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It's Official: Twitter's User Numbers Are Heading the Wrong Way

This has been a long time coming. While Twitter 's user growth has long been stagnant, at least it was positive.

However, the company just reported fourth-quarter earnings and notably posted a sequential decline in its monthly active user (MAU) base. MAUs excluding SMS Fast Followers declined from 307 million in the third quarter to 305 million in the fourth quarter. That's up 6% year over year, but when it comes to a metric like MAUs, the sequential trends are what matter since this user growth is not generally a seasonal pattern.

The headliners

Revenue in the fourth quarter added up to $710 million, up 48% from a year ago. If it weren't for those pesky foreign exchange rates that have been plaguing all multinationals, sales would have been up 53%. Adjusted net income came in at $114.6 million, or $0.16 per share. The top-line result was right on target with the Street's best guesses, but Twitter registered a bottom-line beat relative to the $0.12 per share in adjusted profit that investors were expecting.

The company acknowledged the weakness in MAUs, noting declines in usage but noting that activity has bounced back in January to levels comparable to the third quarter. The gloomy user figures have caused shares to fall to all-time lows.

Disappointing user growth has hounded Twitter from the beginning of its public life. While it's true that Twitter can deliver shareholder value in other ways, investors remain quite focused and concerned about the company's ability to expand its user base. If Facebook can still squeeze out sequential MAU growth, even with a user base that's 5 times as large at 1.59 billion, why can't Twitter?

Product, product, product

It all boils down to the product. Twitter has finally acknowledged that its core product is too hard to use and knows that it needs to do something about it. But every time there's talk about a significant product change, such as the recent resurgence of rumors around algorithmically curated timelines, Twitter users freak out .

On the conference call, Jack Dorsey reiterated, "And as we noted in the shareholders' letter, we think there's a lot of opportunity in our product to fix some broken windows and some confusing aspects of our service that we know are inhibiting growth and timeline is a big focus area for that."

But incremental improvements that increase engagement can only accomplish so much. Fundamentally, Twitter's asymmetric following system inherently limits the appeal to the average user. Twitter is a great platform for widely followed and high-profile public figures to broadcast and disseminate information in real-time. Twitter is a terrible platform for average consumers to interact with each other. That's what Facebook is for.

Twitter is extremely useful for celebrities, but there are only so many celebrities out there -- and most of them are already on Twitter. Furthermore, Twitter's public nature also means that users can access the tweets and information that they're looking for without logging in. Logged-out users can certainly still be advertised to, but it's much harder to target those users in order to increase ad relevance unless they're logged in. In this context, Facebook's free registration wall looks awfully valuable right about now.

Management noting that engagement is reverting back to Q3 levels is of little comfort, since Q3 levels weren't all that great to begin with either. Unless Twitter goes back to the drawing board to start from scratch, it's hard to imagine the company improving the product enough to truly attract new users. But the existing users won't let Twitter make any major changes. What's a struggling social network to do?

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The article It's Official: Twitter's User Numbers Are Heading the Wrong Way originally appeared on Fool.com.

Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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