Twitter's earnings are exactly what Wall Street expected. That's not good.
Today, Twitter released its third quarter earnings report, and the numbers are pretty much exactly what Wall Street analysts expected. The company hit earnings-per-share expectations on the nose, posting a $0.01 EPS, and brought in $361 million in revenue, on an expected $351 million. It even met investor predictions for user growth, picking up 13 million new users to bring its grand total to 284 million.
So if this was exactly what investors were looking for, why did its stock drop as much as 13 percent in the 30 minutes following the earnings call?
Because investors have begun to their manage expectations when it comes to Twitter. This is particularly true when it comes to user growth. The rate at which Twitter was adding new users had been decelerating for five straight quarters, hitting a low of 3.8 percent in Q4 of 2013, when it only added 9 million users. After finally reversing that trend in Q1 and Q2, posting growth rates of 5.8 percent and 6.2 percent, respectively, this latest growth rate has decelerated again, to 4.8 percent. Furthermore, Twitter's big boost in users last quarter was likely due to the World Cup. Without a major once-every-four-years event in the offing, it's back to middling user growth as usual, and 5 percent-a-quarter increases aren't going to cut it
New users aside, the good news is that Twitter is working hard to monetize its existing users, having more than doubled its revenue over the past year. And 85 percent of its revenue came from mobile, compared to Facebook which gets 62 percent of its revenue from mobile.
But Twitter's monetization growth will eventually flatten if it doesn't boost its user base. Beyond relying on huge events like the World Cup, how does Twitter plan to do that?
By becoming (ever so slightly) more like Facebook. Facebook has a much easier learning curve than Twitter, which requires users to carefully select accounts to follow while unfollowing the garbage. Once you're reasonably happy with your feed, the Twitter experience becomes a sort of glorious curated chaos unlike anything else out there. But this is a time-consuming process and is therefore intimidating to new users.
Facebook, on the other hand, utilizes an algorithm that presents the content it thinks users will like most, as opposed to a raw feed, which would be alternately boring or overwhelming, depending on if you follow too few people or too many people. I doubt Twitter will ever go all-in on algorithms like Facebook has -- my guess is you'll be able to toggle between a raw feed and an algorithmically-tweaked feed. But it's certainly moving in that direction, inserting popular or relevant tweets from accounts you don't follow into your feed.
Some people have balked at these experiments, going so far as to call them "the beginning of the end" for Twitter. But if Twitter's lackluster user growth numbers and Wall Street's response are any indication, Twitter might not be experimenting fast enough. Granted, the company's only been public for a year, and its revenue growth is still strong that it has time to take things slow. But certainly something has to change (and I don't mean rescheduling the World Cup to be played every year) in order to convince a significant number of new users to join the service.
I understand why these algorithmic experiments are disturbing to power users. We love the raw feed. But Twitter needs to evolve or else we won't just lose Twitter as we know it, as some have predicted. We'll lose Twitter altogether as profit-seeking investors lose patience. And all that humor, news, and weirdness the site has to offer every day may not show up on an earnings report, but it's still worth preserving even if the platform around it changes.
[illustration by Brad Jonas]