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Twitter's Q3 earnings miss due to ad glitch rattles Wall Street

Shares in Twitter Inc. cratered Oct. 24 after the social media giant attributed its disappointing third-quarter earnings results to a technical glitch on its ad platform, leading several analysts to question how the company's growth prospects could be impacted.

Twitter stock plunged by as much as 20% on the day the company missed third-quarter revenue and profit expectations due in large part to technical problems with its ad platform that executives said will continue to weigh on fourth-quarter results.

Twitter CFO Ned Segal said on an earnings call that the glitches reduced revenue growth by three or more percentage points in the third quarter and could reduce growth by four or more percentage points in the fourth quarter as the company continues to work on fixing the problem. The ad platform issues could persist into next year, Segal added.

Goldman Sachs technology analyst Heath Terry in a research report downgraded Twitter shares to "neutral" from "buy" while slashing his 12-month price target to $34 from $52, reflecting the company's ongoing advertising woes. While the analyst remains optimistic about Twitter's increasing value as demonstrated by its "broad-based" and "accelerating" growth in daily active users, he believes the company faces significant challenges ahead.

"The lack of visibility into the remediation of the advertising platform, uncertainty around Twitter's ability to drive broader advertiser demand, and the risk of further multiple compression drive us to lower our rating to Neutral," Terry said.

The uncertainty around the resolution of Twitter's ad problems should prompt investors to hold off on buying the stock in the near term, said Jefferies technology analyst Brent Thill, who lowered his price target on the stock to $38 from $44 while maintaining his "hold" rating.

"We are optimistic on Twitter's opportunity to drive more direct response advertisers to the platform over time, but near-term Twitter will be focused more on resolving existing revenue product issues," Thill wrote in an Oct. 24 report.

Likewise, Stifel consumer internet analyst John Egbert said he expects the bug-related problems to negatively impact revenue beyond this year.

"Our fiscal year 2020 [estimate for] revenue growth (+14% y/y) may also be at risk given Twitter's ad product 'bugs' sound like permanent headwinds to growth unless the new version of its app install product reinvigorates advertiser traction in this highly strategic vertical," Egbert wrote.

Twitter in August disclosed that bugs in its system may have allowed the ad platform to share certain user data with the company's advertising and measurement partners even if a user had opted out of such sharing arrangements. The issue primarily impacted Twitter's legacy Mobile Application Promotion product. The problem has limited the company's ability to deliver certain targeted advertising as it works to correct the issue.

In addition to technical issues with its ad platform, Twitter executives said third-quarter revenue was impacted by greater-than-expected seasonality in July and August, pointing to year-over-year differences in major sporting events that occurred in the summer, for example. Ad sales did rebound in September, particularly in the U.S., they noted.

Twitter's net income for the third quarter totaled $36.5 million, or 5 cents per share, down from $789.2 million, or $1.02 per share, in the third quarter of 2018. Non-GAAP net income for the quarter was $136.8 million, or 17 cents per share, down from $162.7 million, or 21 cents per share, a year ago.

The S&P Global Market Intelligence consensus EPS estimate was 9 cents on a GAAP basis and 20 cents on a normalized basis.

Worldwide monetizable daily active users totaled 145 million at the end of the third quarter, up from 124 million a year earlier. U.S. users accounted for 30 million of the total, compared to 26 million in the prior year. The company's international user base grew to 115 million, compared to 98 million.

Twitter reported third-quarter revenue of $823.7 million, up 9% year over year from $758.1 million. Looking ahead, Twitter expects fourth-quarter revenue of $940 million to $1.01 billion. Operating income for the fourth quarter is expected to range from $130 million to $170 million.

Twitter shares were trading down 21% around 3 p.m. ET on Oct. 24, at $30.79 apiece.