Like it or not, social media is the lifeblood of contemporary culture. It’s where we connect, share, laugh and cry – but more importantly, it’s where we buy and sell. Mainstream networking sites now account for a huge slice of digital revenues and advertising streams. Platforms like Twitter (TWTR, Financial) are undeniably helping companies of all shapes and sizes to bulk out bottom lines by establishing a substantially higher level of consumer engagement.
If only it worked both ways.
Twitter is a mess. Despite its prominent role in popular culture, the company’s financials have been on the rocks for years. Investors haven’t reacted kindly. Since Twitter’s highly anticipated IPO in 2013, shares have been locked in a proverbial freefall. In the last year alone, prices have fallen 69%. Meanwhile, Facebook's (FB, Financial) booming growth has made things look a whole lot worse by comparison. Twitter's top team seems to shift every few weeks, user numbers are stagnating, and the site still can’t seem to bring in the sort of figures shareholders are wanting to see.
Perhaps they're just looking at things the wrong way.
Believe it or not, Twitter actually posted a pretty good quarter on Wednesday. With shares bottoming out, wary investors were poised for the worst. Instead, CEO Jack Dorsey announced that the networking site had shockingly met Wall Street’s expectations.
Revenue for Q4 came in at $710 million, with nonadjusted earnings of $114.6 million. That equates to a 48% rise year over year – excluding the impact of year-over-year changes in foreign exchange rates – and an EPS of roughly 16 cents a share. The site also posted a GAAP net loss of $90 million and adjusted EBITDA of $191 million.
The lion’s share of Twitter’s Q4 income came directly from its advertising business. Advertising revenue totaled $641 million, an increase of 48% year over year. Mobile accounted for 86% of all advertising revenue. Data licensing and other revenue totaled $70 million for the quarter, representing a 48% year-over-year rise.
Twitter’s annual figures were pretty decent, too. Total revenue reached $2.2 billion, up 58% year over year, with more than $550 million in adjusted EBITDA. Results like that generally merit a sigh of relief from investors; however, Wall Street has never been kind to Twitter. That's why shares immediately dropped 10.67% following Wednesday night’s report.
What's the big idea?
Unfortunately, the perceived problem with Twitter isn’t how much money it did or did not bring in last year – it's sustainable growth.
Despite a 9% hike in monthly active users across 2015, Twitter’s user base has plateaued at 320 million. It didn’t move an inch last quarter – although to be fair, the company's kind of fudging its numbers a bit. Twitter has actually been tallying activity on its archaic SMS service in order to bolster overall numbers. Remove SMS users from the equation, and Twitter actually lost 2 million active users last quarter.
That loss inevitably impacts advertising revenue. After all, who wants to sponsor posts on a shrinking website? That’s why guidance for this quarter is looking pretty sorry. For Q1, the board is anticipating revenue to hit somewhere in the range of $595 million to $610 million. Adjusted EBITDA is expected to come in at least $150 million, with expenditures like stock-based compensation simultaneously hitting the company for up to $170 million.
Unless Twitter can offer some sort of tangible growth in 2016, the future isn’t looking so bright.
Then again, it’s not as if Twitter is going anywhere. Whether you love the site or hate it, it’s impossible to envisage a digital landscape without Twitter. To an extent, the site can even be classed as a public good. It’s a proverbial hive of movers and shakers that brands and marketers simply can’t afford to ignore. The problem is coming to terms with its limited reach.
Every high-value social media network is inevitably stacked against Facebook and its 1.6 billion users. That's not fair or realistic. Why? Each of these sites offer starkly contrasting USPs that cannot adequately be paired off against one another. Twitter will never achieve Facebook’s numbers – and analysts have got to bear that in mind as a potential handicap when tallying up the site’s overall worth. But more important still, the company's board must concede that long-term success does not necessarily hinge on an ever-expanding user base.
Rather than focus on growth, Jack Dorsey and his team have got to place more emphasis on providing good value for money for advertisers. Only then will the company’s shares be able to stabilize and start to generate meaningful returns for shareholders. That's admittedly going to be a long and bumpy road. Will we get there in 2016? Probably not – but stranger things have happened.
Just do yourself a favor, and don't write Twitter off just yet.
