Twitter (NYSE:TWTR) reported its third-quarter earnings yesterday and set a record for net change in monthly users. The company lost 9 million monthly users, by far its largest ever quarterly decline. When it lost just 1 million monthly users last quarter, Twitter stock dropped 19%. This time? TWTR surged over 15%.

Twitter Reports Huge Decline in Monthly Users  

Twitter’s Q3 2018 earnings report contained a very big number that went in the opposite direction that investors usually want to see. Monthly active users (MAU) dropped to 326 million for the quarter. That’s down 4 million from Q3 2017, but the slide is much more shocking when compared to last quarter: a drop of 9 million users compared to Q2. 

President Donald Trump, too, has commented on the marked decline in his own Twitter followers, dubbing the social media company “a blimp”:

Twitter has removed many people from my account and, more importantly, they have seemingly done something that makes it much harder to join – they have stifled growth to a point where it is obvious to all. A few weeks ago it was a Rocket Ship, now it is a Blimp! Total Bias?

— Donald J. Trump (@realDonaldTrump) October 26, 2018

In Q2, investors punished Twitter stock for a much more modest MAU drop, yet this time around TWTR is surging. What gives?

A New Focus on the Health of the Platform

One factor that contributed to the much different reaction to the MAU decline this time around is the recognition that Twitter is acting proactively to shut down accounts that hurt the platform. Social media companies like Twitter and Facebook (NASDAQ:FB) have been increasingly subject to scrutiny over their users. That includes government pressure over accounts that have been used to influence U.S. election results, growing demand to shut down accounts used to promote hate speech, and bots that skew numbers.

Twitter spikes out that big MAU decline and owns it, pointing out that “decisions we have made to prioritize the health of the platform” are a key factor. That’s very different from users bailing on the platform.

In contrast to the MAU decline, the company reported a significant 9% uptick in daily active users (DAU). This is also good news, suggesting Twitter account users are increasingly more active and more engaged — which has upsides in platform loyalty and ad sales potential.

While a small MUA drop was met with consternation in Q2, the growing emphasis around building a healthy platform by weeding out undesirable accounts turned this quarter’s purge in MAU into a win for Twitter Stock. Of course, there were other factors as well.

TWTR Beats Revenue and Earnings Estimates

Actively cleaning up its user base was one part of a winning quarter for TWTR. The other was financial. The company beat expectations for both revenue and earnings.

Q3 revenue of $758 million was a 29% gain year-over-year. Those numbers included an encouraging performance for advertising on Twitter. Total ad revenue also increased by 29% to $650 million, ad engagements increased by 50% and the cost per engagement dropped by 14%. In other words, the platform has proven more effective for advertisers — with users much more likely to look at an ad, and the cost for each of those views dropping. This trend is likely related to Twitter’s ongoing efforts to weed out fake accounts, and it bodes well for future growth in advertising revenue and Twitter stock.

As Reuters points out:

“This time, investors welcomed Twitter removing accounts used for disinformation, hate speech and other abuse as the best way to solidify a base of high-quality users who are attractive to advertisers.”

TWTR profit was also up. While analysts had been looking for the company to report 14 cents EPS, Twitter delivered 21 cents EPS in its fourth straight profitable quarter.

While Twitter stock closed up over 15%, at $31.80, it still has a long way to go to hit the $69 high it reached in 2014. There are still questions about Twitter’s future, including whether the platform has plateaued in terms of users. In particular, those MUA numbers can’t continue to drop, or they will get much tougher to explain away. But this quarter showed that the company’s efforts to clean house are paying off with greater user engagement and increasing advertising revenue.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.