Twitter boss faces crisis of confidence over results
Investors led to believe new products and shakeup at top were paying off
Dick Costolo’s credibility is on the line.
Twitter Inc.’s chief executive failed to foresee a slowdown that forced the social-media company to miss analysts’ first-quarter revenue estimates and cut its 2015 sales forecast, sending the stock tumbling.
While this isn’t the first time Twitter has fallen short on promised results, investors had been told that new features and services, as well as a management overhaul, were starting to pay off. Now, with results missing projections and executives warning of a “slow start” to April user additions, analysts are asking whether Twitter’s potential market is limited and about management’s ability to lure more users and advertisers.
“In hindsight, management should have issued a pre-announcement,” Victor Anthony, an analyst at Axiom Capital Management, wrote in a note to investors. Axiom downgraded Twitter shares to hold from buy.
Even after introducing new products and features to attract more people, growth in the number of monthly active members decelerated as the number of users rose 18 per cent to 302 million in the latest quarter, compared with 20 per cent in the prior period, Twitter said in a statement Tuesday.
“Management will again have to address credibility concerns,” Mark Mahaney, an analyst at RBC Capital Markets, wrote in a research note. The quarter’s performance “raises the question of how much visibility into advertiser and consumer demand for its offerings Twitter really has,” he said.
Twitter shares fell $3.78 US, or 8.94 per cent, to close at $38.49 US Wednesday in New York, after dropping 18 per cent Tuesday.
“We are struggling to find any silver linings in the results,” Paul Vogel, an analyst at Barclays Bank Plc, wrote in a note to investors. He said he was encouraged by many of Twitter’s new products. “But we need to see more.”
Revenue is a new concern for investors, with Twitter forecasting sales of $470 million US to $485 million in the second quarter, short of the average estimate for $538 million. Full-year revenue guidance was cut to $2.17 billion to $2.27 billion, from the previous range of $2.3 billion to $2.35 billion.
Costolo said he was “disappointed” about the performance of his advertising team, which drew less revenue because the company raised its requirements for an engagement or click on its ads, Twitter said.
“There may have been a miscalculation of the effectiveness of their targeting,” said James Cakmak, an analyst at Monness, Crespi, Hardt & Co. “If you’re getting the right ad in front of the right person, they should be clicking on it.”
All told, the earnings miss and changing benchmarks bring into question whether Twitter can sustain revenue growth, after consistently posting numbers that almost doubled every quarter. While the company said the recent changes will ultimately help to bring in higher-quality ads, Wall Street may not buy it.
“Now you have risks on two fronts,” Cakmak said. “You have the user growth concerns, and now we have to worry about monetization.”