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Home / Business / Twitter Q2 Earnings: Stop Worrying About MAUs Start Searching For Profits – Twitter, Inc. (NYSE: TWTR)

Twitter Q2 Earnings: Stop Worrying About MAUs Start Searching For Profits – Twitter, Inc. (NYSE: TWTR)



Twitter earnings (TWTR) in the second quarter showed a slight quarter-on-quarter decline in the MAU from 336 million to 335 million. Unsurprisingly, this frightened investors, as reflected in the large pre-market decline and subsequent bloodbath of -20%.

While positive MAU growth is better than negative, I think it's time to focus less on users and more on finances. I believe that the true potential lies in the future profitability of the company. Additional MAU growth would be nice, but I do not think it's necessary.

I believe that Twitter enters the mature phase of a technology company's life cycle and its ability to earn a decent profit ultimately shapes the future of the stock. [1

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Source: twitter.com

Earnings Growth

After sales growth of 24% this quarter to $ 711 million and the company earned 79.6 million US dollar now has positive sales growth and positive operating margins in four consecutive quarters. A major contribution to higher profits was better cost control, especially in research and development.



The graph above shows that R & D spending as a percentage of revenue has been steadily declining over the last few years, falling to ~ 19% in the last quarter. Proportional R & D spending remained low at $ 188 million or ~ 19% of sales for the quarter.

The declining proportional R & D costs show what I mean when I say that the company is maturing. Obviously, the management realizes that throwing money on "cool projects" will not generate any additional revenue.

While it's fashionable for technology companies to spend a lot of money on research and development, it's very hard for me to believe that. A significant portion of the $ 752 million annual run-rate costs contributed significantly to the top position at. Technology giants like Google (GOOG) and Facebook (FB) are spending billions on R & D because, due to their considerable size, they can experiment with a variety of "cool" projects that open up new revenue streams. For example, Google has a whole "other-bets" segment and Facebook had tried to build a drone-based Internet . Twitter has no such scope, and I believe that it is essentially just a social media platform. However, this need not be bad as management can significantly reduce R & D spending without impacting revenue growth. Thanks to the company's operational leverage, even a slight decline in R & D activity will lead to significant increases in operating income. With an operating margin of 11.2% in Q2, a 100% decrease in R & D expenditures will lead to a strong 9% increase in operating income.

Now it's unclear to me whether management is still disciplined about the cost, but the potential exists. Keep in mind that management does not necessarily have to reduce spending in dollars. If they kept R & D dollars steady in the next quarter and increased sales by only 15%, operating income would rise 41% to $ 112 million.

MAU is not that important

I think it's perfectly fine when the MAU plateaus from Twitter. After all, engagement is the key to any media platform, and by doing so, I would say the company is doing well. Daily active users grew 11% year-over-year, accelerating 10% compared to last quarter. The sustained momentum makes sense, as it is these very strong users who generate income for Twitter. A casual user who checks Twitter for news when something big happens will not generate ad revenue, while those compulsively following celebrities will generate significantly more. Both types of users would be categorized as a monthly active user, but only the latter is a daily active user. Conclusion

I believe Twitter matures with its MAU plateauing. However, this should not affect the monetization efforts, as demonstrated by the accelerated growth of DAU and 24% revenue growth. I believe that R & D cost control could significantly increase margins in the future, as long as the company continues to address its core user group.

I understand where the bears are coming from, as the lack of MAU growth could be seen as a dying platform, but as long as the company is able to increase the monetization of its primary users and control costs, I believe that sales and earnings growth will decline sharply.

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Disclosure: I / we have no positions in the above stocks and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I do not receive any compensation for it (except from Alpha search). I have no business relationship with a company whose warehouse is mentioned in this article.


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