Key Takeaways

  • Adjusted EPS was $0.04, matching analyst expectations.
  • Revenue significantly exceeded consensus estimates.
  • Monetizable daily active user (mDAU) growth fell short of expectations.

What Happened

Twitter reported its Q3 FY 2020 earnings on October 29, 2020 with mixed results for the quarter. The company far surpassed analyst expectations on revenue, representing 13.7% YOY growth as opposed to a predicted 5.9% YOY decline. Revenue gains were driven by growing advertising revenue coupled with an increase in total ad engagements. Adjusted EPS of $0.04 met consensus estimates exactly. However, the company fell short when it came to growth of its monetizable daily active user (mDAU) base. Although mDAUs grew by 29.0% YOY, analysts had predicted a more robust 35.4% growth rate.

(Below is Investopedia's original earnings preview, published October 27, 2020)

What to Look For

Social media giant Twitter Inc. (TWTR) has faced two conflicting trends amid the COVID-19 pandemic. The company has seen a major spike in users as millions of people shelter at home, but the economic slowdown has caused a significant decline in advertising. Twitter depends on ads for the vast majority of its revenue and profit.

Investors will pay close attention to these dueling trends when Twitter reports earnings on October 29 for Q3 FY 2020. Analyst expect a steep drop in adjusted earnings per share (EPS) compared to the same period a year earlier after losing money in Q2 FY 2020. Revenue is expected to decline for the second straight quarter year-over year (YOY), though at a slower pace.

Investors may get promising news from a key Twitter metric, which is monetizable daily active users (mDAU). The metric is expected to post its best quarterly growth in more than three years. mDAU is the company's primary measure of user traffic on its main platform, and is closely watched as an indication of Twitter's capacity to grow its advertising revenue. 

Since plunging with the broader market to a low in March of 2020, Twitter's shares have risen by more than 120%, experiencing wild swings along the way. Twitter has outperformed the broader stock market, posting a 1-year trailing total return of 63.0% compared to 11.9% for the S&P 500.

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

Twitter's stock pulled back after reporting on July 23 that Q2 FY 2020 earnings and revenue badly missed expectations. It posted its first quarterly loss in three years. After the report, the stocks drifted down and then traded essentially sideways for the next two months before resuming its upward trajectory in mid-September.

Twitter had posted YOY three straight quarters of declines in adjusted EPS before the loss in Q2. When it comes to Twitter's performance in Q3, prior periods have trended downward, from adjusted EPS of $0.21 in Q3 FY 2018 to $0.17 in Q3 FY 2019. Now, analysts estimate a 75.5% decline to $0.04 for Q3 FY 2020.

The company's revenue performance also has been poor in recent quarters. In Q2 FY 2020, Twitter's revenue fell 18.8%, its first quarterly decline since Q3 FY 2017. Consensus estimates predict another YOY decline of 5.9% in Q3 FY 2020, although by a smaller amount than Q2.

Twitter Key Metrics
  Estimate for Q3 FY 2020 Actual for Q3 FY 2019 Actual for Q3 FY 2018
Adjusted Earnings Per Share ($) 0.04 0.17 0.21
Revenue ($M) 775.4 823.7 758.1
Monetizable Daily Active Users (M) 196.3 145.0 124.0

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 mDAU metric is watched closely by advertisers, since it serves 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.

Twitter's stock gains in recent months may be due in part to acceleration in Twitter's growth of mDAUs. That pace has sped up in FY 2020 even though the company has posted YOY gains in mDAUs each of at least the past 13 quarters, In Q1 FY 2020, Twitter's 23.9% increase in mDAUs was the biggest quarterly jump in about three years. Then in Q2 of this fiscal year, the company beat expectations when it reported bigger YOY mDAU gains of 33.8%. Now, analysts predict a 35.4% increase in mDAUs for Q3 FY 2020.