Twitter Shares Plunge as Ad-Business Troubles Weigh on Growth

Twitter Shares Plunge as Ad-Business Troubles Weigh on Growth

Tepid outlook shaves off a fifth of the social-media company’s stock market value, prompts questions

By Sarah E. Needleman Updated Oct. 24, 2019 4:38 pm ET

Technical glitches in Twitter Inc. TWTR -20.81% ’s advertising software roiled the social-media company in the third quarter, as a pullback in spending from some buyers and weaker pricing for ads also cut into revenue and profit even though it added millions of new users.
The disclosures and a tepid outlook for the current quarter surprised Wall Street, shaving off a fifth of Twitter’s stock-market value Thursday, and prompted questions about the engine that has helped sustain the company’s growth. Twitter, similar to other social-media and internet firms, has been jockeying to increase its share of the growing digital-advertising business, albeit one that is dominated by larger players such as Alphabet Inc. ’s Google and Facebook Inc. 
The company said malfunctions in ad-targeting software as well as weaker-than-expected spending in July and August hurt its performance. The software problems meant that Twitter couldn’t serve ads to users with the same level of precision as it normally does, prompting some advertisers to pause or reduce spending. For example, a burger restaurant’s ads might have been delivered to a wide swath of users, including vegetarians and people who live long distances away, making them less effective than if they were sent to meat lovers who live near the restaurant, said Wedbush analyst Michael Pachter.
Revenue rose 9% from a year ago to $824 million, marking the smallest annual increase since late 2017 and below the $873.9 million that analysts polled by FactSet were expecting. Advertising revenue accounted for 85% of the company’s total. Twitter said it expects the negative impact on ad sales to persist in the current quarter.
“Unfortunately we had some missteps,” Twitter Chief Executive Jack Dorsey said on a call with analysts, adding that the problems that plagued the company’s advertising business were identified quickly and have been fixed. “I have a lot more confidence in our abilities and our team today than looking back just two years ago. We have a lot more agility.”
Twitter shed more than $6 billion in market value Thursday with shares closing down 21% to $30.75. It was one of the largest single-day percentage declines since Twitter went public in 2013, according to FactSet data.
Irvine, Calif.-based Inc. paused ad spending on Twitter after thousands of dollars spent on campaigns failed to yield any orders. “I didn’t know there was a glitch and didn’t get any message from them that there was a problem,” said Mitch Goldstone, the company’s CEO.
The snafus with Twitter’s ad business came as a surprise to most analysts, said Cascend analyst Eric Ross. “No one was talking about this,” he said. “The results were much worse from a revenue-per-user standpoint than we were expecting. This is shocking given the growth in daily active users.”
Twitter said the number of people who use its platform daily increased by six million from the second quarter to 145 million. The improvement follows changes designed to serve users more relevant content, enabling them to follow topics of interest. Analysts polled by FactSet had estimated Twitter would add roughly three million daily users.e Battling Trolls
Third-quarter profit totaled $37 million, or 5 cents a share, down from $789.2 million, or $1.02 a share, in the prior-year period; the 2018 third quarter included a large tax benefit.
Excluding certain items such as stock-based compensation, profit was 14 cents a share, down from 21 cents a share a year earlier. Analysts had expected an adjusted profit of 20 cents a share.
“Advertising is very high-margin revenue, so when your advertising isn’t growing as fast, your profitability will be impacted by a greater amount,” said JMP Securities analyst Ron Josey.
Given that digital advertising in general is still a growing category, Twitter’s performance suggests it is more vulnerable to seasonal events than its peers, MoffettNathanson analyst Michael Nathanson said. “It’s sounding more like a media company than an online company,” he said.
The technical snafu also raises questions about Twitter’s ability to handle safety and security, Mr. Nathanson said.
In an August blog post, Twitter apologized for potentially sharing certain user data with ad partners and displaying ads to people based on inferences made about the devices used without permission.
Twitter has dealt in recent months with several instances of hacks on the accounts of celebrities and high-profile users including Mr. Dorsey, raising concerns over how secure the company’s protections are for users.
The company has been bulking up its workforce this year to support its growth and work on issues including security of the social network. By the end of December, Twitter said it expects its employment base to be 20% larger than the was a year earlier. It has also worked to proactively remove abusive content, a key goal on Mr. Dorsey’s part of improving the health of conversations on the platform.
Earlier this week, Snap Inc. said the number of daily Snapchat users rose by seven million in the third quarter to 210 million, though that growth was smaller than the 13 million users it gained in the second quarter. Average revenue per user—a key gauge reflecting the health of Snap’s ad business—also grew at the slowest year over year pace since the company went public in 2017.
Facebook is slated to release its quarterly report next week. In the second quarter, the company counted 1.59 billion people who used its “blue” app, its oldest and largest product.
For the fourth quarter, Twitter said it expects revenue of between $940 million and $1.01 billion, compared with $909 million in the final quarter of 2018. The company said it anticipates the issues that plagued the ad business in the July through September period to continue in the current quarter. Crossing the billion-dollar revenue mark in a single quarter would be a first for the 13-year-old company. Analysts polled by FactSet were expecting $1.05 billion in revenue.


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