Twitter (NYSE:TWTR) built up some very strong momentum in 2019, exiting the year with 152 million monetizable daily active users (mDAU), up 21% from the end of 2018. 

That's faster growth than its biggest rival in social media, Facebook, which grew DAUs less than 9% on its flagship platform and about 11% across its family of apps. Even Snap, which saw a resurgence in user growth in 2019, grew its user base more slowly, at just 17% for the year.

Twitter CEO Jack Dorsey attributed half of the 26 million mDAUs the company added last year to product improvements. In order to maintain that momentum, the company will invest heavily in improving its platform this year.

Wood-carved @ and # symbols, and the Twitter bird logo made of California license plates

Image source: Twitter, Copyright Troy Holden (@troy) for Twitter, Inc.

Transforming Twitter

In his prepared comments for Twitter's fourth-quarter earnings call, Dorsey said the ability to follow interests and topics instead of only individual accounts on Twitter will be "transformational" for the platform. The company started enabling users to follow Topics last quarter and said it saw great improvements in engagement. Users are able to see suggested Topics in their timeline, which should lead to greater time spent and engagement on the app.

Dorsey sees Topics and interests as especially useful in onboarding new users. The work the company is doing on improving its artificial intelligence and cataloging accounts by topic will make it easier for new users to find relevant accounts and topics to follow when they first sign up for the service, increasing the chances they'll come back again and again.

Twitter has also been investing in what it calls the "health" of the platform. It's proactively working to reduce abusive tweets and remove them. It's also working to ensure misinformation and disinformation, particularly around political elections, doesn't spread on its platform.

User engagement and retention has historically been a weakness for Twitter. But the strong growth in mDAU suggests that improvements to the platform, including following Topics, innovations to the Lists feature, improving the health of the service, and better AI recommendations are working to improve the number of existing users who log in daily. CFO Ned Segal says there's still a lot of room to improve engagement among existing users and sign up new users.

Increasing its investment in those areas ought to produce continued acceleration in user growth.

Twitter is also investing in its mobile application promotion platform (MAP), which created issues for it in the third quarter, when the company recognized it was inadvertently targeting users based on data it wasn't supposed to. Management believes reworking the platform will not only help return mobile app advertising spend, but also more general direct-response advertising.

A hit to the bottom line

Twitter is planning to increase its expenses about 20% in 2020. That includes a 20% increase in headcount over the course of the year to support product improvements.

The climbing expenses will have a noticeable impact on the company's bottom line. In fact, Twitter's fourth-quarter earnings per share came in below expectations despite it outperforming revenue expectations. EPS came in at just $0.25 compared to $0.29.

For the first quarter, management expects operating income between $0 and $30 million. That's down from about $94 million in the first quarter last year. Additionally, management expects its increased expenditures to be more heavily weighted toward the back half of the year as it onboards more personnel and ramps up investments over time.

In addition to the operating expenses, Twitter is also boosting its capital expenditures in 2020. It expects capex to climb 45% to 55% year over year, compared to the 10% increase it made last year. The biggest impact will come from a new data center it's building to support the audience and revenue growth it's expecting. Segal noted this is not the new normal for capex growth, and investors should expect a return to lower levels in 2021. The burden on free cash flow should be short-lived.

The long-term potential

Twitter still has a lot of long-term potential to increase its user monetization. The biggest factor holding it back is advertiser demand. Once again, Segal told investors that it's more "demand constrained" than "supply constrained." In other words, attracting more advertisers is its best path toward revenue growth.

In prior years, though, Twitter has under-invested in its research and development as it sought to reach profitability. That was compounded last year by the mishap with MAP. Long-term investors should welcome the move to increase investments in 2020.

That said, improving the ad platform and attracting new advertisers will take time. Revenue growth may be a lagging indicator of the company's health, as marketers will want to see strong user growth and engagement and better ad technology before pouring their ad budgets into Twitter. 

Segal noted he expects average revenue per user to improve over time (it has declined in each of the last two quarters), but it won't be a constant improvement. Investors should expect the tech company's investments to improve user growth and engagement before translating into revenue growth. That's further emphasized by Twitter's outlook for the first quarter; the midpoint is below analysts' consensus.