Twitter Stock Rises, Then Drops, After Second-Quarter Results Beat Analysts' Estimates

By Kathleen Chaykowski

Twitter can’t seem to catch a break — and not’s hard to see why.

By many measures, the company had a strong quarter: revenue was up 61%, beating forecasts; profit was higher than expected; and the company raised its guidance for the rest of the year. For a brief moment, investors cheered, sending shares as much as 12% higher in after hours trading following the company’s release of its second quarter financial results Tuesday. But then, reality sunk in. Twitter’s main problem — it’s inability to grow its user base — is not getting better, and there are signs it could be getting worse.

Within an hour into after hours trading, shares of the San Francisco-based company pulled back sharply, falling nearly 6% from their close as investors digested the news and heard company execs warn that strong user growth was not likely to return for some time. They had risen 5.3% in regular trading to $36.54.

 Twitter said its revenue in the second quarter rose 61% to $502 million, up from $312 million a year earlier and beating analysts’ forecast of $481.3 million. Twitter reported adjusted earnings per share of 7 cents, up from 2 cents a year earlier and beating analysts’ forecast of 4 cents.

Twitter raised its full-year guidance to between $2.2 billion to $2.27 billion, up from its earlier range of $2.17 billion to $2.27 billion. (Full results are available here.)

As in the previous quarter, all eyes were on a few key metrics: growth in users, engagement and ad revenue. But unlike sales, user growth was weak. Average monthly active users were 316 million for the second quarter, up 15% from 271 million a year earlier. Twitter has struggled to compete for users and engagement as newer social apps such as Snapchat, Instagram and WhatsApp have emerged and soared in popularity. User growth declined from 18% in Q1 and from 20% and 23% in the two preceding quarters. Average mobile monthly active users represented about 80% of total monthly active users.

“The stock was up, but then the call happened,” Victor Anthony, an analyst at Axiom Capital Management told FORBES after the release. “It wasn’t positive. They were brutally honest about the state of affairs at Twitter, and it looks like user growth will continue to be a challenge for them.”

“They do not expect to see a sustained level of user growth until they start marketing the product,” Anthony added.

Usage on the platform has become more difficult to track, especially in light of Twitter’s removal of its timeline views metric. However, the company did share a figure suggesting that engagement on the site has been declining since last fall. For the second quarter, Twitter said the ratio of daily active users to monthly active users was about 44%, compared to 48% for the first three quarters of 2014.

Twitter has built a large ad business, but faces fierce advertising competition from Facebook and Google GOOGL +0.25%. Advertising revenue totaled $452 million, an increase of 63% from a year earlier. Without the impact of foreign exchange rates, ad revenue would have been up 71%. Mobile advertising revenue was 88% of total ad revenue and international revenue was 36% of total revenue. International revenue totaled $181 million, an increase of 78% from a year earlier. Twitter’s CFO Anthony Noto said on the company’s conference call that improvements to advertising targeting and measurement helped boost second-quarter sales. He added that the company will continue to offer new ad formats. Twitter estimated that its ad load is currently only about a third of what it could become over the long-term.

“Our Q2 results show good progress in monetization, but we are not satisfied with our growth in audience,” Jack Dorsey, Twitter’s interim CEO, who is also CEO of Square, said in a press release. “In order to realize Twitter’s full potential, we must improve in three key areas: ensure more disciplined execution, simplify our service to deliver Twitter’s value faster, and better communicate that value.”

Investors also listened eagerly for updates on Twitter’s search for a long-term CEO after the company’s former CEO Dick Costolo departed this month, but got little information. Dorsey said the company didn’t have an update to offer on the search. While Dorsey didn’t overtly say that he is in the running, he also did not say he that he isn’t being considered or that he isn’t interested in the role.

User Growth

Twitter’s user growth weren’t high enough to be seen as positive in the eyes of many analysts. Before the release, Mark Mahaney, an analyst at RBC Capital Markets, said in a note that user growth above 16 million monthly active users would be considered successful, and anything lower would prompt investors to sell. With an increase of 8 million average monthly active users, from 308 million at the end of Q1, Twitter didn’t quite hit the mark. What’s more, 6 million of Twitter’s new users are non-smartphone users, known as “SMS fast followers,” which aren’t as valuable to advertisers as users on smartphones.

“There’s no single more important number than monthly active users,” Mahaney told FORBES before the release. “Three hundred million is a big number to begin with, but against the expectations and what’s implied in the valuation, it’s not big enough.”

Dorsey said on the conference call that recent product initiatives, such as the instant timeline and logged out homepage, have not had a meaningful impact on bringing new users to the site. He and Noto emphasized that Twitter is committed to becoming a mass market tool, a goal which Noto said will take a “considerable” amount of time.

“You should expect Twitter to be as easy as looking out your window to see what’s happening,” Dorsey said on the call. “If we meet these expectations, and we will, Twitter will become the first thing everyone in the world checks before they start their day.”

Noto said that getting more users onto the platform is both a product problem and a communication issue, adding that the company is planning to run a major marketing campaign by the end of 2015. Dorsey said that Project Lightning, Twitter’s plan to curate content on the site and make it easier for users to follow live events, is expected to roll out sometime this fall.

Management Shakeup

Twitter hasn’t offered a clear timeline for its CEO search, but did announce last month that it had hired a search firm to evaluate internal and external candidates. Sources have told FORBES that Twitter president of global revenue Adam Bain is the clear front-runner. However, Dorsey, who is also CEO of Square, the payments company that is expected to go public this year, is also believed to be a contender for the job.

When asked about his career plans, Dorsey declined to indicate whether he intends to remain at Square or if he is interested in leading Twitter long-term.

“We do not have an update to provide today,” Dorsey said of the CEO search.

After the call, Anthony said investors would like to see Twitter select its next CEO within the next month.

“They should move very, very fast,” Anthony said.

Shortly before Twitter reported earnings, two executives at the company announced they are leaving. Christian Oestlien, who helped lead growth, is going to Google-owned YouTube, and Todd Jackson, a product director, is joining Dropbox.