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Twitter's easy growth stalls as CEO vows to address slowdown

A Twitter logo on the New York Stock

A Twitter logo on the New York Stock Exchange on Nov. 4, 2013. The San Francisco-based social network, posted its first earnings report Wednesday, Feb. 5, 2014, the first since going public in November. The company said its monthly active users totaled 241 million in the fourth quarter, up 30 percent from 185 million a year earlier. Credit: AP / Richard Drew

Twitter Inc., the microblogging service that amassed more than 200 million users in seven years, is now struggling to widen its audience as quickly. The shares tumbled in early U.S. trading.

The San Francisco-based social network, which Wednesday posted its first earnings report since going public in November, said its monthly active users totaled 241 million in the fourth quarter, up 30 percent from 185 million a year earlier and slower than 39 percent seen in the prior period. Usage also dipped, with 148 billion views of Twitter timelines compared with 159 billion views in the third quarter.

While chief executive Dick Costolo said in an earnings call that he is focused on reversing the trend, Twitter's stock plunged as much as 23 percent in early trading.

The results raised concerns that Twitter's easy growth phase is ending. As recently as a year ago, Twitter, which began in 2006 and lets people communicate through 140-character messages, was adding new users at rates of more than 60 percent a year and timeline views were soaring. If the usage declines continue and new members join more gradually, the unprofitable company may fall short of its goal to be a mainstream service like Facebook Inc. and may find it difficult to justify its $34.7 billion market capitalization, which makes it more valuable than Target Corp. and Inc.

"Twitter needs to answer the question about whether it can ever become a mass-market product, or whether it's more destined to be a niche for news junkies," said Robert Peck, an analyst at SunTrust Robinson Humphrey Inc. in New York, who has the equivalent of a hold rating on the stock. "Depending on how fast it's growing, that's what we're willing to pay for it." Costolo said on the earnings call that the company has a plan to increase the number of users and engagement, primarily by making the site easier to use.

"Up until last year, our growth has been viral and organic," he said. "Growth was something that happened to us." Now "it will be a combination of changes introduced over the course of the year that will start to change the slope of the growth curve."

Twitter's stock dropped as low as $50.54 in early trading, after a decline of less than 1 percent to $65.97 at the close in Manhattan. Twitter has more than doubled since it debuted on the stock market at $26 a share on Nov. 6. Twitter trades at 33 times projected 2014 sales, making it pricier than Facebook, at 17 times, and LinkedIn Corp., at 12 times.

Fourth Quarter For the fourth quarter, Twitter reported revenue of $242.7 million, up from $112.2 million a year earlier. Analysts had projected an average $218.1 million, according to estimates compiled by Bloomberg. About 75 percent of Twitter's advertising revenue came from mobile devices.

Yet net loss widened to $511.5 million from $8.7 million a year earlier, and was more than double analysts' projections of $253.5 million. The loss was driven by a $521 million stock- based compensation expense. Total spending also soared to $752 million, up more than six times from $121 million a year earlier.

Over the quarter, the number of timeline views may have decreased because Twitter has been working to make each one more valuable, with more people sharing and clicking to "favorite" each others' messages, Costolo said on the call.

Brian Blau, an analyst at Gartner Inc., said the slowing user growth was troubling, given that Twitter's advertising business depends on more people spending time on the service.

"They've got some user engagement issues," said Blau. "What I don't see here is any kind of formula that says they've got the killer gigantic big kinds of products and revenues that you see from companies like Facebook and Google. They're trying to fix it, but they're not there yet." Twitter's Guidance Twitter forecast first-quarter revenue of $230 million to $240 million, topping analysts' estimates of $214.9 million, according to data compiled by Bloomberg. The company said revenue for the full year could reach $1.15 billion to $2 billion. It projected 2014 capital expenditures of as much as $390 million.

Twitter, which initially didn't price its IPO aggressively, is seeking to avoid the fate of other Internet companies that went public in the past few years that were hyped at the time of their offerings. Facebook, Groupon Inc. and Zynga Inc. all dropped more than 50 percent within a few months of their initial share sales. While Facebook's stock has since recovered, Groupon and Zynga remain below their IPO prices.

Facebook last week said quarterly revenue rose 63 percent from a year earlier, with more than half of advertising sales coming from mobile devices, while net income increased more than eightfold. The results sent the social network's stock soaring.

Twitter is trying to capitalize on the growth of advertising on smartphones and tablets, where most of its users spend their time. The company has added features for advertisers, such as one that lets them target people who are already interested in a brand's products. Twitter is also working to expand promotions outside of its social network after acquiring MoPub, a mobile ad exchange.

The company has stepped up the pace of its product development in order to attract users. Twitter began highlighting images in timeline feeds over the past few months and enabled people to send photos through direct messages, in competition with applications such as Facebook's Instagram and Snapchat Inc.

Twitter will also focus on improving its messaging capabilities and experiment with displaying information in a more topic-based format, which helps newer users understand the service more than chronological displays can, Costolo said.

Twitter isn't predicted to make a profit until 2016, according to data compiled by Bloomberg. Analysts have been split on the company's potential, with price targets as low as $20 from Hudson Square Research or as high as $75 at Stifel Nicolaus.


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