Twitter: Driving with the parking brake on
Twitter seems to have resumed its campaign to become the Yahoo of the post-Yahoo era.
The company staged a conference call last week to discuss its second-quarter financials. The call evoked the Yahoo calls of recent years by trying to put a cheerful spin on numbers that were disappointing by nearly every measure. This after a first-quarter earnings report that inspired hope that CEO Jack Dorsey was finally turning things around.
There is one difference between Twitter and Yahoo. Yahoo, despite its years of chasing a turnaround that was always just around the next corner, had one key asset: The stake Alibaba it obtained in 2005. As Alibaba grew, the value Yahoo's stake grew as well. Yahoo was saved, for a while, because it stumbled into becoming a hedge fund with one very smart investment.
Twitter, meanwhile, also makes strategic minority investments in privately-held companies. The investments are modest – they had a carrying value $90.2 million at the end of March. But tucked into the details of its earnings report, Twitter said it wrote down a $55 million impairment charge on an investment in an unnamed private company (it's reportedly SoundCloud). “There has been a significant decline in the investment's fair value,” the company said in its letter to shareholders.
There is no Alibaba to save Twitter, or to keep investors patient until the promised turnaround finally arrives. There are only Twitter users and Twitter revenue, as far as most investors are concerned. There isn't any Twitter profit to speak of, since the company has been posting losses since it went public nearly four years ago. Leaving out the $55 million impairment charge, Twitter still posted a net loss of $61 million.
As for users and revenue, they continue to be something of a problem. In 2016, user growth was worryingly tepid while revenue growth remained in the double digits. In the first quarter, that dynamic reversed: Advertising revenue fell 11%, but investors decided to focus on the positive news for once – that monthly active users were up 6% from the year-ago quarter and daily active users were up 14%.
Twitter can deliver on revenue expectations, or it can deliver on user-growth expectations, but rarely both. The latter seems to be the case again in the second quarter. The growth rate in monthly users, at 5%, was still strong but below the 6% growth of the first quarter. Daily user growth also slowed, to 12% from 14%. Advertising revenue, however, declined by 8%.
The inverse correlation between Twitter user growth and Twitter revenue performance is puzzling. Deeper engagement at ad-supported companies should drive higher revenue. Facebook has no problem pushing both up quarter after quarter. At Twitter, both seems to vacillate as Twitter experiments with new user features and new revenue products.
One reason for the divergence is that Twitter discontinued TellApart, another pricey investment that in hindsight seems ill-advised. TellApart was an adtech business Twitter paid nearly a half a billion dollars for two years ago. Now that Twitter is winding down its operations, it's causing a drag on year-over-year revenue comparisons.
Still another reason seems to be that Twitter is picking up more of its users outside North America, where ad-rates tend to be lower. International users accounted for 79% of Twitter's total user base, but they bring in only 42% of its revenue. In light of that, it's especially troubling that Twitter's monthly users in North America fell to 68 million last quarter from 70 million in the first quarter. As one analyst pointed out, this was the largest decline Twitter has seen since it went public.
It's as if, during the first few months of President Trump's reality show as Administration, the audience tuned in to read Trump tweets, or to express support or dismay for them. And then three months later, two million had checked out, switched the channel to some other social media.
What, then, is left to help Twitter turn things around? The corporate slogan Dorsey has settled on for the company is “what's happening in the world and what people are talking about.” What happens when the world's happenings induce despair and depression? When people don't want to talk about what's happening – or get weary of hearing others talk about it?
Perhaps just as alarming was the answer that the company gave when analysts asked why US monthly active users declined so much. CFO Anthony Noto replied,
"We don't have the data that will explain a causal impact to that - why the top of the funnel for U.S. MAU decreased, so it could be related to any number of exogenous factors including fewer events, lower seasonal benefits, or organic trends. And so, as we have dug into that, that's the conclusion that we've been able to draw based on the data and the analysis."
Or, to paraphrase that answer into something that could easily fit inside a tweet:
“We have no idea."
Instead, Twitter urged investors and analysts to consider its daily active users, which are growing much faster than monthly users as the Twitter addicts splinter away from the rest of the world. Noto assured investors that Twitter has “much more visibility” in the daily user metric. But Twitter refuses to say how many daily users it has, instead offering confusing explanations that if anything cloud attempts to estimate it.
Twitter claims that it keeps its DAU figures private because its a “priority metric” that's “competitively sensitive.” Which is not only contradictory – if it's so sensitive, why even make it a priority metric? - it also doesn't wash. Snapchat discloses DAU. So do Instagram and WhatsApp. Facebook not only discloses DAU, it celebrates them loudly. Perhaps Twitter finds the DAU metric competitively sensitive because it's doing so poorly at competing for users' attention?
Two years ago this week, Dorsey staged his first earnings call and promptly drove the company's value down $5 billion by bluntly criticizing the company's flaws. Dorsey referenced those comments again during Thursday's earnings call to illustrate the progress he's made. While Dorsey has indeed made some progress on his stated goals, the company's stock has lost more than half its value in that time.
Two years into Dorsey's tenure, Twitter looks like a company driving with the parking brake on - stomping on the accelerator, inching forward more slowly than it should.