Can Twitter Inc (TWTR) Fix The MAU Issue?

For Twitter Inc (NYSE:TWTR), the retention, conversion and growth of MAUs (monthly active users) remains the most critical issue in the near term. It is in a similar kind of situation that Facebook (NASDAQ:FB) faced between mid-2012 and mid-2013.

Unlike Facebook's sentiment downturn, Twitter's issues seem like easier fixes. Facebook was tasked with pivoting its entire company and inventing effective native mobile advertising, both daunting challenges. Twitter doesn't appear to have an awareness issue (the top of the user funnel is solid), but more of a MAU conversion and retention problem.

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Twitter remains arguably the best ways to play the biggest trend in consumer internet –mobile, which represents over 70 percent of usage and 80 percent of company revenue.

The company has some of the best engineers in silicon valley working on a number of product enhancements, and Twitter is going to figure it out. Over the past few quarters Twitter has launched 27 new features and product enhancements.

Deutsche Bank analyst Ross Sandler said the vast majority of features and product initiatives rolled out over the past several months are designed to drive up engagement of existing users, not necessarily generate growth in new users.

Secondary to the MAU debate, Twitter has done a good job of advancing its monetization plans. Market observers believe that Twitter saw significant budget flow during peak moments of the Olympics and other events in the first quarter and that allocations in 2014 remain solid.

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There has been much debate around how to measure engagement for Twitter, given the limited disclosure. Twitter measures engagement in Timeline Views per MAU (TLV/MAU). The common thought is, in the absence of better metrics, using TLV/MAU is the best measurement.

However, the decline in TLV-per-MAU starting in the third quarter was more a function of the product changes versus actual engagement declining, specifically, the threaded conversations design change.

According to management, engagement measured by retweets and favorites, was up 35 percent sequentially in the fourth quarter following the media-forward initiatives. TLV/MAU, on the other hand, continues to decline.

Sandler noted that the company rolled out the new version mid-third quarter, and hence started to see significantly fewer TLVs, despite improvement in the user experience. Prior to the change, any user who opened a conversation could see 3+ TLVs as they flicked back and forth between the core timeline and the threaded conversation.

Under the new design, the user stays in their home timeline and just expands the conversation without adding to the TLV count. This impact started to show up partially in the third quarter but for a full quarter in the fourth quarter.

While some investors are likely to remain skeptical that engagement is actually increasing, he is finding that the experience is better and more engaging under the new design. Either way, this impact normalize, and it should start to flatten out sequentially in the first quarter.

A survey by Deutsche Bank among current, prior and non-Twitter users show that engagement among current users is high (nearly 50 percent of the active Twitter users use the service more than once a day), and most find Twitter second to only Facebook in terms of preferred social networks.

The survey also found that 57 percent of past Twitter users stated they would consider using the service again, and they cited better sorting and filtering tools and improved set up process as key areas that would encourage them to use Twitter again. Most past users are not aware of new/improved features.

For non-users, 30 percent state they would consider using Twitter and a shocking 95 percent responded that they hear about Twitter at least once or twice per week, and 62 percent at even higher frequency, and over 80 percent of non-users hear about Twitter specifically on TV each week.

These insights highlight that most issues around attraction, conversion and retention of MAUs are largely fixable. Twitter is well aware of and working on these issues and are comfortable that MAU growth could re-accelerate at some point in 2014.

Sandler says though it remains unknown when Twitter's MAU growth could accelerate, the company is laser focused on this effort, and it's not the most challenging problem he has seen facing a consumer Internet company.

Historically, there have seen several instances of multiple expansion and upward estimate revisions once user growth re-accelerates.

For instance, LinkedIn's (NYSE:LNKD) user growth reaccelerated in the fourth quarter of 2012 after 5 quarters of deceleration, and the stock surged from $105 in the fourth quarter of 2012 to $245 in the second quarter of 2013.

Another case is the strong performance of Zillow Inc (NASDAQ:Z). In early 2013, the company saw user growth reaccelerate during the early stages of its TV marketing campaign. Zillow stock nearly tripled from $30 in early 2013 to over $90 in late 2013 as user growth reaccelerated from 40 percent to nearly 70 percent on the back of TV.

As such, Twitter's MAU conversion and retention issues are solvable, and shares should work higher as this factor becomes clear to investors, or user growth picks up.

However, Sandler said the timing is uncertain as there are a number of seasonal and product-related factors, but he believes MAU growth should accelerate at some point in 2014.

Consensus currently calls for around 255 million MAUs in the first quarter, or 14 million net additions, above last quarter's 9 million, with buyside expectations at 10-12 million net additions, which is do-able.

Importantly, while MAUs are critical near-term topics, Twitter continues to make progress in all areas of its business, including engagement, user experience and monetization.