Please ensure Javascript is enabled for purposes of website accessibility

Twitter Posts Second Consecutive Quarterly Profit, Still Doesn't Impress Investors

By Evan Niu, CFA – Apr 25, 2018 at 6:51PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Revenue growth drove profitability this quarter, but the top line might not grow much for the rest of the year.

In February, Twitter (TWTR -0.14%) reported its first GAAP-profitable quarter ever in its 12-year history. This morning, Twitter reported its second GAAP-profitable quarter ever in its 12-year history. You might think that investors would be impressed with a second consecutive quarterly profit, but you'd be wrong.

Profits are fine and dandy, but are they sustainable?

Illustration of people sitting on a hashtag symbol

Image source: Getty Images.

Not just cutting costs this time

The profit that Twitter squeezed out of the fourth quarter was almost entirely thanks to cost-cutting, as sales had grown a meager 2% that quarter while costs fell 28%. This time around, Twitter was able to accelerate top-line growth, with revenue jumping 21% to $665 million. That included $575 million in ad revenue (up 21%) and data-licensing revenue of $90 million (up 20%). Total costs and expenses were roughly flat at $589.9 million. In other words, profitability in the first quarter was driven by revenue growth instead of cost-cutting -- the opposite of what happened in the fourth quarter.

Monthly active users (MAUs) increased modestly on a sequential basis, from 330 million to 336 million worldwide. Those MAU gains were mostly on the international front, where Twitter now has 267 million MAUs. Engagement continues to improve, with daily active users (DAUs) jumping 10% during the quarter. Twitter still does not disclose DAUs on an absolute basis.

Chart showing DAU growth over time

Data source: SEC filings. Chart by author.

Ad engagements were up 69%, while cost per ad engagement fell 28%. Both are continuations of existing monetization trends, where falling ad prices are offset by greater volumes. Video ads now represent over half of all ad revenue, which Twitter says was the fastest-growing ad format during the quarter.

All told, Twitter posted GAAP net income of $61 million, or $0.08 per share. On a non-GAAP basis, net income was $123 million, or $0.16 per share. The company finished the quarter with $4.5 billion in cash and cash equivalents, and spent $107 million in capital expenditures related to infrastructure.

Not-so-great expectations

Overall, it seemed to be a pretty solid earnings release. What appears to be concerning investors are Twitter's modest expectations for revenue growth for the balance of the year. "As a result, we continue to believe that our sequential growth rates for total revenue for the remainder of 2018 will resemble the sequential growth rates for total revenue in 2016," Twitter wrote in its shareholder letter. Here are the sequential growth rates that the company is referring to:

Quarter

Revenue Growth (QOQ)

Q2 2016

1%

Q3 2016

2%

Q4 2016

16%

Data source: SEC filings. QOQ = quarter over quarter.

Considering how crucial revenue growth was to delivering profitability in the first quarter, modest growth for the rest of the year has significant implications for profitability. Twitter could potentially need to fall back on cost-cutting in subsequent quarters if it wants to maintain its streak of profitability.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Twitter, Inc. Stock Quote
Twitter, Inc.
TWTR
$41.52 (-0.14%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.