Twitter, Inc. shares plunged 11% in aftermarket trading following its second quarter 2016 earnings report. User growth was sluggish and revenue numbers were marred by constant troubles in its ad business.

Twitter did manage to record user growth, although it wasn’t impressive. Twitter’s users grew from 310 million monthly average users (MAUs) to 313 million MAUs this quarter, up 1% sequentially. Mobile MAUs were 82% of total MAUs.

Twitter’s revenues of $602 million came in way below the Zacks Consensus Estimate of $605.5 million. On a year-over-year basis, revenues grew 19.8%, the lowest gain since its IPO. Revenue growth has been decelerating over the last several quarters. Twitter also added that demand from brand advertisers will take time to improve as marketers remain focussed on desktops at a time when most of the ads are moving to mobile.  Expecting no near-term respite, Twitter guided third quarter revenues in a range of $590 to $610 million, nowhere close to the Zacks Consensus Estimate of $683 million.

TWITTER INC Price, Consensus and EPS Surprise

TWITTER INC Price, Consensus and EPS Surprise | TWITTER INC Quote

Quarterly Numbers in Details

Twitter’s adjusted loss of 11 cents per share compared favorably with the Zacks Consensus Estimate of a loss of 15 cents.

The company posted non-GAAP earnings per share of 13 cents per share, up from 7 cents earned in the year-ago period.

Twitter’s advertising revenues increased 18% year over year to $535 million. Also, there was a 226% year-over-year surge in ad engagements but cost per ad engagement was down 64%, given the shift to auto play video, which has lower cost per view compared with click to play.

Mobile advertising revenues contributed 89% to total advertising revenue in the quarter. Data licensing and other revenues soared 35%.

Twitter earned 40% of its revenues from international markets. International revenues rose 33% year over year to $241 million in the reported quarter. U.S. revenues increased 12% year over year to $361 million.

The company reported adjusted EBITDA of $175 million, up 45% year over year. Adjusted EBITDA margin was 29%, up from 24% in the year-ago quarter.

Non GAAP expenses increased 15% year over year to $508 million.

Twitter also failed to yield any profit this quarter. Twitter reported an operating loss of $86.4 million, which compared favourably with a loss of $131 million reported in the year-ago quarter.

Balance Sheet & Cash Flow

At the end of Jun 30, 2016, cash and cash equivalents (short-term investments) were $3.59 billion compared with $3.49 billion at the end of Dec 31, 2015. In the first half, cash flow from operations was $377.3 million and adjusted free cash flow was $253.2 million.

Outlook

For the third quarter of 2016, adjusted EBITDA is projected to be in the range of $135 million to $150 million. The company expects stock-based compensation expense to be in a band of $135 million to $150 million.

For 2016, adjusted EBITDA margin is expected to be 26% to 27% while capex is likely to be around $300 million to $375 million.

What's Next?

Twitter is now going full throttle with “live” and betting big on Periscope. It is now exploring beyond news and the series of live streaming deals are a step in that direction. The company inked streaming deals with CBSN to stream both Republican and Democratic conventions. It has also brought on board Bloomberg. Twitter will be live streaming market coverage as well as air several Bloomberg shows.

Twitter live streamed special Wimbledon coverage, which is important as the company gears up to live stream 10 NFL matches. It won the rights to stream NFL in April. The company hopes to bring more users and at the same time help marketers to reach a younger demographic, mostly millennials, through its Amplify program. Apart from NFL, it has collaborated with NBA and Major League Soccer and is in talks with cable network Turner Broadcasting about acquiring digital streaming rights for sports-related content.

Twitter said that online video budgets are over $10 billion alone in the U.S and streaming deals will fuel a “long-term shift away from desktop video to premium mobile environments and we believe Twitter is well positioned to benefit from that shift.” The company has collaborated with the likes of Anheuser-Busch InBev, Nestlé, Sony Pictures, and Verizon for ad packages for NFL games that will be streamed this September.

We have always maintained that Twitter’s ability to attract advertising revenues amid significant competition from the likes of Facebook , Amazon (AMZN Quick QuoteAMZN - Free Report) and Alphabet (GOOGL Quick QuoteGOOGL - Free Report) will be a key factor determining its growth, considering the fact that investment in product development needs to continue. With continued troubles in this area, we are more than ever cautious about what lies ahead for this micro blogging site.

It’s been almost a year since Jack Dorsey took over as CEO but the widely anticipated turnaround remains elusive. Twitter’s multiple efforts to revive its fortunes appear to be in the right direction but are yet to achieve the desired results. Things need to improve drastically. Investors are losing their patience, making the company’s independent existence difficult. As per The Wall Street Journal, “Tuesday’s stinging report coupled with a deal-friendly climate in Silicon Valley these days could reignite questions around Twitter’s fate as an independent public company.”

At present, Twitter carries a Zacks Rank #3 (Hold).

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