Twitter Inc.’s stock dropped more than 19% today after the company posted weaker-than-expected profit and revenue for the third quarter that fell short of what Wall Street was expecting.
Revenue in the three months ended Sept. 30 ticked up 8.6% year-over-year, to $823.7 million, but analysts were looking for $874 million. Twitter’s adjusted earnings of 17 cents per share likewise fell short of the 20 cents expected by the market. The same time a year ago, the company reported 21 cents per share.
Twitter blamed the earnings miss on a combination of factors. The company’s advertising system experienced repeated glitches during the third quarter and, in August, the amount of user data available to the system was reduced. Twitter discovered that it had been using a subset of users’ information for ad targeting without their permission.
“We believe that, in aggregate, these issues reduced year-over-year revenue growth by 3 or more points,” the company wrote in its shareholder letter.
“After closing these gaps, the Twitter auction platform received fewer data inputs, and advertisers responded by shifting to other ad formats or pausing spend,” Cowen & Co. analyst John Blackledge explained in a note to clients this morning. “Due to the dynamic auction nature of the ad bidding process, overall ad engagements were unaffected, but pricing was impacted.” Blackledge noted that management indicated the impact would continue potentially into next year.
Twitter also cited unusually high seasonality in ad spending as a third contributor to the disappointing financial results.
The company warned shareholders that the headwinds may continue into the fourth quarter and beyond. The company expects to generate $940 million to $1.01 billion in revenue during the final three months of 2020, below the $1.06 billion that the consensus analyst estimate forecasted.
Yet though this morning’s stock plunge would suggest otherwise, Twitter’s earnings report wasn’t all bad news. The number of “monetizable” daily active users on whom the microblogging service can make money grew by 17% year-over-year to 145 million, surpassing the 14% increase analysts had modeled. Total ad engagements rose 23% in the same period while cost per engagement dropped 12%.
“Despite its challenges, this quarter validates our strategy of investing to drive long-term growth. More work remains to deliver improved revenue products,” said Twitter Chief Financial Officer Ned Segal. “We remain confident that focusing on our most important priorities, and delivering higher performing, better ad formats will deliver better outcomes for all of our stakeholders for years to come.”
Broken down into segments, Twitter’s $823.7 million quarterly sales consisted of $702 million in ad deals and $121 million classified as “data licensing and other revenue.” The lion’s share, $465 million, came from the company’s U.S. business.
“With the U.S. presidential elections and the Olympic Games around the corner, Twitter is well-positioned to build on its user growth and engagement next year,” Socialbakers Ltd. Chief Executive Officer Yuval Ben-Itzhak told SiliconANGLE in an email. “The challenge will be to leverage the opportunity while continuing to keep the platform clean and its political ads transparent.”
But those challenges are shaking the faith of investors. “Particularly given the strong user growth, we are sticking with the story, and gun to head more inclined to think the issues are transitory but think the bias in the short term is to the downside and this very much just became a ‘show me’ story,” Pivotal Research Group analyst Michael Levine wrote in a note to clients.” There are a lot of outstanding questions that could be answered over the next 4-6 months and is now incumbent on the company to answer them.”
With reporting from Robert Hof
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