What Happened

Twitter reported Q2 earnings on July 23, 2020. The company explained that it had been subject to a significant hack in which a large number of high profile accounts were compromised in an attempt to scam bitcoins from people. Twitter CEO Jack Dorsey addressed the "security issue Twitter suffered," saying that the company has "taken additional steps to improve resiliency against targeted social engineering attempts, implemented numerous safeguards to improve the security of our internal systems."

In Q2, as the COVID-19 pandemic had companies cutting ad spending across the board, Twitter's revenue fell short of analysts' expectations, falling 19% YOY, and earnings also failed to meet expectations. The one bright spot was that its number of average monetizable daily active users was 186 million, higher than expected. Twitter's stock is up 5.8% at time of writing.

(Below is Investopedia's original earnings preview, published July 16, 2020)

What to Look For

Twitter Inc. (TWTR), the social media company, is grappling with two opposing trends as the COVID-19 pandemic forces millions of people globally to shelter at home, shutting down big parts of the U.S. and global economy. For Twitter, millions of home-bound consumers have caused a welcome spike in the social media company's traffic. But the economic shutdowns also have begun to cause a decline in advertising, which Twitter depends on for most of its revenue and profit.

Investors will watch how these two forces are affecting Twitter when it reports earnings on July 23 for FY Q2 2020. The news is likely to be mixed. Analysts expect the company to report its first net loss in at least 14 quarters amid plunging revenue, even as the company's user traffic posts biggest quarterly year-over-year (YOY) growth in at last three years. Twitter management this spring was so uncertain about the company's outlook, given the pandemic, that it gave no earnings guidance for Q2.

One metric investors will watch especially closely is Twitter's measure of user traffic on its main platform: Monetizable Daily Active Users (mDAU). Analysts expect a 24.7% gain YOY.

Over the past 12 months, the company has underperformed the broader stock market, posting a total return of -9.2% compared to 6.8% for the S&P 500. This is in line with the company’s historic record of performance, with Twitter consistently lagging the S&P 500 over the past five years.

One Year Total Return for S&P 500 and Twitter
Source: TradingView.

Despite these building headwinds, the company managed to beat earnings expectations in FY Q1 2020 ending March, delivering adjusted earnings per share (EPS) of $0.11 compared to a consensus estimate of $0.10. Twitter's numbers also revealed major warnings signs. Despite the beat, adjusted earnings per share plummeted 69.8% YOY amid weak revenue growth of 2.6%. Twitter’s stock sold off by about 10% short term in the days following its FY Q1 2020 earnings release on April 30, but rallied with a stock market fueled by hopes of an economic recovery.

Twitter has posted robust revenue and earnings growth in Q2 periods in fiscal years 2018 and 2019. The company boosted revenue by 23.8% in Q2 FY 2018 and 18.4% in Q2 FY 2019, and adjusted earnings per share rose 127.1% and 810% respectively.

By contrast, analysts expect Q2 FY 2020 to show a dramatic deterioration. Analysts expect adjusted earnings per share to swing to a loss of -$0.02 from $1.58 in Q2 FY 2019. It could get worse, for all of FY 2020. Analysts expect Twitter's adjusted EPS to plunge 83.3% on a 4.4% drop in revenue.

Twitter Key Metrics
  Estimate for Q2 2020 (FY) Actual for Q2 2019 (FY) Actual for Q2 2018 (FY)
Adjusted Earnings Per Share ($) -0.02 1.58 0.17
Revenue ($M) 695.7 841.4 710.5
Monetizable Daily Active Users (M) 173.3 139.0 122.0

Source: Visible Alpha

As indicated, a key metric to watch at Twitter is Monetizable Daily Active Users (mDAU). This non-GAAP measure is intended to capture the “vetted” users of the platform, after filtering out illegitimate users such as fake accounts, bots, accounts linked to spam, multiple accounts linked to the same user, and so on. Twitter’s mDAUs are watched closely by advertisers, since they serve as a proxy for the size of the audience that their ads can reach through the platform. Although mDAU may provide a more accurate picture of the company’s user base, this also makes it difficult to compare Twitter’s performance to competitors.

The rebound in Twitter stock in recent months may have been due in part that mDAUs grew by 23.9% in FY Q1 2020 from a year earlier, an increase of 32 million users. Analysts expect this strong mDAU growth to continue in FY Q2 2020, rising 24.7% to 173.3 million compared to 139.0 million in Q2 2019. Twitter has shown an accelerating rate of mDAU growth in each of its last seven quarters. The big question is whether rising mDAUs will be able to offset a decline in advertising going forward.