Twitter’s Business Is Flying, Is Low Growth Really a Problem?

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Twitter (NASDAQ:TWTR) failed to impress traders on Tuesday evening when the social media company, which launched its IPO last November, reported first-quarter earnings. Shares closed the regular trading session up 4.64 percent at $42.62 but are down 12.79 percent in pre-market trading. The catalyst? Lower-than-expected user growth — and this, despite a beat on the top and bottom line.

Twitter reported a GAAP loss of $132.36 million, or 23 cents per share, in the first quarter of 2014, compared to $27 million, or 21 cents per share, in the year-ago period. The unadjusted figure includes $126 million in stock-based compensation expenses. Adjusted net income was reported at $183,000, or zero cents per share, which compares against an adjusted loss of $11 million, or 8 cents per share, in the year-ago period. The mean analyst estimate was an adjusted loss of 3 cents per share.

Revenue of $250 million, up 119 percent on the year, beat the mean analyst estimate of $241 million. Advertising revenue clocked in at $226, up 125 percent on the year and accounting for 90.4 percent of total revenues. Mobile ad revenue accounted for 80 percent of total ad revenue.

All this was the good news. Where concerns over mobile monetization plagued Facebook (NASDAQ:FB) after its IPO, the mobile revenue is a nonissue for Twitter. Perhaps looking at Facebook’s post-IPO snafu and learning from the company’s trial by fire, Twitter hit the market with a strong mobile ad product in hand. Moreover, increased strength at the top and bottom line demonstrate that Twitter’s core business machine is running smoothly, and moving the business forward.

Where there was weakness — at least, in the eyes of the market — was in user growth. Twitter reported average monthly active users (MAUs) of 255 million, up 25 percent on the year but shy of a mean analyst estimate of 257 million. Twitter’s 255 million MAUs are just a fraction (about 20 percent) of the 1.28 billion MAUs Facebook ended the first quarter with — are just a fraction, even, up Facebook’s 802 million daily active users, 1.01 billion mobile MAUs, and 609 million mobile DAUs.

It’s not all bad, though. In the earnings call, CEO Dick Costolo highlighted “re-acceleration” in Twitter’s core market, the U.S.. Users grew by 3 million in the U.S. partially thanks to new deals with television content providers and one-time events, such as the World Cup and the Oscars. CFO Mike Gupta pointed out that the absence of these events was a factor in the company’s first-quarter guidance. The company is guiding second-quarter revenue in a range between $270 million and $280 million and adjusted EBITDA in a range between $25 million and $30 million.

Costolo was also asked about which metrics he and his team are looking at and prioritizing. Engagement is important, he answers, but the company’s current focus on increasing the value of the timeline — specifically, the value of the timeline view to the user.

Costolo also touch on what might be the billion-dollar question. “When will Twitter be mainstream?” he asked rhetorically. “The beauty of Twitter as a platform… is that we had 3.3 billion views of tweets just about the Oscars in the 48 hours after the Oscars.”

“Twitter the platform we believe is already incredibly mainstream,” he added.

Here are Twitter’s earnings slides.

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