Twitter Inc. Earnings Preview: What You Need to Know

Source: Twitter.

Twitter is scheduled to report first-quarter 2015 earnings on Tuesday, April 28, after the market close. The microblogger's stock has been remarkably volatile over the last several quarters, and the coming earnings report could be particularly important for investors. Let's see what's going on with Twitter and the key areas to watch in the company's earnings release.

The contextTwitter stock was down by more than 40% ahead of its Feb. 5 earnings report for the fourth quarter of 2014. Investors were deeply disappointed with the company's user growth, and financial performance was also below expectations. However, things took a spectacular turn when witter announced earnings for the quarter.

Both sales and earnings came in comfortably above expectations. Total sales grew by a strong 97% year over year, to $479 million, considerably better than the $453.6 million consensus forecast from Wall Street analysts. Even better, the $0.12 in earnings per share crushed analysts' $0.06 projection.

This produced an explosive rally in Twitter shares, which are up by more than 27% since the latest earnings report and nearly 44% year to date. Considering how dramatically Twitter stock is reacting to earnings announcements, investors might want to keep a close eye at the coming earnings report.

What really matters Wall Street analysts on average forecast earnings per share of $0.04 on the back of $452.6 million in revenue for the first quarter. However, it's not only about the headline numbers: Analyzing how Twitter is generating that performance is perhaps even more important from a long-term point of view.

To generate sales and earnings growth, Twitter needs some kind of combination of user growth, increased activity per user, and an increased ability to monetize user activity.

The company beat expectations in the fourth quarter via big increases in monetization: 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 of the previous year. Ad revenue per thousand timeline views grew 49% in the U.S., to $5.56.; the year-over-year increase in international markets was even stronger, rising 94% to $1.16.

It's great to see Twitter making significant increases in monetization. And there seems to be considerable room for improvement considering that monetization remains materially lower in international markets than in the U.S. However, user growth still leaves much to be desired, and Twitter needs to do better in this area.

Twitter needs more followers Twitter ended the fourth quarter with 288 million monthly active users, a 20% year-over-year increase. Wall Street on average had expected 295 million monthly active users, so the number was below expectations. Also, Twitter had ended the third quarter of 2014 with 284 million monthly active users. This means the company gained only 4 million net new users sequentially.

As a reference, Facebook is doing much better when it comes to user growth. The social media giant announced 1.44 billion average monthly users in March; this represented a year-over-year increase of 13%. Quarter-to-quarter, Facebook gained roughly 50 million monthly users over the 1.39 billion monthly users it had in December.

Facebook is multiple times the size of Twitter, and this should theoretically mean slower growth, since growth tends to decelerate with size. However, when comparing both social networks in terms of size and growth, Twitter sill pales in comparison to Facebook.

Twitter management has acknowledged it needs to make improvements in this area, so Twitter has launched a series of initiatives to accelerate growth and engagement, such as making the platform simpler for new users, an increased focus on video, improved group messaging capabilities, and new services and applications to make the platform more attractive. Analyzing the company's success in terms of users and traction will be remarkably important in the coming earnings release.

In a nutshell, sales and earnings are important, and improved monetization is nice. However, improved monetization combined with accelerating user growth and vibrant engagement metrics would be considerably better for evaluating Twitter's ability to sustain growth over the long term.

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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.

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