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Will Lower Ad Revenues Hurt Twitter's (TWTR) Q4 Earnings?

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Twitter (TWTR - Free Report) is set to report fourth-quarter 2017 results on Feb 8. The company beat the Zack Consensus Estimate in all the trailing four quarters, delivering an average positive surprise of 152.50%.

However, in the last reported quarter, the top and the bottom lines declined 4.2% and 23%, respectively on a year-over-year basis. Notably, both the figures have been showing a declining trend over the last few quarters, which is a concern.

Sluggish user growth coupled and declining revenues remain headwinds. However, the company’s focus on boosting user growth rate and engagement levels is a positive.

Notably, shares of Twitter have gained 40.3% in the past year, outperforming the industry’s 25.6% rally.

Let's see how things are shaping up for this announcement.

Factors at Play

Lackluster user growth remains the primary concern for investors. In third-quarter 2017, Twitter reported adjusted monthly average users (MAUs) of 330 million, up 1.2% sequentially and 4% on a year-over-year basis.

For the fourth quarter, the Zacks Consensus Estimate for MAUs is pegged at 332 million, indicating a 0.6% sequential increase and 4% increase from the figure reported in the prior-year quarter.

We note that Twitter has been taking a lot of initiatives to combat all odds including curbing the widespread bullying on its platform. The company rolled out a 280-character limit for tweets earlier in November, doubling it from the legacy 140 limit.

It also took various other measures to make tweeting easier and more expressive for people, and to keep the platform clear of malpractices.

Twitter’s focus on improving the live video feature is expected to drive user engagement. The company streamed 830 live events in the last quarter and secured 30 new live partnerships.

Moreover, Twitter’s revenues are highly dependent on the international market. In the last reported quarter, the company earned nearly 43.7% of its revenues from international markets. International revenues increased 6% year over year in the third quarter while U.S. revenues decreased 11%.

Therefore, the company’s launch of Twitter Lite application on Android devices in 24 countries across Africa, Asia, Europe, the Middle East and Latin America is prudent in our view.

However, with such a small user base, Twitter falls way behind other social media services like Facebook (FB - Free Report) , which has around 2.13 billion MAUs. Given such a huge user base, advertisers are more likely to opt for it as it presents a much larger canvas for them. The social media giant reported its quarterly earnings recently, wherein its Advertising revenues soared 48.1% year over year to $12.78 billion.

Though Twitter’s ad engagements continue to grow, it is the cost per ad engagement metric that remains an area of concern. It was down 54% in the third quarter of 2017, given the shift to auto-play video, which has lower cost per view compared to click-to-play.

The Zacks Consensus Estimate for Twitter’s fourth-quarter revenues is pegged at $690 million while ad revenues are expected to be around $592 million, representing a respective decline of 3.8% and 7.2% from the figures reported in the fourth quarter of 2016.

Twitter, Inc. Price and EPS Surprise

Twitter, Inc. Price and EPS Surprise | Twitter, Inc. Quote

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or #5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Twitter has a Zacks Rank #2 and its Earnings ESP is -16.00%. Therefore, our proven model does not conclusively show that the company is likely to deliver a positive surprise this quarter.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks With a Favorable Combination

Here are a couple of companies which, as per our model, have the right combination of elements to post an earnings beat this quarter:

Applied Materials Inc. (AMAT - Free Report) has an Earnings ESP of +0.57% and a Zacks Rank of 2.

Agilent Technologies Inc. (A - Free Report) has an Earnings ESP of +1.98% and a Zacks Rank of 3.

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