Can Twitter, Inc. Reinvigorate User Growth?

The past year has been rough for Twitter shareholders. Shares have fallen about 33% in the past 12 months as the company continues to struggle to prove to investors it can reinvigorate user growth. Concerns have only increased recently, driven by the company's worse-than-expected user growth when it reported second-quarter results on July 28.

But Twitter has a plan to address its problems. Unfortunately, it could take some time for these new initiatives to yield any results, management says.

Image source: Twitter.

Twitter's user story "Our Q2 results show good progress in monetization," said Twitter founder and interim CEO Jack Dorsey in the company's second-quarter earnings press release. "But we are not satisfied with our growth in audience," Dorsey admitted.

Twitter's year-over-year quarterly growth rates in its user base have generally trended downward sequentially since the company went public in 2013. Even more, sequential growth in Twitter's users has slowed to low single digits recently, causing investors to speculate whether the company's user base could actually peak soon.

During Q2, Twitter's monthly active users reached 316 million, up 15% year over year and 2.6% sequentially. Notably, however, Twitter's reported users in Q2 benefited from Twitter's new practice of including its SMS Fast Followers in its monthly active user accounts. After factoring out SMS Fast Followers, Twitter's user base grew 12%, year over year, and just 0.07% sequentially.

Investors should be careful to give Twitter's SMS Fast Followers much weight. Twitter's SMS Fast Followers access the company's service via text messages, in markets where feature phones are still prominent. While these users can be monetized via SMS, the monetization per user isn't meaningful.

The company has been trying to address slowing user growth with "instant timelines," a feature that aims to find new users relevant followers and provide immediate value. But the feature hasn't yet had any "meaningful impact" on growing Twitter's audience.

"This is unacceptable and we're not happy about it," Twitter Senior Director of Investor Relations Krista Bessinger said during Twitter's second-quarter earnings call.

Twitter's planBut despite management's clear disappointment in the company's attempts to reinvigorate user growth, Twitter remains optimistic about its future ability to address slowing user growth.

Broadly, Dorsey said the company will aim to "improve in three key areas: ensure more disciplined execution, simplify our service to deliver Twitter's value faster, and better communicate that value."

Specifically, Twitter says it will launch its Project Lighting this fall to help simplify its service and deliver value. This initiative, Twitter says, will reportedly focus on event-based curated content. Further, Dorsey said during the call the company is planning to show users more meaningful tweets and conversations faster.

And perhaps just as important as providing new features for simplifying the platform, the company wants Twitter's value to be articulated more clearly than ever. While Twitter has 95% brand awareness across its most important global markets, the company has achieved less than 30% penetration of users in these markets, management explained during the Q2 call. To better market its platform, the company is working to launch a marketing campaign before the end of 2015 aimed at better communicating the value Twitter offers new users. Further, the company is currently searching for a qualified chief marketing officer to help Twitter in this transition.

Investors interested in Twitter stock should keep a close eye on current and potential new initiatives related to its plan to reaccelerate user growth. But investors shouldn't expect a quick fix. Management warned during the call that it will need to begin to appeal to the mass market before its platform will see any sustained and meaningful growth in monthly active users.

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Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends, and owns shares of, 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.

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