Twitter Inc. (NGS: TWTR) also warned of higher investment spending in 4Q20 that may lead to negative EPS comps vs. 4Q19.
Twitter posted non-GAAP EPS that was nearly five-times higher than pre-reporting expectations. Profits growth was fueled by strengthening revenue trends, reversing the weak advertising trends that weighed on 2Q20 results. Revenue rose in double-digits year-over-year, resulting in the strongest annual sales growth since 2Q19.
TWTR bulls and bears had widely divergent views on the same set of results, with the former choosing to focus on financials and the latter on usage metrics. While total advertising revenue was up 15% year-over-year and ad engagements were up nearly 30%, monetizable DAUs grew just 15 sequentially and missed consensus expectations; international user growth was particularly lethargic and below-trend on a quarter-over-quarter basis.
In addition to some slow-down in 3Q after the shutdown-induced user surge in 2Q, Twitter’s actions to restrict toxic content and fake news may have suppressed its own user growth. The company’s actions, while fraught with risk including claims of partisanship, are designed to contribute to the site’s long-term health. Twitter must navigate a narrow path between eliminating threatening content and suppressing genuine political expression. We believe it is developing the tools for this balancing act, although they are far from perfect. And the application of vigilance and discernment will need to be constant and represents a continuing cost.
Twitter always seems to be releasing earnings in the shadow of a major event that draws everything from consumer support or ire, to threatened boycotts, to congressional inquiries. For the 2Q20 release in July, earnings were overshadowed by the cyber-attack in which over 100 accounts, many associated with celebrities, were hacked and used to request bitcoin. As so often happens, the high-profile event proved immaterial both to financial results and the company’s brand and prestige.
The current contretemps relates to allegations of improprieties by Hunter Biden and his father, presidential nominee Joe Biden. After due diligence, Twitter and other news organizations decided that the information appeared to have been fabricated by Russian intelligence agencies and/or other foreign agencies. Twitter’s decision to remove and suppress this information was met with angry cries of political censorship. Twitter eventually unwound some of those restrictions, while applying warning labels to related content.
As is usually the case, Twitter’s perception in the public sphere and its operating & financial results appear to be on two separate tracks. For 3Q20, Twitter reversed the trends of 2Q20, when user growth was brisk but advertising spending disappointed. The opposite was true in 3Q20, as advertising spending had a huge breakout of the depressed second quarter, but net user gains were unexceptional.
For 3Q20, Twitter grew monetizable daily active users (mDAUs) by 30% year-over-year, to 188 million. However, mDAUs increased just 1% sequentially for 3Q20. After Twitter posted 12% sequential growth in 2Q20 (the first double-digit sequential growth since this metric was introduced in 2016), expectations were high for 3Q20, with the consensus looking for about 195 million mDAUs by quarter-end.
On a regional basis, U.S. mDAUs of 36 million (19% of total mDAUs) were up 20% annually but flat sequentially. International mDAUs of 152 million were up 32% annually but just 1% sequentially. The miss against consensus mDAUs was concentrated in International, where investors were looking for about 160 million daily users.
Advertising revenue, on the other hand, completely blew expectations out of the water. Advertising revenue of $808 million was up 23% from the prior year and up 44% sequentially. U.S.
advertising revenue (53% of total) rose 11% annually, while recovering 51% sequentially. International ad revenue rose 20% annually and 37% sequentially.
As a result of the strong sequential growth in ad sales amid stagnant user growth, advertising monetization per user bounced sharply higher from 2Q20 while returning approximately to year-earlier levels. U.S. ad revenue per U.S. mDAU of $11.88 was down 7% annually from $12.83 a year earlier, but rose by 51% sequentially from $7.87 in 2Q20. The peak in this metric was $16.43 in the 2019 holiday quarter (4Q19). International ad revenue per international mDAU of $2.50 was down 9% from $2.77 a year earlier but up 35% from $1.86 for 2Q20. On an aggregated basis, total ad revenue per mDAU of $4.03 for 3Q20 was down 11% year-over-year, but up 42% sequentially from $3.02 in 2Q20.
CFO Ned Segal reminded investors that Twitter has made ‘revenue durability’ its highest financial priority in 2020. Twitter completed its ad server rebuild by mid-year, with a goal of supporting faster product development, increasing stability, and helping scale the ad business. In 3Q20, Twitter made progress on brand and direct response products, with updated ad formats and improved measurement and prediction.
Commenting on the pace of mDAU growth, the CFO noted that implementation of shelter-at-home standards during 2Q20 caused a likely one-time spike in new accounts and mDAU usage. Twitter focused on retaining new accounts in 3Q20, and its success in that matter ‘gives us increased confidence in our consumer product efforts and in our road map,’ according to the CFO.
Twitter expects the ‘strength and timing’ of holiday season shopping in 2020 to play out differently than it has in the past. As regards the election and the political climate, management believes some advertisers may be holding off on spending and that it could resume when the election is over, assuming no major ramp up in post-election political violence.
In the tumultuous build-up to election, Twitter has remained relentlessly focused on ‘Health,’ ensuring that the Twitter platform is cleared of hateful and threatening content, misinformation, and bot-generated traffic. Twitter continues to refine its prediction models and launch additional proactive detection and remediation tools to reduce abuse and hate speech.
ols to reduce abuse and hate speech. The decision in August to bar certain QAnon-related accounts and tag thousands more was uncommon in that Twitter usually moves against overall abuse, not a set of threads around a specific organization. The policies around treatment of suspect content, such as that alleging misdeeds related to Hunter Biden and his candidate father, are likely to continue developing. The spread of misinformation is only getting more sophisticated, and the tools to sort real from fake content must also continue to evolve.
As the election moves to the rear view and the pandemic hopefully begins to moderate in 2021, we look for Twitter to again better align user growth with advertiser spending growth. On a secular basis, we expect user growth to be a durable outcome of the pandemic. House-bound users who are currently reliant on the Twitter service, including new users, are expected to maintain their Twitter accounts even as they return to the world at large.
Given solid underlying fundamentals at Twitter, we recommend establishing or dollar-averaging into positions in a leading social media platform.
EARNINGS & GROWTH ANALYSIS
Revenue sharply exceeded the $767 million Wall Street consensus estimate. Twitter is no longer furnishing formal quarterly or annual financial guidance.
We regard 2020 P/Es as being distorted by the pandemic. TWTR trades at 47.3-times.
We recommend TWTR for highly risk-tolerant investors prepared for further fluctuations in the share price.