One year after IPO, Twitter investors are wary

A year ago Twitter was praised for executing its IPO without a hitch, delivering a healthy opening pop for investors, without any of the trading glitches that plagued Facebook.

Fast forward one year: Facebook shares have surged 58 percent, while Twitter's are trading about 8 percent below the IPO price of $45.10, and big institutional investors have cut their holdings.

With user growth slowing (66 million monthly active users were added in the last year, a slight decline in growth), the company is struggling with questions about whether it can appeal to the mainstream. It has 284 million total users, compared with Facebook's 1.35 billion.

Perhaps because of this, the company's been trying to shift the focus away from the number of people who tweet, to the larger universe of people who see those tweets, on TV or elsewhere around the Web.

With a ton of management turnover, CEO Dick Costolo is being harshly criticized (CNBC's Jim Cramer has called for a management change) and is under pressure to define his vision for the company.

Five of Costolo's direct subordinates have left or been replaced, and Costolo named his fifth head of product in the past five years just last week. Now the pressure is on Costolo and new CFO Anthony Noto to lay out their vision at the company's first investor day next Wednesday.

The news isn't all bad, however. In the past year, the company has made crucial acquisitions and integrated the mobile video company MoPub it bought just before its IPO. MoPub delivers mobile ads across the Web -- a growing business regardless of how many people tweet or see tweets. The company also bought Gnip -- which analyses Twitter data -- native mobile ad company Namo Media, Tap Commerce and Mitro.

In an effort to weave Twitter into all mobile apps, it unveiled a new developer kit called Fabric late last month, combining tools from some of its acquisitions.

Plus there's new potential in e-commerce. It's testing a "buy button," which holds the promise for generating a new revenue stream as well as bolstering ad purchases from retailers.

Over the past year, Twitter's stock looks like a sine wave—a roller coaster of beaten, met, and disappointed expectations. Now investors are wondering what bar to measure Twitter's performance against -- if not Facebook then what? Can Twitter weave itself through the fabric of the Web?

More than three-quarters of Twitter's active users are outside the U.S., though the majority of its revenue is from the U.S.. There's opportunity in closing that gap, but that's just the first step in convincing investors of Twitter's long term potential.

Twitter CEO Dick Costolo Struggles to Define Vision

Big Investors Sell Shares Amid Executive Departures, Changing Strategy

Dick Costolo was at a crossroads. In May, Twitter Inc.’s stock had sunk to a new low as investors worried the company’s growth was stunted.

Over the next few weeks, the 51-year-old chief executive summoned managers to a series of meetings. In a conference room, he drew three circles on a whiteboard. “This is how the company should be described going forward,” he said, referring to what he called “geometrically eccentric circles.”

One circle represented core users of the social-media service; another denoted those who visited the site but didn’t log in; and the third circle was for people who saw Twitter content embedded on other sites.

Mr. Costolo said he wanted to court all three groups, rather than just targeting active users.

It was the first time his team had heard this. When asked to explain the change in strategy, which came six months after Twitter’s initial public offering, Mr. Costolo said the company needed to emphasize its broader audience, beyond those who logged in at least monthly.

The goal: to stop the press and investors from comparing Twitter to Facebook Inc., whose social network has five times as many users.

The strategy shift reflected Mr. Costolo’s management style. Interviews with current and former Twitter employees and others close to Mr. Costolo and his company describe the former improv comedian as a reactive thinker who bounces from one idea to the next.

That tendency served him well, particularly in Twitter’s formative years. He helped build the company from a ragged startup to a sought-after IPO on Wall Street. Twitter, now valued at about $25 billion, has become a household word and a powerful communication tool that gives voice to ordinary citizens and celebrities alike.

Some people close to Mr. Costolo say the scrutiny that comes with running a public company has amplified his tendencies and left him struggling to convey a consistent vision for a business whose cultural impact overshadows growing losses.

In the year since Twitter went public last Nov. 7, it has confounded investors with mixed messages and a series of executive changes. The personnel shuffles, along with slowing user growth, suggests Twitter may have gone public too soon, before it had a defined business strategy.

The stock has fallen nearly 10% from its first-day close of $44.90, though it remains above its $26 IPO price.

While Twitter’s revenue more than doubled to $361 million in the third quarter, its loss widened to $175.5 million, mostly reflecting the cost of stock-based pay as the company competes for tech talent.

Investor pressure is mounting. Big investors have sold out of the stock or cut their positions over the past several quarters, according to research firm Morningstar Inc. Bill Miller sold the 200,000 Twitter shares in his Legg Mason Opportunity fund during the quarter ended Sept. 30. BlackRock Inc., the world’s largest asset manager, sold its 271,000 shares as of June 30.

