Twitter's user growth isn't quite hot enough

Twitter (TWTR) should have made investors happy when it announced its results for the first quarter of 2014. After all, revenue and earnings were higher than expected. But upon looking closer at user growth and engagement, investors quickly turned negative, pushing the shares down some 9 percent.

Revenue of $250.5 million was up 119 percent year over year, while a non-GAAP earnings per share of zero cents was far better than last year's 8 cent loss. Average analyst estimates were $241.5 million in revenue and a loss of 3 cents a share.
"We had a very strong first quarter," the earnings release quoted CEO Dick Costolo. "Revenue growth accelerated on a year over year basis fueled by increased engagement and user growth. We also continue to rapidly increase our reach and scale."

Average monthly active users were up by 25 percent year-over-year to reach 255 million -- not bad but just shy of the 257 million analysts expected. The number of mobile users was 198 million in the quarter, a 31 percent increase. Advertising revenue per thousand timeline views, a measure of user engagement, hit $1.44, nearly doubling the amount last year.

However, the figure is still significantly behind rival Facebook (FB) and far behind the levels that Google (GOOG) and even Yahoo (YHOO) regularly achieve.

Costolo also specifically mentioned MoPub, a mobile ad network that Twitter acquired earlier this year. He said the service reaches more than 1 billion users each month, "making us one of the largest in-app mobile ad exchanges in the world."

Mobile is seen as critical to online media and advertising. Emphasizing this network suggests that Twitter is not completely dependent on its own user growth and advertising.

The stock price had rallied going into the announcement, up more than 4 percent on Tuesday over Monday, possibly spurred by Sterne Agee analyst Arvind Bhatia speaking positively about the company for the second time in two weeks.

User growth is clearly a critical metric. Last quarter Twitter disappointed investors on that score. Even though the company outdid financial expectations, slowing growth in the number of users was a major concern.

Even if Twitter keeps meeting financial forecasts in the near future, slowing user growth could be a disaster. Not only would it limit the company's potential for revenue and -- one day -- profits, but it could also marginalize Twitter in the eyes of online advertisers. And as of Tuesday evening, that seems to be what investors are focusing on.
Erik Sherman

Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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