Published On: Tue, Oct 28th, 2014

Twitter’s Slowing User Growth Knocks Shares

Twitter reported revenue of $361 million in the third quarter, beating Wall Street estimates.It came in right on target on earnings per share, recording its first profit of 1 cent.

Twitter's slowing user growth

Fourth-quarter guidance was also on the money. Twitter TWTR raised its financial projections to a range of $440 million to $450 million. Analysts had estimated $448 million.

But that wasn’t good enough. Shares plunged as much as 13% in after-hours trading.

“The results were in line but Twitter is priced to be better than in line,” Rosenblatt Securities analyst Martin Pyykkonen said.

The quarter lacked “upside surprise,” UBS analyst Eric Sheridan said.

But the main challenge dragging down Twitter: Growing concern that its service still does not have broad mainstream appeal.

The number of monthly active users grew to 284 million in the third quarter, up 4.8% from 271 million in the second quarter. But the pace at which Twitter is adding users slowed from the previous quarter despite an overhaul of the new user experience on Twitter, sewing seeds of doubt with investors.

Usage of the service also lagged. Timeline views ā€” how often a user refreshes his or her Twitter feed on the desktop or mobile device ā€” reached 181 billion, up 14% from a year ago and 4.6% from the second quarter.

“To me that’s an issue,” Pyykkonen said. “What that implies is that more people are signing up yet their usage is dwindling or they are only half interested.”

Twitter CEO Dick Costolo has taken aggressive steps to prove Twitter still has plenty of room to grow.

He has replaced key executives and rolled out new products. During a conference call with analysts, Costolo said Twitter’s strategy is “to build the largest audience in the world.”

He said Twitter is working to turn Twitter into a daily habit by making it easier for new or casual users.

“It’s more critical than ever that we increase the pace of execution,” Costolo said.

Revenue more than doubled in the third quarter, exceeding the $351.4 million analysts expected. In July, Twitter had forecast a revenue range between $330 million and $340 million.

Analysts say Twitter is starting to see results from new formats such as mobile in-app ads and video ads, following the example of giant social network Facebook.

The company received $1.77 in ad revenue per 1,000 users, reaching its highest level, up 83% from a year ago.

“Twitter had a solid quarter. Its ad products are clearly gaining traction,” EMarketer analyst Debra Aho Williams said. “It is putting a lot of effort into developing the same sort of ad tools that Facebook offers ā€” namely, tools that can help determine whether the ads are effective. These tools have helped Facebook prove its case with advertisers and it looks like they’re helping Twitter as well. Some have said that advertising on Twitter is still experimental. But with these results, that may no longer be the case.”

With its headcount and stock compensation growing rapidly, the company is still losing money. Its net loss was $175.5 million or 29 cents a share, compared with a loss of $64.6 million or 48 cents a share a year ago.

Excluding compensation costs and other expenses, Twitter reported a profit of 1 cent, in line with analyst estimates.

Twitter shares closed down nearly 3% to $48.55 in regular trading on Monday.

The stock has fallen 24% this year after hitting a high of $74.73 in late December. The San Francisco company is nearing the one-year anniversary of when it went public at an offering price of $26.

Twitter announced third-quarter earnings after the market closed on Monday. The reaction from Wall Street underscored the challenges facing the short-messaging company.

Twitter has outperformed Wall Street earnings expectations since its initial public offering. But the stock has been volatile because the service has not proven it has broad mainstream appeal.