Shares of Twitter (NYSE:TWTR) fell sharply in the last hour of trading on Tuesday after its earnings results for the first quarter leaked on its own platform. Market data firm Selerity got hold of the results early and tweeted out the relevant numbers.
The company beat analysts' estimates for earnings, producing $0.07 in non-GAAP earnings per share versus expectations of just $0.04. Revenue fell short, however, not just of analysts' estimates, but of Twitter's typically conservative guidance as well. The company brought in just $436 million in revenue versus expectations for $456.8 million. Overall, it was a mixed quarter, but the bad certainly outweighed the good.
Good: Earnings top estimates
Despite lower-than-expected revenue, Twitter was able to improve its margins enough to outperform earnings expectations. One reason Twitter was able to surpass expectations on the bottom line is because it successfully increased its average price per ad engagement for the second straight quarter. Cost per engagement climbed 30% year-over-year while total engagement also increased 32%.
That 32% increase in engagements is a significant slowdown from the 78% increase in the previous quarter, but comes up against a 694% increase in ad engagements in the year-ago period. Receiving a higher price per ad naturally increases the ROI on its ad sales efforts.
Good: User growth is back on track
Twitter increased its monthly active user count to 302 million, up from 288 million at the end of 2014. The 14-million-user increase is in line with what management guided for after reporting a disappointing 4 million net new users in the fourth quarter.
Twitter invested heavily in creating a new onboarding process that made it easier to get people started on Twitter. It also started engaging "at-risk" users through emails and push notifications in order to prevent them from churning out after signing up for the service.
The efforts seem to have paid off, but Twitter continues to add many more international users than more valuable domestic users. U.S. users increased just 2 million sequentially, and have increased a total of just 8 million over the past year. While Twitter didn't break out its revenue based on geography this quarter, at the end of 2014 it was monetizing U.S. users at more than six times the rate of international users.
Bad: Revenue misses the mark
In its press release, Twitter addressed its revenue miss head-on. "Twitter's first quarter revenues were affected by a lower-than-expected contribution from its newer direct response products." Those products could be its buy button or ad units directed at small businesses.
Regardless, the company is having trouble drawing in new advertisers to its platform. Twitter most recently told investors that it had 60,000 advertisers on its platform back in November. That's nothing compared to the estimated 4 million advertisers using Google (NASDAQ:GOOG) (NASDAQ:GOOGL).
That's one reason why Twitter has agreed to partner with Google to make its inventory available through Google's DoubleClick manager. That opens up Twitter's ad units to the huge number of advertisers using Google's platform. Of course, it cedes control to Google. The partnership will also help improve performance measures of Twitter's ad units. The partnership could have a significant impact on Twitter's ad prices.
Very bad: revenue outlook isn't sunny
If the revenue miss was a one-off event, it wouldn't be so bad. However, Twitter is guiding for the lower-than-expected uptake on its new ad products to continue throughout the year. For the second quarter, the company guided for $470 million to $485 million in revenue, and it expects $2.17 billion to $2.18 billion in revenue for the full year.
Analysts were expecting Twitter to generate $538 million next quarter and $2.37 billion in 2015. Twitter had previously guided for revenue between $2.3 billion and $2.35 billion for the full year.
After the stock soared more than 25% since its previous earnings results based on the strong fourth quarter results and outlook, Twitter lost nearly all of those gains after adjusting its outlook. Investor sentiment is a strong driver for a stock like Twitter, as is faith in management's ability to capitalize on opportunities. After the company's first-quarter earnings report, both of those are trending downward.