Twitter Disappoints on Earnings Despite Revenue Growth

Edited by Vani rao

Anemic user growth and decline in timeline views pull down share prices

Twitter Inc. (NYSE: TWTR) disappointed investors in its first earnings statement as a public company leading to its share price tumbling in late trading.

The San Francisco-based company posted better-than-expected revenue growth of 116% to $243 million in the fourth quarter of 2013. However, investors focused on the anemic user growth as well as a severe decline in timeline views, a measure of user engagement. As a result, its share price fell more than 18% in after-hours trading as investors worried about the slowing pace of user growth.

Twitter, which lets users send 140-character messages through its mobile app or website platform, went deeper into the red with losses of $511.5 million in the fourth quarter, compared with losses of $8.7 million in the year-ago period, owing to huge expenditure on its sales force, research, and marketing divisions.

On a non-GAAP basis that excluded items, the company reported a profit of $9.7 million, or 2 cents per share, compared with a loss of $271,000 a year ago. Analysts’ had expected the company to report a fourth-quarter loss of 2 cents a share and revenue of $218 million.

Source Twitter
Source Twitter

Twitter reported 241 million monthly active users (MAUs) in the December quarter, up just 3.8% from the previous three months, the lowest quarter-on-quarter growth since Twitter began disclosing user figures.

At about 30 times projected 2014 sales, Twitter stocks were more than twice as expensive as Facebook or LinkedIn, based on its Wednesday closing price.

Timeline views, its equivalent of page views or a measure of user engagement, dropped sharply from 159 billion to 148 billion in the quarter, signalling that users were refreshing their Twitter accounts less often.

Source Twitter
Source Twitter

As per the company data, Twitter said advertising revenue for the quarter rose 121% to $220 million, with mobile advertising making up more than 75% of that figure as shown in the graph. International revenue soared 200% to $66 million.

However, the efficiency of its advertising business model, which places ads inside users’ timelines every time they refresh, appeared to steadily improve. The company said it made $1.49 per one thousand timeline views, a significant jump of 76% from a year prior.

Discussing the results, Twitter’s Chief Executive Dick Costolo said that the company is working on improvements to its web software and mobile apps to make it easier for new users to sign up and current ones to find the most relevant information on topics they want.

Twitter will also make it easier to send private messages between users, a measure of the rising popularity of messaging services like Snapchat and Facebook’s Messenger app.

Responding to the questions on Timeline view slump, Costolo suggested that the metric provides an incomplete picture of Twitter’s engagement, since interactions per Timeline view continue to grow. He claims retweets and favorites are up by over 35% following the recent User Interface (UI) changes.

In the fourth quarter, the company made some effort to showcase photos and videos directly in the feed, which Costolo said had improved engagement among users. The company plans to make other modest improvements this year.

Since its inception, Twitter has focused on the public sharing of textual messages, and its leaders have been reluctant to change its fundamental structure. The service presents users with an endless stream of 140-character messages in reverse chronological order, with no difference between the trivial and the important and no easy way to organise information by topic.

The problems with the usage of the site overshadowed an otherwise strong financial report that significantly exceeded Wall Street expectations.

In an unusual move for a fast-growing company, Twitter gave a financial forecast for both the first quarter and the full year 2014. The company said it expects first-quarter revenue of $230-240 million. For the full year, it expects revenue of $1.15-1.20 billion, almost double the $665 million that it posted in 2013. It projected that profits from its core operations, excluding items such as stock options and depreciation expenses, would also double during 2014.

Those projections appeared to have disappointed some investors. Since its IPO, shares have been on a rollercoaster ride, rising from $26 to as high as $74.73 in December, even as many analysts said the stock was overvalued.

There was widespread speculation on Twitter being a niche category with no chance of widespread adoption. Twitter has “massive global awareness”, as Mr Costolo said on Wednesday, 5 February 2014, but that has not translated into user base expansion. Its challenge is to tempt new users to try a site that they know exists but, until now, have not thought it is for them. He has also earlier said that Twitter can lure one billion users, but that it needs to be made easier to use and understand.

This gap between the brand image and reality seems to have been ignored by an excitable market. Twitter’s shares soared more than 150% in the last three months since the IPO – rising even when analysts began to warn that the valuation was unwarranted. Perhaps for Twitter, wiping $6.7 billion off the company’s hefty market capitalization in a couple of hours was a much-needed setting of ground rules. Throughout the IPO process, Twitter had attempted to keep a cap on expectations.

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