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Twitter, Inc.'s Q3 Earnings: Better Than the Market Realizes?

By Daniel Sparks - Oct 27, 2015 at 6:05PM

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Slow user growth disappoints, but monetization continued to improve significantly.

Heading into Twitter's (TWTR -0.30%) third-quarter earnings, which the company reported on Tuesday, there was one key area many investors were watching: the company's guidance for user growth. And this is the very metric where Twitter disappointed the most. Making matters worse, the company's guidance for Q4 was lower than the Street expected. Investors reacted viciously in after-market hours, with a sell-off driving a sharp decline. But a close look at the underlying business still shows evidence of a promising future.

Twitter headquarters. Image source: Twitter

The results
When it comes to revenue and non-GAAP EPS, Twitter handily beat expectations. Analysts, on average, expected revenue and non-GAAP EPS of $559 million and $0.05, respectively. Instead, Twitter reported revenue and EPS of $569 million and $0.10. It's worth noting Twitter's reported revenue also crushed its own guidance for revenue in the range of $545 million to $560 million.

These results compare with $361 million in revenue and non-GAAP EPS revenue of $0.01 in the year ago quarter. Third-quarter results are also up from the prior quarter. During Q2, Twitter reported revenue and non-GAAP EPS of $502 million and $0.07, respectively.

Sequentially, Twitter's GAAP loss narrowed from a loss of $0.21 during Q2 to a loss of $0.20.

But these results weren't enough for investors.

As it was apparent before the company reported third-quarter results, user growth is where investors would likely turn to judge the company's quarter. So, how did the social media company measure up on this front?

Twitter's monthly active users, or MAUs, reached 320 million during the quarter, up from 316 million in Q2, or 1.3%. This sequential growth is down from 3% growth in MAUs between Q1 and Q2. Excluding Twitter's SMS fast followers, which are low-value followers accessing the service through SMS primarily on feature phones, MAUs increased just 0.9% sequentially.

Did the market overreact?
It's worth noting that there wasn't much of a reason to expect Twitter's user growth to ramp up during the company's third quarter -- even if this is the metric the market was watching. The recently reappointed CEO Jack Dorsey hasn't had very much time to implement his strategies to address the company's slow user growth.

Twitter co-founder and CEO Jack Dorsey. Image source: Twitter.

Further, while the company's guidance for fourth-quarter revenue of $695 to $710 million was lower than the Street was expecting, the quarterly guidance does fall within the $693 million to $763 million needed to achieve the company's full-year guidance for revenue laid out earlier this year of $2.2 billion to $2.27 billion. Sure, the outlook implies Twitter would come in at the lower end of this range, but the company also regularly reports actual revenue higher than its guided revenue; so, this guidance isn't as bad as the market seems to imply.

Management actually addressed concern about the company's guidance during the earnings call, noting that last year the third month of the quarter delivered 110% year-over-year growth in revenue; but predicting revenue growth for this month of the fourth quarter, which could represent huge growth, is very difficult, management noted. With this in mind, the company may be expecting bigger numbers than it's letting on.

On a positive note, the company's impressive 58% year-over-year revenue growth during the quarter is certainly impressive. And even this metric doesn't fully encapsulate Twitter's business growth, as revenue increased 64% during the quarter when adjusting to exclude the impact of year-over-year changes in foreign exchange rates.

This revenue growth was driven by exceptional execution on monetization. While the company's cost per ad engagement, or revenue generated per ad engagement, fell 39% compared to the year-ago quarter, total ad engagements increased a whopping 165%. The quarter's monetization progress was undoubtedly a net win.

Despite the near-term underwhelming user growth, the long-term business outlook still looks optimistic.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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