Motley Fool analysts Dylan Lewis and Sean O’Reilly break down the week in tech earnings, and explain just how Selerity got its hands on Twitter’s (NYSE:TWTR) earnings and what went wrong for LinkedIn (NYSE:LNKD.DL) in the first quarter.
A full transcript follows the video.
Sean O'Reilly: Connection request not accepted, on this Tech edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly joining you here from Fool headquarters in beautiful Alexandria, Virginia. To my left is the incomparable Dylan Lewis. How are you today, sir?
Dylan Lewis: Doing all right, Sean. How you doing?
O'Reilly: Not too bad. So, I'm pretty full from my lunch. Going to get a little barbeque.
Lewis: Yeah. Well, afternoon slump coming in.
O'Reilly: Game over. Anyway. So, first we're obviously going to talk about Twitter and LinkedIn's rough earnings, but first we want to talk about how those earnings came out and what a company called Solarity has to do with all of that.
So, first and foremost: what is Solarity?
Lewis: Solarity is a tech media company. They use this proprietary data model to deliver real time data news content. Basically they're what they call an 'event detection' platform. They crawl the web looking for releases from publicly traded companies. Every now and then they get lucky and they find a scoop.
O'Reilly: What happened with Twitter?
Lewis: Around 3:08 p.m. on Tuesday Solarity tweeted out -- what looked like -- an early release of Twitter's disappointing earnings. This was about an hour before Twitter was supposed to announce, just after market closed.
O'Reilly: Where did this come from? That's kind of incredible when you think about it.
Lewis: That's the really interesting thing here. The way Solarity works is, they basically mien investor relation websites for earnings releases based on past naming conventions for earnings releases.
So, this is kind of a gross oversimplification here. If Twitter's earnings release -- the file itself -- was 2014_Q4_Earnings_Release.pdf, they are banking on the next one being 2015_Q1_Earnings_Release.pdf. So, they're crawling sites for that naming convention. Again, it's more nuanced.
O'Reilly: So, did Twitter screw up and accidentally post the pdf an hour early? What happened?
Lewis: What happened was, NASDAQ's Shareholder.com is the one that runs Twitter's investor relation page. It's actually the NASDAQ's Shareholder.com that made the link available. Though not publicly available as you'd see it on the webpage via a link you could click on; the file was loaded onto the site.
So, this crawler was able to go in and find it. So, not exactly Twitter's fault. Really NASDAQ's Shareholder.com's fault.
O'Reilly: Either way the stock price went crazy.
Lewis: Yeah. That doesn't change the fact that the earnings were what the earnings were. I think it's important to note that this is nothing illegal here -- no hacking here. This is information that was public, just not in the conventional sense.
This is the second time that Solarity's done this with a major company. They scooped Microsoft's (NASDAQ:MSFT) earnings back in January 2011 and actually, other outlets have done this in the past, too. Bloomberg News back in 2010 was able to scoop Disney (NYSE:DIS) and NetApp (NASDAQ:NTAP) releases using a similar approach.
O'Reilly: I'm noticing that you are naming this happening to companies twice. So, this is a 'fool me once, shame on you' kind of a thing.
Lewis: Oh, most definitely.
O'Reilly: That's funny. So, moving on to the actual earnings that Solarity actually was able to snag a little bit early; Twitter's earnings were not so hot, it looks like.
Lewis: No. they disappointed. They're about $20 million below what was expected for revenue.
O'Reilly: My favorite thing was the fact that they had $183 million worth of stock based compensation expenses. We'll get to that in a second.
Lewis: Yeah. I think people were also fairly disappointed to see mobile monthly active users a little bit below what they were expecting. I don't think that's growth totally tapering off, but you always want to see your user count growing. That's the monetized base.
O'Reilly: That's why you pay the price you pay for these social networks.
O'Reilly: The thing that I thought was interesting -- and they pointed it out and owned it and everything -- they're basically in the process of trying to monetize their user base. That's why Snapchat's got this $15 billion value. They're assuming that somewhere down the line these social networks that are taking advantage of this huge network effect will be able to monetize and actually make money.
The company that's been able to figure this out really well is Facebook. They are killing it. Twitter's kind of stumbling here a bit. They've got what they're calling 'direct response product ads', which is basically prompting you or me, when we're surfing Twitter on our phones, to buy a smart phone app, or apply for a credit card.
Not only are advertisers getting a little nervous because they aren't getting the kind of data that hey like to see -- because they've been spoiled by Facebook that has all of our info and where we live ...
Lewis: Yeah. The tracking is a little bit more advanced with Facebook.
O'Reilly: And it actually speaks to the power of Facebook. They know everything about us. I always tell that story of the t-shirt they tried to sell to me with the state of Virginia made out of an Ohio flag. It's like, you know where I was born, and where I live now.
Twitter doesn't know that about me. They really don't. So, not only are people not buying these ads, but advertisers aren't willing to pay up for them. Not only because of that, but because Twitter doesn't seem to have the data that other networks have.
Lewis: Yeah, and I think that was one of the things that Dick Costello primarily pointed to with the revenue miss -- the earnings miss -- was the direct response ads and them just misestimating their effectiveness and what they were going to be pulling in from them.
O'Reilly: Do they have a game plan going forward, in your opinion?
