After activist investing firm Elliott Management built a 4% stake in Twitter (NYSE:TWTR), it called for CEO Jack Dorsey to step down from his current position. Dorsey and Elliott struck a deal, however, that Dorsey could stay if he could grow Twitter's monetizable daily active users (mDAU) by 20% and produce accelerating revenue growth. The key goal was to take a greater share of the digital advertising market.

Twitter achieved the former goal already, reaching 186 million mDAU as of the end of June, up from 152 million at the end of last year. User growth has been fueled by interest in COVID-19 and the Black Lives Matter movement, among other current events. 

But Twitter's struggled to keep pace with the rest of the industry in growing its digital ad sales. In fact, ad sales declined 23% last quarter. By comparison, Snap (NYSE:SNAP) reported an increase in revenue of 17% last quarter. Facebook (NASDAQ:FB) provided an update in May that April ad sales were roughly flat year over year. And digital ad spend has reportedly improved in May and June. 

Can the company bounce back in the second half of the year?

A person holding a phone as they walk past a sign with the Twitter logo displayed in black and white.

Image source: Twitter, Image copyright Atsushi Nakamichi for Twitter, Inc.

The biggest factor weighing down Twitter's results

Twitter stumbled on a big problem during the third quarter last year. It was collecting certain data from users even when they didn't opt to share that information. Twitter took action to correct the bug soon after discovering it, but it resulted in a lost ability to target ads and share measurement data with ad partners. The biggest impact was on its Mobile Application Promotion (or MAP) product.

As a result of the change, the value of Twitter's ads fell, and marketers weren't willing to spend as much. Meanwhile, Snap was building out its own direct response ad products, and marketers were willing to give it a try. Snap managed to grow revenue faster in the third quarter through the first quarter than it did the year before. 

Twitter has nearly lapped the issue from last year, and it's testing a new MAP product. It also rebuilt its ad server, which will allow it to develop new ad products more quickly and get marketers on board faster. It should be able to start accelerating revenue growth again in the latter half of the year if it can execute.

Twitter still has to improve revenue durability

Revenue durability has been a focus for Twitter. Management shared how many brands pulled back their ad spend from Twitter as conversations around the murder of George Floyd and the Black Lives Matter movement grew on Twitter. Factors that are outside of Twitter's control like that can have a bigger impact on the company than its competitors due to its heavy reliance on brand advertising.

Facebook has managed to maintain revenue growth despite constant controversy on and about its platforms due to the fact that the vast majority of its revenue comes from direct response advertisements from small businesses, not brand advertisements. Even Snap shared that the majority of its ad revenue now comes from direct response ads during its second-quarter earnings call.

Improving direct response advertising is a priority for Twitter, but it's still well behind the competition. The new ad server and continued improvements to MAP might help, but winning smaller direct response advertisers in this uncertain environment may be tough.

Not giving any hints

During the second-quarter earnings call, Twitter's management didn't instill confidence that revenue would start growing again in the third quarter. CFO Ned Segal refused to answer a question about advertising trends in July so far. "We're here to talk about Q2," he said, "so I'll focus on what we saw in the last quarter."

In the first few weeks of July, Snap shared details about ad revenue, which was up over 30% compared to the same period last year. Management also warned investors that it expects that growth rate to come down over the next two months.

Denying even a qualitative response to the question of how ad revenue is trending in July is a bit concerning. 

Twitter's strong user growth, rebuilt ad server, and successful early pilots of its new MAP products give the tech company a strong foundation to accelerate growth in the second half of the year. But management isn't instilling confidence that its growth can outpace the competition's.