Pando

Jack Dorsey's blunt talk cost Twitter investors $5 billion. And he said nothing new

The jawbone lurking beneath the CEO's artisinal beard turns out to be a formidably destructive tool.

By Kevin Kelleher , written on July 29, 2015

From The Earnings Desk

Twitter may not yet be a broken company, but it sure is a hapless one.

For most of its history, Twitter has been decried by its most ardent users as The Company That Is Not Facebook and thus something of a failure, despite its 83-percent revenue growth over the past 12 months.

While Twitter has seen modest success in efforts to monetize its 316 million active users, it has been having trouble bringing in new ones. Three months ago, for example, Twitter had 308 million users, and so despite initiatives like Instant Timeline — aimed at offering new users a newsfeed in 30 seconds, based on a few stated interests — the hundreds of millions of people on Facebook but not on Twitter still aren't coming around.

This is nothing new. Last quarter, Twitter made clear that its efforts to expand membership and bring more ad revenue from their feeds was going to be a long-term project. So when Twitter announced its earnings,  Tuesday afternoon, nobody seemed surprised that it added only 8 million net new users. Instead, they focused on revenue that grew faster than expected and non-GAAP earnings that beat estimates by three cents a share.

Those figures suggested that Twitter was succeeding at monetizing its current, albeit slow-growing, user base in the short term, even as it plodded away on the long-term strategy it has been outlining for much of the past year. Twitter’s stock shot up 11 percent for a few, glorious minutes after the financial report hit the wires.

That good fortune didn't last very long. An hour later, Twitter's new CEO began talking. Clad in a gray hoodie and streaming the investor call over Periscope, Jack Dorsey began delivering the kind of straight talk that can assuage the concerns held by board members and venture investors of a private company. 

Citing nascent initiatives like Instant Timeline, Dorsey said they "have not yet had meaningful impact on growing our audience or participation. This is unacceptable and we’re not happy about it." He then slammed Twitter managers (inadvisable on a day when two of them jumped ship): “We haven’t done a great job at aligning the entire company around our total audience strategy. We’re in the process of implementing a stronger discipline of direct ownership and accountability.”

There was only one problem. Twitter is not a private company. It's a publicly traded one, and the investors of publicly traded companies have a certain protocol to these earnings conference calls. Hoodies are fine - they inspire warm thoughts of Mark Zuckerberg in investors - but straight talk like this is usually reserved for crisis management. The kind of words Meg Whitman had to say at HP after years of scandals and ill-advised acquisitions had brought the company low.

Here's how these calls work. When things are going great (like at Netflix), executives just roll out the facts and then bask in the glow of success. When things are just so-so (like at Google), the metrics are spun toward a strategy of improving things as quickly as possible. But when you fire up Periscope and bluntly say the status quo is unacceptable, it's basically code for "hey, the wheels are about to come off this thing."

Some people — on Twitter, no less — applauded Dorsey for being refreshingly honest. But on Wall Street, honesty is often a euphemism for naïveté. Securities laws are designed to take care of the honesty part. The enforcers of those laws don't care whether you spin things or speak bluntly. But public investors do.

Dorsey may have been telling it like it is, but when things are not so great, telling it like it is on Wall Street isn't quite so refreshing. It's like dumping a bucket of ice water over a bunch of traders who have their hands poised above sell orders. A worried investor of a private company lacks the liquidity to panic and sell shares right away. Public investors will get the mere whiff that a selloff is nigh, and they will bail before the short sellers can strike.

As a result, Twitter stock went from trading at 11 percent above its closing price to 12 percent below it — all because the CEO was saying in blunt terms what any attentive Twitter investor has known for months: New users are slow to come to the social network, and it's going to take some time to change that. The jawbone that lurks beneath Dorsey's artisinal beard these days turns out to be a formidable destructive tool. It managed to gnaw away $5.2 billion in Twitter's market cap in less than hours.

As of late Tuesday afternoon, Twitter was trading around $32 a share, its lowest level in nearly 14 months. If the idea was to drive the company's stock price down low enough to entice a potential acquirer into making a deal, Dorsey is off to an excellent start.

CFO Anthony Noto (who looked bored and distracted while Dorsey was speaking) should have known investors might not respond well to the straight talk. He later added his own. “We do not expect to see sustained meaningful growth in MAUs until we start to reach the mass market,” Noto said. “We expect that will take a considerable period of time." Several news stories zeroed in on that word “considerable.”

Again, none of this is new. Noto said much of the same back at Twitter's analyst day in November. Only his tone then was that of a cheerleader, not the parent of a problem child. Twitter, Noto said in November, could reach $14 billion in revenue in ten years by using the same strategies Dorsey outlined Tuesday: build the audience of users, make Twitter easier for them, add new services.

Back in November, Twitter aimed to “reach the largest daily audience in the world by connecting everyone to their world.” Now Dorsey says Twitter must be “as easy as looking out your window to see what's happening” and "the best microphone." This isn't an abrupt shift in strategy. It's just replacing a sloppily worded vision statement with better metaphors.

I don't know any more about Twitter's financial health than anyone looking at the figures it discloses. And I hope I'm wrong, but this episode has the fishy feel of a new CEO trying to throw his predecessor under the bus, hoping to lay claim to the reforms that began before his tenure. Twitter today isn't much worse off from Twitter under Dick Costolo. What's new is the sense of crisis. But as many of us know, Twitter's crisis has been slowly building for years. The response to that crisis - set in motion by Costolo - isn't even a year old.

Twitter's stock may recover from the initial selloff soon enough, if investors parse the numbers and decide that the long-term story on Twitter hasn't changed, even if the CEO's tone has. If Dorsey was trying to position himself as the man who turns Twitter around, all he's done is paint Twitter as a company needing a turnaround. It's not an auspicious debut for the CEO of a public company. Anyone thinking of buying into Square's planned IPO should take note.