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Twitter (NYSE:TWTR) Reports Sales Below Analyst Estimates In Q1 Earnings


Full Report / June 23, 2022
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Social network Twitter (NYSE: TWTR) fell short of analyst expectations in Q1 FY2022 quarter, with revenue up 15.9% year on year to $1.2 billion. Twitter made a GAAP profit of $513.2 million, improving on its profit of $68 million, in the same quarter last year.

Twitter (TWTR) Q1 FY2022 Highlights:

  • Revenue: $1.2 billion vs analyst estimates of $1.22 billion (2.04% miss)
  • EPS (non-GAAP): $0.90 vs analyst estimates of $0.03 (beats by $0.87)
  • Free cash flow was negative $34.6 million, compared to negative free cash flow of $666.8 million in previous quarter
  • Gross Margin (GAAP): 57.7%, down from 63.2% same quarter last year
  • Monetizable Daily Active Users: 229 million, up 30 million year on year
  • Twitter has previously entered into a definitive agreement to be acquired by Elon Musk, for $54.20 per share in cash in a transaction valued at approximately $44 billion

Born out of a failed podcasting startup, Twitter (NYSE: TWTR) is the town square of the internet, one part social network, one part media distribution platform.

Founder Jack Dorsey famously chose the name Twitter because its definition was "a short burst of inconsequential information", and "chirps from birds”. Twitter is a platform whose stated mission is to give everyone the power to create and share ideas and information instantly without barriers. Information is posted in the form of “tweets” that users consume by topic or interest and can interact with or respond to. Over time Twitter has evolved into a real time information distribution platform, where public figures make announcements to where news organizations post breaking news.

The platform has value for users, influencers and businesses, allowing them the ability to reach large audiences. For companies, Twitter allows them to monitor public sentiment about their brands or products and interact with customers in real time. For advertisers, Twitter provides the ability to target users by interest. Because of the nature of the platform and the types of ad products the company has built, advertisers have generally used Twitter for brand advertising purposes, rather than the more valuable direct response advertising commonly found on other social networks.

Businesses must meet their customers where they are, which over the past decade has come to mean on social networks. In 2020, users spent over 2.5 hours a day on social networks, a figure that has increased every year since measurement began. As a result, businesses continue to shift their advertising and marketing dollars online.

Twitter (NYSE: TWTR) competes with fellow social media advertising platforms like Google (NASDAQ: GOOGL), Meta Platforms (NASDAQ:FB), Snapchat (NYSE: SNAP), and Pinterest (NASDAQ: PINS).

Sales Growth

Twitter's revenue growth over the last three years has been strong, averaging 20% annually.

Twitter Total Revenue

This quarter, Twitter reported a less than stellar 15.9% year on year revenue growth, and this result fell short of what analysts were expecting.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 19.5% over the next twelve months.

Usage Growth

As a social network, Twitter can generate revenue growth by increasing user numbers, and by charging more for the ads each user is exposed to.

Over the last two years the number of Twitter's daily active users, a key usage metric for the company, grew 20.7% annually to 229 million users. This is a strong growth for a consumer internet company.

Twitter Monetizable Daily Active Users

In Q1 the company added 30 million daily active users, translating to a 15% growth year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Twitter it measures how much it makes off ads served to each user, proxy for how valuable advertisers find its audience and its ad-targeting capabilities.Twitter ARPU

The ability to increase price while still growing its user base shows the value of Twitter’s platform. This quarter, ARPU grew 0.73% year on year, reaching $5.24 for each of the daily active users.

User Acquisition Efficiency

Consumer internet businesses like Twitter grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.

Twitter is efficient at acquiring new users, spending 38% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a relatively solid competitive positioning, which gives Twitter the freedom to invest its resources into new growth initiatives.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Twitter's EBITDA came in at $1.18 billion this quarter, which translated to a 98.2% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 30.9%.

Twitter Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Twitter burned through $34.6 million in Q1, with cash flow turning negative year on year.

Twitter Free Cash Flow

Twitter has burned through $615.8 million in cash over the last twelve months, a -11.8% free cash flow margin. This low FCF margin is a result of Twitter's need to continue investing in the business in order to fuel growth.

Key Takeaways from Twitter's Q1 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Twitter’s balance sheet, but we note that with a market capitalization of $37 billion and more than $6.26 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

It was great to see that Twitter’s user base is growing. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Twitter missed analysts' revenue expectations and the revenue growth was quite weak. Overall, it seems to us that this was a complicated quarter for Twitter. The company currently trades at $38.5 per share.

Is Now The Time?

When considering Twitter, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Twitter is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been decent, over the last three years. And while its ARPU is growing slowly, the good news is its impressive EBITDA margins show massive profitability of the business.

At the moment Twitter trades at next twelve months EV/EBITDA 26.0x. There are things to like about Twitter and there's no doubt it is a bit of a market darling, at least for some. But it seems that there is a lot of optimism already priced even if it wasn't for the acquisition bid and we are wondering whether there might be better opportunities elsewhere right now.

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