Twitter (TWTR) isn't waiting around until its first-quarter earnings release next month to let investors know how the novel coronavirus has impacted its business. The company on Monday released an update for investors in which it withdrew its original guidance for its first-quarter and full-year financial results.
Twitter was the first major social media and digital advertising company to release an update on the impact of the COVID-19 outbreak. It provides shareholders in other companies in the space some key information about how the pandemic has likely impacted the industry as a whole. Here are the two big takeaways for investors.
Image source: Twitter, Copyright Marisa Allegra Williams (@Marisa) for Twitter, Inc.
Advertising revenue is shrinking
The big update to Twitter's financial metrics is an expectation that revenue will decline slightly year over year this quarter. The previous guidance called for revenue growth between 4.8% and 12.5%.
Management also expects the drop in revenue will result in an operating income loss on a GAAP basis. That would break a streak of 10 straight quarters of positive operating income.
The update suggests many advertisers are pulling back their ad spending on social media. That will likely also impact Facebook (META 0.43%) and Snapchat (SNAP 27.63%).
Twitter's and Snap's advertiser bases are fairly similar -- mostly big-brand advertisers. So, Snap investors should expect to see a similar impact on ad revenue. Snap previously guided for first-quarter revenue between $440 million and $460 million. That number will likely come in considerably lower, but Snap should see strong revenue growth still. If the effects of the coronavirus continue well into the second quarter, however, advertising via Snap may be an area marketers cut back more from because it doesn't offer the same targeting and measurement capabilities as its competitors.
Facebook's advertiser base is considerably broader than Twitter and Snap's. Management says it surpassed 8 million advertisers as of the end of January. The vast majority of those businesses are small and medium-sized businesses, which are struggling to survive amid social-distancing efforts. Facebook could see the number of ad buyers on its platform fall. While Facebook offers broader reach and better targeting than its competitors -- which should bolster ad spending among bigger marketers -- it's unclear whether those factors will be enough to offset the negative impact on smaller advertisers.
But there's good news
While ad revenue is declining, Twitter says the ongoing conversation around COVID-19 is driving meaningful user growth. Management says the platform saw an average of 164 million users per day during the first quarter so far, a 23% increase compared to Q1 last year. Assuming that number holds, it'll be the best result Twitter's ever reported for the metric.
Driving user growth above 20% is one of the key operating metric goals for Twitter CEO Jack Dorsey this year.
Twitter's release suggests that metric is higher than management originally anticipated. It also means other platforms people turn to for news and conversation have likely seen increased engagement as well -- namely, Facebook. An internal Facebook report seen by The New York Times shows traffic from the tech company's flagship platform to other websites grew 50% last week compared to the week before. And news sites are seeing much bigger increases.
The question for Twitter and Facebook is whether the engagement will stick around long-term. Twitter needs to capitalize on the news-driven engagement by highlighting product improvements and continuously making it easier for new users to understand and use the product. Those are efforts it's been working on for some time now.
For Facebook, growing engagement is a chance for it to highlight new product developments as well. The company has built a coronavirus news hub, highlighted at the top of users' News Feeds. That could later become the more general news tab Facebook's been testing with smaller audiences.
If either social media company is successful at keeping users engaged after the pandemic starts to calm down and there's less urgency around consuming new information, they should see the benefits when ad spend starts to ramp back up.
