Twitter had a terrible quarter for user growth. Here's why that's good news.
It only added 4 million users during the final quarter of 2014. That gives Twitter 288 million monthly active users, which was up 20% from the same period a year prior.
On the earnings call Thursday, Twitter said it lost 4 million active users to a problem with Apple's iPhone software, iOS 8.
Apparently, in iOS 7, Apple's browser Safari was automatically pinging Twitter, regardless of whether or not the person was actually using Twitter. Apple shut that down, taking away 3 million not-so-active users that Twitter called active users. The other million users were affected by some sort of encryption issue that stopped them from using Twitter.
While, Twitter tried its best to spin this as no big whup, it just leads to more questions than answers. How does it count other active users if it counted these millions of people who don't really care about Twitter?
And yet, despite these issues with user growth, Twitter demolished expectations on the top and bottom line. It generated $479 million in sales, up 97% year-over-year, well ahead of expectations of $453.6 million. Its adjusted EPS was $0.12, double expectations of $0.06.
The fact that Twitter's revenue was strong despite weak user growth is good for Twitter. It shows that users aren't necessarily connected to revenue right now.
The big, looming concern for Twitter is that eventually its revenue growth will match its user growth. If users remain relatively small, then advertisers are unlikely to spend in a big way on the platform. That could still be the case, but for the past twelve months, Twitter has posted ~100% revenue growth, while only growing users ~20-something% on a quarterly basis.
Twitter's revenue growth gives Twitter time to experiment with its product and attract new users, which is what Twitter is doing right now.
On the call, CEO Dick Costolo said that new product initiatives should lead to Twitter adding ~14 million new users this quarter. In an interview with us he reiterated this. He said he believes new products will attract new users, and it will also appeal to people that tried Twitter, then bailed on it.
Maybe these products will work. Maybe Twitter will get lots of users.
Or, maybe Twitter's doomed to be a relatively small social network forever. Perhaps it's going to be niche.
Even if that's the case, Twitter has lots of opportunity to grow revenue. It has people coming to Twitter.com that are logged out, and Twitter can serve those people ads. It is building an ad network where it can serve promoted tweets outside of its apps and its site. And then it has its "Fabric" initiative, which Twitter hopes will serve as an infrastructure for mobile apps everywhere.
Since Twitter, went public the world has been fixated on its "product" issues. People think that Twitter's big problem is that it's just too hard to use. That's a fair criticism. Twitter is hectic, idiosyncratic, and weird.
However, this quarter makes it clear that Twitter's success isn't necessarily tied to Twitter the product. It has a whip smart ad sales team that will figure out whats to make money from tweets regardless of how many people are actively using Twitter.
This has been the story of Twitter since it started reported earnings a year ago. But, sometimes you have to see something happen four times in a row before you really believe it can continue happening.