GOOG Alphabet Inc

By Yoree Koh 

Jack Dorsey's celebrated return as Twitter Inc.'s chief one year ago raised hopes he could revive the struggling company he co-founded.

On Tuesday, Twitter showed it still suffers from shrinking revenue growth and weak user numbers.

Twitter reported its revenue rose 20% to $602 million in the second quarter, its smallest gain and eighth-straight period of declining growth.

The social-media company further warned that demand from advertisers, its main source of revenue, is softer than expected, hurting its outlook for the third quarter.

Twitter's user growth continues to show little signs of life. The company added 3 million net new users in the most recent three-month period, up just 1% from the previous quarter, giving it 313 million users who log in at least once a month.

All told, Twitter has added just 9 million users -- and only 1 million users in the U.S. -- since Mr. Dorsey's return in July 2015. Facebook Inc., by contrast, has added more than 164 million monthly users in that time frame.

In a letter to shareholders, Twitter acknowledged it is losing its shine compared with other social-media advertising offerings. It said there is "increased competition for social marketing budgets" and that its premium pricing is hurting its appeal.

"We need to tap into other parts of the advertising budget, specifically the online video advertising budgets," Twitter's CFO Anthony Noto said in an interview. He added that will be a "gradual process" that requires the company to build out tools that would enable advertisers to reach specific demographics with specific frequency.

In the previous quarter, Twitter executives said they expected the softening demand from big brand advertisers to ease up in the second half of year. On Tuesday, they said it would likely extend into 2017.

On Tuesday's call with analysts, Mr. Dorsey struck a positive tone with regards to the user growth. "What makes our audience growth this quarter notable is we can see directly the link between the product changes we made and our growth," Mr. Dorsey said. "We're making the right decisions and our product and it gives us a foundation for future growth."

Mr. Noto, in an interview later, said that this growth was driven by showing users more relevant content in their timelines and improved push notifications, which have become more targeted and timely.

In after-hours trading Tuesday, Twitter's shares fell about 11% to $16.39, wiping out some of the gains from the past month. That is the fourth straight double-digit decline immediately following Twitter's quarterly earnings release.

Tuesday's stinging report coupled with a deal-friendly climate in Silicon Valley these days could reignite questions around Twitter's fate as an independent public company.

Microsoft Corp.'s $26 billion acquisition of LinkedIn Corp. in mid-June helped fuel that speculation, and pushed Twitter's stock up more than 30% before Tuesday.

Asked by an analyst why it makes sense for Twitter to remain independent, Mr. Dorsey said Tuesday, "I think there is just so much farther to go in terms of our strength as not only a service of importance, but also a company in a business of importance," he said.

Under Mr. Dorsey, Twitter has sought to reinvigorate its ads business around video and revive user growth by making the short-messaging service he invented easier to use.

In recent months, the company has tried to make it easier for users to find interesting content faster, abolished unnecessarily complicated user rules and altered the way it counts what will be part of the 140-character limit.

What's more, as Twitter continues to struggle, competitors Facebook Inc., Instagram and Snapchat have gained ground. About 1.65 billion people sign into Facebook each month, and the social network's photo-sharing app Instagram recently passed 500 million users. About 150 million people use Snapchat each day, according to a person familiar with the matter.

Twitter is hoping to pull in more users with its live-video strategy. It has signed a spate of live-streaming deals in recent months for rights to broadcast politics, sports and financial news content. It has focused on sports in particular, resulting in deals that include the rights to live-stream games from the National Football League, Major League Baseball and National Hockey League this fall.

Twitter will be able to earn revenue from the ads sold against this content. The company still has a lot of catching up to do against market leaders Google, owned by Alphabet Inc., and Facebook.

According to eMarketer, Twitter will earn $2.61 billion in total digital-ad revenue world-wide this year, up 30.8% from 2015. Twitter's share of the global digital-ad market is expected to edge up slightly to 1.4% from 1.3% last year.

Twitter is projected to grab a 7.9% share of world-wide social network ad spending this year, according to eMarketer, a fraction compared with Facebook's estimated 67.9%.

Twitter remains unprofitable, largely because of lofty stock-compensation costs. The company posted a loss of $107.2 million, or 15 cents a share, compared with a year-earlier loss of $136.7 million, or 21 cents a share.

Stock-compensation expenses made up 28% of revenue, one of the highest percentages among companies with $1 billion or more in annual revenue.

Write to Yoree Koh at yoree.koh@wsj.com

(END) Dow Jones Newswires

July 27, 2016 02:49 ET (06:49 GMT)

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