Twitter Not Cheap Enough Yet

Total revenue came in at $602 million, within guidance, and in line with our expectation, but a bit below consensus. Advertising revenue of $535 grew more than 18% year over year and represented 90% of total revenue. The quarter’s 313 million MAUs and a 226% year-over-year increase in ad engagement were positive, in our view. In addition, average revenue per user grew 13% year over year. However, it appears that Twitter has to continue to lower its prices to compete effectively for more of the social network marketing budgets. This was demonstrated by the 64% year-over-year decline in cost per engagement.

On the expense side, gross margin remained in the 66%-67% range, compared with last year. R&D and sales and marketing were below last year’s as a percentage of revenue, and helped Twitter post adjusted EBITDA of $175 million, well above its $145 million-$155 million guidance. We expect sizable increases in operating expenses during the second half of 2016, as Twitter continues to invest in product enhancement and marketing to handle what likely will be further growth in MAUs and content in 2016, driven by the upcoming election and the start of the NFL season.

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