If you’re reading this, then odds are good you already know Twitter Inc (NYSE:TWTR) posted better-than-expected Q2 financials on Thursday, but a lack of user growth torpedoed TWTR stock shortly thereafter.
All told, Twitter stock lost 14% of its value in the wake of its second-quarter results, with investors increasingly unsure that it can ever be a viable organization.
If you want an even bigger reason to worry though, chew on some of the stuff that was said in the Q&A portion of the Q2 earnings call.
Generally speaking, CEO Jack Dorsey and CFO Anthony Noto seem to have a firm grasp of what’s going well or going poorly for Twitter — why that’s the case, and what to do about it. One of Noto’s answers to a question posed during Thursday’s conference call, however, may leave TWTR stock holders wondering if these guys actually know their business anywhere near as well as they need to.
TWTR Stock: Say Anything
In the 1989 cult classic film Say Anything, lead character Lloyd Dobler (played by John Cusack) famously explained to his sweetheart’s father during dinner:
“I don’t want to sell anything, buy anything, or process anything as a career. I don’t want to sell anything bought or processed, or buy anything sold or processed, or process anything sold, bought, or processed, or repair anything sold, bought, or processed. You know, as a career, I don’t want to do that.”
The gag, of course, was that Dobler was saying so much he wasn’t saying anything of meaning at all, only managing to overwhelm the girl’s dad.
Something similar unfurled on Thursday when Goldman Sachs analyst Heath Terry asked a relatively simple question of Anthony Noto and got a 473 word diatribe in response. It wasn’t the length of the answer that might spook TWTR stock holders though. For those who were listening carefully, it was a handful of conflicting and confusing ideas put on the table that raised more questions than answered.
Case in point? This one, for starters:
“We’re also very pleased that we are able to seeing an inflection point in our total revenue growth, improving from an 8% year-over-year decline in Q1 to a 5% year-over-year decline in Q2. And a 2% year-over-year decline when you exclude the contribution both which as you mentioned, deemphasize and expect to be at 0 revenue in the fourth quarter.”
In essence, Noto is calling numbers that are ‘less bad’ an inflection point … a phrase normally reserved for clear reversals. His point is more or less understood. That is, the pace of deterioration is slowing, offering a glimmer of hope. It’s just as possible, however, there’s simply less ground to lose now because the bulk of it has already been given up.
In fact Noto went on to explain:
“… our team has done a great job of communicating the incremental value that we’re driving this year than a year ago to the advertisers as a reflection of our audience growth, our improved ad relevancy measured by rates and better pricing down more than 50% year-over-year.”
Just for perspective, advertising engagements were up 95% year-over-year last quarter, but ad sales were lower by 8%. In other words, Twitter is selling ad space for dirt-cheap relative to prices it was charging a year earlier. As they say, things are cheap for a reason.
Last but not least, Twitter explained several of its initiatives would have driven a much-needed increase in the number of monthly active users in tow, but that growth was crimped by “lower seasonal benefits and other factors.” Thing is, Noto went on to say “We don’t have data that will explain a causal impact to that.”
OK, fine — the company’s leaders may be right in that something seasonal created a headwind. But, if there’s no data to support the idea, might it stand to reason user growth was stagnant simply because nobody liked the changes that were made? Just sayin’.
To that end, it’s worth noting there was no cyclical or seasonal headwind in the second quarter of last year. Maybe the Presidential election had something to do with that. Or, maybe it didn’t. Nobody really seems to know, although that didn’t prevent anyone from jumping to such a conclusion.
Don’t misinterpret the message. Truth be told, most companies’ management members usually talk about results and plans because the media and investors expect them to do so. Often times, the aim isn’t so much to explain corporate initiatives or observations, but rather, to give reporters some soundbites and point analysts in a particular direction. A closer inspection of answers to these questions reveals very few CEOs ever offer anything of real substance.
On the other hand, none of those other companies are Twitter, and investors of an ever-slowing Twitter don’t need canned, generic, meaningless answers at this time. Right now, the company’s shareholders need some assurance that Dorsey, Noto and all the rest have a realistic picture of what’s wrong and that they have a clear plan to fix it. It feels like TWTR’s top guys are just saying anything they’ll think the public will buy into.
Scariest of all is the possibility that Twitter’s management doesn’t think its rhetoric is empty.
Bottom Line for TWTR Stock
With that as the backdrop (and to give credit where it’s due), it may have been Forbes contributor Curtis Silver who best pinpointed what’s really wrong with Twitter here.
See, it’s not a lack of stickiness or value to advertisers. It’s not finding the right number of ads to display before it’s too many. It’s not changes in fiscal trajectories, or lack thereof. It’s … well, just read his call yourself:
“Twitter, rather than being a place for social sharing and conversation as it was at its inception, has become a ball pit full of cobras, towels soaked with kerosene and knife wielding one-armed clowns. Twitter, while not explicitly stated by many analysts, is failing. This might not be quantitative at all, but it certainly is the way it feels.
While feelings don’t pay the bills, they can be the thing that shuts off the lights. Twitter has been fighting the daily abuse that daily users endure from the dregs of the user base. This fight, while never enough and seemingly ineffective is a step in the right direction, but akin to using your spit to fill an Olympic sized pool. Twitter, in order to save itself from itself, needs to take more drastic actions.”
That’s the one thing nobody from Twitter seemed to address on Thursday, even though it’s arguably the one big thing holding Twitter back more than any other. Instead, management continues to talk in circles. An unwillingness to see, or discuss, the true underlying problem doesn’t exactly make TWTR stock something to feel good about buying on a pullback.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.