KEY POINTS
- 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).
- 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).
- 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).
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
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.
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
@HedgeyeInternet
