Twitter (NYSE:TWTR) reported its fourth-quarter earnings last Thursday. The company handily beat revenue and EPS expectations, posting revenue of of $479 million and earnings of $0.12 per share. Analysts had been expecting $0.06 in earnings per share on revenue of $453.1 million. The one disappointment in Twitter's report was that the company added only 4 million net active users. Twitter attributes losing 4 million active users to third-party integration issues.
After the earnings release, CEO Dick Costolo and CFO Anthony Noto spoke to analysts and took questions from Twitter users. Here are five of the most important takeaways from Twitter's fourth-quarter earnings call.
About those 4 million lost users
We lost 4 million monthly active users due to the iOS 8 integration. 1 million of those monthly active users were Twitter owned and operated monthly active users, and 3 million were on Safari -- what we call Auto Point MAUs -- and we lost those.
-- CFO Anthony Noto.
Not many people realize that Apple integrates Twitter into its Safari browser. If an iPhone user goes to his reading list in Safari, there's an "@" tab that lists links shared by your contacts on Twitter. In previous versions of iOS, Safari used to automatically ping Twitter to get those links. In iOS 8, Safari no longer pings Twitter automatically. Because of that change, Twitter lost 3 million active users.
That's OK, though, considering those "active" users didn't provide any revenue to Twitter. What's more, they didn't even provide a real opportunity to generate revenue.
The other 1 million lost users are due to issues on Twitter's side, as users upgraded to iOS 8 and were unable to log into Twitter for various reasons. Noto noted that it's made progress on engaging those users throughout the quarter, and the negative impact of Twitter's iOS 8 issues should be mitigated in the future.
Why we won't be getting any more engagement metrics
We're no longer going to provide the metric of timeline views, and the reason for that is it's really a measurement that doesn't reflect the initiatives that we're doing. In fact, if anything, we're taking specific initiatives and product changes that will hurt timeline views.
Over the past year, investors have gotten used to seeing Twitter report lower engagement in terms of timeline views per user. Twitter had previously guided for a flat engagement level for the fourth quarter but surprisingly saw a 3% increase in timeline views per user.
But Twitter's management is now focused on engaging its audience in different ways -- including logged-out visitors. The new "While You Were Away" feature -- which shows you a recap of top Tweets you might have missed from accounts you follow -- will decrease the number of timeline views but keep users coming back to the service, which is arguably more valuable.
Ad prices are increasing
Cost per ad engagement grew 10% year over year due to both mix shift to higher price and higher performing ad units as well as an increase in same format CPE.
Twitter has been growing revenue extremely well over the past couple of years, but it's been doing so simply by increasing its ad load. Twitter is still a long way away from reaching the 5% ad load it outlined at its analyst day in November, but it's nice to see an increase in cost per ad engagement.
Increasing ad prices is key to Twitter's long-term growth, and the fact that Noto specified an increase in same-format ad prices indicates that demand is outpacing Twitter's supply. If Twitter can continue to grow ad prices as it expands inventory, it should easily sustain its robust revenue growth.
Where is that $500 million to $650 million in capex going?
There's two big investments in capex in 2015. One is a third data center. ... The second thing that's impacting capex in 2015 is real estate capital expenditures.
In 2014, Twitter spent just over $200 million on capital expenditures. In the company's outlook for 2015, it said it plans to spend $500 million to $650 million in capex.
A third data center will provide additional redundancy, ensuring that Twitter's service rarely ever goes down. It will also speed up performance. The company's decision to buy additional office space in San Francisco and New York is necessary as the company expands. Overall, real estate costs will more than double in 2015.
Things to consider for the next couple of quarters
Revenue in Q1 2014 benefited from the Olympics, which is obviously not going to occur again in 2015. ... In the second quarter of 2014, we benefited from the World Cup.
Noto was kind enough to provide estimates for what revenue growth would have been without those two events. For the first quarter, he estimated sequential revenue growth would have been negative 1% instead of a 2% increase. Without the World Cup in the second quarter, he believes sequential revenue growth would have been just 15%, compared with 22%.
The company will benefit from the Cricket World Cup this quarter, providing a similar experience to the FIFA World Cup from last year. Still, Noto guided for a 7% sequential decrease in revenue. Without any other major events until 2016, Twitter will have to rely on attracting visitors organically.
A lot to like
Costolo and Noto provided a lot of details about last quarter and what they have in the works for 2015. From a financial perspective, Twitter had a phenomenal quarter, and that momentum looks as if it will continue into 2015. The company's full-year guidance came in slightly above expectations. While more user growth would have been nice, the reassurance that first-quarter numbers are back on track put investors at ease.