KEY POINTS
- 1Q16 = SCARY GUIDE: We thought TWTR would produce upside to 1Q guidance and resulting consensus 1H16 estimates. However, it wound missing 1Q revenues across both segments, and offered pretty dreadful guidance, which calls for 2Q16 revenue growth at almost half the rate of 1Q16 (19% vs. 36%, respectively). That may appear like a sandbagged guide, but it may actually be a reflection of growing uncertainty around the auto-play headwind that we didn’t give enough credence to before covering our short (point 2).
- AUTO-PLAY = LEGACY SIPHON: While we suspected auto-play could cannibalize legacy ad engagements, we didn’t believe it would occur at this magnitude in 1Q, or at what’s implied for 2Q. While 1Q16 ad engagements spiked 208% y/y, CPE fell off almost 60% (56%), which suggests that the majority of ad engagements are now coming from auto-play given the CPE discount (est. +85% discounts vs. legacy). Meanwhile, mgmt admitted its legacy promoted tweets are "under pressure", which is likely due to waning engagement rates from the influx of auto-play ads (i.e. ad fatigue)
- HAMSTER WHEEL: Mgmt suggested that it is now steering its advertisers toward auto-play, but in reality we suspect that's where engagements are flowing given the lower engagement threshold. TWTR is effectively moving toward CPM (vs. CPC), but is basically back where it started; it needs to introduce a disproportionately higher level of ad load to drive comparable revenue growth. The difference this time is that instead of introducing rampant increases in legacy ad load to offset fading ad engagement rates, TWTR is just swapping in a heavily discounted auto-play ads with a much lower engagement threshold. This could become a growing concern depending on the rate of legacy ad cannibalization; we have more work to do here. For now, we remain on the sidelines.
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
