It's been a rough couple of quarters for Twitter (NYSE:TWTR). After reporting results that failed to meet its own forecast in the first quarter, CEO Dick Costolo stepped down. And despite results in line with expectations in the second quarter, comments from then-interim CEO Jack Dorsey and CFO Anthony Noto about the potential for user growth in the near future (or lack thereof) sent the stock plummeting. (Dorsey was named to the CEO post, no longer interim, on Sept. 30.)
But Twitter still has lots of potential, even if it's not growing users as fast as analysts want. Noto spoke with analysts at the Deutsche Bank 2015 Technology Brokers Conference in mid-September, and talked about several topics. Notably, he talked about three big areas the company is investing in with regard to advertising.
The majority of Twitter's ad revenue still comes from direct sales to big brand advertisers. Comparatively, Google and Facebook derive the majority of their ad revenue from direct-response advertisements. The key difference is that those two are significantly better at targeting advertisements to users than Twitter. That makes it more likely that each impression served will convert into a click.
A recent survey from Cowen and Company found that more than half of Twitter users thought the ads they saw were "a poor fit" or not really relevant.
In its last update, Twitter said that it has just 100,000 active advertisers. Facebook, comparatively, has over 2 million, and Google is estimated to have 4 million. Twitter is clearly missing out on the long-tail of small advertisers because of its relatively poor ad targeting capabilities.
To that end, Twitter is investing in ad targeting. It's hiring artificial intelligence researchers to develop algorithms to better understand the content its users are reading and writing as well as how they respond to the advertisements they see. The company purchased Whetlab to help out with its existing AI team. Additionally, Twitter bought TellApart, which specializes in cross-device retargeting.
The way an ad looks, how words are phrased, and the message an advertiser conveys can all impact how well an ad converts. To that end, Twitter hasn't done much to help advertisers figure out what drives the most clicks for their ads.
Facebook, on the other and, has continued to push its own analytics tools. It Atlas ad platform allows advertisers to see how an ad impacts sales both online and in stores. Earlier this month, the company updated its Conversion Lift tools to help advertisers optimize their ad campaigns.
Twitter doesn't have any similar tools, and Noto thinks that's a real opportunity for the company. "There is a lot more we can do on the creative side," he told analysts at the conference, "in being able to iterate with real tools, not mere processes."
Helping advertisers easily figure out what works and what doesn't will enable Twitter to increase conversions and make the most of its ad impressions.
Return on investment
Another key to attracting more direct-response advertisers is offering accurate return on investment measurements. To that end, Twitter announced a partnership with Google's DoubleClick Bid Manager this summer, which will go into effect by early 2016 if not the end of the year.
The partnership with Google will open up more ad dollars from advertisers that refuse to advertise on platforms without third-party analytics. Additionally, it will give existing advertisers the opportunity to see the real impact their Twitter advertisements are having on sales. Noto gave the example of an ad that doesn't immediately convert, but increases product awareness and converts three days later. Currently, Twitter gets no credit for that sale, but DoubleClick will provide a wider view of how that sale was created, giving some of the credit to the Twitter ad.
Noto believes that third-party attribution will show advertisers the true value of their advertisements on Twitter, which will have a positive impact on average ad prices. Combined with the company's other areas of investment in advertising, Twitter may be able to maintain its high advertising revenue growth rate despite a huge slowdown in user growth.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Facebook, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.