Why Twitter's 38 Million Zombies Could Impact Ad Revenue

| About: Twitter, Inc. (TWTR)


The Wall Street Journal is reporting that 14% (38 million) of Twitter's Q2 2014 MAUs do not log into the service and never see an ad.

Twitter's active user growth and advertising reach are less than once thought.

I expect ad placements, advertising rates and ad revenue to decline. Twitter is a sell.

Twitter CEO Dick Costolo. Source: bits.blogs.nytimes.com

Twitter, Inc. (NYSE:TWTR) announced Q2 earnings over a week ago and it was the talk of the Street. The company exceeded expectations on revenue growth and key metrics for monthly active user ("MAU"), timeline views and timeline views per MAU. Leading up the earnings announcement I predicted it would be D-Day for Twitter, and that the company would announce deteriorating operating metrics and flat revenue quarter-over-quarter. Below are actual results:

  • MAUs increased 24% annually and 6% sequentially, in line with Q1 2014 results.
  • Timeline views grew by double-digits both annually and sequentially. Timeline views per MAU - a measure of user engagement - was up 4% quarter-over-quarter, yet down 8% from the high water mark from a year earlier.
  • Management implied that Q2's outperformance was driven by new products and not the World Cup.
  • Q2 revenue of $312 million exceeded the $283 million the Street was expecting and the stock shot up from $39 to $46 per share (18% increase) on July 30th.
  • Immediately, questions about the one-time World Cup impact weighed on the shares. The stock fell to $45 per share on July 31st and closed at $43 on August 8th.

Days after the company's Q2 earnings, additional concerns were raised. The Wall Street Journal reported that 14% of MAUs - up from 7% a year ago - never interacted with Twitter or saw an ad. Such "Zombies" connected through hundreds of thousands of third-party applications they have given permission to link to Twitter and were growing faster than the company's active users.

Of the 271 million people counted in Twitter's latest tally, 14% or 37.9 million, never log in directly to Twitter's website or mobile app, the only places where Twitter serves ads. Instead, they connect through hundreds of thousands of third-party applications that the users have given permission to link to Twitter. These are the users who, for example, read tweets on digital-news app Flipboard, share photos on Twitter from Instagram, blast their location from Foursquare, or tweet stories from news sites. But they never open Twitter's mobile app or log in to Twitter.com, so they don't see Twitter's ads.

The following chart illustrates the quarterly change in MAUs, broken down between active and inactive users.

Impact of Twitter Zombies

Zombies Can Keep Active Twitter Users Engaged Or Spur Page Views

Though Zombies never log into Twitter's site or see ads, they do have a presence. According the Wall Street Journal, they read tweets on digital-news app Flipboard, share photos on Twitter via Instagram, tweet stories from news sites or blast their location from Foursquare. In some ways, Zombies help Twitter's active users stay engaged or spur their page views. Whenever LeBron James posts a picture to Twitter via Instagram, thousands react to the picture. Many would not have known about the picture had they not seen it on Twitter. In a similar vein, many people read my Seeking Alpha articles after I post them to Twitter. They do not necessarily go to Seeking Alpha looking for my articles; they simply search my Twitter page. In fact, some people read the articles and then tweet about them, keeping them more engaged.

Presence Of Zombies Mutes Advertisers' Reach

In Q2 2014, Twitter had 271 million users of which 38 million were Zombies. That means only 233 million were active or actually saw an ad on Twitter. In Q1 2013 of the 218 million MAUs, 203 million were active and 15 million (7%) were Zombies. In effect, advertisers were marketing to 38 million fewer users than anticipated in Q1 2014. Going forward, that could reduce the amount of ads they show on Twitter or force them to negotiate lower advertising rates.

Active Users Growing Less, More Engaged Than Once Thought

The following chart attempts to bifurcate Zombies and active users.

  • Though MAUs grew 24% annually, Zombies grew 149% and active users increased 15% from Q2 2013 to Q2 2014.
  • Timeline views per MAU was about 638 and 692 for Q2 2014 and Q2 2013, respectively. However, timeline views per active user for Q2 2014 and Q2 2013 were 742 and 744, respectively.
  • The 638 figure in Q2 2013 was the high water market for Twitter - higher engagement level ever. That said, timeline views for active users for Q2 2014 was practically identical to that of Q2 2013, showing just how engaged users were during that period.
  • Q2 2014 engagement also supports Twitter CEO Dick Costolo's assertion that [i] the World Cup did not impact MAUs; however, [ii] it did amplify user engagement during the quarter.

Revenue Opportunity?

The debate about Zombies has arisen through Twitter's attempts to illustrate the microblogger's impact beyond those who log in once a month. The attempt may have backfired, however, placing emphasis on the inefficiency of clients' ad spend on the service. The company is currently trying to wring more dollars from Zombies by placing ads on third-party sites that pull stories from Twitter. Such third-party revenue may be on the come, but the reduction in ad spend on Zombies may occur in real-time.


The revelation that 14% of Twitter's MAUs never log into the service and never see an ad is damaging to Twitter's growth story. Zombies who post stories, articles or updates onto Twitter may keep the company's active users more engaged or spur more timeline views. However, given that the company's growth and advertising reach are less than once thought, I expect advertising rates, ad placement and advertising revenue to decline. At a $26 billion market capitalization based on Friday's close, Twitter trades at about 23x run-rate revenue of $1.12 billion. That said, Twitter is a sell.

Disclosure: The author is short TWTR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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