Lewis: I don't know. It's tough.
O'Reilly: You can say 'no'.
Lewis: I'm not sure. They acquired Periscope and that's something that I'm very interested in because I think ...
O'Reilly: For our listeners, what is Periscope?
Lewis: Periscope's a live streaming video app. It fits very well with what Twitter does already. It's got that immediacy, it's got that breaking new element that I think people are really into with Twitter.
O'Reilly: Which is one of Twitter's advantages, obviously.
Lewis: Oh, yeah. It's one of its core competencies. So, I think that meshes in really well. It will just be interesting to see, again, how are you going to monetize it? We'll see.
O'Reilly: We shall see. So, moving on to the big news of the day -- the big stock price move of the day, of course, is LinkedIn. They reported earnings after the market closed yesterday -- absolutely decimated after hours trading.
I sent it over to you and it was down 28%. I think it's only down "20%" now. They didn't' miss by a ton. What do you think is going on here?
Lewis: Well, it's funny because we were sitting around trying to figure out what we were going to talk about this morning and we're like "Oh, I guess we'll have to talk about Twitter."
O'Reilly: It was like manna from heaven.
Lewis: Just like last week with Amazon (NASDAQ:AMZN). It just kind of knocked on our door and said "Here, talk about this."
You look at actual metrics from this past quarter and you're like "Oh, this looks great." They reported $638 million in revenue on $636 million expected. They beat EPS -- they reported 57 ...
O'Reilly: Had you asked a random person on the street and said "Hey, this company does this, this, and this. Would you say they had a bad quarter?" They'd say "No. It's fine."
Lewis: Yeah. EPS was $0.57 a share, $0.56 a share was what the expectation was going to be from the analysts. So, looking back you're like "Wow! Okay. Not too bad. I wonder what happened." Then you look at their guidance and that's kind of where their issue is.
O'Reilly: Stocks try to discount the future, and boy, is it discounting the future right now.
Lewis: Yeah. Just to give you some insight, it was expected that they were probably going to have $718 million in revenue in Q2 from analysts.
O'Reilly: So, the quarter we're currently in -- just for everybody.
Lewis: Yeah. They then switched their guidance down to about $670 million for revenue, and what was expected to be about $0.74 a share ...
O'Reilly: In earnings.
Lewis: In earnings -- is now down to about $0.28 per share.
O'Reilly: That's the killer.
Lewis: Yeah, and to their credit they addressed it in the conference call fairly well. Two of the main things that were affecting this -- in their opinion -- were changes in foreign exchange rates, and some of the impact from the Lynda.com acquisition and some of that deferred revenue coming in.
O'Reilly: Kind of tricky there. If you're an investor in LinkedIn -- or Twitter for that matter -- how panicky are you right now?
Lewis: If you believe in what they're doing; great time to buy. If you're happy with leadership, happy with the vision it makes sense. Something that we talk about quite a bit with the social media sites is, LinkedIn's model makes the most sense out of any of the major social media websites.
O'Reilly: It has a social utility to it. It helps people get jobs, I can connect with my co-workers ...
Lewis: And the users are the ones paying for it.
Lewis: You're not banking on ad revenue and ROI for businesses that are looking to leverage a platform for sales.
O'Reilly: If I had to -- now that we're saying it -- if someone said "Sean, you have to pick a social media site that's going to exist in 20 years", LinkedIn's probably not a bad bet just for existing in 20 years.
Lewis: Yeah. I think it totally makes sense. I will say -- with LinkedIn -- when they acquired Lynda.com in the middle of this past quarter we weren't really sure what to make of it. There were some details on the acquisition, but we weren't sure what the synergies were going to be, how they were going to try to break it into the platform, what the plan was overall, and what the financial landscape was going to look like for the company.
This was something they brought up in the conference call. They said when the deal was announced they were looking at about $150 million in revenue in 2014 coming from Lynda.com. Analysts said "Assuming this deal closes around end of Q2 we can cut that in half and expect about $75 million, $80 million coming to the [inaudible 0:10:01] for LinkedIn.
They're saying more realistically they're going to have to write that down to about $20 to $25 million based on accrued revenue right back.
O'Reilly: It looks like they got in there, had a look at things in depth, had to adjust their estimates and then -- it is what it is.
Lewis: Yeah. If things wind up being what they expect them to and they can leverage Lynda.com to be this ad on service where people can develop skills and learn and become more well-rounded for their job search, then it totally makes sense.
Perhaps now that this stock's been dinged a little bit you're getting it at a more reasonable valuation. Now you know what you're getting with this Lynda.com.
Lewis: Rather than having the speculative aspect of it from the previous quarter.
O'Reilly: Always looking on the bright side.
Lewis: Always trying to.
O'Reilly: Good stuff. Well, thanks for your thoughts, Dylan. Have a good one. Who knows what the market will give us next week.
Lewis: Yeah, I'm sure we'll have something fun to talk about.
O'Reilly: Very good. Well, before we go I want to make sure our listeners are aware of a special offer we're having for all of our Industry Focus listeners. If you're looking for more Foolish stock ideas, Stock Advisor may be the service for you.
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For Dylan Lewis, I'm Sean O'Reilly. Thanks for listening, and Fool on!