Twitter Slumps as Video Advertising Boost Is Still Far Away

  • Social media company doesn’t have video ad techology ready yet
  • High price of existing ads has been ‘headwind,’ company says

Twitter Shares Plunge on 2Q Earnings

Twitter Inc.’s plan to boost revenue from video advertising, a key part of Chief Executive Officer Jack Dorsey’s revival effort, will take longer than analysts expected.

The company is putting more video from its Periscope app and other sources in users’ timelines. But Twitter said Tuesday that third-quarter sales will be much lower than analysts predicted, in part because ad dollars from those videos won’t have kicked in yet. That sent Twitter shares down as much as 13 percent, the most since April, in early trading Wednesday. The stock fell as low as $16.03 and was trading at $16.22 at 9:47 a.m. in New York.

It will take time to "unlock" video ad budgets because the company hasn’t finished building the technology advertisers need, Twitter said. The company still has to develop an accurate way to verify who saw video ads, along with tools that help advertisers pick audiences and time their campaigns. Updates will happen “over the next few quarters,” it said in a letter to shareholders.

“Playing catch-up for video is no easy feat, especially when you consider the resources deployed by Snapchat, Facebook and YouTube,” said James Cakmak, an analyst at Monness, Crespi, Hardt & Co.

Twitter has cut deals to stream more sports, political and entertainment videos on its service and plans to share revenue from related ads with content partners. Those deals will generate revenue quickly because advertisers will buy commercials for that content the way they normally do. But this won’t start until the end of the third quarter, Chief Financial Officer Anthony Noto said. 

The expected slowdown in revenue growth for the third quarter is "a function of demand," Noto said in an interview. "We want to tap into new budgets. We haven’t done that, and it’s going to take a while."

The video ad initiative is important because Twitter has struggled to grow advertiser budgets for its social media ads. Video typically comes from a different part of advertiser budgets -- the part they spend on TV, YouTube and Hulu -- not the part they tend to spend with Facebook and Twitter. Plus, advertisers tend to pay higher rates for a video ad.

"The demand we’re seeing is unique in that it’s coming from the online video parts of the house,” Twitter Chief Operating Officer Adam Bain said on a Tuesday conference call with analysts.

Twitter’s existing ads are priced higher than some rivals’ ads, and that has "proven to be a headwind" for efforts to increase Twitter’s share of social media marketing budgets, the company said in its letter Tuesday.

During the conference call, Twitter executives said the company has all the big U.S. advertisers as customers already. Now it has to get them to spend more.

“This all points to ad pricing going down from now on, which is not good,” said Jitendra Waral, an analyst with Bloomberg Intelligence. “There will be a reduction in long-term growth expectations.”

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