Why Twitter needs to drive user growth and engagement

Twitter (TWTR) is expected to announce its 2Q16 results on July 26, 2016. The company is guiding for a revenue range of $590 million-$610 million, which translates to growth of 17%–21% YoY (year-over-year).

Twitter’s revenue growth is falling, as you can see in the chart below. With the current guidance, the company’s top-line growth rate is expected to decelerate.

Why Twitter’s Top-Line Growth Could Fall in 2Q16

Twitter’s core product issues and stagnating user base growth, especially in the United States (SPY), are impacting the company’s advertising revenues. Advertising remains the major source of revenue for the company. However, Twitter is lagging behind fast-growing rivals like Google (GOOG) and Facebook (FB). Google and Facebook remain the dominant players in the digital ad space by net revenues, followed by Baidu (BIDU) and Alibaba (BABA), according to eMarketer.

What impacts brand spending on Twitter’s platform?

Twitter made several product improvements last year, but its user growth showed no signs of improvement, and the company’s user engagement declined. It’s important for the company to drive user growth and engagement in order to attract brand marketers.

During the last reported quarter, Twitter’s revenues from advertisements grew 37% YoY. However, the company noted that the brand spending on its platform didn’t grow as quickly as it expected.

This is cause for concern, as the company earns most of its revenues from advertising, and lower ad spending on its platform would only amplify its problems.

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