Cost-Cutting Drove Twitter's Big Earnings Beat

By Motley Fool Staff Markets Fool.com

Twitter (NYSE: TWTR)shares jumped on first-quarter earnings that came in better than analysts had expected. The bottom-line beat was primarily driven by cost-cutting, following a restructuring announced late last year, when Twitter laid off 9% of its workforce.

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In this segment ofIndustry Focus: Tech, Motley Fool analyst Dylan Lewis and contributor Evan Niu, CFA, discuss the headline figures from Twitter's Q1 report.

A full transcript follows the video.

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This video was recorded on April 28, 2017.

Dylan Lewis: Revenue came in at just under $550 million, which beat expectations. But even with that beat, the top line was still down from nearly $600 million that the company brought in at the first quarter a year ago. Looking over at the bottom line, non-GAAP EPS came in at $0.11. Of course, if you're looking at the generally accepted accounting principals side of the financials, the company lost $0.09 per share. I think in some ways, this is the quarter that Twitter desperately needed. It was the first set of good news for the company in a while. They had the beat on some financial numbers, and they also had some core business numbers that looked pretty rosy. The stock is up over 10% since the report. Obviously a lot of people like what they saw. Looking at the results, Evan, what stuck out to you?

Evan Niu: I think the key theme for this quarter was cost-cutting, which really helped profitability. Not that they're profitable on a GAAP basis. But in general, it certainly helps their financial position. If you remember, they announced in late 2016 that they are restructuring and laying off 9% of their staff. That's certainly a big driver of these big cost reductions. For example, revenue is down 8%, but total costs were down 10%. You can see that translates into a little bit of margin expansion, which is funny, it's almost like reverse operating leverage, if you can get margins to expand while revenue is going down. But, I think it's an interesting thing. This is an argument I've been making recently. Before Q1, this quarter, Twitter has been operating unsustainably because they have consistently large net losses, deteriorating operating metrics, most notably around users. But meanwhile, revenue has been growing for most of the time, so it makes it more acceptable. But if you have net losses, declining sales, and poor operating metrics, that's just a really bad recipe. This quarter being the first-ever revenue decline, but the silver lining is they helped their profitability a little bit. I think of it kind of like inflection points. Sales went down, but this is their highest EBITDA margin they've ever posted.

I think, in a way, Twitter has to accept what it is, and more importantly what it isn't. It's definitely carved out place for itself at the intersection of social media news, microblogging, and interacting with people or public figures that you might not know personally. But there are limits to how far that usage can take Twitter in that role. Frankly, overinvesting in future growth could be a waste of money because I think the platform does lack some mainstream appeal, which is what we've seen manifest itself over the years, in terms of poor user growth. This quarter was the strongest user growth they've had in two years, so there are things that are turning up, and engagement is improving. They're stabilizing their financials and right-sizing the cost structure. I think they're more surgically investing in product improvements. And, obviously, the goal of that is to improve user engagement and growth. But I think what they're doing really bodes well in terms of financial sustainability, because they can support themselves. They brought in $550 million in sales. You can sustain a business on that, if you're bringing in that much money each quarter, so long as you have some cost discipline, you're not overinvesting and chasing things that won't ever materialize. So, I do think this was an important quarter for them.

Dylan Lewis has no position in any stocks mentioned. Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.