Twitter (TWTR) has been on a roll. The social media company reported third-quarter earnings this morning, delivering its fourth consecutive quarterly GAAP profit. Twitter's first GAAP profit in the fourth quarter was primarily attributable to cost-cutting instead of revenue growth, although growth did contribute to its second quarterly profit. Twitter continues to exercise cost discipline while growing the top line and improving the health of the platform.
Here's what investors need to know.
Image source: Twitter. Image copyright Atsushi Nakamichi for Twitter, Inc.
Fourth time's the charm
Total revenue grew 29% to $758 million, outpacing the 14% increase in total costs and expenses. Gross margin expanded from 64% to 68%, and operating income swung from a negative $17.5 million a year ago to positive $87.3 million. Video ad formats are still bringing in the bulk of ad revenue -- over 50% during the quarter.
That all translated into GAAP net income of $789 million. However, much of that bottom-line profit was attributable to the release of deferred tax asset valuation allowances of $683 million. Excluding that line item, net income was still a respectable $106 million. On a non-GAAP basis, net income was $163 million.
The numbers were so strong that investors shrugged off the decline in monthly active users (MAUs).
The purge is working
Worldwide MAUs fell by 9 million to 326 million in the third quarter. The U.S. saw just 1 million fewer MAUs, while Twitter lost 8 million MAUs internationally. This isn't all that surprising, as Twitter has been actively purging bots and other malicious accounts all year in an effort to combat harassment and misinformation. Twitter notes that purged accounts "are not typically valuable from an advertising perspective."
Doing so has clearly helped support the business, as ad revenue jumped 29%. Daily active users (DAUs) jumped 9%, with ad engagements increasing 50%. In addition to purging questionable accounts, Twitter is making progress stopping those accounts from being created in the first place. The company says it has strengthened the sign-up process and is able to detect and identify many questionable accounts during that process.
Twitter is surviving
In recent years, some analysts have questioned Twitter's long-term financial sustainability, believing it may not be able to survive as a stand-alone company and would likely get acquired. I argued that Twitter could survive if it stopped spending so extravagantly and accepted that its platform would never become as big as Facebook's. Twitter can build a successful business with its current user base, as long as it sets its expectations and budget accordingly.
The company has executed remarkably well on its turnaround since then, and a string of quarterly profits should assuage any fears that Twitter can't make it on its own.
