Twitter (TWTR) has been trying to break away from a storyline that's dogged it nearly from Day 1: Monthly active user (MAU) growth plateaued very shortly after the company went public in 2013, which has been a key investor concern ever since.
Twitter once tried to downplay the concern by adding in "SMS Fast Followers," users predominantly located in emerging markets that exclusively accessed the service via SMS text messages, although the company could not monetize these users in any meaningful fashion. Fortunately, Twitter stopped measuring SMS Fast Followers, presumably because it realized that it was a useless metric to begin with.
Image source: Getty Images.
Enter engagement
More recently, Twitter has been trying to emphasize gains in engagement, which is generally measured among social networks as the ratio of daily active users (DAUs) to MAUs. Management was quick to point out that DAUs jumped 11% last quarter, accelerating a trend of DAU growth throughout 2016.
Image source: Twitter Q4 2016 earnings presentation.
That's all fine and dandy, but investors aren't buying it for two important reasons.
Twitter is playing DAUs too close to the chest
Highlighting percentage gains is specious absent absolute figures, and Twitter continues to withhold the total number of DAUs in absolute terms. It's easier to generate higher growth rates off smaller bases, and the potentially small size of Twitter's DAU base is what's troubling. Investors simply don't have a clear picture of how big or small the DAU base is, or the ratio of DAUs/MAUs. Analysts even explicitly asked for a precise figure, and CFO/COO Anthony Noto declined to provide one:
As we think about DAUs and the other metrics that you mentioned, we re-evaluate what metrics we're going to share with you from a disclosure standpoint at the end of each year. We've obviously moved down the path of reporting more than just MAUs. We're now providing you with DAU growth as well as a growth trend in our engagement metrics. We think the growth rates are the thing that we're most comfortable with sharing at this time, and we're going to stick with that.
Presumably, Twitter is afraid of unflattering comparisons with rivals that do disclose these figures. But by selectively withholding this information from investors, Twitter's attempts to shift the narrative fall flat.
Increased engagement isn't helping ad sales
The underlying financial reason why increased engagement matters is the prospect of that translating into more ad revenue. Except it's not.
Data source: SEC filings. Chart by author.
There's a stark contrast between ad revenue growth and DAU growth, a divergence that investors cannot ignore. Simply put, the quarter that saw the slowest ad revenue growth also saw the highest DAU growth, which calls into question Twitter's ability to monetize that increased engagement.
Until Twitter starts disclosing DAU figures or better monetizing higher engagement, the engagement narrative is going to fall on deaf ears.
