Trying to understand the state of Twitter’s business is a remarkably complicated affair. Which, given how bad things are, is probably not an accident.
On Thursday, the company reported no user growth during the second quarter and a 5 percent drop in revenue. Yet its earnings releases are filled with happy talk and rosy numbers, and its earnings call with analysts was peppered with optimism.
You have to listen hard, and squint mightily, to discover the reality, which is that things are not likely to improve anytime soon.
Investors, to their credit, did see through the obfuscation. They drove Twitter’s stock down yesterday by 14.13 percent to $16.84 per share. It is a harsh but clear verdict: More than two years after Jack Dorsey returned as Twitter CEO, shareholders have run short of patience and faith.
Despite Twitter’s cultural impact, its business is strangely stagnant.
To understand how diminished Twitter has become, consider that earlier this week Facebook announced it now has 2.006 billion monthly active users, up from 1.936 billion in the first quarter. Facebook added 70 million MAUs in one quarter. That is almost 2.5 times the number of MAUs Twitter has added in the past 2.5 years.
In one quarter.
Over the past six quarters, Facebook has added 352 million MAUs. That is more than the 328 million MAUs Twitter has attracted in its 11-year history.
Not surprisingly, Twitter has all but given up on attracting new users. Instead, it’s trying to get current users to use it more often. Over the past few quarters, it has begun talking about “Daily Active Usage.”
“About 12 months to 18 months ago we did decide to prioritize DAU growth based on our analysis of what would help us drive future growth of the business,” said Twitter chief operating officer Anthony Noto on the earnings call with analysts. “And, as Jack mentioned, we’re focused on delivering value for customers and advertisers on a daily basis.”
A company spokesperson clarified that Twitter says “usage” and “user” are synonymous — though no dictionary would agree with that. User is a person. Usage seems to imply the amount or rate of use. It’s not clear why Twitter decided to start using “daily average usage” and “monthly average usage.”
Making this even more confusing is the fact that Twitter does not release the underlying numbers for “daily average usage.” Instead, it has just been talking about the percentage increase and how it has been double-digit the last three quarters.
Indeed, Noto was so pumped about this number that he cited the 12 percent growth in “daily active usage” in the second quarter in five of his 10 responses to questions on the analyst call:
“Let me put into context your question about audience, so it’s framed relative to our results and what we’re focused on,” Noto said. “We couldn’t be more pleased that our DAU growth, as Jack mentioned, of 12 percent was our third consecutive quarter of double-digit growth and I’d note the second highest growth quarter in more than eight quarters.”
Twitter’s unwillingness to share the underlying number is indefensible. If DAUs are the metric they want to be judged by, then the data would seem to be material to investors. Period. Instead, analysts have made a cottage industry out of trying to calculate just how many DAUs Twitter actually has.
“Is DAU versus MAU still 50 percent or less?” asked analyst Richard Greenfield of BTIG during the call. “I think everyone is just trying to understand how much runway does DAU have even if there isn’t robust growth in MAU.”
“You asked the question of where we are in DAUs versus MAUs and we had provided a perspective back in 2014, and you asked specifically about less than 50 percent,” Noto said. “What I’d say is our DAU/MAU ratio, regardless of how you measure it, hasn’t changed meaningfully or substantially one way or the other over the last couple years. So there’s still a significant amount of headroom for us to drive DAU growth without MAU growth.”
So DAUs are about half of those 328 MAUs? Then why not just say that? And why not just share the DAU number?
Instead, Noto added: “And as we mentioned, we grew 12 percent year-over-year in DAU, our third consecutive quarter, double-digit growth, and MAU grew 5 percent.”
This was part of a long and winding answer in which Noto hinted at one of Twitter’s many problems going forward. As the company began emphasizing DAU growth in the current quarter one year ago, it’s going to make for tougher comparisons going forward. In Q3 2016, DAU grew 7 percent from the previous year.
As for how it’s going in the current Q3? Here’s what Noto had to say: “We’re really pleased that we’re seeing stable year-over-year growth in DAU so far in Q3, despite the strong year-ago comps at 7 percent DAU growth. Now I want everyone to keep in mind, and I went through the explanation of the difference between MAU and DAU, because the growth rates could converge further given our priority on DAU and focus on driving daily usage, and so much room that’s left in driving DAU growth relative to MAU growth.”
Stable…meaning they’re on track for 7 percent growth again? Or stable compared to the 12 percent rate of Q2? When he says MAU and DAU rates could “converge,” does that mean they both could go to zero? Or they expect DAU to keep growing and spark MAU growth? Or what?
Another troubling item that emerged this quarter: The number of MAUs in the U.S. dropped to 68 million from 70 million in Q1. Why? Noto acknowledged that Twitter pretty much had no idea.
“We don’t have a 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,” he said.
Finally, what about the revenues? The company said it will face a $75 million headwind, in large part due to the ongoing shutdown of the TellApart ad business it revealed earlier this year. Twitter bought TellApart in April 2015, just before then-CEO Dick Costolo left and Dorsey returned as interim CEO. The move proved to be a dud.
On Thursday, Noto said other ad products that are not being shut down are showing good momentum. But: “As it relates to the back half of the year, we did note that while we’re encouraged by the improvement of overall revenue trends, we don’t expect to see revenue growth rates improve for the second half of 2017 because [of] the headwinds you mentioned of $75 million.”
That is also being hurt by the loss of the contract for NFL Thursday night games to Amazon. Though Twitter is busy launching new video products, including a sports network, it’s not expecting that video ad revenues will grow enough yet to make a big dent.
To be clear, it’s not like Twitter is going out of business anytime soon. It has plenty of cash in the bank, and it generates cash each quarter, though it is not profitable, due to issues from things like stock option expenses.
But after 11 years, it seems like Twitter is further than ever from figuring out how to turn itself into an actual, sustainable business. Rather than just being transparent about how bad things are, it seems the company is just trying to convince us that black is really white.
Hopefully, Twitter execs are being more honest with themselves behind closed doors. If not, these next 12 months could be brutal.
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