Twitter Inc. (NYSE:TWTR) reports Q1 results on Wednesday, April 26 before the market open. Consensus revenue appears aggressive to MKM Partners, well above the midpoint of a very wide range. Despite top-line disappointments, the company has done a better job of managing EBITDA, though GAAP earnings are still a long way off (the firm forecasts a $181mn GAAP loss this quarter). In absence of M&A potential which most investors now agree looks less likely, evidence of continued audience momentum is critical. The firm thinks anything less than high single digit DAU growth would be disappointing. Maintain Neutral.
The range of revenue guidance was unusually wide, from $429mn to $559mn for Q1. This implies down 3% to down 28% y/y revenue growth. The high-end was assuming a bounce-back to trends of the first few weeks of January with the midpoint representing trends from mid-January through the February 9 report. The low-end was supposed to reflect the scenario where certain direct-response products were de-emphasized. There have been no announcements of de-emphasized products (i.e. not likely the low-end), but the firm also sees no evidence that the selling environment has improved through the quarter (i.e. not likely better than the midpoint).
MKM thinks Twitter has been losing engagement of influencers to Instagram in key categories like sports, music and entertainment for some time. With the Snap (SNAP, NR) IPO this quarter and management suggesting a sudden change in ad bookings mid-January due to an aggressive competitor, the competition for ad dollars appears to be escalating. It is possible that Twitter sees some benefit from the Google ad boycott, but the firm thinks this would be short lived if at all.
While MAU growth has been at 3-4% through 2016 (U.S. lower at 0-3%), management says that DAU growth has accelerated for four straight quarters to 11% in Q4. The firm thinks DAUs are a much better metric of engagement and likely to become the convention. It thinks DAU growth less than high single digits would be disappointing and double digit may be required to keep remaining optimism alive. With the election surprise fading and the NFL season over (with Thursdays heading to Amazon next season), the turnaround in engagement may become difficult to sustain. Twitter does not disclose DAUs on a quarterly basis and the firm does not expect they will start this quarter. Using various periodic disclosures, it estimates DAUs to be about 146mn last quarter, with about 31mn in the U.S.
MKM thinks that a disappointing quarter is widely expected. Sentiment is very bad, Twitter was the worst performing of 35 stocks it tracks last quarter (down 22% since the last report vs. NASDAQ up 4%) and short interest has increased by 55% since last quarter (now 5.3-days to cover). The firm thinks that a sustainable turn in engagement is an extremely difficult task and worth monitoring, but it doesn’t think worth investing in at this point. Maintain Neutral.