Twitter Inc (TWTR)

Bottom Line: Between sluggishness in its user base and advertising dollars not able to outpace overall costs, what can TWTR do to jump-start growth and alleviate investor concern that it has hit a wall? How would you improve TWTR? Can the firm afford to change its service without alienating its dedicated users? See my opinion at the end of this post!

Twitter Inc (TWTR) is quite an interesting company in this day and age, as a rare “mature” social media company. Three years after its IPO, it has released its 2015 results and the news is mixed despite best efforts to jump-start growth. Which begs the question, has TWTR reached its plateau for users and revenue potential? Or will users respond positively to it adapting its strategies as it matures?

Quick snapshot, revenue is up more than 50% to $2.2 billion however the company is still losing money as it has for years (according to Generally Accepted Accounting Principles, or GAAP, the standard used in the States). Though, it is losing less money this past year per below. I will note that the company reports “adjusted EBITDA” which is their non-GAAP measure of profit, as it excludes certain expenses.

Main concern is that for the first time ever, the company’s monthly average users were flat for the last quarter of 2015. Though annual users were up 9% to 320 million, this is the first time that TWTR’s user base has stagnated on a quarterly basis. Note that the vast majority of these users are outside of the United States, and in fact its users in the States declined during this time frame.

The firm reassures that users have since come up for the month of January, but we won’t know for sure until next quarter’s earnings. This is an essential detail, because users have been slowing down across 2015 compared with earlier years culminating in a flat quarter indicating that the firm may be hitting the dreaded plateau that maturing tech companies sometimes see. Investors have responded with skepticism, with the firm’s stock declining around 60% since beginning of 2015.

Still, like all companies, it’s about monetization. Its business is split across two areas: Advertising and Data Licensing & Other. The former segment is the main revenue driver, and grew to $2 billion last year primarily due to an increase in advertisers. Still, the company has substantial sales and marketing costs plus research and development which combine to $1.6 billion per year. It’s an example of a firm growing sales, but costs aren’t being held in-check at the same rate. It’s also interesting to me that a company like TWTR, which seems ubiquitous in today’s society, spends so much on marketing itself but perhaps this is akin to Pepsi Inc running TV ads to maintain its brand identity.

Another couple of items I’d like to mention are its young CEO Jack Dorsey returned to the firm last year and has started to reshape the look and feel of its core services, plus expand in areas like video streaming (via Periscope) and “Moments” which displays current news items and topics but is only available in three markets so far. The firm has the lofty goal to reach across the entire globe, but for some perspective, it is still small compared to a peer like Facebook which has 5 times the amount of users.

Personally, to answer my initial questions, I think the user experience is key and making it as easy as possible to on-board new users should be a cornerstone. Additionally, continuing to present itself as the go-to source for “live” interaction across a broad sweep of people with expanding “Moments” into more markets and supporting its existing video offerings is also a key strategy. I think the firm is doing a good job at integrating non-intrusive ads into its user experience and offering self-service for advertisers, it’s just that costs of doing business in particular marketing costs are still high and without further user growth, profitability and investor confidence seems a ways off.

Sources: Twitter Inc 2015Q4 Earnings, NY Times

-Dom