KEY POINTS
- 3Q16 = CORE DETERIORATION: TWTR produced a top-line beat across both its Advertising and Data segment, but the underlying details suggests the core business continues to deteriorate. TWTR’s Ad revenue growth decelerated to 6% y/y growth vs. 18% in 2Q. However, we estimate that all of that growth came from Auto-Play, with its legacy Owned & Operated (O&O) Ad revenue declining on a y/y basis at an accelerated rate vs. 2Q16. Further, both US and Non O&O Ad revenue declined on a y/y basis as well. TWTR pulled revenue guidance for 4Q, but its EBITDA guidance suggests Ad revenue growth will teeter on positive and negative territory. We expect it to be the latter given that TWTR had fully lapped the Auto-play launch in 3Q16, and considering Point 2 below.
- SHOOTING ITSELF IN THE FOOT: TWTR announced that it will be cutting 9% of its workforce, focusing primarily on “sales, partnerships, and marketing efforts”, which sounds like the bulk of those cuts will be occurring within its salesforce. This smells like mgmt already knew they were walking into a declining revenue growth situation, and these cuts are serving as a retrospective excuse for what would have been inevitable declines. But remember by mgmt’s own admission, TWTR’s ad revenue growth is mostly dependent on capturing advertising wallet share, which naturally will be much tougher to achieve when TWTR is both reshuffling its reps and reducing the number of reps per account. That said, TWTR has likely exacerbated its top-line pressure moving into 2017.
- KICKING THE CAN: TWTR didn't explicitly guide to declining 4Q Ad revenue growth, which we suspect is just setting itself up for a nastier blow-up on the next print. There’s no guarantee that the sell-side will read between the lines, especially since consensus was already looking for accelerating Ad revenue growth through 3Q17, and mgmt suggested that it can get to accelerating revenue growth “over time” within its shareholder letter. However, there’s a lot of time between now and the next print in February, so it may make more sense to duck out of the short temporarily to avoid being blown up by next round of M&A chatter. In short, the story has taken fundamental turn for the worse, but it may not be worth staying short this far away from the next catalyst.
Let us know if you have any questions or would like to discuss in more detail.
