Twitter Earnings Analysis: By the Numbers

Close up picture of a young woman using Twitter social networking website on an iPad 2
Twitter (TWTR) reported revenue of $361 million for the quarter ending on Sept. 30, versus $163.6 million a year earlier, beating analysts' estimates. Nevertheless, the stock fell after the results came out Monday night. Almost one year since the San Francisco company went public last November at $26 a share, the stock, which peaked at $74.76 last December, has fallen approximately 24 percent in 2014, as some investors worry that Twitter's growth has peaked.

The reaction from Wall Street emphasized the challenges the company faces, as its positive revenue numbers failed to quash investor concern about user growth and fourth-quarter revenue. Although its user base grew 23 percent to 284 million monthly active users in the third quarter, it wasn't enough to satisfy investors, who have been focused on the company's ability to recruit new users and engage existing ones-numbers they think foretell the company's long-term profitability.

The company is still unprofitable. Its third quarter loss widened to $175.5 million or 29 cents a share. That compares with a loss of $64.6 million, or 48 cents a share a year earlier, when it was still a private company.

We compare Twitter's earnings with the earnings announcements from the following peers: Facebook (FB), Google (GOOG) and Yahoo! (YHOO).

  • Summary numbers: Revenues of $361.3 million, Net Earnings of $-175.5 million and Earnings per Share (EPS) of $-0.29.
  • Performance focus more on top-line than profits: same period revenue increase from last year of 114.3 percent vs. drop in earnings of -171.6 percent.
  • Gross margins widened 82.3 percent from 80.3 percent compared to the same period last year, operating (EBITDA) margins now -28.0 percent from -20.4 percent
  • Earnings decline from operating margin decreases as well as from one-time accounting balance sheet items

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):
Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014
Revenue Growth (YOY)104.8%116.2%119.1%124.1%114.3%
Earnings Growth (YOY)-199.2%-5775.6%-389.8%-242.6%-171.6%
Net Margin-38.3%-210.8%-52.8%-46.3%-48.6%
Return on Equity-36.3%-111.9%-18.0%-19.3%-21.4%
Return on Assets-26.4%-93.9%-15.8%-16.7%-15.5%

Revenue Growth Versus Profitability

Comparing revenue growth to earnings growth helps Capital Cube evaluate a company's focus on gaining market share, compared to its efforts to produce profits.

Twitter's increase in revenue compared to the same period last year of 114.3 percent is better than its change in earnings, which declined -171.6 percent, suggesting perhaps that the company's focus is on market share at the expense of profits. This increase in revenue is better than average among the results announced thus far by its peer group-putting its market share gains in perspective and helping Capital Cube view its weaker earnings performance this period more favorably. Also, compared to the second quarter, revenues increased by 15.7 percent while earnings declined by -21.3 percent.

Decline in Earnings

The company's earnings declined from the same time last year largely due to increases in operating costs. Its operating margins (EBITDA margins) widened from -20.4 percent to -28.0 percent. This worsening in earnings and operating margins would have been worse but for the fact that the company's gross margins improved, from 80.3 percent to 82.3 percent. For comparison, gross margins were 82.6 percent (and EBITDA margins -33.4 percent) in the quarter ending June 30, 2014.

Operating Cash Flow Growth Versus Earnings Growth

Capital Cube tries to determine if the trend in a company's performance is sustainable, as companies often post earnings numbers that are influenced by non-cash activities. We gauge the quality of the earnings number by judging the difference between the growth in earnings and the growth in operating cash flows. In general, an earnings growth rate that is higher compared to the operating cash flow growth implies a higher proportion of non-operating and even one-time activities. Such activities are typically not sustainable over long periods.

Twitter's decline in operating cash flow by -1,492.8 percent trailed its change in earnings, leading Capital Cube to conclude that the earnings number might have benefited from some accounting unlocking of accruals. In addition, this drop in operating cash flow is less than the average among the results announced to date by its peer group.

EPS Decline Versus Earnings Decline: Losing Ground in Generating Profits

Twitter's change from the same time last year in Earnings per Share (EPS) of -107.1 percent is better than its change in earnings of -171.6 percent. This decline in earnings is also worse than the average for the results announced thus far by its peers, suggesting that the company is losing ground in generating profits in this group.

Supporting Data

The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014
Revenue Growth (YOY)104.8%116.2%119.1%124.1%114.3%
Peer Average Revenue Growth (YOY)32.8%40.9%41.1%36.9%35.0%
Earnings Growth (YOY)-199.2%-5775.6%-389.8%-242.6%-171.6%
Peer Average Earnings Growth (YOY)-27.4%22.1%-5.2%9.0%45.8%
Gross Margin80.3%67.3%81.8%82.6%82.3%
Peer Average Gross Margin81.9%75.5%82.6%82.8%83.0%
EBITDA Margin-20.4%-196.3%-35.7%-33.4%-28.0%
Peer Average EBITDA Margin25.8%26.9%25.5%24.8%24.6%
Net Margin-38.3%-210.8%-52.8%-46.3%-48.6%
Peer Average Net Margin20.4%20.1%24.6%23.4%21.6%
Peer Average EPS$0.23$0.27$0.27$0.28$2.20
Return on Equity-36.3%-111.9%-18.0%-19.3%-21.4%
Peer Average Return on Equity11.1%12.7%12.7%11.6%14.3%
Return on Assets-26.4%-93.9%-15.8%-16.7%-15.5%
Peer Average Return on Assets9.3%10.7%10.2%9.1%12.0%

Company Profile

Twitter, Inc. is a global messaging platform for public self-expression and conversation in real time. It provides a network that connects users to people, information, ideas, opinions, and news. The company's application provides social networking services and micro-blogging services through mobile devices and the Internet. It can also be used as a marketing tool for businesses. Twitter was founded by Jack Dorsey, Christopher Isaac Stone, Noah E. Glass, Jeremy LaTrasse, and Evan Williams on March 21, 2006 and is headquartered in San Francisco, CA.

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