Twitter earnings disappoint

Twitter’s stock fell today after the company reported disappointing earnings and investors grew more concerned about its ability to grow.

Yoree Koh had this story for the Wall Street Journal:

Wall Street is coming to grips with the possibility that Twitter may remain a niche service, rather than become the next Facebook.

Twitter Inc.’s stock hit a new low on Tuesday even after the short-messaging service reported its quarterly revenue more than doubled, its loss wasn’t as large as expected, and it stemmed four consecutive quarters of slowing user growth.

The 10% stock slide in after-hours trading reflects Twitter’s outsize expectations ever since it went public in November and finished the day with a $25 billion market value. Many investors have expected Twitter to eventually follow the trajectory of Facebook Inc., which is used by more than half of the U.S. online population and has built a formidable mobile-advertising business.

While Twitter has proven to be a powerful communications tool for celebrities, activists, marketers and journalists, it hasn’t caught on with mainstream users. Facebook, meanwhile, has become a required place to share photos and life’s daily happenings.

Writing for the New York Times, Nicole Perlroth pointed out that Twitter isn’t struggling to add users and it needs to make more on ads:

Wall Street, it appears, is more worried about Twitter’s ability to add users and keep them engaged than about its ability to increase revenues.

In the last two quarters, that has been a problem. Twitter said it had 255 million monthly users globally in March, up 5 percent from 241 million at the end of December, which ended a quarter in which monthly active users rose less than 4 percent.

“They need to prove that they can be a very large-sized platform,” said Arvind Bhatia, an analyst with Sterne Agee, an investment firm. “Can they get to 500, 600 million users worldwide? That’s what they have yet to prove.”

And engagement, a measure of user activity on the site, looked lackluster. On average, users refreshed their Twitter feeds 614 times a month during the recent quarter, up only slightly from 613 times a month in the fourth quarter. Twitter users, especially those overseas, were refreshing their feeds less frequently than they were in the year-ago quarter.

But most disconcerting for shareholders is that Twitter made $1.44 in advertising revenue for every 1,000 timeline views, down from $1.49 in its previous quarter. That may be the best marker of Twitter’s ability to make money from its platform, and in the first quarter it was trending down. In a call with analysts, Twitter’s executives attributed some of that to seasonality because the fourth quarter tends to be the most profitable.

Bloomberg Businessweek’s Brad Stone said that investors shouldn’t be concerned with ad revenue:

Twitter’s ad revenue is one area that investors do not have to worry about. The company reported ad sales of $226 million in the first quarter, up 125 percent over the same period a year earlier. Advertisers are buying more placements like sponsored tweets and trends. Twitter also has plenty of room to expand internationally. More than two-thirds of its members are based overseas, yet international sales, which increased 183 percent year-over-year, only constituted 28 percent of total revenue.

Over the last year, Twitter has also intensified its focus on dipping into the vast pool of television ad revenues. As part of a program called Amplify, Twitter is approaching advertisers along with representatives of content owners like Viacom and the NFL and selling sponsorships of tweetable video clips such as sports highlights and award-show acceptance speeches.

“We had a great first quarter,” said Twitter CEO Dick Costolo, who cited revenue growth and particularly the acceleration of growth in the U.S., where the service gained 3 million users. Costolo added that Oscar-related tweets were viewed more than 3 billion times in the days after the awards show, and he called Twitter “the best companion experience to what’s happening in [our users’] world.

CNET said in a story by Daniel Terdiman that investors were also unhappy about the sales forecast and that changes to the service weren’t going as quickly as expected:

Investors were also put off by Twitter’s 2014 sales forecast of $1.2 billion to $1.25 billion, which fell short of analyst expectations of $1.24 billion. Mostly, though, they were concerned that the company’s user growth hasn’t accelerated enough.

It “seems like the number of [monthly average users] were slightly below expectations, especially after so many big events in Q1,” said CRT Capital Group media analyst Neil Doshi, like the “Olympics, Super Bowl, Oscars, Grammys, Ukraine, etc.”

Twitter, of course, has not been blind to concerns about, or reasons for, that slow growth. In February, during its Q4 earnings conference call, the company was candid that it understood that the major reason it has not been able to match growth rates of competing social networks like Facebook, Instagram, and Snapchat, is that new users find Twitter difficult to use.

As a result, the company said then that it expected to undergo a series of modest changes to the Twitter service intended to make it easier for new users to figure out what they’re doing. Costolo was clear that it’s vital to the service’s stickiness that someone new understand it from day one.

To date, though, the biggest change has been a roll-out of new Twitter profiles reminiscent of Facebook’s. The service has also boosted the presence of photos and videos in tweets, and has been reported to be tinkering with minor semantic changes like renaming retweets, though such modifications appear to have been experiments. There have also been rumors that the company is considering doing away with fundamental Twitter elements such as @ symbols and hashtags. The thinking is that, although core users love those tools, they are mysterious to newcomers unfamiliar with such conventions.

Twitter is going to have a hard time maintaining its momentum as a public company if it keeps turning in earnings reports like this one. While many tech investors know that it takes time for a company to get its footing, there were few bright spots in this quarter’s report.