KEY POINTS
- BACKSTORY: The TWTR story prior to ~3Q16 can be summarized as a mgmt team that was scared of the street. Instead of rebasing expectations early on, we estimate that mgmt chased consensus estimates with rampant increases in CPC ad load, which was not only pulling monetization forward, but pushing TWTR’s users away at the same time. In turn, MAU growth sputtered out after TWTR churned through an estimated ~40% of its US user base (based on Aug 2015 survey, n=7.5K). The situation devolved to the point where the model became structurally defunct since TWTR couldn't increase ad revenue (ad load) w/o putting more of its existing ad inventory at risk since doing so could have led to declining MAU growth. Ultimately, TWTR decided to restructure its model after seemingly failing to sell itself ahead of the 3Q16 print.
- WHAT'S CHANGED: We originally viewed the announced restructuring primarily as a cop-out preempting an inevitable decline in ad revenue. However, we now suspect that TWTR has also been right-sizing its model in terms of ad load (inventory), which means the model may now be more sustainable. For context, we estimate that TWTR has reduced its core legacy CPC ad load (est. +90% of 2016 ad load) by almost 30% YTD on a y/y basis. That means that there is now a lot more room to swap in auto-play video ads, which have a lower engagement threshold, so should monetize more proportionately with increasing ad load vs. its legacy CPC ad products. Moving into 2018, we estimate that legacy CPC ad revenues are now slightly less than 50% of O&O ad revenue (vs. ~75% last year), so it should be less of a drag on revenue growth even if it declines at comparable rates; we doubt that would be the case given what appears to be sequential stabilization in legacy ad revenues over the last two quarters. All said, we estimate that TWTR could return to double-digit ad revenue growth by 2H18, but we have some lingering concerns.
- NEXT STEPS: The first two bullets focus mostly on ad inventory (supply), which we previously viewed as TWTR's major structural impediment. The two factors we still need to dig into are MAU/DAU growth and advertiser demand. On the former, we suspect that event frequency on the platform could be the driving factor to DAUs given how TWTR defines the metric, so we'll be looking for color on its planned events for 2018 relative to 2017. On advertiser demand, we believe TWTR would need to reinvest in its salesforce after pulling back there throughout 2017, so we'll be looking for S&M deleverage throughout 2018. None of the above are necessarily gating factors to getting constructive, but would be a running concern if we were to go that route.
TWTR | Don't Be a Hero
Feb 2nd, 2017
[click here]
See above deck for supporting detail/analysis. Let us know if you have any questions or would like to discuss further.
