Twitter Inc. Earnings: The Good, the Bad, and the Spectacular

By Markets Fool.com

Twitter stock was rising by an explosive 11% on Thursday after the market close, as investors reacted with optimism to the company's earnings report for the fourth quarter of 2014. After several consecutive quarters of disappointing performance, things could be turning for the better, so let's take a look at the latest earnings news from Twitter and the main takeaways for investors.

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The good: sales and earnings
Total sales during the quarter ended in December grew by a strong 97% year over year, to $479 million. The number was better than the $453.6 million in sales forecasted on average by Wall Street analysts.

Advertising revenue was $432 million during the quarter, an annual increase of 97%. Mobile advertising revenue represented a big 88% of total advertising sales, so Twitter is performing strongly in this important segment. Data-licensing revenue accounted for $47 million during the quarter, growing 105% versus the same period in the prior year.

Source: Twitter.

Adjusted earnings per share came in substantially above expectations. Twitter reported an adjusted net gain of $0.12 per share, a big increase versus $0.02 per share in the fourth quarter of 2013. The figure crushed analysts' forecasts, as Wall Street was expecting $0.06 in earnings per share for the quarter.

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The bad: Slowing user growth
User growth was the main weak spot in the report. Twitter ended the quarter with 288 million monthly active users, a year-over-year increase of 20% versus the same period in the prior year. Wall Street was on average expecting 295 million monthly active users, so the number was below expectations. Also, Twitter ended the third quarter of 2014 with 284 million monthly active users. This means that the company gained only 4 million new users sequentially.

Management said that Twitter lost 4 million users due to "changes in third party integrations." The company also said that, based on current trends, it expects that the absolute number of user additions during the first quarter of 2015 will be in line with the first three quarters of 2014. This is insinuating a sequential increase in the low-to-mid teens, so management is clearly expecting an acceleration when it comes to growth.

Source: Twitter.

The company is actively launching a series of innovations and improvements to accelerate user growth, such as providing an instant timeline for new users, improved direct group message capabilities, and a simplified login process. However, user growth is still underperforming, so management needs to deliver better results in this area.

By comparison, Facebook is doing much better than Twitter when it comes to user growth, especially considering that Facebook is much bigger than Twitter, which should naturally mean slower growth. Facebook ended the fourth quarter with 1.393 billion monthly active users, a net gain of 43 million versus 1.35 billion monthly active accounts in the third quarter of 2014.

The spectacular: booming monetization
Timeline views grew 23% year over year, to 182 billion. Since timeline views outgrew users, this means that timeline views per thousand monthly active users increased 3% versus the same quarter in the prior year, to 631 versus 613. On a sequential basis, timeline views per thousand users fell marginally versus 636 in the third quarter of 2014.

User growth was quite a disappointment during the quarter, and engagement per user was relatively stable as reflected by timeline views per user. However, Twitter made a big difference because of its increased ability to monetize timeline views.

Ad revenue per thousand timeline views grew by an impressive 60% year over year, reaching $2.37 on a worldwide basis versus 1.49 in the same quarter last year. Ad revenues per thousand timeline views increased 49% in the U.S., reaching $5.56. The year-over-year increase in international revenues per thousand timeline views was even more vigorous, rising 94%, to $1.16.

Source: Twitter.

On a sequential basis, worldwide ad revenue per thousand timeline views grew 34%, with the U.S. showing a 32% increase, and international markets jumping by 38%.

Investors have valid reasons to expect and demand accelerating user growth in the future, and management needs to step up its game in that area. On the other hand, Twitter delivered a jaw-dropping improvement in its ability to monetize the user base, and this allowed the company to beat both earnings and sales forecasts during the last quarter. User growth is still a big pending, but things are looking much better for investors in Twitter stock after the latest earnings release.

The article Twitter Inc. Earnings: The Good, the Bad, and the Spectacular originally appeared on Fool.com.

Andrs Cardenal has no position in any stocks mentioned.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.