.  TWTR has historically driven its model off of surging ad load; yielding CPE along the way.  However, CPE just turned positive on a y/y basis in 4Q14 for the first time in TWTR’s reported history (after cumulatively declining by 82% since 1Q12).  There is a lot of moving parts to CPE (ad load, product mix, customer base, geography), so tough to get any edge here.  However, we estimate that CPE needs to not only grow, but accelerate on a y/y basis to hit consensus 1H15 Ad Revenue estimates. 

 

1Q15 = MUTED UPSIDE

We’re expecting limited top-line upside on consensus estimates that are above the top end of 1Q15 guidance.  Further, any upside to estimates likely comes from the Data segment, with a limited upside to consensus advertising estimates that we believe are failing to adequately consider the non-recurring tailwinds from last year. 

 

During the 4Q14 call, TWTR tried to warn the street about the 1H14 benefit from the Olympics and the World Cup, which contributed an incremental 10% and 20%, respectively, to 1Q14 and 2Q14 results.  Excluding these events, consensus is calling for a mild slowdown in advertising revenue growth into 1Q14, with a reacceleration in 2Q14; a tall order for a company already experiencing a sharp decelerating in ad engagements (more detail below).

 

TWTR: Thoughts into the Print (1Q15) - TWTR   Adj Consensus Est 1H15

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad eng vs. Price y y 

 

A VERY TRICK SETUP

We believe TWTR is facing a precipitous slowdown in ad revenue growth with the company struggling to find an answer to comping past the 2Q13 Supply Shock, which was a sudden and sustained surge in ad load that drove much of its revenue growth through 2014.   For supporting detail, see the note below.

 

However, TWTR is now at the point where ad engagements are precipitously decelerating, and we don’t believe the company can risk another surge in ad load since it needs to beat on both revenue and MAU expectations to appease the street, yet those two factors have historically worked against each other. 

 

The question is when mgmt will own up that slowdown, or if it will try to acquire its way through it (or both).  The more important questions may be timing; we’re not sure if management concedes that point on the 1Q or 2Q print (2Q guidance or earnings).  The setup seems similar to 2Q14/3Q14 when TWTR guided high for 3Q14 revenues, then disappointed with inorganic upside and light advertising revenues.  It's a tough setup, but we suspect Noto is more likely to manage expectations; he already tried last quarter by quantifying the non-recurring tailwinds mentioned above.

 

TWTR: Are Acquisitions Enough?

03/17/15 08:50 AM EDT

[click here]

 

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad Engagement vs. Pricing 4Q14

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad engagement vs. MAU

 

WHAT WE’RE KEYING IN ON

Ad Pricing (CPE), which is the biggest risk to our Short thesis.  TWTR has historically driven its model off of surging ad load; yielding CPE along the way.  However, CPE just turned positive on a y/y basis in 4Q14 for the first time in TWTR’s reported history (after cumulatively declining by 82% since 1Q12). 

 

There is a lot of moving parts to CPE (ad load, product mix, customer base, geography), so tough to get any edge here.  However, we estimate that CPE needs to not only grow, but accelerate on a y/y basis to hit consensus 1H15 Ad Revenue estimates.  For context, we have included a scenario analysis flexing ad pricing (CPE) against ad engagements (per MAU), along with a chart showing the recent trajectory between the two factors.

 

TWTR: Thoughts into the Print (1Q15) - TWTR   1H15 Scenario Analysis

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad eng mau vs. Price y y

 

 

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

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more