Revenue grew 8% Y-o-Y to $616 million, driven by growth in DAU and Tweet impressions
Online social networking and micro-blogging site Twitter Inc. (NYSE: TWTR) announced its Q3 FY16 financial results on October 27th, 2016.
The San Francisco, California-based company offers products and services for users, advertisers, developers and platform and data partners. The Company’s service is live commentary, live connections, and live conversations. Products and services for users include Twitter, Periscope, and Vine. Its Twitter is a platform for public self-expression and conversation in real time. By developing a way for people to consume, create, distribute and discover content, Twitter helps users in content creation and distribution. The public nature of the Twitter platform allows it and others to extend the reach of Twitter content beyond its properties.
Its mobile application, Periscope, lets users to broadcast and watch video live with others. Pairing Periscope with Twitter gives broadcasters greater distribution and the ability to integrate into its revenue products. Vine is a mobile application that enables users to create and distribute short looping videos of six seconds in length. Read more about Twitter’s financial results below.
Q3 FY16 financial highlights
During Q3 FY16, Twitter posted better-than-expected results while focusing on restructuring its sales, partnerships, and marketing efforts to achieve GAAP profitability in 2017. During the reporting quarter, total revenue grew 8% Y-o-Y to $616 million, driven by growth across daily active usage, Tweet impressions and time spent, for the second consecutive quarter. Product improvements and organic growth with marketing initiatives also boosted revenues.
During Q3 FY16, Twitter achieved improvement in advertising metrics with increased yield and lower ad load quarter-over-quarter as a result of improving auction dynamics and the acceleration in daily active usage and Tweet impressions. Product improvements had a direct positive impact on audience growth, engagement, and monetization.
During Q3 FY16, Twitter’s advertising revenue grew 6% Y-o-Y to $545 million, with mobile advertising revenue accounting for 90% of total advertising revenue. Data licensing and other revenue jumped 26% Y-o-Y to $71 million. U.S. revenue grew 1% to $374 million, while international revenue soared 21% Y-o-Y to $242 million. Total ad engagements surged to 91% Y-o-Y, while cost per engagement (CPE) was down 44% Y-o-Y during the reporting quarter.
For the reporting quarter, Twitter’s average monthly active users (MAUs) grew 3% Y-o-Y to 317 million compared to 313 million in the previous quarter. Average U.S. MAUs were up 1% Y-o-Y to 67 million compared to 66 million in the previous quarter. Average international MAUs grew 4% Y-o-Y to 250 million compared to 247 million in the previous quarter. Mobile MAUs represented 83% of total MAUs. Average daily active users (DAUs) grew 7% Y-o-Y versus a 5% growth in Q2 FY16 and 3% in Q1 FY16.
In all, Twitter narrowed its GAAP net loss to $103 million, or $0.15 per diluted share, in Q3 FY16, from $131.7 million, or $0.20 per diluted share, a year earlier. Non-GAAP net income stood at $92 million, or $0.13 per diluted share. Adjusted EBITDA grew 28% Y-o-Y to $181 million, representing an adjusted EBITDA margin of 29%.
Refining core services: During Q3 FY16, Twitter drove DAUs while refining core services in four key areas: onboarding, the home timeline, notifications, and Tweeting. During the reporting quarter, the enhanced timeline drove increases in retention for both monthly active and daily active usage, as well as increases in Tweet impressions and engagement (in the form of Tweets, Retweets, replies, likes and time spent on the platform).
Twitter is also increasing its use of machine learning techniques to improve the relevance of notifications and provide additional content to people who come back to Twitter so they can continue to explore all of the unique news and commentary our service has to offer. For the past few months, Twitter has been working hard to build the most important safety features and updating our safety policies to give people more control over their Twitter experience.
With regard to content, Twitter is improving its premium live-streaming video experience and Periscope. The Company has signed more than a dozen live streaming video partnerships since June 2016, many of which have already started streaming content on a daily or weekly basis. Twitter has been entering into several partnerships for sports, politics and entertainment content such as the National Football League’s Thursday night games, which it can stream alongside tweets related to the video. This is seen to better entice users without Twitter accounts to use the service, while allowing it to share revenue on the video ads. The first five NFL Thursday Night Football games reached more than 3 million viewers, up more than 28% from Twitter’s inaugural game with 2.35 million viewers.
Twitter’s live streams of the U.S. presidential debates were also very successful. The second and third debates averaged a reach of 3.3 million unique viewers, an increase of more than 30% over the first presidential debate. In total, the debates generated an average of almost 3 billion Tweet impressions, with the second debate generating a record of 16 million debate-related Tweets sent, making it the most Tweeted debate ever. Twitter has integrated its video player with several service providers including SB Nation, and Sports Illustrated on the web and Apple TV, Amazon’s Fire, and Microsoft’s XBox on connected TVs.
