Twitter Posts Much-Needed Earnings Boost, But Still Has Much To Prove With Advertising

Last quarter, Twitter’s stock got hammered after user growth stagnated, despite its solid financial results.

But analysts appear ready to stop punishing Twitter for its user numbers.

Although Twitter shed 4 million users in the third quarter year over year – monthly actives now total 326 million – the company’s stock grew nearly 3% in premarket trading Wednesday morning and stayed strong after the market opened, due to strong revenue and optimism about Twitter’s efforts to clean up its platform.

Twitter capped a fourth straight quarter of profitability and reported revenue of $758.1 million, beating the Street’s expectation of just over $701 million.

Ad revenue comprised the bulk of overall revenue at $650 million, a 29% increase compared to last year, which Twitter CEO Ned Segal attributed to advertiser interest in new ad formats and improved campaign ROI.

But the question remains whether Twitter can keep boosting its ad sales despite perennial bugbears such as user engagement and brand safety concerns.

Ad engagements increased 50% on a year-over-year basis thanks to increased demand, better click-through rates and a continuing mix shift toward video ads, including video website cards and video app cards. Twitter’s cost per engagement is down 14% YoY.

Twitter hopes lower prices and higher ad engagement will attract advertisers. The platform continues to be what Segal called “demand constrained,” a slippery euphemism that means brands still aren’t spending enough money on its ad products.

But Twitter sees opportunity everywhere, particularly with video and events, both of which it’s banking on to entice advertisers.

In Twitter’s view, events are about more than just the big stuff, like elections, sports or tentpoles. “Sometimes an event is a product launch as opposed to something happening around the world,” Segal said.

Twitter is also eyeing small and mid-size businesses – millions of SMBs use Twitter, but many don’t yet pay for advertising – and looking to search ads and direct-response advertising as potential revenue drivers.

Google and Facebook each rake in billions of dollars on the search and DR fronts, but Twitter has notably lagged on both.

CEO Jack Dorsey said Twitter will “pay a lot more attention” to search going forward, but for the moment the focus remains squarely on improving the onboarding experience and providing better, more relevant notifications to encourage retention.

Regarding direct-response, Segal pointed to a blending of performance and brand budgets. Some marketers who buy Twitter ads aim to spread awareness by getting people to watch a video while others want click-throughs to apps or websites. Twitter positions its ad products as a way to capture “the whole bucket rather than pieces of it,” Segal said.

In the meantime, Twitter is keeping its head down on health.

Dorsey told investors that Twitter’s platform health initiatives – purging “spammy and suspicious accounts at sign-up” and cracking down on abuse and the spread of misinformation – is “a long-term growth vector for the company” despite “short-term implications” on usage metrics.

And, to be fair, usage metrics are relative. Dorsey noted that although Twitter’s web-based daily usage declined, mobile daily usage increased by double digits. Twitter sees more junk sign-ups coming in through the web versus app.

Beyond efforts to cut the rubbish and update products to reduce automated usage, user counts were also hurt by headwinds from GDPR, Twitter exiting SMS carrier relationships in certain markets and what Twitter referred to in its earnings release as “a technical issue that temporarily reduced the number of notifications sent.”

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