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Twitter Earnings: The Good, the Bad, and the Ugly

By Jamal Carnette, CFA - May 1, 2015 at 1:04PM

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Twitter's earnings report wasn't all bad, but concerns abound.

Source: Twitter

Earlier this week, microblogging site Twitter ( TWTR 5.71% ) released earnings after the bell ... well, actually in the middle of the day when financial platform Selerity found the company had inadvertently published its release before the scheduled time and tweeted that info to the world. As a result of both the content of the report and the sloppy manner in which the data were distributed, Twitter shares took a beating after a brief period in which trading was halted.

All told, the stock dropped 18% that day, pushing Twitter to a market capitalization of $25 billion, very close to the valuation it closed its IPO day with nearly 18 months ago. And although Twitter lost nearly one-fifth of its value that day, there are actually some positive things to report from Twitter's first-quarter report. Here's the good, the bad, and the ugly from Twitter's earnings.

Good: EBITDA, earnings, and MAUs were strong, revenue growth concerns overplayed
For investors, it appears Twitter is becoming more serious about becoming stronger operationally. On both an adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, and earnings (non-GAAP compliant) basis, the company performed better than expected. The company reported an EPS figure of $0.07 per share where The Street was expecting $0.04. On an EBITDA basis the company reported $104 million, above its high-end guidance of $94 million.

From a monthly active-user perspective, the company matched expectations by reporting 302 million MAUs, an 18.4% increase over last year's figure. But perhaps the sequential comparison is more important -- after last quarter found Twitter only increased MAUs by 1.4%, this quarter found a sequential increase of 4.9%.

In addition, I found revenue concerns may be overplayed here. It's true that the company came in lower than expectations of $456 million by reporting $436 million in revenue, but the company blamed foreign exchange impacts as taking out 6 percentage points of annual growth. In addition, the company still grew its top line at a brisk pace of 74% year over year.

Bad: Guidance
Perhaps the bigger story concerning Twitter's fall has to do with its guidance updates. For both the second quarter and the full year, the company guided to lower figures than analyst estimates or previous guidance figures. For its second quarter, Twitter now expects revenue to come in at $470 million-$485 million -- 11.3% lower than analyst expectations of $538.1 million. On Twitter's widely used adjusted EBITDA metric, those numbers were updated from $122.5 million to a range of $97 million-$102 million, a drop of 18.7% at the midpoint..

Ugly: The leak
In a bout of irony, if it wasn't for Twitter the service, its botched release probably wouldn't have been so widespread. And in a weird way, this is perhaps the best microcosm for Twitter as an investment. On one hand, you have an amazing and inherently valuable distribution platform. On the other, you seem to have a company that, operationally, is facing questions about leadership and direction. Having your earnings leak early, leading to a short halt of your stock, looks bad and feeds into a greater narrative for Twitter.

Although long term, Twitter has tremendous potential, there are risks. While it is true the company is unable to collect user data on the same scale as Facebook, this is an opportunity for CEO Dick Costolo to grow users and collect more data while Wall Street has given up on the company. The question for Twitter's current investors is, will the company's current management ever be able to execute on Twitter's potential?

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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