Cash and cash flow: Twitter ended Q3 FY16 with $3.7 billion in cash and marketable securities. GAAP net cash provided by operating activities was $189 million. Adjusted free cash flow was approximately $80 million in the quarter compared to ($19) million last year.
Integration with Google’s DoubleClick Campaign Manager (DCM): Twitter’s integration with DCM is on track, with annual run rate for advertiser campaigns being measured through DCM being currently at $75 million. Twitter moved into a public beta for all brand engagement objectives during the first few weeks of Q4 FY16. Twitter also plans to continue a private beta for direct response and performance based marketers, using desktop data as a proxy, for mobile conversions in Q4 FY16. It has also started testing Alphabet Inc.’s (NASDAQ: GOOG) Google’s DoubleClick Bid Manager (DBM), trying integration with the Twitter Ads application programming interfaces (APIs) in the first few weeks of Q4 FY16.
Reduction of manpower: Despite the better-than-expected quarterly results, Twitter said that it would cut 9% of its global workforce, or roughly 350 people, as part of a broader plan to cut costs at the company and refocus its business. The reduction will be mainly focused on its sales, partnerships, and marketing efforts. The cuts come about a year after a similar wave of layoffs of up to 336 employees were announced when Jack Dorsey, its co-founder who had been serving as interim chief executive, took over as permanent CEO.
While Twitter is trying to improve its performance and cut costs through layoffs, it still had 3,860 employees as of June 30th, 2016 and paid out $168 million in stock-based compensation in Q2 FY16, an amount equal to roughly 28% of its quarterly revenue. In comparison, Facebook’s stock-based compensation was just 12.5% of its Q2 FY16 revenue. The current layoffs could save Twitter $50 million to $100 million per year.
Twitter shuts down engineering operations in Bangalore, India: Twitter has been slashing its workforce in an effort to save costs and streamline its operations in a run-up to finding a suitable buyer. On September 20th, 2016, Twitter announced that is shutting down its engineering operations in Bangalore, India, and laying-off around 20 engineers in the process. Twitter will continue to operate three offices in the country, in Delhi, Mumbai, and Bangalore, with only the engineering team out of Bangalore impacted by the layoffs. Twitter took a big plunge into India when it acquired a startup called ZipDial in January 2015, as part of a strategy to capture global revenues by offering more localized services.
Who would be the best suitor for Twitter?
Twitter has been the subject of numerous takeover and acquisition rumors over the last few months; possible suitors are said to include cloud computing pioneer Salesforce.com (NYSE: CRM), Alphabet Inc.’s (NASDAQ: GOOGL) Google, Apple Inc. (NASDAQ: AAPL), Microsoft Corp. (NASDAQ: MSFT) and even media mogul Rupert Murdoch, either via 21st Century Fox (NASDAQ: FOZA) or News Corp. (NASDAQ GS: NWS), and more recently, The Walt Disney Company (NYSE: DIS) and Verizon Communications (NYSE: VZ). A buyer for Twitter would have to pay over about $18 billion, which industry experts believe is a steep price tag for a company that has had stagnating growth and recurring losses. Despite a number of promising efforts, Twitter has been facing challenges related to safety and tools to combat user abuse.
Salesforce.com, which is seen as a forerunner in the race to acquire Twitter, could benefit from the huge trove of data generated by Twitter’s social network of 313 million monthly users. Increasingly, messaging services like Twitter are being used to communicate directly with companies and with the public about customer service. Twitter could likely strike a deal to be acquired by the end of the year.
Live video strategy: Twitter, which has been the subject of numerous takeover and acquisition speculations over the last few months, is now confronted with the need to rely more heavily on its live video streaming strategy, as reported on October 8th, 2016. This fresh development comes after top potential bidders were said to have lost interest in making buyout offers amid pressure from their investors.
After several potential buyers backed out of takeover talks, Twitter is trying its best to appeal to a diverse audience and gain traction in social networking through a new strategy that emphasizes live video feeds. Twitter’s recent push into news and sports on mobile devices could spark an interest among potential acquirers.
Updated guidance for full year FY16
For the full-year FY16, Twitter expects adjusted EBITDA to be in the range of $700 million to $715 million, adjusted EBITDA margin on GAAP revenue to be 27.5% to 28% and capital expenditures to be no more than $360 million.
For Q4 FY16, Twitter expects stock-based compensation expense to be in the range of $150 million to $160 million, GAAP share count to be in the range of 715 million to 720 million shares, and non-GAAP share count to be in the range of 725 million to 735 million shares.
Twitter’s stock finished the day at $17.66, gaining 1.49%, at the close on Friday, October 28th, 2016, having vacillated between an intraday high of $18.00 and a low of $17.50 during the session. The stock’s trading volume was at 29,254,092 for the day. The Company’s market cap was at $12.48 billion as of Friday’s close.