Twitter — Death Spiral or Resurrection?

Twitter — is it beginning its death spiral or is it the beginning of its resurrection? Curious and inquiring minds want to know.

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Big Red Car here in the ATX which is a little dark and gloomy today, though it is warm.

So, for some reason I have been taking a hard look at a lot of tech companies. Yesterday, we talked about the Snapchat IPO.

If you missed it, it is here: Snapchat Snapshot. <<< link

Today, we talk Twitter.

Hey, Big Red Car — President Trump loves Twitter, no?

Yes, dear friends, the new President of the United States is a 70-year old Twitter aficionado. If that were enough, Twitter would be streaming, gleaming, and beaming. One big customer — even the Most Powerful Tweeter in the World — is not enough.

How is Twitter doing, Big Red Car?

So, Twitter just released its Q4-2016 performance and there is a lot to ponder. Before we go there, let’s take a look at some transcendental issues, shall we?

Here are some troubling macro considerations about the company in general.

 1. The stock price has not been a pretty thing. From an 8 November 2013 initial price of $41.65 to a high of $69.00 on 10 February 2013 to $18.72 on 8 February of 2017 to $15.68 as this blog post is being written. It has, arguably been a disappointment. No bueno!

From the high price of $69.00 three years ago to the day to a current price of $15.68 has been a let down.

Bit of a macro view, but folks own stocks to gloat as they go UP, not to cringe as they go DOWN. Wall Street does not believe in style points, even the Russian judges.

 2. The company shares its CEO, Jack Dorsey, with Square, another company with Dorsey’s fingerprints on the murder weapon. Strict corporate governance types might question the wisdom of having a sharing arrangement with another company, particularly at a time like this. You can judge that for yourself.

The Big Red Car thinks it’s folly. A big company like Twitter requires its own full time CEO — but, what does a 1966 Impala convertible know about such things? It is hard to think a guy, even a brilliant guy like Jack Dorsey, can be the CEO of two significant enterprises at a time like this.

In the pursuit of fairness, let’s say that Dorsey was lured back to the company in 2016 with an agreed upon objective of “turning around” Twitter. Fair play to him.

He promptly trimmed its workforce by about nine percent and re-tooled the Board of Directors. This may be deck chairs on the Titanic, but no turnaround gets done over night, even if you’re working full time. Give the guy some breathing room, no?

 3. The company has lost a bit of talent at the top (Chief Operating Officer and Chief Technical Officer), thereby putting a bit more pressure on Twitter Jack Dorsey. Re-read the previous point, #2 above.

 4. The company put itself up for sale, disastrously some will be inclined to say, in late 2016. After showing a lot of ankle and promising a very good time for a new acquirer,  when the lights came up, the music stopped, the beer goggles were trashed, Twitter went home without a mate. Seemed a bit amateurish.

This is always a bad sign when nobody wants to date you at any price. It was, actually, a little weird.

 5. Twitter also did some pruning, selling off Fabric to Google while shutting down its much ballyhooed Vine video app. When you start selling stuff to Google, it is not a leap of faith to think Google might be the ultimate acquirer of Twitter. See #4, above.

 6. One is forced to ask — Are the cool kids still using Twitter? [Pro tip: President Trump is not likely to be considered a cool kid. Just saying and not intending to be mean.]

Earnings, Big Red Car?

So, yes, armed with some macro thoughts, it now gets down to the company’s actual performance. Public companies are held hostage to expectations. Not fair, but everybody knows that when they suit up and take public money, so no sniffling, please.

 1. The Street was expecting a surge of new customers. Twitter disappointed those voracious expectations by admitting to only 2MM new users bringing the monthly total to 319MM — which seems like a Hell of a lot of Tweeters to a Big Red Car, but not so much to the Wall Street crowd.

It was the lowest number of new users in the last three quarters. So, there is that.

 2. Revenue was $717MM when the Street was slathering for $740MM. This is considered disappointing, while the Big Red Car says, “Close. Very close.” Still, Wall Street doesn’t do close.

Year ago sales growth was a healthy 48% while this quarter it was only 1%. A growth rate of 1% feels like a head fake and the width of the chalk stripe.

 3. Twitter is one of those companies which seemingly does not make a profit as the bean counters on Wall Street (and GAAP for that matter) define a profit.

Twitter, therefore, kneels and prays before the EBITDA and cash flow gods to put the maximum amount of whipped cream on a cow patty it can. Nothing wrong with that as long as you pay careful attention to the trend.

