Twitter Earnings: Not Enough User Growth

Twitter stock was falling by almost 6% on Tuesday after official market hours, as investors reacted with negativity to the company's earnings report for the second quarter of 2015. Both sales and earnings came in ahead of expectations; however, user growth remains a big disappointment for investors in Twitter stock.

The headline numbersTotal sales during the second quarter of 2015 came in at $502 million, up 61% year over year. Excluding the impact from changes in foreign exchange rates, revenue would have increased by a healthy 68% versus the second quarter in 2014.

Sales came in above the company's own revenue guidance in the range of $470 million to $485 million, and the number was also considerably better than the $481.8 million Wall Street analysts estimated on average, so top-line performance was broadly better than expected.

Source: Twitter.

Management said it's expecting revenue of between $545 million and $560 million during the third quarter, roughly in line with Wall Street expectations for $555.8 million. Sales guidance for the full year 2015 compares favorably against forecasts, though. Twitter expects revenue of $2.2 billion to $2.27 billion versus an average forecast of $2.2 billion for the current year.

Adjusted earnings per share were $0.07 during the second quarter, better than the $0.04 average forecast.

Strong monetization; disappointing user growthOne crucial area to watch is user growth, since disappointing performance in this important metric has been one of the biggest reasons for negativity surrounding Twitter stock over the past several quarters. The company is implementing a series of initiatives to attract more users and increase retention levels, but the latest earnings didn't provide a lot of encouragement for investors.

The company ended the quarter with 316 million average monthly users, a 15% increase versus the same quarter in 2015, and up by nearly 8 million new monthly users sequentially. The number was better than most analysts expected. However, most of this growth came from SMS Fast Followers, meaning those who use Twitter through text messages, as opposed to logging in to the platform.

Excluding SMS Fast Followers, monthly active users were 304 million during the second quarter, a 12% year-over-year increase, and only 2 million new users were gained sequentially.

Even when including SMS Fast Followers, growth seems to have stalled in the U.S., as the company ended the last quarter with 66 million users in the country, an increase of 9% year over year and flat versus the first quarter.

Source: Twitter.

The U.S. market is particularly important for companies in online advertising, since monetization levels are typically higher than in international markets, so Twitter needs to find a way to jump-start growth in this key region.

The company did a sound job regarding ad engagement during the past quarter, and this was one of the main positives in the report. Engagement jumped by 53% year over year and by 21% versus engagement levels in the first quarter of 2015.

Interim CEO Jack Dorsey admitted in the earnings press release that the company is doing well on the monetization front but that it still needs a lot of improvement when it comes to user growth: "Our Q2 results show good progress in monetization, but we are not satisfied with our growth in audience," Dorsey said.

It's good to see Twitter delivering solid sales numbers on the back of improving monetization, and expanding the company's reach with initiatives such as SMS Fast Followers could be a smart move. However, that's no substitute for user growth. Investors and analysts are demanding stronger growth in Twitter's user base, and management acknowledges that it needs to do much better in this area.

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Andrs Cardenal has no position in any stocks mentioned. The Motley Fool recommends Twitter. The Motley Fool 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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