Why Twitter whiffed — and why it may not get better soon

Key Points
  • Twitter's third-quarter earnings were marred by issues in a product that advertisers use to market mobile apps.
  • The company is no longer targeting ads in certain ways because it was using some user data without permission.
  • With less information about users, some of Twitter's advertisers don't want to pay as much for certain ads, or they might pause or shift spend away.
Twitter's chief financial officer Ned Segal breaks down earnings miss
Twitter's chief financial officer Ned Segal breaks down earnings miss

Twitter blamed its third-quarter earnings whiff on the top and bottom lines Thursday in part on issues with technology that helps advertisers promote mobile apps on the platform. The unexpected miss sent Twitter shares down as much as 20%.

While there were a variety of factors to blame for the lackluster results, the key problem area was Twitter's "Mobile Application Promotion" (MAP) suite of products that help advertisers promote mobile apps on the platform, including app installs, conversions or engagements on apps. Twitter said it inadvertently used information that users wanted to be private as a way of serving ads to them, including their device data.

The problem isn't over, either. Twitter said the issues could continue into 2020, harming its revenue and earnings growth.

So, what's going on?

Here's the breakdown of Twitter's messy ad problems.

What happened this quarter

On its earnings call and shareholder letter, Twitter discussed issues with its "legacy" MAP technology used to help advertisers promote downloads and usage of mobile apps. The company said these bugs impact its ability to target ads and share data with measurement and ad partners.

The company says a second, improved version of MAP is in the works, but it doesn't know when it'll be ready yet.

For example, Twitter gives advertisers the opportunity to target based on the devices they're using to access the platform. They can reach audiences based on a version of their operating system, a specific device, WiFi connectivity, mobile carrier and whether a device is new, which indicates they might be more on the hunt for new apps or services.

Before Twitter lets advertisers target users based on their device data, though, it asks permission.

"That setting wasn't working as expected," Twitter Chief Financial Officer Ned Segal said on Twitter's earnings call. It turns out Twitter was using those device settings "even if people had asked us not to do so," Segal said.

The company said it's no longer using those device settings to target ads when users opt out.

Twitter also asks users if the it can share user data with measurement partners and advertisers. That setting also wasn't working "as expected," Segal said. "We were passing on data which we had not intended to," he added.

As a result, the company said for users that had clicked or viewed mobile apps and subsequently interacted with that app since May 2018, it may have shared certain data with measurement and ad partners even if they didn't have permission from those users.

The company said it's no longer letting advertisers target ads using certain information when users opt out.

"Although we are working on remediation, there isn't remediation yet in place, so the effects of that will continue into Q4," Segal said. "As you can imagine, the remediation would be sharing aggregated data as opposed to personalized data when people have asked us not to share data."

Twitter originally disclosed these problems in a blog post in August, adding the issues were fixed on August 5. But we didn't learn that it would hurt the company's earnings results until now.

Why this impacts revenue

Twitter said the issues around MAP and the changed approach to personalization and data settings resulted in three or more points of impact in the third quarter and that they'll likely result in 4 or more points of reduced year-of-year-growth for total revenue in the fourth quarter.

The reason issues like this can impact revenue has to do with the way advertisers buy ads using this information and supply and demand.

Twitter runs auctions for ads, where advertisers bid against one another to have their ads shown to an audience they want to target. The auction considers both what an advertisers is willing to pay and what Twitter sees as the "quality" of an ad. When an advertisers wins an auction, the ad will be served once to a user on Twitter.

When Twitter offers more insights and data on users, advertisers find it more compelling because they can show more relevant ads to the users they want to reach.

"The more that you know about what somebody might want to see, the more compelling an ad or the more relevant an ad you can show them," Segal said on CNBC's Squawk Box Thursday morning.

If advertisers can't get the specificity they want in order to target a type of ad, they might pay less or they might even pause spending and wait for things to change.

"One of the great things about having an auction-based service is that things adjust naturally," Segal said. "If there's less demand from one type of ad format or fewer inputs for advertisers across different formats, they'll use other inputs, they'll bid the price that makes sense for them, and sometimes things move from one format to another. Other times, advertisers pause and wait for things to change or they take their campaign elsewhere."

The company said cost per ad engagement was down 12%, which it said indicated a shift in media mix from MAP to video ad formats, which have a lower cost per engagement. Twitter said since cost per ad engagement is an output of its ad auction process, it will vary from one period to another based on geographic performance, auction dynamics and the strength of demand for different ad formats and campaign objectives.

Whether recent ad changes have anything to do with this

Beyond the bugs, Twitter appears to be ramping up how many ads it shows to some of its most dedicated users.

In recent weeks, Twitter users have commented on what they've seen as an increased amount of ads on their Twitter feed or various issues with targeting. Twitter typically shows fewer or no ads at all to users with large followings.

A Twitter spokesperson said any increased ad load was due to a switch in strategy.

"Historically, users with high follower counts have seen fewer ads," the statement said. "Recently, we've shifted our approach to showing ads to everyone who uses Twitter and as a result, some will notice an increase in the number of ads they're seeing."