Jack Dorsey took over as Twitter (NYSE:TWTR) CEO at the start of the company's third quarter. Dorsey has been running the company as if he'd be named permanent CEO from the start of his tenure as interim CEO, eventually getting the nod to drop the "interim" from his title from the board at the beginning of October.
During those three months, Dorsey made some extensive changes at Twitter. He restructured the product team, and the communications chief was ousted. Dorsey wasn't afraid to tell it like it was on the company's second-quarter earnings call with analysts, and he's done a better job than his predecessor at articulating a long-term vision for Twitter.
Amidst an announcement of Dorsey's biggest move to date -- the upcoming layoff of up to 336 employees -- Twitter let loose another bit of information that should get investors excited: The company expects to top its original revenue and EBITDA outlooks for the third quarter.
When Twitter released its second-quarter results, CFO Anthony Noto provided a revenue outlook of $545 million to $560 million and EBITDA of $110 million to $115 million. The high end of that revenue estimate represents a 55% increase in sales year over year. Twitter increased revenue 61% year over year during the company's second quarter.
There are several factors that could have led to the improved outlook for third-quarter results.
The TellApart acquisition may have produced better-than-expected results. Noto made a point that the company expects some TellApart partners to stop doing business with the advertising company after Twitter takes control, since they'd be helping a competitor. TellApart specializes in cross-device retargeting, which helps ads convert better. Higher conversion rates mean more money in Twitter's pockets.
Another factor could be a better-than-expected improvement in cost-per-ad engagement. Twitter is still largely focused on increasing total ad engagements through increasing the number of active users, increasing the ad load, and improving targeting. But it has been able to simultaneously increase average cost per ad engagement in each of the past three quarters. Improved targeting or the feedback Twitter provided to advertisers throughout the third quarter could have led to better-than-expected results.
While there were no hints that Twitter's user growth is back on track, outsized growth in the number of people on Twitter would naturally result in better revenue numbers. The company added just 2 million net new users for its app and website last quarter, and investors are hoping for somewhat better results this quarter. Dorsey tamped down expectations for near-term user growth during the second-quarter earnings call, so slow user growth was likely to have been baked into Noto's numbers. If user growth numbers come in above expectations on Oct. 27, investors are sure to pile into the stock again.
An important factor to keep in mind for investors is that Dorsey has only been running the show for a little over three months. Indeed, he can't take much of the credit for the better-than-expected third-quarter results, as much of the groundwork was laid before he took over the company. Even Moments, perhaps the biggest product launch in Twitter's history, was prototyped before Dorsey came back as CEO.
Dorsey has already made some bold moves, including this most recent layoff announcement. The company will incur costs of $15 million to $35 million in severance and restructuring costs related to the layoffs, but Dorsey believes it will enable Twitter to invest more in the growth of the company and focus on the projects that will provide that growth.
But one quarter isn't enough for a CEO to set a company straight. While Dorsey has done a job commendable enough to earn the position permanently, there's still a way to go before he's proved that Twitter is on track to achieve his long-term vision for the company. At least, however, he knows where he is and where he wants to go, and he seems to have ideas on how to get there.
Stay tuned for Twitter's upcoming earnings release on Oct. 27 for more color into how the company beat expectations and what to expect going forward.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.