Ending the profit drought
Twitter (TWTR) said during the release of its 3Q17 earnings that it was hoping to end its profit drought on a GAAP (generally accepted accounting principles) basis in 4Q17. It said that GAAP profitability may be possible if it hits the peaks of its estimates for the quarter.
The company went on to forecast 4Q17 adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) in the range of $220 million–$240 million.
But what underpins hopes for the first profit at Twitter? The answer lies in how the company has been handling its expenses and its data licensing business.
Cost cuts expected to bear fruit
In recent quarters, Twitter has worked to whittle down costs, and it seems the company’s management believes these efforts are about to bear fruit. In 3Q17, Twitter recorded its third consecutive quarter of a double-digit decline in its expenses. The company’s 3Q17 expenses were $582 million, representing a fall of 16% from a year earlier. Its expenses fell 11% in 2Q17 and 10% in 1Q17.
Twitter has been selectively cutting costs in areas such as marketing and product development, with expenses in these two areas falling 23% each in 3Q17.
Data licensing business continues to grow
Twitter’s profitability hopes are also anchored in the company’s data licensing business. “We expect data and enterprise solutions will continue to be an increasingly important contributor to revenue growth and overall profitability,” the company said recently in a letter to a shareholder.
Twitter’s revenue from data licensing and other non-advertising sources was $87 million in 3Q17, indicating a rise of 22% year-over-year. The company is working to build up its data licensing business as another way to diversify its revenue streams. Like Facebook (FB), Alphabet (GOOGL), Snap (SNAP), and Yelp (YELP), Twitter looks to advertising for over 80% of its revenue.