Company Overview: Twitter, Inc. offers products and services for users, advertisers, developers and data partners. The Company's products and services include Twitter, Periscope, Promoted Tweets, Promoted Accounts and Promoted Trends. Its Twitter is a platform for public self-expression and conversation in real time. Periscope broadcasts can also be viewed through Twitter and on desktop or mobile Web browser. Its Promoted Products enable its advertisers to promote their brands, products and services, amplify their visibility and reach, and extend the conversation around their advertising campaigns. Promoted Accounts appear in the same format and place as accounts suggested by its Who to Follow recommendation engine, or in some cases, in Tweets in a user's timeline. Promoted Trends appear at the top of the list of trending topics for an entire day in a particular country or on a global basis. Its MoPub is a mobile-focused advertising exchange. Twitter Audience Platform is an advertising offering.


TWTR Details

Twitter Inc (NYSE: TWTR), a provider of online social networking and microblogging service, runs a platform that allows for real-time self-expression and conversation. The company has products and services, with a feature Periscope, which is a mobile application that enables a user to broadcast and watch video live with others. The latest quarterly result from TWTR demonstrated the healthy fundamentals playing a key role and how the group is aiming to work on technology driven developments for mitigating challenges and high end competition. With improved value for advertisers, enhancement of global presence, stark improvement in fundamentals like return on equity growing to 13.1% on a quarterly level, and better operating margins, TWTR is expected to continue the gleaming performance. 


Financial Parameters (Source: Company Reports and Thomson Reuters)

Better than expected revenue and EBITDA margin expansion: TWTR for the third quarter of FY 18 has reported 29% increase in the total revenue to $758 million. There was a 30% rise in total revenue that excludes $7 million of TellApart revenue noted in the third quarter of 2017 (final quarter with reported revenue). Total US revenue rose 28% to $423 million. Total international revenue grew 30% to $335 million during the third quarter. All regions witnessed broad-based growth in revenue and Japan continued to be the company’s second largest market with 44% growth and contributing about $130 million in the third quarter. Revenue from data licensing and other totaled $108 million, up 25%. New and expanded relationships helped TWTR witness strong and predictable growth in DES with additional support from MoPub.

There was a 22% rise in total costs and expenses (on a non-GAAP basis) in the third quarter 2018 to $570 million. Traffic acquisition costs (TAC) were approximately $15 million in Q3 (down 35%) due to the TellApart deprecation and ongoing variability in the TAP revenue; while TWTR has continued to grow the headcount and has ended the quarter with more than 3,800 employees. On a non-GAAP basis, the net income of $163 million with non-GAAP net margin of 21%, and non-GAAP diluted earnings per share of $0.21 were noted (against net income of $78 million, a non-GAAP net margin of 13%, and non-GAAP diluted earnings per share of $0.10 in the corresponding period of the prior year). Further the US Tax Act led the blended US federal and state statutory tax rate for the calculation of  the reported non-GAAP provisions for income taxes, decline from 37% to 24% from the beginning in Q1 2018. This has resulted in about $28 million of the $85 million year-over-year rise in non-GAAP net income. Further, the company during the third quarter has posted the adjusted EBITDA of $295 million, or 39% of total revenue against $207 million, or 35% of total revenue reported in the same period of the previous year. The key aspect to note is that adjusted EBITDA and adjusted EBITDA margins were above the guidance ranges and this was owing to a much better revenue scenario. Thus, the full year adjusted EBITDA margin expansion in 2018 is expected on the margin expansion seen till date while TWTR has ended the quarter with approximately $6 billion in cash, cash equivalents, and marketable securities.


