Shares of Twitter Inc. (NYSE: TWTR) dropped on Monday, falling 2.47 percent to $53.01, less than a week after the microblogging site issued its first- ever earnings report following its highly anticipated initial public offering in November. Although the social media company posted results that beat Wall Street estimates, the company disappointed investors after it announced 241 million monthly active users, short of analysts' expectations.
Twitter last Wednesday posted fiscal fourth-quarter earnings of 2 cents per share on revenue of $243 million, topping Street expectations for a loss of 2 cents on sales of 218 million, according to analysts polled by Reuters.
Expectations are high for the social networking giant, following the company’s IPO that saw the stock soar 73 percent to close at $44.90 on Nov. 7, 2013, from the initial price of $26 set ahead of its debut.
For the fiscal 2013 year, the company reported a net loss of $645 million, or an EPS loss of $3.41, and a non-GAAP net loss of $34 million, or an EPS loss of 18 cents. Full-year revenue came in at $665 million, up 110 percent year-over-year.
James H. Gellert, chairman & chief executive officer at Rapid Ratings International Inc., spoke with International Business Times last Thursday about the stock market’s reaction to Twitter’s disappointing earnings report, and why the “honeymoon” phase for the social networking giant is now over.
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IBTimes TV: What was Rapid’s assessment of the earnings report?
Gellert: Well we look at 62 different measures within a company’s financial statements to get our financial health rating. Our financial heath rating is a zero to 100 score. So we’re looking at a very wide variety of things. No individual measure disproportionately drives the ultimate rating. It’s really about how all of these different elements of the company interplay to generate our financial health ratings score.
We happen to have them [Twitter] rated quite low. They’re a 16 on our 100-point scale. That’s actually two points under where they came out at the IPO, but when you’re at that level you are in our very high-risk zone, and investors and anyone else who’s looking at the company as a counter party should be very careful. In their case, it’s a very early-stage company. There’s a lot to prove to the market, and they came out probably earlier than when other companies, like say a Facebook, did their IPO. So there’s a very big difference between them and some of the industry peers that a lot of the market tends to compare them against.
IBTimes TV: Are investors concerned about how fake accounts and fake users affect mobile ad growth?
Gellert: At the moment, investors are looking at the big picture. How much revenue is it driving? How many new users and what’s the interaction with those new users? Most of the market hasn’t really been paying attention to the monetization of those users and how that’s driving the company ultimately to profitability, which they need to. Ultimately, every company needs to be profitable, and every company needs to be returning to its shareholders, returning on capital employed, returning on assets, returning on sales. They have yet to demonstrate that they can do that. It’s a long march. They’re going to have to get there, but what we found out yesterday [Wednesday] is that the market, the momentum behind the market, is really paying close attention to how many new users, and can they continue that fast growth, and they’ve shown that they can’t and the market has punished them quite severely.
IBTimes TV: When you have a company like Twitter and this is its first-ever earnings report, when is the next most important report?
Gellert: In one sense, every single report from now on is extremely important because they have to show that they can execute. They have to show that they can deliver. This report I wasn’t terribly concerned about because the banks that brought the IPO have a huge vested interest in making sure that the timing was right and that the IPO was successful. So I don’t think they would have let Twitter come to the market with the IPO if they thought this first quarter had a lot of risks to it. So I think the timing was probably very well-orchestrated, and there weren’t a lot of surprises to Twitter or the banks involved in this first one.
The next one, it’s going to start getting more interesting and start getting more important.
A. because it will be further along the road and further out of the hands of those who controlled the IPO, but B. because we’re going to have a lot more shares available to be sold. So the lockup periods for the restricted shares, there are two lockup periods coming off, one this month and another in the spring, and when those two happen another 87 percent of the stock will be available to be sold or bought and we’ll see how much the next earnings report affects the float the interest and the buy and sell momentum.
IBTimes TV: How long do you think a company like Twitter gets a “honeymoon” phase?
Gellert: I think it’s different for different companies and how they’re doing in the interim, but I think Twitter’s honeymoon is over. I think the market now recognizes that more fundamentals need to be observed and they’re not going to get quite the same leave pass that they got coming out of the gates.
IBTimes TV: What do we look for next in Twitter’s earnings? Is it all about mobile ad growth, or is it more than just that?
Gellert: I think it’s how much closer they’re coming to profitability. So that’s a combination of how many more users are they bringing and what’s the momentum of that growth. How much engagement they’re getting with those users? What the mobile ad growth looks like and how much of that is able to go down toward the bottom line. So are they continuing to spend on employee compensation? Are they continuing to spend on research and development, and if they’re doing those things, are those being done in an efficient way that makes the company stronger, ultimately making it be able to return to its shareholders?