More Volatility?

Long-term holders such as mutual funds have pared their holdings to 12.6% as of June 30 from 16.3% at Dec. 31. Meanwhile, hedge funds, which tend to be short-term-minded, have boosted their stake to 5.2% from 2.7%, a sign the stock could be facing more volatility.

In all, the CEO has replaced or lost five direct reports since the IPO. Last week, he named Twitter’s fifth head of product in as many years. Its most recent vice president of product, Daniel Graf, who came from Google Maps and was handpicked by Mr. Costolo, lasted less than six months in the post.

Amid the staff changes, Mr. Costolo has vacillated in defining Twitter, confusing investors betting on the company’s future and Twitter’s own employees, who are unclear about its mission.

In November 2012, in a lecture at his alma mater, the University of Michigan in Ann Arbor, Mr. Costolo described Twitter as a “global town square,” comparing it to the ancient Greek agora. By the time the company filed its IPO documents, that term had vanished and, in its place, Twitter became a public, real-time communication platform. In subsequent appearances he has called it an “indispensable companion to life in the moment” and “the world’s largest information network.”

Along the way, Mr. Costolo has changed his script on Twitter’s business plan. On the first conference call with analysts, soon after the IPO, Mr. Costolo focused solely on the importance of turning its core user base into a bigger and more engaged audience that “reaches every person on the planet.”

No Explanation

Now there are the three circles Mr. Costolo used on last week’s third-quarter conference call to explain how Twitter’s reach extends far beyond its 284 million monthly users. Twitter executives haven’t explained how the company might make money from this broader audience.

“I think [Twitter] has a huge amount of potential,” said Mr. Miller of Legg Mason. “But can they monetize all of that traffic and create greater stickiness? That’s an open question right now.”

In a meeting with Mr. Costolo this summer, Mr. Miller, who has a Twitter account but doesn’t tweet regularly, says he told Mr. Costolo that it was hard for new users to figure out how to use the site, and that Twitter should provide a guide. According to Mr. Miller, Mr. Costolo replied, “Yeah, we thought about that, but we think people can figure it out.”

Mr. Costolo has said on recent analyst calls that Twitter is taking steps to make it easier for new users to sign up and understand the service.

Walter Price, a senior portfolio manager of Allianz Global’s Technology Fund, with $1.3 billion in assets under management, said he reduced his position in Twitter because of issues with product and management changes.

“I’m just very frustrated,” he said. “When you talk to them, I think they understand the problem, but they’re afraid of alienating [those who tweet]. It’s like this tension within the company in terms of what they want to be and how they want to do things. It hasn’t been resolved.”

Confused and Frustrated

His sudden, often unexplained, decisions, including abrupt management changes, confused and frustrated executives higher up in the ranks, sometimes throwing strategy off course or hurting morale.

Frequent reorganizations led to defections at lower levels, prompting management to ask some senior staffers who planned to leave to delay their official announcements in exchange for higher pay. Over time, these staffers came into the office less and less until their final exit, which some employees called “getting ghosted.”

Some decisions have had serious repercussions. In 2012, Mr. Costolo promoted his friend Michael Sippey several rungs up the ladder to run the product team in charge of the design and functionality of Twitter’s site and app. Several people had advised Mr. Costolo to look outside the company to fill the crucial role as Twitter’s user growth rate began to slow.

Under Mr. Sippey, poor communication and indecision plagued the product team, yielding high turnover but few results. In response, Mr. Costolo required product teams to present him with a weekly progress report. But he would sometimes overlook big-picture issues, such as the growing rift between senior managers on the consumer-product and engineering teams, which led to conflicting agendas.

Mr. Sippey was eventually demoted and left the company two months after its IPO.

The next month, in its first earnings report as a public company, Twitter revealed that its user growth had slowed to 3.8% from the previous quarter’s 6.4%; the shares tumbled 22% the following day. Investors have been fixated on the company’s user growth ever since. (Last week, the stock fell 10% after Twitter’s growth rate again decelerated.)

A Mistake

Mr. Costolo later told several people that elevating Mr. Sippey had been a mistake. Mr. Sippey declined to comment.

Meanwhile, Mr. Costolo made significant staff changes. He pushed out vice president of engineering Chris Fry in late May, and in July demoted Chief Financial Officer Mike Gupta to lead a newly formed strategic investments team. He replaced Mr. Gupta with Anthony Noto, the Goldman Sachs Group Inc. banker who worked closely with his predecessor on Twitter’s IPO.

