Twitter CEO’s credibility at risk after stock rout

SAN FRANCISCO — Mr Dick Costolo’s credibility is on the line.

Twitter’s chief executive failed to foresee a slowdown that forced the social media company to miss analysts’ first-quarter revenue estimates and cut its sales forecast for this year, and the stock slumped 18 per cent.

While this is not 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 user additions this month, analysts are asking whether Twitter’s potential market is limited and about its management’s ability to attract more users and advertisers.

“Management will again have to address credibility concerns,” Mr Mark Mahaney, an analyst at RBC Capital Markets, wrote in a note to investors. The quarter’s performance “raises the question of how much visibility into advertiser and consumer demand for its offerings Twitter really has”, he said.

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.

Revenue is a new concern for investors, with Twitter forecasting sales of US$470 million (S$622 million) to US$485 million in the second quarter, short of the average estimate of US$538 million. Full-year revenue guidance was cut to US$2.17 billion to US$2.27 billion, from the previous range of US$2.3 billion to US$2.35 billion.

Mr Costolo said he was disappointed with 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 Mr 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.”

Mr Costolo has worked to deliver on promises to introduce products designed to attract more users and marketers. At a seven-hour analyst presentation in November, he detailed the things Twitter was going to accomplish with new features, and by the time of the fourth-quarter earnings call, all of them had started rolling out.

As Twitter has evolved, Mr Costolo has also sought to explain changes in how the company’s performance should be measured. He usually has a positive business reason for why a number went down. For example, after a slump in timeline views, a metric that Twitter touted as a key figure before its November 2013 initial public offering, Mr Costolo said product improvements had made clicks less necessary, deflating the importance of a number that was supposed to measure user interest. That figure no longer appears on earnings releases, and Twitter has not replaced it with a new metric to track engagement.

As Twitter’s monthly active user growth slowed, Mr Costolo responded by saying that it did not show the whole picture, because 500 million people also visit Twitter’s website each month without logging in.

Now, Twitter has said it has decided to tweak the metric, making historical comparisons more difficult. The company is adding to the total user count people who access Twitter and send tweets via SMS, or text messaging, in emerging markets, reasoning that they will one day become regular users when upgrading their phones. The change, which will start this quarter, would have added six million more people to the prior period’s total count.

All told, the earnings miss and changing benchmarks bring into question whether Twitter can sustain revenue growth, after posting numbers that almost doubled every quarter. While the company said the changes will help bring in higher-quality ads, Wall Street may not buy it.

“Now you have risks on two fronts,” Mr Cakmak said. “You have the user-growth concerns, and now, we have to worry about monetisation.”

BLOOMBERG