FBN Securities analyst Shelby Seyrafi maintains a Sector Perform rating for Twitter Inc (NYSE:TWTR) as she sees upside to FQ4 estimates after the company reports results.

Twitter

We reiterate our Sector Perform rating on Twitter Inc (NYSE:TWTR) and see upside to our FQ4 estimates after it reports results (Wed., Feb. 5 ATM). Recent results from fellow online advertising peers Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG) bode well for Twitter. We think that key investor focal points will be monthly active user (MAU) growth, engagement rate (Timeline Views/MAU) growth, and monetization (advertising revenue per 1,000 Timeline Views) growth. As the table below shows, we are modeling MAU growth of 36%, engagement rate growth of 10%, and monetization growth of 36%. A key concern in our initiation was that engagement rate growth has been decelerating (from 30% in FQ1 to 8% in FQ3), but we think that the recent exposure from its IPO should help engagement rate and MAU growth.

As our detailed Advertising Revenue Model shows, we are modeling:

  • MAU to reach 251M (up from 232M in FQ3). 249M consensus.
  • Timeline Views to reach 175.2B (up 49% Y/Y). 173.7B consensus.
  • Timeline Views per MAU to reach 698 (up 10% Y/Y).
  • Advertising Revenue per MAU to reach $1.16 (up 36% Y/Y) with international ad revenue/MAU increasing to $.50 (still only 17% of the US level of $2.95, up from 14% in FQ3).

Twitter’s FQ4 results

For FQ4, we expect Twitter Inc (NYSE:TWTR) to report revenue of $215.5M (+92% Y/Y and in line with consensus of $217.8M) and NG EPS of -$.03 (vs. consensus of -$.02).

Twitter’s FQ1 guidance

For FQ1, we are modeling Twitter Inc (NYSE:TWTR)’s revenue at $214M (+87% Y/Y and slightly below consensus of $216.2M) and NG EPS of -$.05 (vs. consensus of – $.03).

Investor focal points

In addition to the aforementioned metrics, key investor focal points will include:

Mobile advertising ramp

We see mobile advertising increasing to 72% of advertising revenue from 70% in FQ1, but there could be upside here as mobile % has increased by 5pp two quarters in a row.

Actions to improve engagement rates

Since decelerating engagement rate growth is the weak link in its results so far, investors will want to hear about what actions Twitter Inc (NYSE:TWTR) is doing to improve engagement. Such actions could include improving the user interface.

Video opportunity

Investors want to hear about how Twitter expects its video-related advertising revenue to ramp. Twitter Inc (NYSE:TWTR) has Amplify (in-tweet video clips), a partnership with Nielsen (Nielsen-Twitter TV rating), and Bluefin (acquisition that allows for better targeting).

International country ramp

As of the end of CQ3 2013, Twitter Inc (NYSE:TWTR) sold advertising products in over 20 countries outside the US, and international was 27% of advertising revenue in CQ3 (we see this moving to 32% in CQ4).