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Twitter, Inc.'s Guidance Previews Single-Digit Percentage Growth

By Daniel Sparks – Jul 28, 2016 at 9:05AM

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Here's what investors should know about Twitter's second-quarter earnings report -- and what may have sparked yet another sell-off.

On Tuesday afternoon, Twitter (TWTR) extended its trend of rapidly decelerating revenue growth into Q2. In addition, the company forecasted lower-than-expected revenue for Q3. Shares fell about 14.5% on Wednesday as investors considered the implications of the social network's inability to stabilize its rapidly decelerating revenue growth.

Image source: Twitter.

Here's a closer look at the first quarter, Twitter's slowing revenue growth, and other key factors from the results.

Financial results 

Revenue: Twitter's second-quarter revenue was $602 million. While it was in the top half of the company's guidance range for the quarter of $590 million to $610 million, it was below a consensus analyst estimate for $607 million.

Furthermore, though Twitter's revenue was in line with its own expectations, it's impossible to ignore just how rapidly the company's revenue growth is decelerating. Twitter's second-quarter year-over-year revenue growth of 20% was down considerably from its first-quarter year-over-year growth of 36%, and its 56% year-over-year growth two quarters ago.

Particularly concerning is how slow Twitter's core business grew during Q2. Twitter's advertising revenue, which represents 89% of total revenue, increased just 18%. This compares to a 37% year-over-year increase in advertising revenue in Q1.

On a more positive note, Twitter's smaller data licensing segment was up 35% year over year. This is actually an uptick compared to the segment's 34% growth in Q1.

Earnings per share: Both Twitter's GAAP EPS and non-GAAP EPS worsened compared to the year-ago quarter. In the year-ago quarter, Twitter's GAAP and non-GAAP EPS were a $0.12 loss and a profit of $0.15, respectively. In Q2, Twitter's GAAP and non-GAAP EPS were a $0.15 loss and a profit of $0.13.

Outlook: Twitter's guidance may have been the main metric sparking a negative response in the stock market on Wednesday. Twitter management guided for third-quarter revenue in the range of $590 million to $610 million. The midpoint of this guidance implies only a 5% year-over-year increase in revenue during Q3. Further, this guidance is far behind analyst expectations for third-quarter revenue of $678 million.

Overall, Twitter's financial results highlighted a challenging environment for the company. Indeed, management said in Twitter's shareholder letter it is seeing a continuation of weakening overall advertiser demand as competition for marketing budgets intensifies.

User growth

Image source: Twitter.

Twitter's ongoing challenges with growing its users continued into Q2. Average monthly active users reached 313 million, up just 3% year over year and just 1% sequentially. Importantly, however, Twitter did say engagement and daily active usage improved -- a step Twitter management seemed to suggest is the beginning of a longer positive trend for the company's user metrics:

This growth was driven by marketing initiatives, organic growth and product improvements, including better relevance in both the enhanced timeline and push notifications. We are seeing the direct benefit of recent product changes, and with disciplined execution, we believe we can drive improved engagement and audience growth over time.

What's next?

To address "increased competition for social marketing products," Twitter plans to "continuously raise the quality bar on the advertising solutions we bring to market," management said. Initiatives include a renewed focus on driving ROI for advertisers, ad solutions extending beyond typical social marketing budgets, "into performance and premium mobile video budgets," and more.

It wasn't long ago that Twitter's revenue growth was one of its greatest strengths. But, until the company can prove it can gain some traction in new efforts to make its advertising products more competitive, investors may have to get used to the slower growth baked into the company's guidance.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Twitter. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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