Despite its struggles to compete with other social networks, Twitter (TWTR +0.00%) has had a surprisingly strong 2017. It regularly surpassed earnings expectations, management is about to make good on its plans to produce a profit in the fourth quarter, and the stock produced a greater-than-50% return year to date.
2018 could be another year of resetting for Twitter as it works to get revenue moving in the right direction again following a year of declines. Those profits Twitter expects in the fourth quarter might not show up again until late 2018 now that management's cost-cutting efforts are complete. Here's what investors should expect over the next year from Twitter.
Image source: Twitter, Copyright Marisa Allegra Williams (@marisa) for Twitter, Inc.
No more cost-cutting
Twitter CFO Ned Seagal told investors management has no more room to cut costs going forward.
Twitter slashed its sales and research and development teams over the last year or so, and started focusing on its most profitable products. That resulted in a decline in revenue in each of Twitter's first three quarters for the year, but expenses fell even faster. The high end of management's fourth-quarter outlook indicates it's on track to produce a profit in the fourth quarter.
Starting next year, Twitter will invest selectively in new products and opportunities. Specifically, it's going to ramp up its sales team again to promote its growing daily active user (DAU) count and its improving return on investment for its advertising. Twitter is also expanding its data-licensing business, targeting small developers.
Without any additional room to cut costs, Twitter's only option to maintain its planned profitability is to start growing revenue again.
Revenue growth will be backloaded on the year
To the extent Twitter grows its revenue base next year (analysts are expecting about 6% growth in 2018), most of it (if not all) will come in the second half of the year.
Earlier this year, Twitter shut down some less popular ad products including its ad-retargeting platform TellApart. Twitter began to shut down TellApart near the end of the second quarter this year, which will result in tougher comparable sales for Twitter in the first half of next year. Seagal said investors can expect about $20 million in negative impact in both the first and second quarters from the decision on TellApart.
Considering the fourth quarter is Twitter's strongest period, it's likely Twitter will once again show a loss through the first half of the year at least. The company's ability to become consistently profitable will depend on how well its strategic investments pay off.
Strategic investments
There are a few areas Twitter will invest in 2018.
- Video: COO Anthony Noto wants Twitter to stream live video 24/7. While Twitter doesn't invest much in video upfront -- it operates using a revenue share model -- it will need to invest in video delivery, video ad formats, and promoting video to users. Video is already Twitter's largest ad format, and it's only going to get bigger in 2018.
- Marketing: Now that Twitter has shown consistent DAU growth over the last six quarters or so and improving ad ROI, management says it has a new story to tell marketers. It's going to invest in a sales team to convince marketers to spend a larger portion of their ad budgets on Twitter. It's also investing in a new ad product for small businesses, where Twitter will manage ad campaigns for a flat monthly fee.
- Product improvements: Twitter has consistently made product improvements over the past couple years in an effort to make Twitter more accessible and less prone to abuse. The team will continue to roll out new features to encourage further engagement on the platform and drive daily active user growth.
Modest expectations
Personally, I have modest expectations for Twitter after a not-as-bad-as-feared 2017. The company appears to be moving in the right direction, but it's still lagging well behind the competition in digital advertising. In a market dominated by just two companies, Twitter is left competing for scraps, and it still doesn't have the most compelling platform based on any of the metrics advertisers are looking for, like ad ROI or audience engagement.
