Twitter slashes jobs, Vine as it seeks profits
SAN FRANCISCO — Twitter appeased Wall Street by restructuring to chart a course to profitability and by showing early signs its business is perking up.
User growth and revenue climbed more than analysts expected as the struggling social media company announced 350 job cuts, or about 9% of its workforce. It also said it would shutter mobile video app Vine.
"The current quarter results were ahead of expectations and user figures provided some promising elements as well," said Pivotal Research Group analyst Brian Wieser, who is maintaining his price target of $26 and a buy recommendation on the stock.
The effort to right the company comes as potential buyers such as Google, Salesforce and Walt Disney declined to pursue an acquisition. The lack of interest has cranked up pressure on Twitter's embattled management.
Jack Dorsey, the Twitter chief executive who returned to the helm last year to reinvigorate growth, declined to comment on the takeover discussions, saying only that Twitter's board is committed to "maximizing long-term shareholder value."
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"We see a significant opportunity to increase growth as we continue to improve the core service," Dorsey said in a statement. "We have a clear plan, and we’re making the necessary changes to ensure Twitter is positioned for long-term growth."
That said, analysts say a takeover could still be in the cards.
"We see Twitter aggressively experimenting with its product, and that’s the right thing to do," said RBC Capital Markets analyst Mark Mahaney. "But we continue to believe an M&A exit is plausible, just not likely in the near term nor near current valuation."
The service known for its 140-character messages has struggled to broaden its mainstream appeal and bring in advertising dollars while the fortunes of established competitors such as Facebook have soared and newer entrants such as Snapchat and Facebook-owned Instagram have quickly gained traction. Snapchat, the messaging service run by Los Angeles company Snap, is planning an initial public offering in 2017 that could raise billions of dollars and bring a heady valuation of up to $40 billion.
Twitter kills Vine three years after launch
Twitter, on the other hand, is being forced to retrench, discontinuing its Vine mobile app and launching its second round of cuts after it let go 8% of its workforce a year ago. The money-losing company said it's targeting profitability in 2017.
Layoffs will come from sales, marketing, and partnerships, leading to what chief financial officer Anthony Noto called a "meaningful change" in margins.
"Once a company gets to our scale and growth, it is appropriate to work toward profitability," Noto said.
Sales and marketing costs, about 30% of revenue, could be reduced to between 22% and 26%, he said.
Twitter said it expects the restructuring to rack up cash costs of $10 million to $20 million, in addition to stock-based compensation expense of $5 million to $10 million. Most of the charges would come in the fourth quarter, Twitter said.
"Twitter is overstaffed for the revenue it generates, relatively speaking. It has far more people working on a far smaller and less complex product than Facebook does. So some cuts make sense," said Jan Dawson, chief analyst with Jackdaw Research. "But it makes you worry about their ability to achieve their goals around improving the product, cutting down on abuse, and ultimately driving growth."
Executives say increasing daily usage and engagement on Twitter were boosted by live-streamed broadcasts of NFL games and the presidential election debates. Twitter did not say how many daily active users it has.
The number of people who use the service at least once a month increased 1.7% to 317 million from the second quarter. That significantly lags Facebook, which has 1.71 billion users, and Instagram, which has 500 million users.
Twitter executives are betting on live-streaming video, not just to bring more users to the service, but to lift advertising revenue, too. Morgan Stanley estimated the NFL deal would generate $11 million in additional ad revenue in the fourth quarter.
Third-quarter revenue rose 9% to $616 million, marking the smallest revenue gain since Twitter went public three years ago and the ninth straight quarter of declining growth but still beating analysts' expectations of $605.5 million.
Advertising revenue accounted for $545 million, up 6% year-over-year. Twitter warned in July that its advertising business could flatten or even decline in the third quarter.
Mahaney said he's not convinced "a substantial number of advertisers will commit meaningful dollars to Twitter."
"Twitter believes it can command premium ad pricing, but its dramatic ad revenue deceleration doesn’t support that," Mahaney wrote in a research note.
Twitter posted a net loss of $103 million in the third quarter, less than the $131.7 million, or 20 cents a share, a year ago.
Twitter did not give revenue guidance.
"Given that growth has been hard to come by, cost cutting seems to be the best route to profitability," Dawson said. "But, of course, cuts can have their own impact on revenues too, as Twitter suggested in refusing to give revenue guidance."
Twitter shares, which have been on a rollercoaster ride in recent weeks from takeover speculation, fell slightly on Thursday.
Last week, Salesforce.com CEO Marc Benioff confirmed he was backing away from a deal because "it wasn't the right fit for us."
A report from Bloomberg says Disney bowed out over concerns with how Twitter handles harassment and abuse on its service.
In a letter to shareholders issued with earnings results Thursday, Twitter says it will share "meaningful updates" next month to the service's safety policy and enforcement strategy.