Twitter's profit warning proves COVID-19 will infect big tech

Network traffic is rocketing; sexagenarians and infants are piling into online services as they once bundled into bars and playgrounds; Internet usage globally is at an all-time high. Amid the rampant coverage about technology's importance during the COVID-19 pandemic, it is easy to think technology firms enjoy an immunity to the economic symptoms. Twitter's profit warning this week is a troubling reminder they do not.

In a statement published late Monday, the social networking company blamed the impact of COVID-19 for a decision to withdraw first-quarter guidance on sales, profits, expenses, headcount, stock-based compensation and capital expenditure. It immediately went on to say that revenues would probably fall slightly, compared with the year-earlier period, and trigger an operating loss. Last year it managed an operating profit of $74.9 million, on revenues of $664.9 million, for the first quarter.

The problem is certainly not related to usage of Twitter's service. Shut out of public venues, the old and young alike have been airing their views about COVID-19 and less apocalyptic matters on Twitter and other social networking sites. The overall number of what Twitter calls "monetizable" daily active users has now hit about 164 million, up from 134 million in the first quarter of 2019. "We're seeing a meaningful increase in people using Twitter, and our teams are demonstrating incredible resilience adapting to this unprecedented environment," said Jack Dorsey, Twitter's CEO, in a statement.

Advertising dollars normally follow the conversation, when it comes to social networking, but the spread of COVID-19 has made that traffic a lot less monetizable than it would usually be. "The COVID-19 impact began in Asia, and as it unfolded into a global pandemic, it has impacted Twitter's advertising revenue globally more significantly in the last few weeks," said Ned Segal, Twitter's chief financial officer.

The damage will not become evident until April 30, when Twitter is due to publish results. But MKM Partners, a market-research firm that tracks Twitter, today provided a downbeat take on the Internet company's problems. Since February 17, Twitter's advertising revenues have declined about 30%, year-on-year, it reckons. If the trend worsens in the second quarter, before signs of a recovery in the third, Twitter's sales would fall by 8% to 12% this year, according to Rohit Kulkarni, an analyst at MKM Partners. That would leave Twitter facing a 20% drop in full-year earnings (before interest, tax, depreciation and amortization).

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Investors are focusing on the positives and possibly relieved the outlook is not worse. Twitter's share price was up around 3% in New York during midday trading, to about $25.50, although it remains well down on its 2020 high of $39.05, achieved on February 20.

The forecast bodes ill for other technology companies that typically rely on the strong correlation between eyeballs and advertising dollars for their financial health, including the likes of Facebook and Google. While COVID-19 will force retail dinosaurs to look at online channels far more seriously, companies throughout the economy are suffering. In many European countries, cinemas, gyms, restaurants and other businesses that advertise online have been ordered by government authorities to shut down.

"We believe social distancing could lead to accelerated user growth for all social media companies," said Kulkarni in a research note. "We view user growth as a key leading indicator for long-term monetization of social media platforms. However, Twitter's pre-announcement highlights sudden changes in advertiser appetite, given the ongoing uncertainty with COVID-19's duration and intensity of impact on budgets." The world must continue to hope the summer brings an end to the crisis.

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— Iain Morris, International Editor, Light Reading

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