Twitter's Results Are a Letdown

 | Feb 11, 2016 | 6:30 AM EST
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The following commentary was originally sent to Action Alerts PLUS subscribers on Feb. 10, 2016, at 6:06 p.m. ET.

After the closing bell Wednesday, Twitter (TWTR) failed to impress investors with its fourth-quarter results, despite facing very low expectations (both from the sell side and buy side), as it reported disappointing user growth metrics along with downside guidance. (Twitter is part of TheStreet's Action Alerts PLUS portfolio.)

On the headlines, the company did beat on the top and bottom lines, with revenues of $710.5 million coming in roughly $500,000 ahead of consensus and EPS of $0.16 beating consensus expectations for $0.12. Fourth-quarter advertising revenue, which represented 86% of total revenue, was up 48% year over year to $641 million. Domestic revenue was up 47% and international revenue increased 51%.

As we mentioned, however, the headline beat is more misleading than anything else, as 4Q total monthly active users (MAUs) came in flat sequentially at 320 million (which was 9% growth year over year). More importantly, MAUs excluding SMS Fast Followers (users who can only use the service on a low-speed, text-messaging basis; this is considered the more telling metric) declined by 2 million users to 305 million (up 6% year over year) vs. consensus estimates for 309 million. This is extremely disappointing given that the main critique of the platform (among many) is the lack of user engagement and the inability of the management team to embed Twitter as an essential service for users (both for those who actively tweet and those who really only use the timeline as a news feature).

That being said, we do give management a smidgen of credit for specifically addressing the issue in their shareholder letter, noting that the platform has already seen increases in MAUs excluding SMS Fast Followers at the end of January to 3Q levels (and we note that 4Q is typically the company's worst quarter seasonally). While that is slightly encouraging, it doesn't discount the decline experienced in 4Q and could be a sign of volatility in the metric for quarters to come, which, unfortunately, is a reflection of the company's execution.

As for guidance, the company expects first-quarter 2016 revenue to come between $595 million and $610 million, far below consensus estimates that call for roughly $630 million. The company's EBITDA outlook does see some upside, however, with expectations of roughly $155 million beating initial consensus of $149 million.

All in, we are clearly disappointed with the company's failure to grow its user base at a very critical point in its history. The bottom line: The market cares about user growth and Twitter hasn't proven its ability to deliver. We reiterate that the stock will remain pressured until this changes. That being said, we continue to recognize the long-term potential the platform possesses -- even with stagnant user growth in this past quarter, the company was still able to grow revenues roughly 50% year over year, demonstrating that there is still a business to be made even if user growth is slowing. Imagine if management could actually grow their active user base and further penetrate their 800 million total user audience (which includes logged-out users). If only.

On that note, management did point out in their release that they are seeing increasingly positive impacts from their marketing initiatives (which have helped raise total users back to 3Q levels, as we mentioned) and that users are being held onto at higher rates. Overall, management is working on making the service simpler in order to attract and maintain more users.

Our final thought: We appreciate management's focus on important, strategic initiatives, but we can't fully buy in until we see concrete results and clear evidence that recent changes have actually made a difference. It is all about execution. Until then, the long-term appeal will continue to be a mirage way out in the distance.

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