Twitter Woes Deepen as Lack of User Growth Threatens Sales

How Twitter Plans to Prove Everyone Wrong
  • Dorsey says making product easier to use is a top priority
  • Company focusing on live video, commentary on news and events

Twitter Inc. added no new users in the fourth quarter, confirming the fears of advertisers and investors alike: the social-media site is in real trouble.

The company has faced sharp criticism over slowing growth in its audience since a 2013 initial public offering. Even as Chief Executive Officer Jack Dorsey rolled out efforts to make its product more mainstream, by some measures Twitter’s user base shrank from the third quarter.

Twitter tried to divert Wall Street analysts’ attention by listing reasons to believe in its future, including a stronger focus on live events and video, several coming tweaks to the product that it says will benefit advertisers, and a vow to aggressively hire good board members and engineers. Still, a disappointing first-quarter revenue forecast indicates the lack of user growth is also hurting its ability to draw in more ad dollars, threatening its core business.

“This is the critical period for Twitter, and they need to show more than just optimism,” said Rob Sanderson, an analyst at MKM Partners LLC. “It’s very vulnerable right now, and especially if we are heading into a recessionary environment, those ad dollars are going to become more difficult to get -- for everybody.”

Twitter shares fell 4.2 percent to $14.35 at 2:18 p.m. in New York. Earlier, the stock tumbled to its lowest price ever, dropping as much as 7.1 percent to $13.91.

Monthly active users were 320 million in the last three months of the year -- the same number the company reported in the third quarter -- while analysts on average had estimated 324 million. Twitter said it will stop including users on older, non-smartphone mobile devices in its overall count. Without these so-called SMS fast followers, Twitter’s user base fell from the third quarter, to 305 million from 307 million, though the company said since the fourth quarter ended it has already recouped those user losses.

Revenue in the first quarter will be $595 million to $610 million, the San Francisco-based social network said Wednesday in a statement. That compared with an average analyst projection of $627.6 million, according to data compiled by Bloomberg.

Dorsey’s Turnaround

Twitter shares have dropped 38 percent this year amid deepening skepticism about the company’s turnaround efforts under Dorsey, a co-founder who returned as CEO. Dorsey, who started his tenure in October with staff cuts and the appointment of a new chairman, has been rallying his teams to make the site more accessible and useful for following news stories and live events. On Wednesday he outlined his five priorities: making the main product easier to use, investing in live streaming video, giving creators and influencers better tools, investing in making Twitter safer, and supporting developers.

Speculation about Twitter as an acquisition target intensifies as the stock falls further. In an interview Thursday, Chief Operating Officer Adam Bain acknowledged Twitter’s fiduciary duty to shareholders, but said he thinks the company can generate investor value as an independent public company.

“The product work will drive user growth to a sustained period of growth for the long term, if we execute,” Bain said on Bloomberg Television.

Several analysts downgraded the stock, including Evan Wilson at Pacific Crest Securities, who lowered his rating to sector weight from overweight. He said he doesn’t have confidence in management’s 5-point turnaround or think it will attract new or lapsed users.

In the fourth quarter, sales rose 48 percent to $710.5 million, in line with analysts’ predictions. Excluding certain costs, fourth-quarter profit was 16 cents a share, compared with an average analyst estimate of 12 cents. The company’s net loss narrowed to $90.2 million, or 13 cents, Twitter said in the statement.

Changing Product

Twitter appointed Dorsey as permanent CEO in October after a search to replace Dick Costolo, who resigned amid pressure from Wall Street over slowing growth. Dorsey, who also runs payments company Square Inc., has been pushing the staff to change even the aspects of Twitter’s site that seem untouchable. 

For example, Twitter has considered lifting a 140-character limit in posts, which has been the format since the company started. The company said Wednesday it will also change the ".@" structure for replies on the site. Earlier in the day, Twitter said it would start displaying more popular tweets at the top of a user’s feed, instead of keeping them in the company’s traditional reverse-chronological stream.

“They definitely needed to do something in order to boost new user growth,” said Orli LeWinter, vice president of strategy and social marketing at digital marketing agency 360i. “Hopefully this is it.”

The year will include many more “significant changes” for the product, Twitter said.

Expanding Advertising

Twitter is also working to deal with its user-growth challenge another way: by making it possible for non-members to see advertisements if they click on a tweet, say, in a Google search or a news article. Opening up advertising to that audience adds 500 million people, Twitter has said, and makes its business model more like YouTube’s -- you don’t have to log in to be valuable to the company. The early efforts in this direction look promising, the company said on its call with investors.

Still, Dorsey’s job hasn’t been easy. A week after he officially retook the helm, Twitter cut 8 percent of its staff. In January, five executives, including the heads of product and engineering, announced their departures during the same weekend. The company has lost at least 20 high-level executives since its November 2013 initial public offering.

"The continuing management instability is likely to further delay the development of the technology and product that Twitter needs to drive user growth, engagement, and monetization,” Heath Terry, an analyst at Goldman Sachs, said in a January note to investors.

Dorsey is working to build out the leadership at Twitter -- including his bosses on the board. After he took the CEO job, the board appointed Omid Kordestani, formerly of Google, to be executive chairman. Kordestani has been involved in many key decisions at the company since. The board is getting close to adding two other members, people familiar with the matter have said. Dorsey on Wednesday said he wants to add board members with public company experience, media expertise and international experience.

Meanwhile, social-media competitors like Instagram and Snapchat are amassing larger audiences and focusing their products more on what Twitter does best: real-time news and information. Larger rivals, like Facebook and Google, have built out real-time advertising capabilities, too.

Twitter is expected to capture 9 percent of worldwide social-media advertising spending this year, compared with Facebook’s 65 percent, according to EMarketer.

“They were the only game in town for live ads a while ago -- even a year ago,” said Jonathan Adams, chief digital officer at Maxus, a media agency. “Their share is eroding relative to the gains their competitors are making.”

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