Twitter shares were down more than 17.5 percent in after-hours trading in the wake of its first-ever quarterly earnings report. While the company blew past analysts' expectations for revenue, its user growth slowed significantly, leading many to worry it has peaked.
But Twitter doesn't think so. In its earnings conference call, CEO Dick Costolo tried to spin the slowdown in growth by admitting that he knows that the service's experience for new users is far less than ideal, and said the company is planning major initiatives to make things easier for new users from the moment they join the social network.
"There's a lot we can do to significantly improve the user experience," Costolo said. "We believe the changes we're making will lead to a much more satisfying user experience."
In its earnings report, Twitter said that it had brought in $243 million in the fourth quarter, up 116 percent year over year, and that its fiscal 2013 revenue of $665 million was up 110 percent over fiscal 2012. At the same time, it said it had 241 million monthly active users at the end of the fourth quarter, up 30 percent from a year earlier. But that growth number was down significantly from previous quarters, continuing a flattening trend. It had year-over-year growth of 48 percent, 44 percent, and 39 percent in the last three quarters.
Clearly, as Twitter attempts to grow revenue and become profitable, it has to boost its user base, and many worried that although the service has massive global reach, it was beginning to hit a growth ceiling.
That's not a sentiment that Twitter can afford to ignore, nor did it. By admitting that the company knows it has problems retaining new users -- though not providing much in the way of specifics about what it plans to do about it -- Costolo in a way staked the company's future on promising to make things easier for them. If it cannot deliver on that promise, it's hard to imagine that the company will be able to post meaningful revenue growth, no matter how strong its advertising programs are.
Still, while it's too early to know if Twitter can follow through, some observers are impressed that the company is even admitting that it has a problem.
"I thought it was refreshing that [Costolo] was speaking candidly like that," said Gartner analyst Brian Blau. I don't think [Costolo] tiptoed around the issue. He seemed to be articulate about the issue, and at the same time, he seemed to be confident."
Blau added that it can be rare for companies to own up to major structural problems like Twitter has had with retaining new users. For example, he suggested, there's been plenty of talk about Facebook's growing problem with attracting teenage users, but except for one or two moments during a previous quarterly earnings call, "you don't often see Facebook talking about teens," Blau said.
Much of the post-earnings report coverage has focused on Twitter's slowing user growth as the reason for concerns about its future, but Blau isn't convinced that should spook investors. "It seems like the same conversation we were having around the IPO period," Blau said, "that there were user growth and engagement issues...Maybe it was a surprise [to investors] that it actually is happening."
Still, Blau thought that Twitter's fourth-quarter performance was "pretty good," and that the company seems "to have a handle on how to monetize users...They also seem to have a plan for increasing advertising and expanding internationally."
Making things easier
Although Twitter has millions and millions of extremely active users, the service can cause head-scratching among those who don't understand how it works. Costolo said that the company is putting much of its energy this year into solving that problem.
Already, it has made moves like unveiling a "media forward" strategy that front-loads many tweets with things like photographs and video. In addition, it has been working to improve things like conversation flow, so that users see more threaded discussions than simple chronological feeds. On the whole, though, Twitter works well, Costolo argued, and the changes it must make are hardly fundamental. "We don't think we need to change anything about the core characteristics of our platform," he said. "We just need to make Twitter a better Twitter."
From Blau's perspective, that was a key point. "One of the best things I heard [during the call] was the plans for changing the user experience," Blau said. "Not moving away from the core product, but making it a lot more accessible to users."
One thing Costolo was clear about was that Twitter must make it simple for new people to join and begin using the service on mobile devices. In its earnings report, Twitter said that 76 percent of its monthly active users were on mobile, highlighting the importance of making the mobile Twitter experience as good as, if not better, than on desktop computers.
Then again, Twitter has been constantly refining its user experience across all devices to be consistent, and to be geared toward an easy mobile experience. It also has one structural advantage over Facebook in that its ability to display ads on mobile devices is essentially the same as on desktop computers.
Costolo also noted that the company is crystal clear that new users aren't giving it a grace period when it comes to understanding how to use the service. If they don't understand, they leave. "It's very much about making it easier for people who first come to the platform to get it," Costolo said. "It's not just get it in their first weeks and months on Twitter, it's get it in their first moments on Twitter. That is absolutely a focus area for us."