Q3 2018 Key Results (Source: Company Reports)

Advertising Revenue Performance in the third quarter of 2018: There was a 29% growth in total advertising revenue to $650 million during the third quarter of 2018 and the owned and operated (O&O) advertising revenue was up by 36% to $617 million. The company continues to see sales momentum with advertisers based on differentiated ad formats, improved ROI and relevance. There is an immense pressure to deliver increased value to advertisers and this is the focus around the world, with launch of something new and going for Twitter to reach the target audiences. On the other hand, non-O&O advertising revenue had declined 31% to $33 million during the quarter. Excluding $7 million of TellApart revenue in the third quarter of 2017, non-O&O advertising revenue has fallen by approximately $7 million, which is 18%.  It is to be noted that video ad formats account for more than half of ad revenue and are the fastest-growing ad format; while in terms of region, US advertising revenue has been up 32% to $348 million compared to just 9% in the second quarter. The strong growth in the US is due to strong execution across product and sales along with stronger and more broad-based advertiser demand.

For International ad segment, revenue growth is 26% to $302 million on the back of broad-based revenue growth across the globe. Advertiser demand around the World Cup during the second quarter and the first two weeks of the third quarter has helped the group. This itself has generated a good revenue opportunity in both second and third quarter. In the third quarter, the company had generated approximately $20 million of revenue from the World Cup, which is in line with the expectations set from the 2014 World Cup. By sales channel, large to mid-tier customers have formed the largest portion of the advertising revenue. Opportunity in ‘self-serve’ feature as required by smaller and local businesses that base themselves on small investments to fully capitalize TWTR platform to reach their customers, is another key zone for revenue generation.

Advertising Metrics continued to be strong: Value for advertisers continued to improve in the third quarter, due to an ongoing ad engagement growth, better developed product features, better ad relevance (calculated by clickthrough rates (CTR) and ad engagements), and pricing. There has been a 50% growth in total ad engagements at the back of rising demand and mix shift toward video ads (Video App Card and Video Website Card), and improved CTR. On year-over-year basis, the improvement has been drastic.


Advertising Metrics (Source: Company Reports)

View on Audience and Engagement in the third quarter: During the third quarter of 2018, DAU (Daily active user) grew 9% due to a combination of organic growth, marketing, and product improvements. TWTR has reported for a double digit growth in five out of the top 10 global markets and non-top 10 markets in aggregate; and this is indicative of good growth over the past quarters. However, resourcing and prioritizing of work impacted the DAU with some efforts needed to manage spammy and suspicious accounts. Average MAUs (Monthly active users) in the third quarter were 326 million, down 4 million year-over-year and 9 million quarter-over-quarter. Mainly, product changes and technical issues impacted the number. Average US MAUs were 67 million for Q3, down against 69 million in the same period of the previous year and compared to 68 million in the previous quarter; and average international MAUs were 259 million for the third quarter, compared to 260 million in the same period of the previous year, and compared to 267 million in the previous quarter.

Outlook for the fourth quarter 2018: TWTR expects adjusted EBITDA to be between $320 million and $340 million; and adjusted EBITDA margin to be between 39% and 40% for the fourth quarter 2018. Capital expenditures are expected to be in the range of $60 million and $85 million and the stock-based compensation expense is expected to be within $85 million to $90 million bracket. Ongoing health work, decisions on renewals or shift to paid SMS carrier relationships in certain markets may lead to a sequential decline in MAU in the fourth quarter as the company’s decision to allocate resources towards GDPR and health has been under focus. TWTR may thus see a drop of mid, single-digit millions of MAU. While the expense base may increase with higher headcount, TWTR is continuously working on prioritizing investments in health, audience and engagement growth, the revenue product, ads platform, and salesforce.

Stock Recommendation: TWTR stock is trading at $32.56, and has support at $26.8 and resistance at $46.7. The company has reported strong performance in the third quarter with strong revenue growth resulting in strong EBITDA margin expansion. TWTR stock has already fallen due to various reasons (including the recent global tech sector downturn), therefore the investor may now look at the stock. The current levels provide value with an expectation of a single digit to double digit rise in stock price in the next 12-24 months. We give a “Buy” on TWTR at the current price of $32.56.

TWTR Daily Chart (Source: Thomson Reuters)

 
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