Twitter's Management Offers Confusing Results

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Twitter (NYSE: TWTR) reported a less-than-stellar earnings report a few weeks ago. Despite beating analyst expectations on the top line, the stock sold off after management reported a downward trend in monthly active users and an upward trend in daily active users.

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In this segment from Industry Focus: Tech, analyst Dylan Lewis is joined by senior tech specialist Evan Niu to discuss some of the strange inconsistencies that sprang up on the call, how Twitter's management is explaining them, why the SEC is getting involved, and more.

A full transcript follows the video.

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This video was recorded on Aug. 4, 2017.

Dylan Lewis: You look over at how management spends so much time stressing the importance of daily active users, and using that as their proxy for engagement. They talk about how DAUs were up 12% year over year, and yet again, they refuse to provide the actual number for what's going on with DAUs. And, they say, despite positive DAU growth for the last three quarters, the ratio of DAUs to MAUs hasn't meaningfully changed since the company said it was slightly less than 50% in 2015. 

Evan Niu: Right. Which kind of suggests that these DAU numbers are very small, which is presumably why they're hiding them. But, if the numbers are really small, then if you get growth off of a small base, that might be why the overall ratio isn't really changing much.

Lewis: But for that to be your core metric that you're focusing on as a proxy for engagement, and then to have two different measures of that metric not trending in the same direction, it's baffling to me.

Niu: Yeah, it makes no sense. It's interesting because this whole disclosure of DAUs is becoming more and more important, and more and more investors and analysts alike are raising eyebrows at this exact thing. Why won't you break this out, to the point where the SEC sent Twitter a letter in June asking them to basically justify it, exactly what we're talking about here, like, "You're saying this is so important, but you're not telling us what it is. How do you reconcile this obvious cognitive dissonance of saying one thing but doing the other thing?" It's the same defense, and it's a really poor defense. They're just like, "We think the percentage change is more important. The absolute number is not important." But then, why do you keep saying DAUs are so important? And it's even condescending, in a way, because they're like, "If we give you absolute numbers, that's going to confuse investors and distract them." You don't think investors can understand the difference and know what to focus on? Let investors choose, don't choose for them and assume they won't understand. It's kind of condescending to say that they're not going to be able to figure out the numbers if you gave them to them.

Lewis: Yeah, my feeling is, just give me the number. I'll do my own analysis if you give me the DAU number, and I'll understand the puts and takes. Management offered some commentary on what's going on with the DAU calculation and MAU calculation, to reconcile how the DAU number can be trending up over a period, but not mean that DAUs as MAUs is growing as a percentage. CFO Anthony Noto went on this long-winded explanation, basically saying that DAUs are calculated by averaging the number of users each day in the quarter, while MAUs are the average of the last day of each month in the quarter. So, you can think of the DAU calculation basically as an average of 90 days, whereas the MAUs are an average of three days. I can understand how that would lead to some lumpiness in the data, but to me, that's a terrible explanation, because the management team is the one that's deciding to calculate it that way. You have the data to work with, you're deciding that you're making a lumpy number. That's such a cop-out.

Niu: Exactly. They're going through so much effort to hide this. It's easier to just get it out there, you stop getting all this criticism and let investors figure it out for themselves. But they're doing all these gymnastics just to hide this and obfuscate it. And, certainly one thing they're afraid of is being compared to Facebook (NASDAQ: FB). In their response to the SEC, they very much said that they calculate it differently because they don't want to compare to other companies that do disclose DAUs, and Facebook is really the only one that discloses as much as there is. For example, they've said, "Because Facebook includes people who use Messenger in their DAU number, even though Messenger is a different application," but that's also poor reasoning, because Twitter also has a direct message of its service, it's just within the same app. Facebook has Facebook and then it has Messenger, in addition to its other messaging services. Messenger is fundamentally part of Facebook. Just because it's a separate app doesn't mean you're not using the service. So, that's also a poor reason. The functionality, it's effectively the same thing, both companies have feed of content and both companies have a messaging service. So, how does that make it not comparable? The whole reasoning falls flat.

Dylan Lewis owns shares of Facebook. Evan Niu, CFA owns shares of Facebook. Evan Niu, CFA has the following options: long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.