Source: Twitter

Twitter (NYSE:TWTR) reported its fourth-quarter earnings on Thursday. While the company beat analysts' expectations on both the top and bottom lines, it fell short on the number of new monthly active users. Earnings were double expectations, coming in at $0.12 per share versus expectations of $0.06. Revenue came in at $479 million compared to expectations of $453.1 million.

But net active user growth sorely disappointed. It ended the quarter with just 288 million MAUs, a 4 million-user increase from the quarter before. Overall, that still represents a 20% increase in users year over year, but analysts were expecting 290 million to 295 million users.

Where are all the users?
In the earnings report, CEO Dick Costolo pointed out that the company lost about 4 million monthly active users due to changes in third-party integration. That's likely a referral to updates in iOS 8 that reduce auto logins. On the upside, those users don't provide much value to Twitter.

Still, adding back in those 4 million third-party users would put Twitter's user growth at just 8 million. That's well short of the 13 million to 16 million new users Twitter added in each of the first three quarters of the year.

However, Costolo believes the company is on track to grow users similarly to the first three quarters of 2014 in the first quarter 2015. That would put user growth in the 18% to 19% range, maintaining its growth rate from the past two quarters.

More important than user growth, however, is Twitter's ability to monetize its users (logged-in or not, on its app or a third party's). To that end, Twitter's financial performance was outstanding.

Engaging users
As Twitter grows, its average engagement in terms of timeline views per MAU has decreased steadily. A large part of that has been trouble engaging new users and making the onboarding process easier. Twitter seems to be making progress with new users, as the number of timeline views per MAU climbed year over year for the first time since the company went public.

For the quarter, Twitter users viewed an average of 631 timelines compared to 613 last year. Management had previously guided for no growth in engagement, so this turnaround is a pleasant surprise.

A more pleasant surprise is that Twitter has been able to capitalize on its engagement. The company grew ad revenue per 1,000 timeline views to $2.37. That's a 60% increase year over year. Internationally, the company is making strong progress increasing its ad load, which resulted in a 94% increase in revenue per timeline view.

Expanding EBITDA margins
One of the most surprising metrics from Twitter's fourth-quarter earnings report is the 12-percentage-point increase year over year in EBITDA margin. The company generated $141 million in adjusted EBITDA for the quarter, representing 30% of total revenue. This factor is largely responsible for the significant earnings beat the company posted.

While Twitter typically sees higher than average EBITDA margins in the fourth quarter due to higher ad demand, it expects the trend to continue into 2015. For the first quarter, Twitter guided for revenue of $440 million to $450 million (slightly below analysts' expectations) and EBITDA of $89 million to $94 million. At the midpoints of its guidance, that's a 20% EBITDA margin, versus 15% in the year-ago quarter.

Investors shouldn't want EBITDA margin to get too large in the near term. Growing EBITDA margin is a sign that Twitter is generating more revenue than it can invest in its business. The outperformance in revenue compared to expectations is the likely reason why EBITDA margin expanded so much. It's also the likely reason why we've seen an acceleration in the number of new features and partnerships Twitter announced since the beginning of the year.

Who needs new users?
While Twitter certainly disappointed by only adding 4 million net active users, it made up for it by outperforming where it really matters -- in the earnings results. If Twitter wants to continue making the case that its total audience is more valuable than its active users, it needs to continue showing that it can outperform its revenue expectations, and reinvest that revenue into new features that can help monetize its whole audience.