Analysis, Business

Twitter's Growth Slowing, But Optimism in Ad Platform Remains

Twitter (NYSE:TWTR) has published its report for third quarter 2014, and with a growth slowdown, the microblogging company seems to be at odds with how it will reap profits from its advertising network. During the quarter, revenue actually grew 114% year-on-year to $361 million, although loss has widened, resulting in a diluted loss of $0.29 per share. Non-GAAP diluted EPS is at $0.01.

Twitter’s revenue exceeded analyst expectations of $351 million for the quarter, and EPS is at par with expectations. This quarter is marked with a plateauing of user growth, and the company faces concerns about future growth, in terms of users and audience. During the quarter, monthly active users rose to 284 million, a 23% growth over the previous quarter, compared with Q3 2013, during which sequential growth was at 24%. Also, engagement per user — measured with Timeline views per MAU — declined 7% year-on-year from 685 to 636, and remained flat sequentially.

With this outlook, Twitter’s stock price was down 10% in after-hours trading.

The issue here stems from the microblogging service’s need to reach out to as wide an audience possible, in order to effectively monetize its advertising network. In the company’s earnings call, however, CEO Dick Costolo explained the three-tiered focus of the company, in terms of reaching out to its audience. The first “circle” includes the active users, which consume and share content on Twitter itself. Second includes casual or logged-out users who access content on Twitter or owned properties. The third circle includes users who access content through third-party publishers or services.

According to Costolo, the company is focusing on improving the first circle, but is also actively finding ways to better engage casual users who may be accessing the Twitter feed from elsewhere. The company is focusing on “improving the new user experience and getting new users a high quality timeline the moment they sign up for the service,” Costolo says. For casual users, another aim is “providing much better rich media creation and consumption tools and experiences to drive more breadth and depth of content.” Twitter is also geared toward “adding functionality to our direct messaging service to enable users to move fluidly between the public conversation and private conversation all on Twitter.”

In gist, there is a big push for Twitter to be considered not just as a microblogging service for real-time feeds and updates. Rather, the company is gearing to establish itself as a platform for developers to build upon. In fact, Costolo has stressed Twitter’s launch of Fabric, which is a software development kit “all about providing services to developers, mobile app developers across platforms from the day they start developing their applications to the day they launch those applications and want to measure growth to the day they need to monetize and want to monetize usage at scale.”

Fabric is all about embedding Twitter — and Twitter’s own ad network — into third-party applications in exchange for a smoother user experience across different devices and operating systems. This means that users do not necessarily have to be active on Twitter or its applications, but can still interact with the feed actively through other access points.

Analysts have pointed out this marked difference in strategy, in which Twitter’s coverage is more expansive than its own walled garden. This means a greater potential for Twitter, compared with contemporaries like Facebook, which showcase a simpler metric of active users.

To date, Twitter’s average revenue per 1,000 timeline views is at $1.77, which is up 84% year-on-year and 10% up sequentially. However, Costolo himself admits that Twitter needs about $10 average revenue per user, in order to “reach the monetization levels of industry peers,” implying social networks like Facebook. Still, this rising metric is indicative that Twitter’s ad network is making a positive impact on the company, and will likely continue to do so once the company sees positive uptake of the Fabric SDK.

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