Twitter’s digital advertising market share continues to lose
After activist investment firm Elliott Management took a 4% stake in Twitter (NYSE: TWTR), he called on CEO Jack Dorsey to step down from his current job. Dorsey and Elliott made a deal, however, that Dorsey could stay if he could increase Twitter’s monetizable Daily Active Users (mDAU) by 20% and produce accelerated revenue growth. The main goal was to take a bigger share of the digital advertising market.
Twitter has already hit the first target, reaching 186 million mDAU at the end of June, up from 152 million at the end of last year. User growth has been fueled by interest in COVID-19 and the Black Lives Matter movement, among other current events.
But Twitter has struggled to keep pace with the rest of the industry by increasing its digital ad sales. In fact, ad sales fell 23% last quarter. By comparing, Break (NYSE: SNAP) recorded a 17% increase in turnover in the last quarter. Facebook (NASDAQ: FB) provided an update in May that said April ad sales were roughly flat year over year. And digital ad spend reportedly improved in May and June.
Can the company bounce back in the second half of the year?
The biggest factor weighing on Twitter results
Twitter ran into a big problem in the third quarter of last year. It collected certain data from users even when they had not chosen to share that information. Twitter took steps to correct the bug soon after discovering it, but this resulted in a loss of ability to target ads and share metric data with ad partners. The biggest impact has been on its Mobile Application Promotion (or MAP) product.
As a result of this change, the value of Twitter’s ads plummeted and marketers were unwilling to spend that much. Meanwhile, Snap was developing its own direct response advertising products, and marketers were ready to give it a try. Snap managed to grow its revenue faster from the third quarter to the first quarter than the year before.
Twitter is almost past last year’s problem and is testing a new MAP product. It has also rebuilt its ad server, which will allow it to develop new ad products faster and onboard marketers faster. He should be able to start accelerating revenue growth again in the second half of the year if he can run.
Twitter still needs to improve revenue sustainability
Sustainability of revenue has been a priority for Twitter. Management shared how many brands pulled their ad spend from Twitter as conversations around George Floyd’s murder and the Black Lives Matter movement grew on Twitter. Factors beyond Twitter’s control like these can have a bigger impact on the business than its competitors due to its heavy reliance on branded advertising.
Facebook has managed to maintain revenue growth despite constant controversy on and about its platforms due to the fact that the the vast majority of its revenue comes from direct response advertising small businesses, not branded ads. Even Snap said the majority of its ad revenue now comes from direct response ads during its call for second quarter results.
Improving direct advertising is a priority for Twitter, but it lags far behind the competition. The new ad server and continued improvements to MAP could help, but winning small direct response advertisers in this uncertain environment can be difficult.
Gives no clue
During the call for second quarter results, Twitter management was not convinced that revenue would start growing again in the third quarter. CFO Ned Segal has declined to answer a question about advertising trends in July so far. “We’re here to talk about Q2,” he said, “so I’m going to focus on what we saw in the last quarter.”
In the first weeks of July, Snap shared details of ad revenue, which has increased by more than 30% compared to the same period last year. Management also warned investors that they expect the growth rate to decline over the next two months.
To deny even a qualitative answer to the question of how ad revenue is going in July is a bit of a concern.
The strong growth in the number of Twitter users, the rebuilt ad server and the first successful pilots of its new MAP products give the technology company a solid basis for accelerating growth in the second half of the year. But management does not instill confidence that its growth can exceed that of the competition.
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