5 Questions Every Twitter Investor Needs Answered

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Twitter (NYSE:TWTR) failed to impress investors on April 29 when it reported first-quarter earnings. The data, at a glance, wasn’t bad. A GAAP loss of $132.36 million, or 23 cents per share, in the first-quarter of 2014, compared to $27 million, or 21 cents per share, in the year-ago period. The unadjusted figure includes $126 million in stock-based compensation expenses.
Adjusted net income was reported at $183,000, or zero cents per share, which compares against an adjusted loss of $11 million, or 8 cents per share, in the year-ago period. The mean analyst estimate was an adjusted loss of 3 cents per share. Revenue of $250 million, up 119 percent on the year, beat the mean analyst estimate of $241 million. Advertising revenue clocked in at $226, up 125 percent on the year and accounting for 90.4 percent of total revenues. Mobile ad revenue accounted for 80 percent of total ad revenue.
Where there was weakness — or, perhaps more accurately, some confusion — were in use growth and engagement metrics. Twitter reported average monthly active users (MAUs) of 255 million, up 25 percent on the year but shy of a mean analyst estimate of 257 million. This, combined with a weak outlook for the coming quarter, spooked the market and drove shares down more than 8 percent overnight.
The selloff isn’t exactly surprising given that Twitter is a glass canon — a company with a sky-high but fragile valuation based on some broad interpretation of its potential to grow in the near future. Many analysts jumped onto this idea immediately in the wake of the IPO, but with more and more data under their belt it feels like the market is understanding Twitter better and better. Here are a couple of questions from the company’s first-quarter earnings conference call that help unpack the situation.

1. What are Twitter executives looking at?

One of the issues at the heart of the conversation surrounding Twitter — maybe the issue — is metrics. Specifically, which metrics matter? Which metrics actually signal growth of Twitter’s core business machine, the social platform that serves ads to its users?
The answer to this question isn’t exactly clear. For example, there’s a fairly justifiable focus on user growth (or, reach) because Twitter’s entire business is predicated on having a sufficiently large user base. The value of a social network is, at least in part, a function of the size of its user base in both the eyes of other users and in the eyes of advertisers. The sheer size of Facebook’s user base is, arguably, one of its greatest competitive advantages over smaller and ostensibly more nimble (niche, at least) social networks like Twitter. Twitter’s 255 million MAUs are just a fraction (about 20 percent) of the 1.28 billion MAUs Facebook ended the first-quarter with – are just a fraction, even, of Facebook’s 802 million daily active users, 1.01 billion mobile MAUs, and 609 million mobile DAUs.
Apparently suspecting that MAU growth doesn’t quite capture the whole picture, Diana Kluger from JPMorgan Chase (NYSE:JPM) asked Costolo “if you could prioritize to us which metrics you’re looking in order of importance.”
Costolo’s answer provided some meaningful insight. He recognized that there are various metrics that compete for the attention of analysts and executives alike and that “it’s not binary,” but revealed that his team is focusing on engagement. “If you think about over the course of the long term, we’re going to drive up engagement, we believe, over all of these axes,” he told Kluger. “But the current focus on increasing the value of a single timeline has this multiplicative effect, as we’ve seen, on monetization.”
Timeline view volume (engagement) increased 15 percent on the year to 157 billion, or 614 per MAU. Advertising revenue per timeline view (monetization) increased 96 percent on the year to $1.44 — a 3 percent sequential decline was cited as seasonal.

2. What is Twitter’s use case moving forward?

It’s no secret that Twitter has competition. It’s also no secret that Twitter struggles with a little bit of identify crisis. With Facebook — by now a massive business machine hungry for growth — dominating the landscape, Twitter has been forced to defend its use case. This means identifying what about its business is unique and valuable, and what ultimately will keep and increase users and increase engagement. The company has had to prove that it understands why people use its service over others, and that it knows how to capitalize on that understanding.
Anthony DiClemente of Nomura Securities summoned this specter, asking Costolo what he’s doing in when it comes to differentiating Twitter’s use case. “We think of Twitter as this companion experience to what’s happening in your world,” Costolo responded. “And I really see that as the consistent use case over time,” he added. Costolo revealed that as a platform, his team believes that Twitter “is already incredibly mainstream.”
Costolo then underscored his answers to the metrics questions. Namely, he said that, “Now what we need to do is help that world of users who already experience Twitter every day understand the value, the increased value of the log-in experience.” In other words, dig deep, and grow through increased engagement and more sophisticated monetization — and not, specifically, through aggressive user base growth.

3. How important are idiosyncratic events?

“You mentioned the Olympics as a live event that was a driver of behavior in the quarter,” DiClemente, the analyst from Nomura continued. “I just wondered if can you talk about other idiosyncratic events like the plane that went down in Malaysia or the events in Ukraine, and how those compared to something like the Olympics in terms of being a driver of the KPIs that you’re looking at.”
Twitter CFO Mike Gupta took the question, and he made one key observation about how different types of one-off events may or may not be a boon for the company. That distinction is the difference between one-time events that are naturally commercializable, like the Super Bowl, and one-time events that are not naturally commercializable, like the situation in Ukraine. Advertisers are not flocking to Twitter to serve ads orbiting the situation in Ukraine, but they do flock to Twitter to serve ads orbiting the Super Bowl.
So while the situation in Ukraine increases engagement on the Twitter platform, it doesn’t necessarily directly stimulate business activity. There is no doubt some benefit from increased timeline views, but it’s unclear how meaningful this is.

4. What about global competition?

Twitter is not an American phenomenon. In the first-quarter, Twitter reported U.S. timeline views of 46 billion, up 16 percent on the year but accounting for just 29 percent of the total. Moreover, international timeline view growth of 15 percent was not meaningfully lower than timeline view growth in the U.S. As a share of total MAUs, the U.S. accounts for just 22 percent, and MAUs grew much faster internationally (+27 percent) than in the U.S. (+19 percent) in the first-quarter.
Understanding that Twitter is an international — global — platform, Jordan Monahan from Morgan Stanley (NYSE:MS) asked a high-level question: “We’re wondering, do you think that over time that users tend to congregate around a single global service? Or do you think there are regional differences that would actually prevent that from happening and natives kind of short messaging and communications just inherently more local and more regional?”
The question is a pretty heavy one, and heavier still in the shadow cast by a Facebook fat with the acquisition of WhatsApp. If users are going to congregate around a single global service, is that service going to be Twitter? What does Twitter look like if it’s not?
“I think that platforms like Twitter don’t see that kind of regional differentiation,” Costolo said in response to Monahan’s question. Costolo brought up examples like KakaoTalk and Line, mobile messaging apps that are ostensibly competitors with WhatsApp, and added that “we see a broad global distribution of our users.” Costolo’s implication is that Twitter has some meaningful advantage over these services.

5. Where are ad loads and where are they going?

“I was hoping you could talk a little bit about where you are on ad loads,” said A. Justin Post of Merrill Lynch. This is one of those issues at the intersection of usability and monetization: how much advertising can Twitter support without jeopardizing the user experience? What is the capacity and, more specifically, where is the current ad load in relation to that capacity?
Gupta answered, saying that Twitter’s ad load remains “very low.” Low ad room has afforded the company some flexibility — as Gupta put it, “We’ve had the luxury of being able to improve ad revenue per timeline view and monetization without impacting our ad load.” This is basically a best case scenario, maintaining the user experience while increasing monetization. Gupta highlighted progress in Twitter’s ability to deliver relevant content, putting the right ads in front of the right viewers — a trick that advertisers will pay for.
Here are Twitter’s earnings slides.