What marketers should know about Twitter’s Q4 2016 earnings
Twitter's daily audience is growing, but its ad revenue has shrunk, and its direct-response advertising struggles have gotten more difficult.
Twitter’s fourth-quarter earning report wasn’t all bad. It was just a lot of bad, with some good and a bit of ugly.
The product changes Twitter has made over the past year, like adding an algorithmic mini-timeline, appear to be working. The platform’s monthly audience may not be growing by much, but it’s still growing. More importantly, its daily audience growth is accelerating.
In the fourth quarter of 2016, the average number of people using Twitter daily rose by 11 percent year over year, marking the third straight quarter that the growth rate increased. In Q3, it was up by 7 percent; in Q2, it was up by 5 percent; and in Q1, it was up by 3 percent.
In addition to getting more people to use Twitter each day, the company is getting people to use Twitter more. In Q4, the amount of time people spent on Twitter increased “by double digits on a year-over-year basis,” as did the number of times people came across a tweet, according to the company’s letter to shareholders (PDF).
Twitter is counting on maintaining this audience growth in order to get its advertising business back to growth. Yes, “back.”
Twitter didn’t only lose its longtime ad boss in the fourth quarter of 2016. It lost ad revenue. The company’s total advertising slipped by less than 1 percent year over year, and its US ad revenue dropped by 5 percent year over year. And while off-Twitter ad revenue didn’t decline for a second straight quarter, it didn’t grow, either. More problematically, neither did on-Twitter ad revenue, which is where Twitter makes the majority of its money: it shrank by 1 percent year over year.
But Twitter considers its advertising trends a lagging indicator of its audience trends. “Revenue follows audience,” Twitter COO Anthony Noto said during the company’s earnings call on Thursday morning.
Twitter’s ad revenue in Q4 reflected audience and pricing trends from “six months ago,” Noto said. Brand advertisers account for “the majority” of Twitter’s ad revenue, and those types of advertisers spend their money way before their ads actually run, he added. As a result those advertisers bought Twitter’s ads before Twitter could show them how its audience is growing, according to Noto.
So now, Twitter is meeting with these brand advertisers to present them with its updated audience numbers in hopes of getting them to reevaluate their spending again, this time in Twitter’s favor. But Twitter may also need to convince them to reappraise its video ads.
Twitter’s video ads make the company more money than any of its other ad formats. But video ads also make the company less money per ad. While Twitter sold more video ads and got people to engage more with those ads in Q4, those increases drove down the average amount of money Twitter makes per ad engagement, and the average price of a video ad engagement was “significantly lower” in Q4 2016 than in Q4 2015.
Twitter’s ad pricing declines are the result of Twitter making it easier for advertisers to pay less money for its video ads. In Q2 2016, Twitter lowered its video ad viewability standard, which also lowered its video ad prices. And then in Q4 2016, Twitter added the option for brands to buy its video ads based on impressions, instead of views, which are easier to come by and therefore cheaper to buy.
Twitter’s struggle to attract direct-response advertisers has gotten harder. These advertisers want to buy ads that get people to visit their sites, install their apps, shop in their stores. And Twitter has tried for years to sell them those ads. Twitter has tried, and it has failed.
Twitter’s revenue from direct-response ads declined year over year in Q4, the company said on Thursday without providing the raw numbers. It attributed the segment’s revenue decline to “decreases in our owned-and-operated mobile application download and website click ad formats.”
As a result of its direct-response dilemma, Twitter is reevaluating its direct-response ad products to see which are worth keeping. It has already started the pruning process. In December, it did away with its lead generation ad format that advertisers could use to request people’s names, Twitter handles and email addresses.
Twitter may need to also reassess part of its ad tech business. While its Twitter Audience Platform ad network increased its revenue in Q4, its programmatic ad-buying platform TellApart recorded “significant year-over-year declines in revenue,” according to Twitter. That’s especially bad because Twitter bought TellApart less than two years ago and paid $479 million for the ad-tech firm. Even worse is the outlook for TellApart and its impact on the rest of Twitter’s off-platform ad business. “We expect contributions from non-owned-and-operated advertising revenue to face significant headwinds in 2017 from factors impacting TellApart,” the company said in its letter to shareholders.