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Twitter Surprises by Adding New Users, but Now It's Got Another Problem

Twitter Inc. finally showed signs of addressing its biggest challenge: attracting new users.

Ever since the company went public in 2013, it has been battling the perception that its growth is limited. But Twitter showed signs of new life in the first quarter, reporting that average monthly active users rose 6% from last year to 328 million. The number of daily users has been increasing at a faster pace each quarter for the past year, Twitter said, even benefiting this year from “new and resurrected users following more news and political accounts,” especially in the U.S.

Now that CEO Jack Dorsey has managed to defy investor expectations by reviving user growth, he has to do the same for revenue: Twitter on Wednesday posted its first quarterly revenue decline since going public in 2013, an 8% drop from the quarter a year earlier.

And ad revenue fell 11%.

Sales struggles
The company plans to use its momentum to convince marketers to spend more on ads.Still, Twitter expects revenue growth to “meaningfully lag” audience growth for the rest of the year. As the company struggles to define its future, it faces competitors with larger and faster-growing user bases, like Facebook and Snap Inc., which went public in the first quarter. Instagram announced Wednesday that it added 100 million monthly active users since December, for its fastest-ever growth, bringing the total to 700 million.

Twitter’s user growth “could be your first indicator that revenue could recover some day,” said Mark Mahaney, an analyst at RBC Capital Markets. Still, it’ll be tough, given the competition. “The investor issue is — when do things get less worse?”

After a failed process to sell itself in 2016, Twitter wants to prove it can go it alone and reach profitability by the end of this year. It has wielded the ax in pursuit of that goal. The company sold its Fabric developer services business to Google, shut down its Tellapart ad tech offering, and cut some planned ad products. First-quarter earnings, excluding some items, came in at 11 cents a share, well ahead of the 1 cent analysts estimated.

The eliminated products helped focus the business, but will make it even harder for revenue to recover, Chief Operating Officer Anthony Noto said on a call with investors. Twitter will meet with all the biggest spenders in advertising to convince them that with a growing audience base and a lower price, their ads would be a valuable return on investment, he said. But the company is competing in a digital marketing landscape where Facebook and Alphabet Inc.’s Google get the majority of the money.

Ad competition
“Right now we’re competing for the equivalent of the spot or scatter marketing budget allocation,” Noto said. “That’s a minority of the ad dollars that get allocated. Right now, sitting here today, we don’t see an improvement in our growth rate for revenue.”

Twitter said that some work to improve its product, such as showing people more relevant tweets at the top of their timelines, has attracted more visitors to the service. Efforts to curb abuse and harassment have led to a decrease in reports and blocking from users, which the company described as “meaningful progress.”

While President Donald Trump is a prolific Twitter user and helped raise the platform’s profile since the election, Twitter has said in the past that Trump’s tweets haven’t directly helped the company. While not mentioning Trump specifically Wednesday, Noto did make an allusion.

“Having the political leaders of the world as well as news agencies participating in driving” the news “is an important element to reinforcing what we’re best at,” he said on a conference call with analysts.

Last year, Twitter embarked on a strategy to appeal to broader audiences by streaming live video on its site from sports, entertainment and news partners, including Bloomberg. The plan is working, as video ads were the fastest-growing ad unit, generating the most revenue, the company said. It’s also attracting a younger, more international audience, the company said. Still, it hasn’t been enough to accelerate overall sales.

“It’s more like The New York Times than it’s like a tech company,” said James Cakmak, an analyst at Monness Crespi Hardt & Co. Twitter competes with many other companies that want premium video content, he said. For example, Twitter was outbid by Amazon earlier this year for rights to Thursday night NFL games. “They can’t afford to keep up with the deep pockets that are willing to pay for that content.”

The company’s ad revenue is declining even as the overall market for digital advertising increases.

“Revenue down isn’t good,” said Michael Pachter, an analyst at Wedbush Securities. “When Facebook grows by four Twitters a year, that tells you that there’s something really wrong.”

— Bloomberg News

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