Twitter Inc (N:TWTR)’s 4Q2015 results had some positive indications as adjusted EPS exceeded consensus expectations and topline metric matched expectations. The gains were achieved despite stalled subscriber growth during the quarter. But that is also a source of concern. Investors want to see subscribers increasing because that is when they can be sure Twitter can sustain its topline growth. However, Twitter’s sequential subscriber growth ground to a halt in 4Q2015, sparking features that a decline in user growth was looming.
While there are valid reasons to be concerned about Twitter’s subscriber growth, it seems all is not bad as the company tries various ways to keep revenue growing.This Twitter analysis article looks at the efforts the company is making to drive more growth and what else it can do to both growth revenue and subscribers. But first is a recap of the last quarter results.
4Q2015 earnings highlight
Twitter Inc (NYSE:TWTR) posted revenue of $710 million in 4Q2015, which rose 48% from a similar quarter a year ago and matched the consensus estimate of $710 million. Full-year 2015 revenue was up 58% to $2.2 billion. For the quarter, adjusted EPS was $0.16, comfortably smashing the consensus estimate $0.12. The bottom-line improvement in the quarter was primarily supported by lower operating expenses.
1Q2016 guidance
Twitter guided 1Q2015 revenue in the band of $595 to $610 million while adjusted EBITDA was guided in the range of $150 to $160 million.However, the topline guidance fell short of the consensus expectation of $633 million for the quarter.
How Twitter can impress
There are three key areas of interest for Twitter Inc (NYSE:TWTR) investors. They are user growth, platform engagement and revenue per user. In the recent times, Twitter has demonstrated efforts to boost engagement on its platform. Towards that end, the company has rolled out a bevy of features such as Periscope, Moments and Recap (a feature that resurfaces missed tweets) to try and encourage subscribers to stay long and interact more on the platform. The progress with these efforts is positive although there is still much to be done.Twitter has also rolled out a number of innovative features to try and boost revenue per user and the efforts are paying off.
However, expanding subscriber numbers still remains Twitter’s greatest challenge. The company can only impress investors if it could grow its user base faster.
- Platform improvement
There are many people who want to use Twitter but they can’t figure out how to get started because of the complexity of the platform. That is a challenge that even CEO, Jack Dorsey, has admitted exists. Twitter could get many more people interested in its service by making its platform a little more user-friendly, especially by fixing the parts that look confusing to new users.
In 2016, Twitter has identified several key initiatives aimed at improving the platform. They include simplifying the core service, especially by doing away with features that have limited usage of the platform. Twitter also intends to focus more on live interactions such as live video streaming, live commentary and live connections. Additionally, the company hopes to continue working to make the platform safe for users. Issues of harassment on Twitter have led to the exit of a many active users and also caused damage to the company’s reputation.
If signing up and using Twitter is simplified, the platform is made safer and live conversations are encouraged, there will not only be an increase in subscribers, but engagement would also improve, thus paving way for higher average revenue per user (ARPU).
The other strategy that Twitter could use to boost both its subscriber numbers and engagement is to bring more influential users on board or encourage them to be more active on the platform. With that, the followers of the influential users would also be encouraged to be more active on the platform. There is also a chance that their followers who are not already on Twitter would be interested to sign up and follow them on the site.
Twitter finished 4Q2015 with 320 million MAUs, same as in the previous quarter. However, Wall Street expected MAUs to rise to 325 million at the end of the latest quarter. The stalled user growth in 4Q and the recent slow growth of the metric are making investors increasingly wary of the company’s prospects.
The chart below captures Twitter’s subscriber growth trend for the last several quarters:
Increased monetization
There is opportunity for Twitter Inc (NYSE:TWTR) to increase the amount of money it generates on its platform even without increasing the number of its registered users. More than 500 million people reach Twitter’s site every month although they don’t have registered accounts. Twitter has started working on monetization of this growing base of logged-out users and initial tests have been encouraging.
Twitter earlier started targeting logged-out users with a specially designed homepage that allows them to interact more deeply with the platform. Initially, the homepage for the logged-out users was available only in the U.S. and Japan but Twitter has now rolled it out to 23 countries with plans to roll it out even more broadly over time. Through the specially designed homepage for unregistered users, Twitter serves both relevant content and ads. The company hopes that those users would find reason to sign up for accounts so that they become registered users. However, if they don’t Twitter is still able to make money off of them through ads.
Assuming that Twitter can monetize the unregistered users at half the ARPU of its registered users, the company has a potential to generate upwards of $1.3 billion in new revenue.
Additionally, Twitter is sitting on massive and rich data that it can also monetize to fuel topline growth and also diversify revenue stream so that it can break its overreliance on advertising.
- Innovative ad services
Besides monetizing logged-out users, Twitter Inc (NYSE:TWTR) could also drive topline growth with its existing users through innovative ad products. Marketers continue to look for ad solutions that can help them drive ROI and if Twitter can provide what they want, there is no reason the company should charge higher for ad spots and generate more revenue even without expanding its current subscriber base.
It is important to point out at this juncture that the reason Twitter’s has been posting improving revenue metrics is that the company is benefiting from its innovative ad solutions.Improving ad measurement, ad format and ad targeting have played an important role in driving topline growth and there is more growth headroom.
Ad measurement: Twitter has also been pushing out ad measurement and analytic features. These help marketers to improve their ROI, which ultimately boost ad sales. Features such as DoubleClick and Dynamic Ads test also help marketers to run more effective ad campaigns on Twitter.
Ad formats: Twitter recently came up with what it calls First View ad format, which is a video ad service that allows marketers to pin their ads on strategic spots to increase visibility. First View ads not only have the potential of improving ROI for marketers, but also driving ad revenue for Twitter. Of the $710 million revenue reported in 4Q2015, $641 million was ad revenue, indicating 48% YoYgrowth.
The company has also come with auto-play videos as another means to give marketers more opportunities to interact with subscribers on its platform.
Conclusion
Although investors are right to be obsessed with subscriber growth metrics, there are multiple ways Twitter Inc (NYSE:TWTR) can drive topline and profitability improvements just with its existing subscriber population.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.