KEY POINTS
- 1Q17 = MAUs: TWTR beat both 1Q revenue and MAU estimates. Total Ad revenues declined -8% y/y vs. 1% growth in 4Q16, US Ad revenues declined -17% vs. -7% in 4Q, Owned & Operated Ad revenues declined -11% vs. flat in 4Q. MAUs accelerated to 6% growth vs. 4% in 4Q; US MAU growth accelerated to 8% vs. 3%. The highlight was a continuing acceleration in DAU growth (up 14% y/y). However, we still do not know its DAU number or mix, and it doesn't sound like mgmt will disclose that anytime soon. Still the improving DAU growth is a positive any way you slice it. TWTR's 2Q EBITDA guide missed consensus estimates, but it also implies a big miss to current revenue estimates and exacerbating y/y declines.
- WE SERIOUS ABOUT ROI? This is so dumb that we're having a hard time even addressing it. If the basis for improving ROI on TWTR's ad products is the denominator, than it's not worth talking about it. TWTR literally touted its +60% decline in ad pricing (CPE) as a basis for improving ROI, and did so multiple times throughout its investor letter/earnings call. Putting those comments into practical terms, it basically means that the ROI on TWTR's ad products was(is) so bad that it had to sell it at +60% discount vs. the prior year. But in reality, the reason why CPE declined as much as it did was predominately due to mix-shift toward TWTR's autoplay ad products, which are priced at a considerable discount to its legacy ad products given the lower engagement threshold (3-second view vs. click). Further, all that CPE decline means is cheaper ad engagements; it says nothing for actual returns on the advertisers' total spend.
- BE CAREFUL: TWTR fell off our radar after it finally flagged the pending declines in 2017 revenues on its last call. So there's not much left to play for on the short side unless you have some edge on the MAU number (we don't). Today's move in the stock despite the big 2Q miss on its revenue/EBITDA guide suggests MAUs are all that matters this year. But it's important to understand what's actually going on. TWTR may be all but abandoning its legacy O&O ad products (ex autoplay); we estimate the associated revenues were down ~50% y/y in 1Q17. Conversely, we estimate that autoplay now represents over 90% of its ad engagements, but only a little more than half of its O&O Ad revenue. That said, there's still a lot more downside to revenues considering that ~40% of which are coming from products that are being deemphasized. However, that also likely means that ad load is declining, which we suspect would be a tailwind (waning headwind) to MAU growth since we estimate that TWTR's ad load is what created its MAU issues to begin with (see deck for context). That would suggest a bullish bias for TWTR this year, but if you're wrong on MAU upside on any given print, you're going to get blown up that much more by exacerbated top-line pressure. All that said, there are better places to hang out this year.
See deck/replay below for supporting analysis and additional context on the charts below. Let us know if you would like to discuss in more detail.
TWTR | Don't Be a Hero
Feb 2nd, 2017
[click here]
