Any company that depends on advertising for the bulk of its revenue is in trouble, at least for a while. The novel coronavirus pandemic, and the actions taken to slow its spread, have caused economies around the world to slow down. Certain industries, like travel and restaurants, have been hit exceptionally hard.
Twitter (TWTR +0.00%) finds itself in a unique position. The company's platform is extremely useful during a crisis like this, providing users with information and news in real time. "Twitter's purpose is to serve the public conversation, and in these trying times our work has never been more critical," CEO Jack Dorsey said in a recent press release.
But ultimately, Twitter's business is selling ads, and that business is coming under pressure. With some analysts predicting a 30% drop in U.S. gross domestic product in the second quarter, times are going to be tough for the companies that don't fail outright. And those companies won't be too keen on shelling out for Twitter ads.
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The end of growth and profits
Twitter withdrew its revenue and operating income guidance for the first quarter, as well as its outlook for various metrics for the full year. The impact of the pandemic on the global economy and on advertising demand is highly uncertain and changing rapidly, forcing Twitter to join the long list of companies that have pulled their outlook.
Twitter now expects its first-quarter revenue to be down slightly on a year-over-year basis. Previously, the company had guided for first-quarter revenue between $825 million and $885 million, up nearly 9% at the midpoint.
Twitter also expects to post an operating loss on a GAAP basis during the first quarter, ending its streak of profitability. Some expenses will be reduced due to the disruption from the pandemic, but not enough to fully offset the negative revenue impact.
It only took a few weeks of disruption this month to put a big dent in Twitter's first-quarter results. Its second quarter will likely be much worse as the pandemic runs its course.
User growth amid the chaos
The good news is that people have been flocking to Twitter during the crisis. Monetizable daily active users now sit at 164 million, up 23% from the first quarter of 2019, and up 8% since the end of 2019.
But those users are less monetizable today than they were a few weeks ago, given the trouble Twitter is now having attracting advertising spending. In the short term, Twitter will be spending more to support a larger, more-active user base while pulling in less revenue. That will hurt the bottom line.
In the long run, Twitter will benefit if the new users stick around after the crisis. But there's no guarantee of that. When this is all said and done, Twitter could see its daily active user count drop as people go back to their regular lives.
All social media companies that rely on advertising are going to be hit hard by this crisis. Twitter's expected slight drop in revenue in the first quarter could give way to a much larger drop in the second quarter. The company has plenty of cash on hand to ride out the crisis, but its results are going to look pretty awful for at least the next couple of quarters.
