Twitter (TWTR +0.00%) might have lost more users in the third quarter, but those sticking around are significantly more valuable.
Although monthly active users declined last quarter due to the company's ongoing work to improve the health of its platform, Twitter saw an increase in daily users of 9% year over year. That growth was still outpaced by the company's 29% year-over-year revenue growth, which was better than anticipated.
This represents the third straight quarter revenue growth outpaced daily active user growth. When asked whether that's sustainable on the earnings call, Twitter's CFO Ned Segal said he expects that trend to continue.
There are three main factors driving revenue growth to be faster than user growth at Twitter, and as long as those factors remain true, investors should expect strong revenue growth compared to user growth.
Image source: Twitter, Copyright Aaron Durand (@everydaydude) for Twitter, Inc.
Getting rid of unvalued users
The biggest factor driving the gap between user growth and revenue growth is Twitter's ongoing work to clean up its platform and remove spammy and malicious accounts. In management's letter to shareholders, it notes there's a significant disparity in accounts that access Twitter exclusively through the web and those that access it via mobile.
"Spammy and suspicious sign-ups tend to be more prevalent on the web (vs. mobile)," management wrote, continuing:
In Q3, we saw a year-over-year decline in DAU that access Twitter only through the web, whereas DAU that access Twitter through the web and mobile or using only mobile apps continued to grow double digits on a year-over-year basis.
Spam accounts don't usually click on ads. If they do, those clicks are worthless as there's no human behind the click. Simply removing more accounts that don't generate revenue for Twitter will create a gap between user growth and revenue growth.
Opportunities to increase user monetization
There are still several opportunities within Twitter's existing product to improve monetization. On the earnings call, CEO Jack Dorsey fielded a question about ads in Twitter's search product, which has practically no advertising today. "We do see a lot of opportunity and potential within search," Dorsey told the analyst. "You should expect us to pay a lot more attention to this going forward."
Segal later added, "There's lots of opportunity to continue to grow the advertising against all of that [content], and new surface areas where we haven't done as much as Jack described ,such as search and explore." That comment suggests that he sees room to increase the ad load for users in the timeline and in video besides just opening up advertising in other parts of the Twitter app.
Increasing ad load can be a major driver of revenue growth. Facebook (FB 3.50%) relied on increasing ad load for several years before reaching the saturation point where user engagement dropped with further increases in advertising. The competing social network has been able to grow revenue through increasing ad prices since then, but it's starting to show signs of slowing revenue growth. Still, Facebook's history of growing ad load and letting prices grow into the increased ad supply could present a similar road map for Twitter.
Self-serve advertising is still small
Lastly, Twitter says it still has a lot of opportunity to grow its self-serve ad platform, which caters more toward local and small and medium-sized businesses. Small and medium-sized businesses make up the majority of advertisers on Facebook, but a "sizable majority" of Twitter's advertising customers are large and mid-tier business.
On the earnings call, Segal said there are "millions of small businesses on Twitter who reach their customers on Twitter in many ways, but might not pay us yet for advertising." The letter to shareholders noted, "We see a large opportunity in self-serve ... with additional product investment needed to fully capitalize on the opportunity to help these businesses reach their customers on Twitter."
The opportunity is there (as it's been for several years), but Twitter has yet to prove it can truly capitalize on it. Small businesses are more likely to concentrate their ad dollars on one or two platforms in order to maximize their limited operational capacity. More often than not, that means bypassing Twitter for bigger platforms like Facebook. But as Twitter continues to improve its self-serve products and generate stronger return on investment for advertisers, it could start to win over smaller businesses.
Opportunities abound
Taking advantage of its opportunities will be key to continuing the trend of strong revenue growth compared to user growth for Twitter. It will lap the biggest impact of its health works sometime next year, at which point it will need to show strong execution on continued improvements in user monetization.
Twitter's challenges with spam and malicious accounts don't make it easy to get an idea of how valuable its real users are or how fast the user base is actually growing. So, the metric isn't nearly as valuable as watching the company's top-line growth. And Twitter has shown substantial progress on that front so far this year.
