Twitter Grows Users and Ad Revenue in First Quarter, but Wall Street Shrugs

5 million more users, ad dollars up 36%

Twitter gained 5 million monthly active users in the first three months of 2016, breaking the social media giant's user-growth slump of the past two quarters during which it failed to gain—or actually lost—users.

According to the company's first-quarter earnings statement, Twitter reported 310 million MAUs, up from the 305 million it had reported during the second half of 2015. Revenue totaled $595 million for the quarter, a 36 percent increase over the first quarter of 2015. Twitter reported $531 million in advertising revenue in the first three months of the year. That's up 39 percent from the same period in 2015. In the U.S., revenue totaled $390 million, while international revenue accounted for another $204 million.

However, the company still fell short of earnings expectations, causing its stock to tumble nearly 10 percent in after-hours trading.

"We saw a return to sequential growth in monthly active usage, driven by seasonality and marketing initiatives," states Twitter's letter to shareholders. "We also saw deepening engagement (likes, replies and retweets) driven by a few important product launches, including the enhancements to the timeline and the Twitter-Periscope integration. We remain focused on disciplined execution to drive sustained audience growth over time."

Mobile advertising revenue accounted for 88 percent of total ad revenue in the first quarter. That makes sense considering mobile users now account for 83 percent of the company's user base.

Last month, Twitter celebrated its 10th anniversary. And while marketers say they're happy with returns they've seen from advertising campaigns, investors are impatient for the company to grow its users base more rapidly.

Here are some other noteworthy developments to come out of Twitter's first-quarter earnings call:

The algorithm is working

Twitter said only 2 percent of users have opted out of its "enhanced timeline," the company's way of describing the algorithm that reorders the first part of news feeds with tweets it deems most relevant to each user.

Twitter said it's seen an increase among those using the timeline in tweets, retweets, replies and likes. On the earnings call, Twitter COO Adam Bain said the efforts the company's made to gain new users and foster existing users has led to a 48 percent increase in new follows and a 56 percent increase in mutual follows.

Video is on the up and up

Twitter said it's seen a promising increase both in the performance of existing video products and in the overall interest marketers have shown in spending more on them during the rest of 2016.

Tests have shown video ads have twice the ad recall rate that traditional promoted tweets do, according to Bain. Marketers moving into video also saw a 30 percent increase in ad association compared with traditional promoted tweets, while also increasing lift by 18 percent.

"Ultimately, it's helping drive all aspects of marketers' campaigns and objectives, and video is just performing much better," Bain said.

To illustrate the interest it's received in video advertising, Twitter's letter to shareholders mentioned that three global agency holding companies have renewed contracts in the past month, each with deals centered on video. Twitter said it expects more advertisers in the second quarter to trade up their brands' promoted tweets budgets in favor of promoted videos.

Twitter said it's planning to expand its promoted video with Periscope in the second quarter, working with brands to distribute their broadcasts to a wider audience. The company said it's also gearing up for its three-year relationship with the NFL to livestream Thursday Night Football games this fall, controlling part of the ad inventory before, during and after the games.

"The demand from the marketing community has been strong, and as a result, we expect to access new online video budgets," the company states in its shareholder letter. "In fact, we already have a Fortune 500 advertiser committed to advertising in the live stream with many more expected in the coming months."

Brand spending was down

Overall brand spending declined in the first quarter, even while video ad spending was up. However, the growth in video spending was offset by the decline in ad products without video.

According to Twitter CFO Anthony Noto, fast-food and retail brands on the platform saw "decidedly lower" performance for their ads compared with other categories.

Twitter is live—still

Over the past two quarters, Twitter has continually—and continuously—maintained its focus on live events and live conversation. On today's earnings call, the company reiterated that the live factor is a distinguishes it from social media competitors increasingly betting on live video. Asked by one investor what he thinks about Facebook touting its live functions, CEO Jack Dorsey pointed out that going live is nothing new for his company.

"We've been doing live for 10 years, and we believe we have leadership potential in it," Dorsey said.