Twitter (TWTR) Earnings Show Struggle With User Growth

An Earnings Beat From Twitter (TWTR) Didn't Obscure User Losses

For just a glimmer of a moment, it's possible Twitter (TWTR) CEO Jack Dorsey though the market would revel in last quarter's earnings and revenue "beat", and ignore the fact that the number of people who used Twitter didn't actually shrink during the company's fourth quarter. That pipedream didn't last long, however. TWTR shares were deep in the red during after-hours trading on Wednesday, shortly after Twitter announced its fourth-quarter results. That 5.6% selloff -- which carried through to Thursday's session -- brings the one-year rout to a whopping 70%.

The good news: Twitter earned 16 cents per share last quarter on $710 million worth of revenue. Both were better than expected; the pros were only looking for income of 12 cents per share of TWTR and a top line of $709.9 million. Revenue was also up an impressive 48% on a year-over-year basis, as the company has made a much more concerted effort to monetize its platform in just the past few months.

The bad news:  Already slowing down, the pace of user growth actually turned negative last quarter. Twitter reports it only attracted 305 million unique users (excluding SMS-only users) per month last quarter, down 2 million from the previous quarter's total number of MAUs.

In that Twitter was and still is a growth story, and the core of its growth relies on user growth, Twitter stumbled on the one metric it couldn't afford to show weakness with.

Dorsey and Co. put on a positive, optimistic game face of course, introducing a plan to turn things around. Dorsey's five-point strategy is (1) refining the core service and making it more intuitive, (2) investing in live streaming video, (3) helping creators and influencers connect with Twitter's audience, (4)making Twitter safer, and (5) supporting developers to grow their businesses on Twitter.

The market wasn't buying it though.... literally and figuratively. That may be because numbers 1, 3, and 5 have already been tried, number 2 could be expensive -- particularly now that competitors are well ahead in terms of video -- and number 4 doesn't actually grow the business.

The results and lack of any clear and plausible recovery plan made TWTR an easy target to pounce on, and the market did - Pacific Crest and Topeka both downgraded TWTR, and other analysts are apt to follow.

Pacific Crest analyst Evan Wilson explained:

"...but this earnings report was a significant event. It gave Twitter an opportunity to communicate to investors, with plenty of time for new management to prepare, how Twitter was going to fix its user growth. Its five-point plan for 2016 is to (1) fix the glitches and systems that are so frustrating, (2) focus on live video (Periscope, Vine), (3) create better tools for content creators, (4) make the platform safer, and (5) invest in external developers. We do not think these will attract new or lapsed users."

He also flatly said “We are also not very confident in the turnaround plan.”

He doesn't appear to be alone in that sentiment.

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