Twitter Q4 14A– Essential Fabric

Reply to this post

Ecosystem is now a real focus for Twitter.

• Twitter reported very solid results as monetisation of its users continues to go from strength to strength.
• However, management entered into dangerous territory when discussing the softness in user numbers.
• Q4 14A revenues / Adj. EPS were $479m / $0.12 ahead of consensus at $453m / $0.06.
• At the end of Q4 14A the company had 288m monthly active users (MaUs) which is 4m more than Q3 14A and 47m more for the whole year.
• The total reach of Twitter remained constant at around 500m.
• This initially caused some disappointment and the shares fell immediately after the announcement but then rallied hard as management did a good job of convincing the market that growth would resume.
• The weakness in MaU growth was mostly caused by the loss of 4m MaUs as a result of integrating Twitter with iOS8.
• However, the initial signs (January) are that the company has returned to the trend it saw in the first three quarters of 2014A where it added around 14m per quarter.
• Consequently, the company has clearly set the goal of adding 14m MaUs in Q1 2015E which was the main source of relief for the market.
• At the same time it sets the stock up to be very heavily punished if it fails meet that target in Q1 15E.
• Outside of that guidance was Q1 15E was somewhat weak with Q1 15E revenues / Adj EBITDA of $440m-$450m / $89m-$94m expected for Q1 15E.
• This does not compare very favourably with forecasts of $450 in revenues and $92m in adjusted EBITDA.
• However, the market remains fixated on MaUs as its yardstick of value, and so the disappointing forecasts were ignored.
• Most importantly of all, I think that Twitter has realised that its existing business has limits and that it needs to do much more in order to reach its long term revenue target of $14bn.
• In its current guise, RFM forecasts that revenue growth will flatten out at around $2bn.
• This is why its Fabric strategy is so important.
• Fabric is a set of APIs that allows developers to build apps that can run on a range of smartphone platforms and be tightly integrated to Twitter.
• The key is that these APIs also include hooks into Twitter’s system that allows it to understand what these users are doing and most importantly, to monetise them.
• Because the apps can be for a range of different Digital Life activities outside of microblogging and instant messaging, this could give Twitter the reach that it badly needs to make its long term revenue goals.
• The quality of the apps produced using Fabric as well as developer support remain uncertain but critically this is exactly what Twitter needs to do to continue its revenue growth beyond $2bn.
• Twitter still has time as I don’t expect it to run out of revenue growth before 2016E, but ecosystems take a long time to build.
• Until then, I am still not very excited by Twitter’s valuation as investors are already paying for revenue growth which is far from certain.
• I continue to prefer Microsoft, Google or even Apple. (I am a little less positive in the short-term on Apple now that the blow-out quarter is behind us).