What happened: Twitter added 2M MAUs in 2Q to its core user base,vs our estimate of +6.5M, with MAU growth coming entirely international…U.S. sequential MAUs went ex-growth. Commentary around theinability to break into the”mass market” makes us wary of TWTR’s addressable audience,and the question marks around the company’s ability to drive sustainable user growth are unlikely to go away in the near-term.Total 2Q revenue was $502M vs guidance of $470-485M, 4% above MSe $486M and Street estimate of $482M. Advertising revenue grew 63% Y/Y to $452M – including a $12M contribution from TellApart, which closed a week ahead of Twitter’s expected assumed close-above our expectation of 58% growth.We estimate that ex TellApart advertising revenue decelerated to ~60% from 72% in Q1.
User growth. As announced in 1Q, the company adopted a revised definition of MAUs, which includes users who access Twitter solely through SMS. Core MAUs incl. SMS-only users grew +15% to 316mn, from +19.4% in 1Q. The US was flat in 2Q, compared to a +2mn net add in 1Q. International markets saw +8mn net adds in 2Q, compared to +13mn net adds in 1Q. Mobile MAUs represented approximately 80% of total MAUs, consistent with the prior three quarters. Management discussed the issues around MAUs growth in detail on the conference call. While we believe the company can improve the user experience around content curation, timeline structure, conversation threading, and search, management’s commentary illustrates the degree of difficulty involved in driving user growth and engagement.
Bank of America Merrill Lynch:
Maintain Neutral; lowering Price Objective to $40 We remain constructive on Twitter’s monetization opportunity given content, but we remain cautious on user & engagement growth vs social peers and valuation. In the near term, we expect concerns on users/usage to weigh on stock as street takes a wait and see approach to the Project Lightening (curated feeds and news) launch in the fall. In the long-term, Twitter needs to become a mass market platform and we are not convinced added marketing will put the platform over the hump (it is a product problem, in our view).
Per usual, Twitter beat Q2 estimates but missed user targets. Monetization bulls and user bears have another reason to stay entrenched in this battleground stock. Results were close enough to normal that the announcement of the new CEO, which we expect in Q4, should be the next catalyst for long-term sentiment; we remain positive on TWTR in front of a new direction.
The bottom line for TWTR is that after nine years of its existence, my mother still doesn’t understand what it means to “hashtag” something, but she does understand what it means to “like” something. That is to say that Twitter is still too difficult to use and inaccessible to too many. It still isn’t a mass market product and it is unclear if it ever will be. User growth is the key issue. Monetization isn’t the problem. The roadmap for monetization has already been shown by Facebook; TWTR can just follow it (and, in fact, is). However, if it can’t improve the product and make it more interesting and accessible to more users, the stock simply will not work.