Twitter's first earnings report disappoints investors

Twitter's first earnings report disappoints investors
In the fourth quarter, Twitter's net loss widened to $511.5 million from $8.7 million as the company poured money into sales and marketing, and research and development. Above, a phone post at the New York Stock Exchange sports the Twitter logo. (Richard Drew, AP)

SAN FRANCISCO — Back when Twitter crashed frequently, users were shown the "fail whale," a flock of Twitter birds lifting an apologetic marine mammal.

For investors, the "fail whale" made a comeback Wednesday as Twitter Inc. released its first earnings report as a publicly traded company.


The fourth-quarter report revealed that Twitter had the slowest pace of user growth yet. The company also offered only a modest forecast for revenue gains in 2014.

It was the biggest test for Twitter since its November initial public offering thrust the young company into the spotlight. And for many investors, Twitter didn't get a passing grade. Shares plunged more than 17% in after-hours trading.

Granted, it would have been difficult for Twitter to meet expectations that had swelled wildly since the IPO. Shares of Twitter rose from the IPO price of $26 to as high as $74.73 in December.

That surge was propelled by the growing success of its larger and more established social media rival Facebook even as analysts cautioned that the stock was massively overpriced and that Twitter could not match the appeal or the scale of Facebook, which has five times as many users.

The highflier floated back down to earth Wednesday, weighed down by a major concern: Despite all the celebrities and politicians who have flocked to the service, many people still don't get Twitter.

Now Wall Street is wondering whether Twitter will ever reach a mainstream audience or whether it is destined to be that service whose name everyone knows but that not everyone — and certainly not your parents, co-workers or neighbors — uses.

Twitter did attract more users in the fourth quarter — just not as many as Wall Street had expected. Despite the worldwide attention heaped on Twitter during its high-profile IPO, Twitter said it averaged 241 million users in the fourth quarter, just 9 million more than in the third quarter. That was an increase of less than 4%, the lowest growth rate quarter over quarter since Twitter began disclosing the figures.

That slow pace also weighed on Twitter's yardstick for how deeply engaged its users are — timeline views, meaning each time a user refreshes a page on a desktop computer or mobile device. Those fell for the first time, to 148 billion from 159 billion.

Slowing growth for a company that makes money by getting advertisers to fork over big bucks to reach its audience gave investors the jitters.

"The leading indicators for these kinds of Internet companies are user growth and engagement," said Wedbush Securities analyst Shyam Patil. He expected Twitter to report 246 million monthly active users and 170.6 million timeline views. "This is something the company has to address," Patil said.

In a conference call with analysts, Twitter sought to reassure investors that its real-time conversation is a very real and growing business — and that, with some significant improvements, more people will sign up.

"We are confident in our ability to continue to scale revenue by expanding our global reach," Twitter Chief Executive Dick Costolo said.

The company is "doubling down" on its effort to accelerate user growth, rolling out new features to make Twitter easier to understand and more enticing for new or casual users, particularly those using the service on mobile devices, he said.

Twitter did report better-than-expected financial results, with the company clearly making progress in its mission to develop a bigger following on Madison Avenue. Revenue more than doubled to $242.7 million, driven by growing spending from advertisers.


Twitter had a big jump in advertising revenue generated when users refresh their screens. Twitter said it made $1.49 for each 1,000 timeline views, a 76% increase from a year earlier.

But Twitter did not swing to a profit. In the fourth quarter, its net loss widened to $511.5 million from $8.7 million as the company poured money into sales and marketing, and research and development.

Twitter's earnings forecast wasn't rosy enough to appease investors. It said it expected full-year 2014 revenue of $1.15 billion to $1.2 billion, and revenue for the first quarter of $230 million to $240 million.

Analysts had projected $1.14 billion in revenue for 2014, with first quarter sales of $215 million.

The disappointing results were the first major misstep for Twitter, which had avoided the runaway hype that dashed Facebook's IPO and clouded that company's early days as a public company.

It didn't help that Twitter had such a tough act to follow. Facebook last week posted a 63% increase in revenue and an eightfold increase in profit in the fourth quarter, causing its shares to soar.

Some analysts pointed out that Twitter is going through the same Wall Street wringer Facebook did.

"Today's results were never going to be good enough to sustain existing valuations," said Pivotal Research Group analyst Brian Wieser, who slapped a "sell" rating on Twitter the day of the IPO but remains bullish on its prospects. "My fundamental view of the company has not changed. They are doing fine."