Twitter Inc. Earnings Preview: 3 Key Numbers to Watch

By Markets Fool.com

Source: Twitter

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Twitter is scheduled to report earnings on Thursday, Feb. 5, after the market close. Twitter stock is down by more than 40% in the last year, as investors are getting increasingly concerned over slowing user growth and disappointing financial performance from the company. For this reason, the coming earnings release from Twitter will attract a lot of attention on multiple fronts.

Wall Street analysts are on average forecasting earnings per share of $0.06 on the back of $453.34 million in sales during the December-ended quarter. While earnings and sales figures will most likely have a big impact on Twitter stock's price in the short term, investors will want to look beyond the headline numbers when analyzing the health of the platform and Twitter's ability to sustain growth in the years ahead. Lets take a look at three important figures to watch.

Twitter needs to gain more followers
In the social media industry, the size of the platform and the rate of growth in the user base are variables of utmost importance. A bigger platform means more valuable connections for users and more opportunities for engagement. The platform becomes more useful as it becomes bigger, and this attracts even more users. This positive cycle of self-sustaining growth is called the network effect, and it's one of the main sources of competitive strength for a company like Twitter.

As of the end of the third quarter, Twitter had 284 million monthly active user accounts. This represented an increase of 23% year over year, and a sequential growth rate of 5% versus the second quarter of 2014. Although the numbers look quite solid in terms of demonstrating Twitter's scale and staying power, analysts are getting disappointed with user growth lately.

By comparison, Facebook had a much larger user base of 1.39 billion monthly active users as of the fourth quarter, growing 13% year over year. Facebook's daily active users were 890 million in December 2014, an annual increase of 18%. Considering that Twitter has roughly 20% of Facebook's monthly active accounts, investors have valid reasons to demand higher growth from Twitter.

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Twitter is launching a series of initiatives to make the platform friendlier and easier to use for newcomers, like new a Web on-boarding flow that simplifies the sign-up process and automatically creates a timeline based on the user's preferences and browsing history. Strong user growth would prove that these strategies are working, and that Twitter has what it takes to continue building a massive user base for years to come.

Watching the timeline
It's not only about gaining more users; user activity can be just as important. More activity per user provides more chances for Twitter to monetize the user base, in addition, user activity says a lot about the level of engagement and interest in the platform.

Twitter considers it a timeline view every time a registered user visits Twitter, refreshes the timeline, or conducts a search. Timeline views increased 14% year over year, to $181 billion during the third quarter. Since timeline views increased at a slower rate than users, this means that timeline views per monthly active user fell 7% in the last quarter.

Declining timeline views per user should be no reason to panic as long as the company is delivering enough growth in the user base and the total amount of timeline views is growing at a healthy rate. However, investors may want to closely watch the interaction between active accounts and timeline views.

Turning views into sales
Average revenue per user is a widely followed statistic for social networks, as it provides an important measure on the company's ability to monetize the user base. Twitter, on the other hand, focuses more on "ad revenues per thousand timeline views." There are both pros and cons to using this metric, but it makes sense considering that Twitter gets an opportunity to make money every time a user engages with the platform; a registered account is not worth much if that user doesn't use the platform very often.

Advertising revenues per thousand timeline views grew by a strong 83% year over year during the third quarter to $1.77. Importantly, there is a big difference when it comes to monetization in the U.S. vs. international markets. Ad revenue per thousand timeline views is $4.28 in the U.S. and only $0.84 in the rest of the world. This is indicating that Twitter has substantial room to increase monetization on the international front.

In order to generate sales and earnings growth, Twitter needs to rely on some kind of combination among user growth, timeline views increases, and higher revenue per timeline views. With this in mind, investors may want to look beyond the headline sales and earnings figures when analyzing Twitter's coming earnings release.

The article Twitter Inc. Earnings Preview: 3 Key Numbers to Watch originally appeared on Fool.com.

Andrs Cardenal has no position in any stocks mentioned.Andrsowns a Twitter account, where he publishes someamazingly good investing articles. Inadditionto those, Andrs publishes his own articles via Twitter.The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.