Dick Costolo

Twitter plays defense in first earnings call

February 5, 2014: 6:48 PM ET

To attract more users, "We simply need to make Twitter a better Twitter," says CEO Dick Costolo.

Dick Costolo

Dick Costolo

FORTUNE -- In its first quarterly earnings report as a public company, Twitter's (TWTR) CEO Dick Costolo was on the defensive. The company, which has not yet turned a profit, reported strong top line revenue growth with widening losses.

Twitter Wednesday reported fourth-quarter earnings of $243 million, an increase of 116% over the same period last year. The company reported a loss of $3.41 in earnings per share. For the full year, Twitter earned $665 million in revenue, an increase of 100% over last year. The company lost $1.41 in earnings per share in 2013.

But the widening loss is not what sent Twitter's stock down by 17% in after-hours trading.

Analysts, the press, and the tweeting echo chamber are all concerned with Twitter's user growth. The company reported 241 monthly active users last quarter, which is only 9 million more than it had last quarter -- a 3.8% increase.

Both Twitter and Facebook (FB) have experienced slowing user growth (Facebook's sequential user growth was 3.4% last quarter), but the difference is that, with 1.2 billion monthly active users, Facebook already has almost half of the world's Internet users on its service. Twitter has a much smaller audience to sell to advertisers. The company's $36 billion valuation was based on the idea that Twitter would grow to Facebook-like size and eventually earn Facebook-like profits.

On its earnings call Wednesday, Costolo and CFO Mike Gupta dedicated a lot of airtime to Twitter's plans for reversing the stagnating user growth. In order to attract new users, re-engage the ones who abandoned the platform, and keep its existing users happy, Twitter needs to be accessible to the average person, not just power-user media junkies who speak in a bizarre language of hashtags, abbreviations, and inside jokes.

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Costolo pointed out that Twitter has massive awareness levels. Everyone knows what Twitter is. But not everyone who knows about Twitter has signed up for the service, and those that do are often confused by it. Solving that, Costolo argued, is "about making it easier for people who first come to the platform to 'get it' more quickly."

As such, Twitter launched a number of improvements to its service, including a better onboarding experience for mobile users, more photos and videos in the stream of Tweets, and better direct messaging and conversation tools, all of which started to "get that flywheel of increased interaction happening," he said. These initiatives, introduced last quarter, had positive results, giving Costolo the confidence that Twitter will be successful in attracting more users, he said. "Those additive changes ... will start to change the slope of that growth curve going forward," he said. "We simply need to make Twitter a better Twitter."

No matter the positive spin, analysts were fixated on the growth issue, repeatedly broaching the topic during the earnings call as Costolo defended Twitter's efforts. (One analyst apologized for "beating a dead horse.")

This is, surprisingly, the first time Twitter has actually put any effort into user growth. "Up until last year our growth has been viral and organic. Growth was something that happened to us," Costolo said. Now, it's up to him to make it happen.

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