Twitter Inc. (TWTR) Q1 2016 Earnings: Jack Dorsey Says Algorithmic Timeline Is Working Despite Slower Advertising Growth

Twitter Inc. shares dropped more than 10 percent in after-hours trading Tuesday after the company reported lower-than-expected revenue due to slower spending by advertisers.

Twitter posted revenue of $595 million, a 36 percent increase year over year while analysts had pegged a 39 percent increase from $436 million in the first quarter of 2015. “Brand marketers did not increase spend as quickly as expected in the first quarter,” the company said in a filing.

But Twitter (NYSE: TWTR) did report modest user growth, something that has eluded the company for the better part of a year. It posted 310 million monthly active users, up from 305 million in the previous quarter. That’s a reversal from the prior quarter when it reported a drop in active users. The company is no longer including SMS Fast Followers, the term for people who use Twitter exclusively by text message.

The San Francisco company reported a loss of $103 million, down 36 percent from $162 million in the year-earlier period. That figure beat analysts’ estimates of a $120 million loss, but it failed to pull in the expected amount of revenue.

CEO Jack Dorsey said his company is making strides in new products, specifically citing the algorithmic timeline and live video. “We made a lot of progress on product innovation this quarter, particularly with live video and our refined timeline, and people love it — with less than 2 percent opting out. We remain focused on improving our service to make it fast, simple and easy to use,” he said in a statement.

While the stock price dropped for Twitter in the hours after the announcement at less than $16 per share, some investors say they regained some confidence given the new user growth. Success “is not going to happen overnight. [Dorsey’s] going to have to work through these issues. It’s going to take a few cycles to figure it out,” said Sander Read, CEO of Lyons Wealth Management.

The revenue decline came from a stagnation in brand marketers’ spending, according to Twitter’s filing. The majority of Twitter’s revenue is coming from mobile, but it fails to beat competitor Facebook for attracting ad dollars. “If someone says, ‘Where should I spend my money?’ I have a hard time not saying Facebook. The only fear that I have is more that they’re in control of too much,” Ian Schafer, CEO of digital agency Deep Focus, told International Business Times.

For Twitter, mobile ads account for 88 percent of ad revenue. International revenue is up 39 percent year over year while U.S. revenue increased by 35 percent.

Twitter is working to improve its ads and is going after TV ad dollars, not unlike Facebook. A major step toward that, which Twitter repeatedly highlighted in its call with investors, is its non-exclusive deal with the National Football League to stream Thursday Night Football games. Twitter will add demographic targeting and validation as well as gross rating point (GRP) targeting and reporting by the NFL season in the fall.

With those new measuring tools, Twitter is pitching its potential for more dollars from marketers' video budgets. "We believe we can tap into incremental video budgets," said Chief Operating Officer Adam Bain. He announced that one major partner has already signed for its NFL streams and attributed its video budget, not its social media spending, to the deal. Twitter will have a subset of the ad inventory for pre-game, in-game and post-game stream.

Other sports leagues may be interested in more streaming opportunities with the social network. Dorsey said "almost every league in the world contacted" his company to ask about new experiences after Twitter and the NFL announced their deal.

But streaming the NFL games doesn't mean Twitter will be getting more users. Watching the games will be the same experience for a logged-in user, a logged-out user, or someone who is not a Twitter user, noted Chief Financial Officer Anthony Noto.

Twitter is working on improving the new user onboarding experience. Less than 2 percent of Twitter users have opted out of the new algorithmic timeline. There's been a 48 percent increase in follows and 56 percent increase in mutual follows for users overall, Dorsey said.

Even if Twitter is slowly adding more users, investors are concerned that these views are not actually translating to sales. “The way that Twitter makes money is by ads, so it doesn’t matter the number of active users. It matters how many active users engage with their advertisements. They haven’t been able to do that,” said Adam Sarhan, CEO of Sarhan Capital.

Twitter has been building out its other revenue sources. The company’s data licensing business brought in $64 million last quarter, up 34 percent from the year-ago quarter. Twitter hired a managing director for its operations in China, where it hopes to grow its business with Chinese companies. Twitter is also pitching its data offerings in Japan, the Associated Press reported.

There's a long way to go. The company posted guidance for its second-quarter, posting revenues between $590 million and $610 million, which is far less than the $678 million estimation from analysts polled by Thomson Reuters.

"Twitter’s in a precarious situation because they’re faced with an uphill battle from both investors and users. Investors have to ask, ‘Why should I buy the stock when it’s gone nowhere but south for over a year?’ Users have to ask, ‘Why should I use Twitter when it’s a very crowded space and there are many other alternatives?'" said Matthew Tuttle, CEO of Tuttle Tactical Management.