Twitter: Great earnings, paltry user growth

Twitter (TWTR) released a solid earnings report after the market closed on Thursday, beating expectations. Last quarter's revenue of $479 million handily beat the average analyst estimate of $453 million, while a loss of $125 million was far less than analysts predicted. Adjusted earnings of 12 cents per share, which removes significant nonoperational expenses, doubled Wall Street's call of 6 cents per share.

In hectic after-hours trading, the stock first dipped but then steadily rose, up more than 11 percent at one point, or $4.64, to $45.82.

"We closed out the year with our business advancing at a great pace," said CEO Dick Costolo in a prepared statement. "Revenue growth accelerated again for the full year, and we had record quarterly profits on an adjusted EBITDA basis. In addition, the trend thus far in Q1 leads us to believe that the absolute number of net users added in Q1 will be similar to what we saw during the first three quarters of 2014."

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If Costolo sounds like he's working hard to make things look good, he is. Some investors have called for his ouster, complaining that Twitter has continued to lose money even as revenues sharply increased, a pattern repeated last quarter. Revenue was up 97 percent year-over-year. But the net loss, while far less than the prior year's $511 million, was still significant.

The biggest worry has been the degree of user growth. Twitter's stock, like many in high tech, is attractive because of expected future expansion. And growth in users has continued to decelerate. Average monthly active users, or MAUs, in the fourth quarter increased by 20 percent over the prior year, to more than 288 million. But that's an even lower growth rate than in the previous quarter and continues the slowing trend since the first quarter of 2012.

Wall Street compares that pattern to Facebook, which hit 1.39 billion monthly active users by the end of 2014. And even with that large number, growth was 3.18 percent over the third quarter. Compare that to Twitter's 288 million monthly users in the fourth quarter, which was only 2 percent growth over the third quarter. Facebook still manages higher percentages of quarterly growth even with its much larger user base.

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In addition, there are worries over strategy shifts and the churn among Twitter's top executives. Both are potentially signs of a management team uncertain of how to steer a more effective course.

Twitter couched the scant user growth by saying that it "reflects a loss of approximately 4 million net Monthly Active Users in the fourth quarter due to changes in third party integrations," according to the earnings release. But the statement comes across as an attempt to explain away a condition that investors would not find acceptable.

Two of Twitter's board members -- co-founders Evan Williams and Jack Dorsey, who's also chairman of the board -- have publicly said the board supports Costolo. That's important for the CEO's future, but even the board might find it hard to continue in the face of unhappy institutional and activist investors. Should they start selling, which could turn into a big drop in stock price, the directors may have no choice but to find another CEO.