What Twitter Isn't Telling Us About Its Ad Business

One of the oft-cited claims from Twitter's (TWTR) standout fourth-quarter earnings was that the company's ad products are seeing success because of improved return on investment for advertisers. In its letter to shareholders, the company said its ad product team made changes that resulted in an 18% increase in ROI for advertisers.

Management pointed to a decline in ad prices (cost was down 42% year over year) and an increase in total engagements (up 75% year over year) as a clear indicator that advertisers are seeing better returns on investment.

But that only tells one part of the story. In fact, Twitter saw a greater decline in ad prices in the fourth quarter last year (60%) and an even bigger increase in engagements (150%). But the supposedly improved ROI didn't help Twitter's ad revenue in 2017.

Image source: Twitter, Copyright Marisa Allegra Williams (@marisa) for Twitter, Inc.

Why aren't advertisers showing up?

The biggest problem with the claim that advertisers are seeing better return on investment on Twitter is that they're not acting like it. If the return on investment were so much better, advertisers would have significantly increased their spending on the platform.

But let's take a look at how Twitter's ad revenue growth compares to its closest competitors.

Data source: company financial reports. *Ad revenue growth for owned-and-operated properties only.  

Snap's huge increase in ad revenue can be attributed to a big jump in ad impressions. Alphabet (GOOG 1.25%) (GOOGL 1.27%) subsidiary Google also got a boost from increased engagements, particularly on YouTube and mobile. But while advertisers are spending money on additional engagements on those properties, they're not significantly moving into Twitter despite the huge spike in engagements. That probably means those engagements don't offer great returns compared to engagements on Snapchat or the various Google platforms.

Meanwhile, growth at Facebook was largely driven by an increase in average ad price. The company revealed its average price per ad increased 43% in the fourth quarter during its earnings call. That's a much better sign of strong return on investment for marketers than Twitter's results.

Hidden details

In the letter to shareholders, management said it saw an increase in cost per ad impression (CPM) despite the decline in cost per engagement. That's a strong indication that it's getting better at putting ads in front of the right people, which is further affirmed by management's disclosure that click-through rates on advertisements also increased last quarter.

On the earnings call, CFO Ned Segal told analysts, "We try to think more about CPMs than we do about the inputs."

The only problem is, management isn't giving investors the details about CPM or click-through rates.

Facebook provides an update on cost per impression every quarter. Google uses cost-per-click as a catchall for clicks on Google and impressions on YouTube. Even Snap has provided updates on its ad price declines in recent quarters. And those are all important metrics for investors to track.

But Twitter gives cost per engagement, despite saying that it's not as important as CPM. That means the company doesn't provide the opportunity for investors to track the progress of Twitter's efforts to improve return on investment and gauge the true health of its advertising business.

Remove the mystery

Twitter showed strong results in the fourth quarter with improved ad revenue and finally posting a profit on a GAAP basis. But the strength of its ad business compared to its competitors is still questionable, as management is holding back on giving investors details about the metric the company says it pays the most attention to. The company needs to give investors the ability to monitor its advertising business by being more transparent about its self-proclaimed key metric.