For a moment, just a small moment, Wall Street seemed to have hope that Twitter (TWTR) was going to make a comeback. After three months of having co-founder Jack Dorsey as the interim CEO, the man took over as permanent CEO earlier this month. Not coincidentally, the company announced its new Moments feature on the same day.
Investors took the bait and Twitter shares rose 27% leading up to the company’s earnings report earlier this week. And that’s when reality set back in.
Q3 earnings not the problem
Twitter actually didn’t disappoint with its third quarter earnings. Not only did it turn a profit with earnings per share of $0.10, beating the expectation of $0.05, but the company also saw revenue increase 58% year over year to $569.2 million, beating the consensus by $9.6 million.
So what’s the problem then? Two things:
First, fourth quarter guidance is light. In fact, it’s so light that the optimistic side of the company’s projection, $710 million, is 4% below the $739.7 million consensus. Not a good way to start off Dorsey’s term. It also confirms investors’ fears that the company’s business and product model isn’t sustainable.
The second problem is the problem that has plagued Twitter for quarters on end: monthly active user (MAU) growth. In Q2, the company added 8 million MAUs for 15% growth year over year. This time around, Twitter added a paltry 4 million users, putting its total up 11% from this time last year.
Of all the things you’ll read about Twitter’s third quarter earnings report, this is the most concerning. The company has been doing a pretty decent job over the last 18 months improving its monetization scheme despite posting such weak MAU growth. But eventually it won’t have any other options. It can pull whatever levers it wants to increase revenue, but user growth is the biggest problem Dorsey faces now.
And based on a Wall Street Journal report, it seems he knows that. “Our focus is on three things: a more disciplined execution, simplifying our services and better communicating our value,” Mr. Dorsey said on Tuesday’s call. “We’ve made meaningful progress across all three.”
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