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The One Somewhat Bright Spot For Embattled Twitter: Advertising

This article is more than 8 years old.

On a day when Twitter's stock got hammered in after-hours trading, it's hard to find a bright spot for the embattled company. But if there is one, it would be advertising.

It's certainly not user growth, which rose only 8 percent from a year ago--the slowest yet, and one of the big reasons shares fell 13 percent in trading after the market close. That was the key takeaway in Twitter's third-quarter results reported today.

And even on the advertising front, the news wasn't all good. In particular, Twitter's revenue guidance for the fourth quarter came in substantially below what analysts had been forecasting, though comments from Chief Financial Officer Anthony Noto on the conference call for analysts implied the company is being conservative about what is customarily a very strong December.

But while Twitter's main focus remains getting more users and getting them to use Twitter more often, the bottom line ultimately is how much advertising revenues Twitter can generate. And few investors were complaining about the 60 percent jump in ad revenues, to $513 million. It would have been 67 percent if not for currency exchange rate changes. "Overall, the existing platform remains sufficiently differentiated and valuable to a sufficiently large group of advertisers," Brian Wieser, an analyst with Pivotal Research Group, wrote in a note to clients. "We think investors should focus on the company’s revenue enhancement initiatives such as the growing use of video units" and other advertising opportunities.

Today, Twitter cited a raft of other promising signs around advertising, among them:

* Advertisers like Twitter's new auto-play video ads. Because Twitter imposed a relatively strict standard for viewability of video ads--100 percent of the ad must be in view for at least three seconds for advertisers to pay for them--marketers saw an 84 percent drop in the cost per view of video ads. Video completions also rose by seven times. Although such reductions might seem to be a negative for Twitter, they get a lot more advertisers to shift budgets from other kinds of advertising online. And it's worth noting that video ads generally command higher prices than other kinds of display ads. "Video in particular this past quarter was a huge driver," said Twitter Chief Operating Officer Adam Bain.

* More video ad inventory is about to open up. Starting this quarter, Twitter will launch Promoted Moments that it started testing in the third quarter. That's a paid ad that looks like and appears in Moments, a feature introduced in early October that lists events rather than an endless list of reverse-chronology tweets from people you follow.

* Twitter now has more than 100,000 active advertisers. That's a result of a recent focus on getting small and medium-sized businesses to advertise. Industrywide, they account for 60 percent of display advertising and a large proportion of search ads as well. But Twitter said it's aiming to get millions of smaller advertisers by approaching the 9 million businesses that are Twitter users.

* New ad targeting options for events are working. Bain cited an example of media buying agency Mindshare seeing a 73 percent to 110 percent lift in ad engagement as a result of the new options.

* Twitter's selling more ads off Twitter.com itself. Some $66 million of Twitter's $515 million in third-quarter ad revenues came from ads placed in other apps through its MoPub mobile ad network. That's up from 8 percent in the second quarter and just 2 percent a year ago. This isn't entirely a positive, though, because Twitter must pay its partner apps and websites for the traffic, so profit margins on these ads are much smaller.

* Overall, ad engagements rose 165 percent thanks to auto-play video and off-Twitter ads. As a result, Noto said, average cost per ad engagement fell 39 percent from a year ago as a result, another attractive development for advertisers.

The fourth quarter also will see a pilot program launching for Twitter's deal with Google announced last April to enable advertisers to buy Twitter's Promoted Tweets from inside Google's dominant DoubleClick display-ad buying system. "There is a set of advertisers that will only spend inside DoubleClick," Bain said. Another pilot ad program, for "dynamic ads retargeting," also will launch this quarter. Not least, Twitter will run ads tonight on the World Series--that one at the top of the page.

For all that, the muted fourth-quarter guidance points to continued challenges. Canaccord Genuity analyst Michael Graham lowered his price target from $40 to $38, saying the weak outlook signals a "lack of visibility on the advertiser front that is troubling given typical seasonal strength." In particular, ad sales on Twitter.com aren't growing as fast as before, and lower-margin off-Twitter sales aren't likely to make up for that.

And Twitter still has a lot to do in order to attract more of its advertisers' budgets. One key thing advertisers want, Bain said, is the ability to measure the results of their advertising, especially inside the Twitter app. To date, most media measurement firms haven't offered much in the way of in-app measurement tools.

Bain thinks better measurement will show the attractiveness of Twitter advertising. He cited Datalogix, which helps marketers tie online advertising to sales in stores, as saying that Twitter's return on ad spending is double that of traditional display ads. That's not a high bar, but if Twitter can capture some of the billions of dollars spent annually on display ads--and that's still a big if--its advertising business could see higher growth in years to come.

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