Twitter Inc Downgraded For Lack Of Visibility Around User Growth

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Twitter has continued to disappoint investors with its slowing user growth, and now since the company changed the way its reports user growth, transparency could be a problem. After all, if the numbers disappoint investors, why not find a different way to report them. Now the microblogging platform has received a downgrade based on the newfound lack of transparency regarding user growth numbers.

Questions for Twitter from SEC

Earlier this year, the Securities and Exchange Commission questioned Twitter about its regular changing of reporting metrics. In April, the company said it was changing its metrics and stopped reporting the number of Timeline views in its earnings report.

Regulators also wanted to know why the micro-blogging platform doesn’t reveal the number of advertisers it has or report revenue per advertiser. Twitter said in correspondence with the SEC that investors don’t care about revenue per advertiser because it doesn’t track its business that way.

Twitter downgraded to Market Perform

In a report dated Oct. 14, JMP analyst Ronald Josey and his team said they downgraded Twitter from Market Outperform to Market Perform because of the lack of visibility around user growth. They still see great potential for the micro-blogging platform in real-time web and think its hashtags and product are “firmly ingrained in our culture.”

They also believe the new management will finally bring stability, however, they also expect Twitter to continue lagging behind peers in engagement growth. The JMP team said they expect it will take some time for wider uptake and adoption of Moments and the company’s other new products to gain some traction.

They think the micro-blogging platform faces negative impacts on monetization due to the expected limitations on user growth. As a result, they’ve moved to the sidelines, and, until they can see signs that user growth is becoming sustainable, they will remain there.

Twitter announces job cuts

Twitter shares moved higher on Tuesday after the company announced that it was trimming its global workforce by 8%. Investors viewed this as a positive because new CEO Jack Dorsey (who was previously interim CEO) is clearly starting to see the importance of controlling costs as they seek to regain the trust of investors.

The JMP team believes the layoffs suggest that Twitter management expects to take some time to fully optimize the company’s operations around what they think should be its main goals. Those goals are innovation on products and user engagement resulting in monetization improvements.

They were pleased about the preannouncement of third quarter revenue and EBITDA meeting or higher than the top of guidance and actually see it as a positive sign for the social networking industry as a whole. However, like most of Wall Street, they’re more worried about user growth right now. Unsurprisingly, they still prefer Facebook more than any other social network right now.

Twitter shares on the rise

Twitter shares have had a bumpy ride over the last several months. The company’s stock climbed about 10.5% after announcing that Dorsey was the next official CEO and naming Adam Bain as chief operating officer, outperforming the S&P 500 which only gained about 3% since that time.

As of today, shares of Twitter have risen by more than 8% over the last 30 days, although most of that gain came on Tuesday with today’s share price up only 0.69% at $29.26 per share, as of this writing shortly before noon Eastern.

What to expect in Twitter’s next earnings report

Twitter is scheduled to release its next earnings report toward the end of this month, and the JMP team is estimating net adds of 4 million monthly active users and an ending monthly active user number of 308 million, which would only be an 8.5% increase year over year.

They’re looking for $563 million in revenue, which would represent a 55.8% increase from last year, and $114 million in EBITDA, which would be a 67.4% year over year increase. They’re projecting pro forma earnings per share of 5 cents. These numbers compare to the high end of management’s guidance for revenue at $560 million and EBITDA at $115 million.

Consensus estimates suggest Twitter might report $559 million in revenue, $117 million in EBITDA and 5 cents per share in earnings.

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