Twitter shares are crashing in after-hours trading after the company reported another quarter of disappointing user growth and a weak revenue forecast for the last three months of the year.
Here are the key Q3 numbers:
- Monthly active users: 320 million, versus the 324 million expected by analysts, and compared to 316 million users in the second quarter.
- Monthly active users, excluding SMS followers: 307 million users, compared to 304 million users in the second quarter.
- Revenue: $569 million, up 58% year-on-year, compared to the $559.6 million expected by analysts. Twitter had already pre-announced that revenue will be at or above the top end of its forecast range of $545 million to $560 million.
- Adjusted EPS: $0.10 versus the $0.05 expected by analysts.
- Net loss: Another huge loss of $132 million, compared to a net loss of $175 million in the year-ago period.
- Q4 Revenue Guidance: $695 million to $710 million, versus analyst expectations of $739.7 million.
Twitter shares plunged roughly 13%, or $4.04, to $27.30 in after-hours trading Tuesday.
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It's not a great debut for Jack Dorsey, who was appointed CEO earlier this month. He previously served as interim CEO, and will be hosting his first earnings conference call with investors as the company's new chief later Tuesday. Wall Street will be looking for answers about how Dorsey intends to revitalize the company's flagging user growth and reverse the growing impression that Twitter could become a social-networking also-ran.
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To put Twitter's stalled user growth in perspective, the company added a total of 4 million new users this quarter. Facebook, more than four times the size of Twitter, added 49 million new monthly users during its second quarter.
Twitter also appears to have suffered a steep and sudden drop in the prices that it charges marketers to run ads on its service. Twitter revealed that its "cost per ad engagement" fell 39% year-over-year.
Dorsey said in prepared remarks that the company has simplified its "road map" and organization around a few big bets across Twitter, Periscope. and Vine that it believes represent the largest opportunities for growth.
It's been a busy few months for Twitter. In addition to appointing a new CEO, the company launched the new Moments feature, which tries to make it easier for new users of the service to follow live events, such as sports and presidential debates. And the money-losing company recently slashed 8% of its workforce.
While Twitter eliminated some of the uncertainty about its management by completing its CEO search, the appointment of Dorsey to the role creates more questions. The 38-year-old Twitter cofounder also serves as the full-time CEO of digital-payments company Square, which is in the process of preparing for an IPO.
Twitter's stock has plunged 41% from its 52-week high of $53.49, though it has rebounded from recent lows when shares were trading below the company's IPO price.
Twitter warned investors last quarter that they should not expect any meaningful user growth for a "considerable" amount of time. The question now is whether Dorsey has a plan to change that.
You can also view Twitter's press release regarding their Q3 2015 earnings report by clicking HERE
COMMENTARY: Twitter's third quarter 2015 earnings failed to meet investor expectations on user growth and guidance for the fourth quarter 2015, driving down its stock price. More specifically, Twitter continues to struggle in attracting and retaining new users to its platform, and its advertising business is facing challenges with respect to direct-response advertising.
In addition, while ad engagement and videos have recently snowballed on the platform, the average cost per ad engagement continues to decline substantially. Notwithstanding these challenges, we think it’s too early to expect results from the new leadership. Product changes have recently accelerated on the platform (for both users and advertisers), and if successful, these initiatives could meaningfully drive growth over the coming quarters.
Key Takeaways From Twitter’s Third Quarter Earnings
Guidance Came In Below Expectations: Twitter’s management guided for revenues of $695 million to $710 million for the fourth quarter of 2015. This came in significantly below average analyst estimates of $739.7 million. We believe this weak outlook indicates continued challenges in the company’s advertising business (most prominently in its direct response ad units).
Revenue Growth Driven By Rise In Ad Engagements: Twitter’s overall revenues rose by 58% annually to $569 million during Q3 2015. Advertising revenue increased by 60% in dollar terms and by 67% in FX-neutral terms. This was primarily driven by a 165% annual increase in the number of ad engagements, due to growth in both auto-play video ads and off-network advertising business. Off-network advertising revenue (which includes advertising through TellApart, TapCommerce and MoPub Network) contributed about 13% of overall ad revenue during the quarter. The average cost per ad engagement dropped by 39% annually, due to a shift towards lower-cost auto-play video ads. Going forward, we believe growth in overall ad engagements will continue to drive the company’s advertising business, as there is still significant potential to increase ad load levels on the micro-blogging platform.
Video Usage Has Gone Up Significantly On Twitter: Video consumption has been growing tremendously on Twitter of late with the launch of auto-play videos. Native video views have risen by up to 150 times across the Twitter, Periscope and Vine platforms over the past six months. As a result, video ads have gained much more prominence on Twitter over the past few months. Moreover, the company plans to pilot Promoted Moments (video-focused ads) across the U.S. during Q4 2015.
Innovation Has Accelerated On The Platform: One positive that we have noted of late is that product changes have accelerated under the leadership of Jack Dorsey. With new features such as Highlights on Android, Polls, and recently launched Moments, the company aims to step up engagement levels on the platform. Additionally, changes have also been made on the Vine and Periscope platforms, such as introducing music on Vine. While it’s too early to measure the precise impact of these changes, we believe these recent initiatives could drive growth in the coming quarters. Twitter’s efforts to simplify its service will be central to its long-term goal of drastically expanding its audience base, and we will be keeping an eye on its progress in meeting these goals.
I don't know about you, but I don't see Jack Dorsey turning around Twitter anytime soon. The fact that Twitter will fail to exceed Q4 2015 guidance should give you a good hint. All these wonderful things that Jack has implemented since he took over the helm as CEO (I actually consider him part-time CEO since he splits duties with Square) will do very little to increase new users, monthly active users, revenues and profitability.
Twitter is very troubled company whose original business model has become outdated and has lost its luster. It is no longer an exciting and fast growing social network when Dick Costolo came on board as its CEO in June 2010. Since the beginning of 2013, Twitter quarterly MAUs have been growing at single digit rates, and have remained this way ever since. Year-to-year growth rates have also been on a steady decline when Dick Costolo took over. The following charts make this point very clearly.
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I find it unforgiveable that Twitter's stock was rewarded with a nice "bump" (opened at $28 and ended the day at $48) when it went public in November 2013. MAU quarterly growth rates were in single digits and the company has never generated a profit since it was founded in 2006. Fast forward to today, and nothing really has changed. MAU growth remains stagnant and another huge loss.
Twitter really needs to make radical changes and this does not leave out the possibility of making a huge pivot in its business model. When I say radical, I men possibly rebranding. This might include a name change, getting rid of the blue bird logo, and getting rid of "tweets."
Twitter also needs to consider transitioning from a pure online microblogging site to a true social network. This means giving Twitter a completely new look that's modern, slick, and cool, and offers more functionality and customization.
I would also consider eliminating the ad-based revenue model, and going to a subscription based model for larger users. I would not mind paying $4.95 to $9.95 per year depending on the number of followers and tweets and retweets I post. If these changes are too radical for you, then I would recommend a mix of subscriptions and advertising.
Bottomline, Jack Dorsey needs to make Twitter easy and fun to use. This is the only way to increase usage and engagement. Increasing the length of tweets doesn't do it. You need RADICAL changes to Twitter. Sleep on that. Comments gladly encouraged.
Courtesy of an article dated October 27, 2015 appearing in Business Insider, an article dated October 29, 2015 appearing in Forbes, an article dated October 27, 2015 appearing in Marketing Land, an article dated October 27, 2015 appearing in Fortune, and an article dated October 27, 2015 appearing in Seeking Alpha