Twitter Shares Tumble As Users Disappear

Updated with comments from conference call with analysts, investors.

For the first time ever, Twitter's  user base, by an important metric, is shrinking.

Twitter  shares fell as much as 14% in after-hours trading after the social network on Wednesday reported that the number of monthly active users, excluding SMS "fast-followers" who access the site from a feature phone, dropped from 307 million in the third quarter to 305 million in the fourth quarter. As investors digested the company's fourth-quarter financial results, which were relatively robust and above analysts' expectations, the shares recovered much of their losses. They were up 4% in regular trading.

Revenue in the fourth quarter, ending December 31, was $710.5 million, up 48% from $479 million in the same period a year earlier and slightly higher than the $709.9 million’ expected on average among analysts polled by Yahoo Finance. Twitter previously offered fourth quarter revenue guidance of between $695 million and $710 million.

The San Francisco, Calif.-based company posted a net loss of $90.2 million, or 13 cents a share, compared with a year-earlier loss of $125.4 million, or 20 cents a share. Excluding certain expenses, Twitter said it would have earned $191.4 million, or 16 cents a share, topping forecasts of 12 cents per share on that basis.

Twitter said revenue for the first quarter of 2016 would be about $595 to $610 million, lower than the $629.3 million analysts were forecasting according to Yahoo Finance. Twitter forecast adjusted net income of $150 million to $160 million in the first quarter, in range with analysts' estimate of $151 million.

Once again, user growth in the latest quarter was sluggish. Total monthly active users in the fourth quarter grew 9% year-over-year, remaining at 320 million, compared to 320 million in the previous quarter. Excluding “SMS fast followers,” or users who access Twitter via feature phones, monthly active users increased by just 6% year-over-year to 305 million in the fourth quarter, from 307 million in the prior period. However, Twitter said it has already made up for those user losses on the same basis. The company saw year-over-year user growth of 18% in the first quarter of last year, 15% in the second quarter and 11% in the third quarter. And for the first time, Twitter also lost U.S. users, which dropped from 66 million monthly active users to 65 million monthly active users in the fourth quarter.

Twitter's ongoing struggle to attract new users raises questions about the company’s ability to simplify its product and give the service mainstream appeal. Twitter's user growth stands in stark contrast to other popular social apps such as WhatsApp, which has 1 billion monthly active users and Instagram, which has 400 million. By comparison, Facebook saw user growth of 14% in the fourth quarter, despite having about five times as many users as Twitter.

On Wednesday's call with analysts and investors, the company's CFO Anthony Noto said the size of its user base has remained flat, including SMS followers, from the third quarter, to the fourth quarter and in January. Twitter said it sent fewer emails to dormant users in the fourth quarter, which may have affected its monthly active user figures.

Twitter has had a rocky start to the year, recently losing nearly half of its top executives and repeatedly getting pushback from users resistant to proposed product changes. The company's CEO Jack Dorsey said his number one focus is on recruiting people for engineering, product and design positions. For Twitter's board, Dorsey said he is looking for candidates with public company, international, media and financial experience. Regarding the product, he said the big focus will be on refining the site's timeline and ensuring interface details, such as the way users can reply to or mention others on the service, are simpler to use.

"We have some really weird rules around conversation and replies that no one understands, and we need to fix those things," Dorsey said on the call.

He said Twitter's new curated "Moments" tab is performing well (although he didn't offer metrics). And he said tests of a new curated "best tweets" feature, which rolled out Wednesday, has also boosted the volume of tweets and retweets user post.

Twitter is projected to capture a 9% share of global social network ad spending this year, according to forecasting firm eMarketer. Facebook is expected to capture the majority at 65.1%. eMarketer says Twitter’s ad revenue will grow by 45% this year and that Facebook’s will grow by 31.5%.

Twitter rose 4.03% to $14.98 during regular trading Wednesday. The stock is down about 35% this year as of Wednesday’s close.