Last year, on October 27th, when Twitter announced the results for the third quarter of 2015, the share price closed at $31.34 per share. During the subsequent earnings call the mood turned negative, and the next day the share price opened 10% lower, at $28.13. The mood has not changed since this last earnings call, and the share price of Twitter closed at $15.72 on Friday February 5th, just a few days before the announcement of the results for 2015. The share price of Twitter dropped exactly 50% in a period of three months time.
Given the disappointing decline of the share price, it seems obvious that the upcoming results announcement and earnings call on February 10th will be highly anticipated. It has even been called a seminal moment for Twitter. It will be interesting to see what happens with the share price after the results for 2015 have been announced, and guidance from the earnings call has been absorbed.
I believe the actual results will have little impact. The market is expecting Monthly Active Users (MAUs) to be stable, and I don’t think there is any reason to believe otherwise. The most likely outcome seems to be for growth in core MAUs (excluding SMS fast followers) to be mildly positive, with an increase of maybe 2–4 million for the fourth quarter of 2015, similar to the previous quarter. Growth of MAUs will probably not be negative, although there is still a substantial risk this will happen in the near future, given the structure of MAUs. I wrote about this in more detail in this article some months ago, which included some comments about the deteriorating quality of MAUs. With respect to revenue for 2015, I do not believe the market is expecting huge surprises.
It is questionable to what extent guidance for the year will have an impact on the share price, unless it is very negative. Since Twitter has disappointed so often, investors will most likely want to see tangible results, and not rely too much on guidance from management. Investors have heard enough about all the new features that have been introduced, and so far did not move the needle on MAUs. Also the promise of reaching the mass market (logged-in or logged-out), once the product is better, is something that seems to get more and more out of reach. A company that will be 10 years old in 6 weeks time should be profitable, certainly a company that has such a crucial and unique position in the world of real-time information.
The current share price demonstrates the current strategy is not working, and any guidance from management that they believe it will start working will be received with skepticism. Twitter wants to own the “traditional” user experience exclusively. In its basic form this means viewing timelines of tweets, sending tweets and following accounts. Once most timelines are viewed on Twitter properties, promoted tweets can be inserted in these timelines to monetize the platform. Since 2012 there has been an impressive increase in revenue for Twitter, accompanied by an equally impressive increase in costs. And no positive financial results yet. This blog post from Twitter from August 16th, 2012, shows that developers were strongly discouraged to offer the “traditional” user experience.
I would argue that there is an alternative strategy for Twitter, a strategy that is more about controlling costs than about chasing revenue. A few observations support the case for controlling costs. The first is that tweets per day are not growing, and may actually be in decline. The second is that the performance of the Twitter platform has been very stable for the past few years. The combination of these two observations leads me to believe that the core user experience of Twitter, which has nothing to do with the painful financial investor experience, could be delivered for a fraction of the costs that Twitter has today. Let’s elaborate on this.
On October 25th 2012 Dick Costolo revealed Twitter had reached 500 million tweets per day.
This same number of 500 million tweets per day was mentioned in November 2013 in the IPO prospectus. Currently Twitter does not mention the number of tweets per day anymore on their web page, but the last time they did in 2015, it was still 500 million tweets per day. For more than 3 years, while MAUs kept growing, tweets per day did not grow. With a rising share of passive MAUs (Twitter users who only consume tweets, and do not post tweets), it is likely that the number of tweets per day is actually in decline. If the ratio of active tweeting MAUs versus total MAUs declines, you can only expect growth in tweets per day, when active users tweet more per day, or when growth of MAUs is high enough to add more tweeting MAUs in absolute terms. Given that MAU growth has been disappointing in the last quarters, it is unlikely that either of these two conditions has been met.
At the end of the third quarter of 2012, around the time Dick Costolo made the announcement about the 500 million tweets per day, Twitter had 1,200 employees. This has grown to 4,200 employees at the end of the third quarter of 2015. On October 12th, 2015, the board of Twitter approved a restructuring plan for up to 336 employees, constituting approximately 8% of the total global workforce. At the time of writing the Twitter website mentions a global workforce of 4,300 people in more than 35 offices around the world. At the end of 2013 Twitter had offices in more than 15 cities around the world.
Given the lack of growth in tweet activity on the platform, it does not seem far fetched to assume an organisation with 1,200 employees could easily manage the required infrastructure to deliver the core user experience of Twitter. The vast majority of cost increases must be related with chasing revenue and building the infrastructure to chase this revenue, like the ads platform and the analytics platform. It is certainly hard to understand how 20 new offices and 3,000 new employees in the last 2 years could have anything to do with the core user experience. It would be really interesting to see what Twitter would look like if they would restrict costs to 1 billion dollars per year, target 500 million net profit per year, and figure out a sales model that works with this. In such a model it would be logical to embrace the ecosystem of developers again, listen to them carefully, and even let them compete with Twitter on the core user experience. Twitter can’t be everything to everyone, but with the help of developers, it may be able to become more to more people, at a lower cost to Twitter. It also might get MAUs on an upward path again.
Let’s face it, the negativity around Twitter is mostly because of its disappointing performance as an investment, where expectations were just set too high. It has much less to do with its unique role as the global centre of real time information. This role is undisputed, and the chance of Twitter losing this role and going away any time soon can be considered very small. Twitter needs to either demonstrate the current strategy is working, or it needs to revisit the strategy in a convincing way, so the share price can gradually find its way up again.
If the market does not believe Twitter management can turn things around, we may get in a completely different scenario. The share price could keep sliding, up to a point where a possible acquirer, who is not afraid to run a big infrastructure, may step in and change things around for the better.