What advertisers should know from Twitter’s Q3 2016 earnings call

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Twitter’s third-quarter earnings report and corresponding call with analysts on Thursday covered a lot of things you probably already knew about the company. Its ad revenue continues to grow but slowly. Its monthly audience continues to grow but slowly. It still hasn’t turned a profit. Its ads are getting more engagements, it’s getting less money per engagement.

But there were a few new things were there to learn about Twitter’s business.

Everyday Twitter is winning millions of new users, but every day Twitter is losing almost as many

Twitter execs used to point to major events like the Super Bowl or the U.S. presidential election as top opportunities to attract new users or bring back people who stopped using Twitter. So it would make sense that the Democratic and Republican National Conventions in July, the Summer Olympics in August, and the first U.S. presidential debate in September. Nope

“Did the Olympics and election drive [Twitter’s] acceleration in metrics? What I would say is no,” said Twitter CFO Anthony Noto during Thursday’s earnings call. When it came to the Olympics in particular, “there was less than 100,000 [daily active users] over that 17-day time period using a 7-day average that would get attributed to the Olympic,” he said.

Instead of people primarily registering a Twitter account because of one-off events, they appear to be doing so because of everyday Twitter. Twitter CEO Jack Dorsey said improvements to Twitter’s product were what spurred its audience growth in the third quarter. He specifically credited more relevant notifications pointing to tweets that offer a better peek at the rest of Twitter as well as the algorithmically curated mini-timeline for boosting usage.

But but BUT, for all the “millions” of people who signing up for Twitter every day, there are a bunch of people signing out. Twitter execs didn’t say specifically how many millions of people are registering or resurrecting accounts every day, but let’s put it at a somewhat conservative 2 million. So 2 million new users every day for a 30-day month equals 60 million new monthly active users. That’s awesome. Except Twitter only added 4 million monthly active users in the third quarter.

More daily users means more ads to sell without over-stuffing the service

In the third quarter, 7% more people used Twitter daily than did a year ago. That daily usage increase followed a 5% year-over-year increase in the second quarter and a 3% increase in the first quarter, and it meant that Twitter didn’t have to try to stuff more ads on people’s screens in order to boost its ad revenue. While Twitter’s ad load in Q3 2016 was higher than in Q3 2015, it was lower than the ad load in Q2 2016.

Instead Twitter’s available ad inventory opened up naturally. “We saw tweet impression growth accelerate, and it grew faster than revenue growth,” said Noto.

Since Twitter wasn’t as pressured to shove more ads in individual users’ faces, it could be more selective with that ones it did show them, making those ads more targeted, or relevant, to someone’s interests. Turns out that fewer tailored ads are better than more general ads.

Coinciding with the decline in ad load, Twitter saw a rise in click-through rates across all of its ad formats except one, which Noto didn’t identify but which he said maintained the same click-through rate it recorded in Q2 2016.

This ad load-performance dynamic has the potential to be a really good thing for Twitter’s ad business. Since Q2 2015 Twitter has been making less money each time someone engaged with an ad than it had the year prior. A lot of that had to do with Twitter’s autoplay video ads, in which the view that advertisers pay for are cheaper than clicks; and that had to do with brand advertisers who don’t really care about clicks spending more money on Twitter’s ads than click-conscious performance, or direct-response, marketers. But generally the trend indicated that advertisers as a whole were devaluing Twitter’s inventory, and Twitter was struggling to prove the value of that inventory.

However, if Twitter can continue to show people fewer-but-better ads to individuals and if people continue to respond to those ads, then the average performance of Twitter’s ads should increase. Then if advertisers appreciate the performance increase, Twitter might be able to get them to re-appraise the value of its ads and pay more, or at least not continue to pay less.

That’s a lot of ifs, though. And they assume that Twitter can continue to be choosy with the ads it shows people, which depends on Twitter not being pressured to increase its ad load to artificially increase ad revenue, which depends on more available inventory opening up under the current ad load, which depends on more people using Twitter and more often.

The ad tech side of Twitter’s ad business is struggling

There’s another thing complicating Twitter’s potential to increase its ad revenue without increasing its ad load. Twitter’s ad revenue growth is becoming more dependent on the ads appearing on Twitter at a time when it should actually be becoming less dependent on that owned-and-operated inventory.

Two years ago Twitter started selling ads on other publishers’ properties, creating a supplementary revenue stream that could offset any softness in Twitter’s main revenue stream. Not only would off-Twitter inventory allow Twitter to offer more scale to advertisers, but it could also serve as a release valve for any ad-load pressure on Twitter, like how Facebook has used its ad network as well as Instagram and lately Groups.

But that supplementary revenue stream is the one going soft. Twitter’s revenue from off-Twitter ads declined by 12% year-over-year in the third quarter.

In its letter to shareholders published on Thursday, Twitter chalked up the off-Twitter ad revenue decline to “customer transition to in-house platforms and other solutions during the platform migration process.” Translation: some number of brands and publishers that had been using Twitter’s ad-tech platforms like its Twitter Audience Platform ad network and TellApart automated ad-buying tool have stopped using Twitter’s ad tech.

Twitter said it expects its off-Twitter ad revenue to rebound next year “as we continue to build out our capabilities to drive cost effective performance at scale.” Problem is, Twitter is far from the only digital platform doing that. There’s also Google, Facebook, Verizon-AOL-Yahoo and a host of independent players like AppNexus, Rubicon Project, Index Exchange and MediaMath. And some of those companies are likely the “other solutions” that Twitter’s previous ad-tech customers have flocked to.


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