Twitter layoffs expected to headline quarterly results

SAN FRANCISCO — Just three years ago, Twitter was heralded as the next big social-media company to rival Facebook, its shares soaring 73% in its public-market debut.

These days, it's better known on Wall Street for stirring drama worthy of a TV soap opera. Management turmoil and turnover. Scrapped business strategies. Product delays. Stalled user and revenue growth.

Jack Dorsey, the founder charged with righting the company, is the latest in a long line of chief executives to discover just how tough it is to fix Twitter. Even an effort to sell the companyrecently flopped.

As Facebook, Instagram and Snapchat (on the verge of its own hotly anticipated initial public offering) attract the world's attention and advertising dollars, analysts have begun to lump Twitter with Yahoo as a "struggling asset."

Coming off a particularly tumultuous period, Dorsey will bring investors up to date Thursday when Twitter is scheduled to report third-quarter financial results. The announcement itself drew controversy due to a last-minute decision to announce results before the markets open, rather than after they close when two tech giants — Alphabet and Amazon.com — are scheduled to release earnings.

REVENUE FORECAST: Twitter is expected to report third-quarter revenue of $605.5 million, up from $569 million in the year ago-period, representing continued deceleration. In the second quarter, revenue rose 20% to $602 million, the smallest gain and eighth straight period of declining growth. Advertising revenue from NFL Thursday Night Football streaming isn't expected to make much of a contribution. Morgan Stanley's Brian Nowak estimates about $11 million in additional ad revenue. "We expect to see continued deceleration over time," said RBC Capital Markets analyst Mark Mahaney.

EARNINGS FORECAST: Twitter, which continues to lose money, is expected to report earnings per share of nine cents, excluding certain expenses. Including those expenses, such as stock-based compensation costs, the company is expected to post a loss of 16 cents.

FLAT OR ANEMIC USER GROWTH: Also expected to disappoint: the number of people who log into the service at least once per month. Monthly active users will stay flat or grow only slightly, analysts say. Last month monthly active users grew 1% to 313 million. Mahaney expects 3% year-over-year growth in the third quarter for a total of 316 million.  He expects Twitter's usage in the U.S. to remain flat as it has at 65 million to 66 million for six straight quarters.

LAYOFFS LOOMING: Twitter is expected to announce it will slash hundreds of jobs, 9% of its workforce, just as it did a year ago. Wedbush Securities analyst Michael Pachter says this second round of cuts would "put the cost structure more in line with its growth trajectory."

SunTrust Robinson Humphrey analyst Robert Peck estimates the cuts could save Twitter $50 million to $100 million a year.

"Twitter's cost structure was originally built to grow into a much larger user base, but with user growth stagnating we feel the company likely needs to reduce excess costs," Peck wrote in a research note. "We believe Twitter could reduce costs while preserving R&D innovation and investments."

FULL-TIME CEO: Peck says this is the most common question he fields from investors: Does Twitter need a full-time CEO?

Dorsey says he has no trouble running both companies he co-founded, Twitter and Square. During a panel discussion moderated by CNBC this week in Las Vegas, Dorsey said: "I don't really consider it a shift. I want to work on things that people interact with every single day, and that empower them in particular ways, and finance and commerce is one such [way] and communication is another."

Some analysts disagree, given Twitter's considerable challenges.

"We believe it is imperative for Mr. Dorsey to come on board full-time given his sway as a founder, and if he’s not willing to do so, then we argue Twitter needs to find someone else who will,” James Cakmak, an analyst at Monness, Crespi, Hardt, wrote in a research note.

STAYING INDEPENDENT: Market gossip that Walt Disney might still be in the running to bid for Twitter drove up shares this week. But don't expect Twitter management to discuss it, RBC Capital Markets' Mahaney said.

It's widely expected that Twitter will continue to talk up its plans to chart an independent course after potential bidders, Google, Salesforce, Disney, all vanished.

Analysts are concerned about the mood inside the company. In the second half of 2015 and first half of 2016, Twitter experienced "elevated" management turnover, Peck says.

"This level of turnover can be disruptive to morale and product execution," he said. "Looking forward, as we think about the lack of traction on recent product initiatives, potential cost cuts, and the competitive Internet landscape, we are concerned there could be another wave of defections."

Pachter says he's concerned that management appears "unfocused and complacent."

"Until Twitter is focused on attracting new users, driving increased use by its existing users, and demonstrating its value proposition to people who don't use the service, we expect it to grow very slowly," he wrote.

Former Twitter board member Bijan Sabet is more bullish on Twitter's prospects. "At this point, I think it should just be heads down and forget the critics," Sabet said on BloombergTV's "Bloomberg Markets" Wednesday.

ALL EYES ON Q4: Investors, who are expecting more of the same from Twitter in the third quarter, are already looking ahead to the fourth quarter.

Peck is calling the fourth quarter "make or break" for Twitter.  "We think fourth-quarter results are critical in demonstrating any potential efficacy of the current strategy," he wrote. "If current trends continue, we think M&A is inevitable, albeit potentially at lower prices and not until 2017."

Without a bidder for the company, Twitter shares are expected to drift lower. One analyst is making the bear case for $7. Twitter currently trades at about $17.