“Sitting on your arse waiting for something to happen”

Friday brought some vindication for analysts at Arete Research, who downgraded Twitter to sell from neutral a day before the company posted its wildly disappointing set of second-quarter results. 

Whether down to Musk’s prevarications or not, the numbers aren’t pretty: revenue fell 1 per cent on the same period a year before while ad revenue grew just 6 per cent on a constant currency basis. Compare that to growth of 26 per cent in the first three months of the year, and it’s clear the so-called adpocalypse we wrote about a few months ago is well underway. 

Arete’s Richard Kramer sees little cause for optimism: “Twitter is an imploding business and these results are borderline disastrous,” he told Alphaville on Friday. “Blaming it all on Musk’s shenanigans is one thing, but a lot of the spend on Twitter is brand advertising, so would have been committed before the whole buyout fiasco began”.

Even the relatively good news in Twitter’s results might not amount to much. Twitter’s average monetizable daily active usage – basically the number of people and companies active on the site – may have risen 16 per cent from last year, but Arete reckons the metric is increasingly “irrelevant” now that companies across crypto, trading and gaming have lost so much spending power.

And then there’s the Musk situation. From Arete’s downgrade note, published before the earnings report:

We see no positive outcome for the Musk saga . . . [breakup fees] cannot repair the damage to the business in lost momentum, key staff departures and exposure of its poor governance and inadequate internal controls.

We see no easy path to sustaining advertiser confidence: if Musk takes over, there will be a complete overhaul and serious questions about product roadmaps and formats; if he does not, TWTR will have lost a year in which its staff effectively “downed tools” and advertisers likely stood back. We are unlikely to hear whether it remains committed to increasing (much needed) opex. Even assuming a $10bn breakup fee (worth $12.8/share), our core value for TWTR is just $33, while our estimates are far below those offered in the proxy statement

Elsewhere, spending on research and development rose by over a fifth from the previous quarter to $454mn, though Baird’s Colin Sebastian points out in an email that the jump mostly reflects a big increase in stock-based compensation which climbed almost 60 per cent in the second quarter to $282mn.

“That’s exactly what happens your stock price plunges and you have to keep your people from fleeing,” Arete’s Kramer told Alphaville. “Management may have paid themselves a crap load of options when they saw the Musk deal was on the way, just to feather their nest.”

Suffice to say Kramer takes an extremely dim view of Twitter’s top team: “the fact its CEO and CFO are both in line for $60m+ pay-outs for either a short tenure or presiding over share loss and failure to realise leverage is, in itself, a black mark on its Board’s governance”. Management’s decision back in February to buy back $2bn worth of Twitter shares to prop up the company’s share price now looks particularly misguided, he added, having left the company with net cash of just $873mn.

Morale amongst rank and file Twitter employees is probably now at rock bottom, Kramer said. “If you’re a project manager there right now, what are you working on? Nothing! You’re waiting for [Musk’s] deal to close one way or the other – you’ve got no incentive to start fresh projects, you don’t care if you finish existing projects,” he said. “You’re basically just sitting on your arse waiting for something to happen”.

Still, Twitter’s shares climbed more than 1 per cent on a down day for tech on Friday. Either someone thinks that a Musk deal is possible (apparently at a $30bn valuation, not $44bn) or Kramer’s bearishness misses some silver linings in the earnings report. Let us know in the comments.