Just a few months ago, not many investors would expect Twitter (NYSE: TWTR ) would post a decline in revenue in 2017. One of RBC Capital's analysts, Mark Mahaney's "bold predictions" for the year was that Twitter could post lower revenue than 2016, giving it a 30% chance.
After Twitter reported its fourth quarter results, it looks like a lot more analysts could be jumping on board. In fact, Twitter's ad revenue already declined last quarter from $641 million to $638 million.
Granted, Twitter made a major overhaul to its sales team last quarter, which prompted it not to release any guidance for the quarter. But on the earnings call, COO Anthony Noto told analysts "There's no quantitative analysis that shows that we've had an organizational impact due to the restructuring." In other words, Twitter's shortfall on ad revenue wasn't a one time hit, but an ongoing problem.
Twitter expects a big decline in revenue for the first quarter
While Twitter didn't provide a revenue outlook for the first quarter, it did offer a few details. Management expects adjusted EBITDA to come in between $75 billion and $95 billion, and adjusted EBITDA margin between 17% and 17.5%. That's less than half of the $180 billion in adjusted EBITDA Twitter reported in the first quarter last year on a margin of 30%.
Twitter's outlook implies revenue somewhere between $428 million and $559 million in the first quarter. The middle of that range represents a 17% decline from last year.
On the earnings call, Noto recognized that's a very wide range, and said it represents three cases. The high end represents results for the rest of the quarter similar to early January. Twitter started noticing more competition from the likes of Facebook (NASDAQ: FB) and Snap (NYSE: SNAP) in mid-January. If those conditions persist, Twitter expects to hit the middle of that revenue range. The bottom end represents Twitter de-emphasizing some revenue producing products as it aims to simplify its products focusing on those with the highest growth potential.
When asked if Twitter can grow revenue at all for the full year, Noto didn't provide a direct answer. He pointed out the company still makes the majority of its revenue from brand advertisers, which have long lead times for buying ads. Noto says it's imperative for Twitter to show that it's improving engagement in order to win back revenue from those advertisers, but it will take time.
True, engagement is improving
A point of emphasis for Twitter was that while ad revenue is falling, engagement is improving. Management noted that daily active users increased 11% year over year for the quarter (although it still didn't provide any exact numbers). It also saw double-digit growth in tweet impressions and time spent on Twitter in the fourth quarter.
If anything, however, Twitter's inability to grow revenue in spite of growing engagement is an indictment of its ability to produce results for advertisers. Average ad revenue per user in the U.S. fell to $5.70 from $6.31 last year. By comparison, Facebook's ad ARPU for the U.S. & Canada increased to $19.28 from $13.06. Snap also increased its ARPU in North America to $2.15 last quarter from $0.67.
It seems advertisers are shifting more of their budgets to Facebook and Snap, and that's backed up by Noto's statement that it saw increased competition starting in mid-January. He even made a wink at Snap's IPO when he said, "Some of the competitors have a lot more at stake at this moment in time."
Noto's expectations that showing advertisers the improving engagement rates on Twitter will help turn around seems like wishful thinking. Businesses don't buy advertising based on a platform's engagement rate; they buy it based on how effective it is. If Twitter's ads were effective, an increase in engagement would have results in an increase in ad revenue. Instead we saw advertisers leave as more inventory opened up on Twitter's competitors. That doesn't bode well for a turnaround in Twitter anytime soon.
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