For the sticklers, the company lost $167MM which was a larger loss than expected and than last quarter.

Twitter had mumbled that this was the year in which it would become profitable, though that can be an aspirational utterance when you are also talking “turnaround.” Let us be charitable here, shall we?

 4. Twitter Jack Dorsey said that “daily active users” increased by 11% in the quarter, but one is required to take that with a bit of sea salt as the company doesn’t actually disclose those numbers. Bit of a leap of faith.

“Trust me, daily active users increased by 11% in the quarter, but we don’t otherwise substantiate that. Next question, please?”

Why not just disclose that. Pretty graph and all.

Bottom lining it, as the Big Red Car is wont to do, the quarter was not a bell ringer or a humdinger.

What about the future, Big Red Car?

Public companies issue what is called “guidance” which is like a really good dessert after a truly lousy meal. Sometimes, the right bit of guidance can salvage an, otherwise, troubling report. Sometimes.

In this instance, Twitter is lowering expectations for the future by guiding us all to $75-95MM in “adjusted earnings” (that EBITDA thingy) when folks were expecting $188MM. Wow! That feels like a barbed wire enema, you?

Again, Twitter does not see the same robust future that the sharp boys with the mousse in their hair saw. This is disappointing in a world where disappointment is punished.

Bottom line it, Big Red Car

The Snapchat IPO, again read the Big Red Car’s thoughts at the link above, has some bearing on how much damn optimism a shareholder in a social media company is supposed to possess.

This feels a little closer to a death spiral than a resurrection, but it could go either way. If President Trump stops tweeting — it is all over. Of course, the likelihood of that happening is zero.

If the Board of Directors of Twitter were to announce that Twitter Jack Dorsey is going to throw all of his talents at Twitter and spurn Square, then one would be tempted to give them a better chance of survival.

I hate using that word — survival — but after having watched Twitter put itself up for auction and fail, it feels like survival will not be an independent Twitter. Based solely on what Twitter has been doing. No other insight. They are acting like a bridesmaid trying to go home with a cute groomsman. You agree?

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car and anybody with a brain would question taking investment advice from a freakin’ car, no? You do have a brain, right? Never, ever follow the advice of a car.cropped-LTFD-illust_300.png


10 thoughts on “Twitter — Death Spiral or Resurrection?

  1. Twitter has some good things going for it:

    users .. monthly total to 319MM

    revenue was $717mm

    the company lost $167MM

    Sounds like time to cut expenses by about $200MM a year.

    And, why not?

    Well, there is the Twitter server software, but being software it “never wears out”; yes, some software maintenance can be needed.

    There are the expenses for the servers and the network data rates, but can buy a lot of those for $200MM a year.

    There is some marketing expense for the ads that yield the revenue, but, again, that should not be sinking the boat.

    Presto, bingo, there’s not a lot to the expenses. So, should be able to cut the expenses.

    Let’s see, how about a little five step dance:

    Step 1: Continue to lose money.

    Step 2: Let the stock price fall.

    Step 3: Buy up a lot of the stock.

    Step 4: Cut expenses and show pre-tax profit of, say, 30% of revenue.

    Step 5: Sell the stock.

    For more, for the longer term, hope that Twitter, Drudge, etc. continue to shoot the mainstream media (MSM) in the gut and cause them to bleed to death.

    • I agree with JLM. Seriously, a CEO running two companies? The employees must feel like step children. Who would want to work for a company where the CEO cares about you enough to spend half of his time running another company? While your stock and stock options go to complete shit, no less.

        • Stock Option performance

          Which accounts for a huge amount of the difference between GAAP and EBITDA and Cash Flow numbers.

          There is a massive two edged sword when you hire people that are looking to shoot the moon with options. If they don’t work out you have self selected people that will chase the next rainbow.

          The problem with double taxation of dividends and option compensation means that companies don’t focus on profits but rather growth.

          If I personally owned Twitter, I’d cut expenses to the bone and milk the hell out of the fact that I have a platform that everybody loves. I’d be printing money like the Federal Government.

    • What you could do is simple. Cut expenses like you say. I would say much deeper. Then cut the main expense: options. Give employees 10% back of the profits split based on their salary put into an account that pays 2 years after they are earned if you are currently employed. Interest is accrued and the forfeited money is also added to the interest.

      Use profits for dividends.

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