July 27, 2018 / 11:36 AM / 3 months ago

CORRECTED-UPDATE 4-Twitter to prioritize fixing platform over user growth, shares plunge

(Corrects paragraph 7 to show adjusted EBITDA margin forecast is for the third quarter not the full year)

* Social media firms under pressure to control content

* Monthly users fell 1 million quarter-on-quarter

* Twitter says gained daily users over a year ago

* Shares down 17 pct in morning trading

By Meredith Mazzilli

NEW YORK, July 27 (Reuters) - Twitter Inc on Friday reported fewer monthly active users than analysts expected and warned the closely-watched figure could keep falling as it deletes phony accounts, sending shares tumbling.

The company said the work it was doing to clean up Twitter by purging automated and spam accounts had some impact on user metrics in the second quarter, and that it was deciding to prioritize improving suspicious accounts and reducing hate speech and other abusive content over projects that could attract more users.

Twitter, like bigger rival Facebook Inc, has been under pressure from regulators in several countries to weed out hate speech, abusive content and misinformation, better protect user data and boost transparency on political ad spending.

The user outlook came as Twitter reported higher-than-expected revenue thanks to the FIFA World Cup, video ads and booming international ad revenue. Twitter also earns revenue from licensing its data.

The quarter marked the first time overseas revenue contributed the majority of Twitter’s ad sales.

The World Cup brought in $30 million of revenue in the quarter. But Chief Financial Office Ned Segal told analysts that the event, which carried into the third quarter, raked in less revenue in its second two weeks.

Twitter raised its 2018 capital spending forecast and estimated third-quarter adjusted EBITDA margin of 33 percent to 34 percent, suggesting worsening margins.

Twitter shares tumbled 17 percent to $36.24 in morning trading.

The drop echoed that of Facebook on Thursday, when its shares ended down nearly 19 percent after the company said spending to improve privacy and slower user growth in big markets would hit margins for years.

The reaction in Twitter shares to the user outlook may be overblown, some analysts said.

Twitter executives answered questions on the earnings call by saying the steps to improve user and advertiser experience would be a long-term boost for the company, and that there had been no revenue hit.

FEWER MONTHLY ACTIVE USERS

Monthly active users fell by 1 million in the second quarter from the first to 335 million. Analysts expected a gain of 1 million users, and the results could harden concerns Twitter lacks a clear strategy to fix platform problems and grow usage and revenue together.

“We are making active decisions to prioritize health initiatives over near-term product improvements that may drive more usage of Twitter as a daily utility,” the company said in a shareholder letter. Twitter refers to platform “health” when describing the spam and other issues.

Twitter said the decline in the third quarter would be in the mid-single-digit millions, suggesting a sequential decline to around 330 million users. Analysts had expected 340 million monthly active users in the third quarter, according to Thomson Reuters I/B/E/S.

Chief Executive Jack Dorsey said in a statement that daily users grew 11 percent compared to a year ago, showing that addressing “problem behaviors” was turning the service into a daily utility.

The company does not disclose daily users.

Twitter’s relations with advertisers have been strained by concerns about phony accounts bought by users to boost their following.

Revenue of $711 million rose 24 percent from last year and exceeded the average estimate of $696 million.

Profit was $100 million, with a $42 million boost due to a tax benefit.

The non-GAAP earnings were 17 cents per share, in-line with estimates.

“Investors are overreacting to (monthly active user) trends,” BTIG analyst Richard Greenfield said about the share fall. “This is an identical overreaction that we saw in Q2 last year. Last year’s Q2 created an incredible buying opportunity in the stock.”

Twitter said it lost some users due to the introduction of the General Data Protection Regulation in Europe in May but did not note any revenue impact.

Twitter also saw usage fall after saying it would not subsidize messaging fees for users who accessed its app through text messages.

The new capital expenditures forecast is for between $450 million and $500 million, up from $375 million to $450 million, as Twitter expands and upgrades the computer infrastructure underlying its service. The company again flagged its push to increase headcount this year.

Costs related to licensing video and automated analysis of user data increased overall expenses 10 percent compared with a year ago.

Twitter has said increased video programming, including news shows and live sports, and investing in technology that automatically surfaces interesting content with limited user intervention should make the service appealing to first-timers.

Reporting by Meredith Mazzilli, additional reporting by Munsif Vengattil Editing by Peter Henderson, Edmund Blair and Nick Zieminski

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