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

In February, Twitter (TWTR +0.00%) 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?

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.

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:

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.