Twitter Needs to Accept a Scaled-Back Reality

(Bloomberg Opinion) -- The hyped Twitter “recovery” has derailed. 

The company's second-quarter financial report showed that the number of people using Twitter has stagnated and will decline, although the company said that's at least in part because of intentional decisions to clean up its cesspool. Revenue growth, particularly in Twitter Inc.'s vital U.S. advertising market, is tepid for what was billed as a growth phase. Revenue gains may slow significantly in the third quarter, based on the company's forecast. Twitter's (accounting-massaged) profit margins are wimpy. 

Twitter in the last year became the biggest blind spot for Wall Street, at least in the technology industry. Investors grew excited as Twitter dug itself out of a hole. But crawling out of an abyss of falling revenue and overspending isn't the same as flying. Twitter's stock price and enthusiasm from investors went too far. That's reflected in a 13 percent drop in Twitter's stock price in pre-market Friday stock trading.

The disappointment is understandable after a buildup of over-enthusiasm. In the second quarter, Twitter's revenue rose 24 percent from a year earlier, or 27 percent excluding the sales from a business the company had to shut down. That's good, but the results looked shiny in comparison to falling sales at the same point in 2017.

In the third quarter, Twitter's forecast implies revenue growth of as little as 7 percent. In the U.S., Twitter's most important source of advertising sales, ad revenue rose a mere 9 percent in the second quarter. That's not good enough. (Bloomberg L.P. has a web-video news operation that publishes on Twitter.) 

Twitter said that its spending would increase the rest of this year and that its profit margins, based on its preferred metric of adjusted earnings, would shrink in the third quarter from the prior quarter. The number of people using Twitter at least once a month in the U.S. has flatlined, and Twitter said its total monthly user numbers would decline in the current quarter because of efforts to clean up trolls, scams and other unwanted activity.

That's good news for the company and the world. But as with Facebook's cleanup efforts, it's worth wondering how much the stagnating user numbers are intentional and how much is caused by people losing their taste for the digital hangouts.

This is an ideal moment for Twitter to reset expectations with the financial world. If Twitter's user numbers aren't going to grow to much bigger than current levels, then Twitter needs to devote itself to generating more revenue from the users it does have and ensuring those sales are as profitable as possible. That will require a shift in mindset for Twitter and certainly for the company's investors. The time for that tough talk is now. 

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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