By Meredith Mazzilli
NEW YORK (Reuters) - Twitter Inc on Friday reported fewer monthly active users than analysts expected and warned that the closely-watched figure could keep falling as it deletes phony accounts, sending shares sharply lower in early trading.
The company said the work it was doing to clean up Twitter by purging automated and spam accounts had some impact on its user metrics in the second quarter, and that it would prioritise 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.
Monthly active users fell by 1 million in the second quarter from the first to 335 million. Analysts had expected a gain of 1 million users, and the results could harden concerns that Twitter lacks a clear strategy to grapple with various platform problems and grow usage and revenue together.
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, on average, had expected 340 million monthly active users in the third quarter, according to Thomson Reuters I/B/E/S.
Twitter shares fell 15 percent in pre-market trading.
"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 accompanying the results.
The user outlook came as Twitter reported higher-than-expected revenue thanks to the FIFA World Cup driving ad demand, strength in video ads and booming international ad revenue. Twitter also earns revenue from licensing data.
The quarter marked the first time overseas revenue contributed the majority of Twitter's total advertising sales.
Chief Executive Jack Dorsey said in a statement that daily users grew 11 percent compared to a year ago, saying this showed that addressing "problem behaviors" was turning the service into a daily utility.
The company did not reveal the number of daily users.
Twitter had said earlier in July that deleting phony accounts would not have much impact on monthly users, since the purge focused on inactive accounts. Twitter's relations with advertisers have been strained by concerns about phony accounts bought by users to boost their following.
Revenue of $711 million, mostly from advertising and up 24 percent from last year, exceeded the average estimate of $696 million among analyst research aggregated by Thomson Reuters.
Twitter said it benefited from two weeks of the FIFA World Cup in the second quarter, with ads tied to the soccer tournament generating $30 million in revenue.
Profit was $100 million, with a $42 million boost due to a tax accounting move. Twitter turned its first-ever profit in the fourth quarter of 2017 and has been profitable ever since, but warned last quarter revenue growth would slow this year and costs would rise.
Earnings excluding items were 17 cents per share, in-line with analyst 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."
U.S. President Donald Trump, an avid Twitter user, on Thursday slammed the company for restricting the visibility of prominent Republicans, but provided no evidence to back the claims. Twitter said in a blog post it had identified an issue where some accounts were not auto-suggested in search even when people were searching by specific name.
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.
Twitter said it lost some users due to the introduction of the General Data Protection Regulation in Europe in May but it did not note any revenue impact.
Twitter also saw usage fall after saying it would not subsidise users who accessed its application through text messages without paying messaging fees to wireless carriers.
The company increased its capital expenditures forecast for the year to between $450 million and $500 million, from $375 million to $450 million, as it expands and upgrades the computer infrastructure underlying its service. It is also adding jobs, the shareholder letter said.
Costs related to licensing video and powering automated analysis of user data increased overall expenses 10 percent to $631 million in the second quarter compared with a year ago.
In April, Twitter said it inked more than 30 deals for live and original programming, including with Walt Disney Co for a Twitter-only version of ESPN's SportsCenter.
(Reporting by Meredith Mazzilli, additional reporting by Munsif Vengattil; Editing by Peter Henderson, Edmund Blair and Nick Zieminski)
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