One of the few areas that has remained steady is advertising and sales, overseen with relative autonomy by Adam Bain, a former News Corp . executive. While still unprofitable, the company for the past seven quarters has doubled its revenue from a year earlier, helped by new advertising formats and better targeting methods.

The consumer-product team has remained a sore spot. In June, Mr. Costolo’s confidant and operating chief Ali Rowghani abruptly left the company amid a dispute over how to manage the team. Mr. Rowghani’s resignation was followed by a wave of other departures, including Chloe Sladden, who oversaw the media business, and Vivian Schiller, Twitter’s first head of news.

No ‘Radioactive Problem’

Bijan Sabet, a partner at venture-capital firm Spark Capital who was on Twitter’s board when Mr. Costolo became CEO, said management changes are natural for fast-growing companies looking for talent. “I don’t feel like there’s some glaring radioactive problem here,” he said.

But some investors are getting worried. “The management turmoil of people that were supposed to fix the problem is not a good sign, and not a comfort,” said Allianz’s Mr. Price, referring to issues with users not being able to easily search for tweets. He said Twitter has “a lot of potential” if it can address that.

About two months after Mr. Costolo presented his three-circle analysis to managers in May, Mr. Noto, the ex-Goldman banker, joined the company and gathered its management team. Their mission: to boil down Twitter’s vision and strategy so he could explain it to Wall Street. For weeks, senior executives debated how to best sum up Twitter’s strategic goals.

Twitter articulated the message that emerged to investors for the first time during the company’s second-quarter report: to build the world’s largest audience. The goal was reiterated four times last week on the company’s latest earnings call.

During the call, Mr. Costolo’s presence was more muted, while Mr. Noto handled most of the analysts’ questions.

Over the next few weeks, the 51-year-old chief executive summoned managers to a series of meetings.

Twitter Inc. (TWTR) Chief Executive Officer Dick Costolo said the company will unveil products to attract new users and others who don’t normally pay attention to the microblogging service, as it works to extend its reach beyond the base of regular users.

Costolo said today at the company’s first analyst day in San Francisco that Twitter will roll out an “instant timeline” to “remove all that friction for new users.” The product will let consumers see what’s going on on the site without having to first follow people. The CEO also said the company is working on new mobile applications besides Vine and added that more than 500 million people come to Twitter each month without logging in.

Twitter is on a mission to explain its prospects to appease investors who are disappointed after several quarters of slowing user growth and questioning whether the product may ever reach the scale of Facebook Inc. (FB), which has 1.3 billion members or about five times the users. Costolo has prioritized improving the company’s product even if users are logged out of the service and coming into Twitter via a link to a tweet, or to view someone’s profile.

Twitter’s monthly active user count rose 23 percent to 284 million in the third quarter, down from 24 percent growth the prior quarter.

Shares rose 3.4 percent to $40.95 as of 12:33 p.m. in New York. The company went public at $26 a share last November and the stock has been under pressure this year amid investor questions. Costolo has replaced several top lieutenants, including ousting his chief operating officer and appointing a new chief financial officer and head of product.

“People are on Twitter because they like to see tweets, but they need to curate the site to engage the casual reader, who just want to easily find these important nuggets,” Walter Price, a portfolio manager at RCM Capital Management LLC, said today on CNBC.

Standard & Poor's assigned a junk rating to Twitter's debt on Thursday, saying the company had a "fair" risk profile.

S&P's unsolicited rating of "BB-" is three notches below investment grade. The company sold $1.8 billion worth of convertible notes in September.

S&P holds a "stable" outlook on the social media firm as it expects it "to experience very strong growth and not encounter a significant increase in competitive pressure," the ratings agency said in a note.

Twitter shares closed down nearly 5.9 percent Thursday. Twitter's 1 percent Sept. 15, 2021 convertible note was last trading at 90.4272, down 0.8 percent from Wednesday's close.

"We could raise the rating if Twitter broadens its revenue sources through international expansion and new product launches, maintains its market position, continues to improve its profitability, and achieves positive and sustained discretionary cash flow in excess of $100 million in 2016," the note said.

However, S&P noted that it could lower the rating if Twitter failed to achieve positive discretionary cash flow, revenue growth or if revenue actually contracts.

"This could indicate that the business model may be facing significant risks...," the statement said.

Earlier this week, the stock gained more than 7 percent after Twitter CEO Dick Costolo laid out a range of possible product changes that he said would improve the company and spur long-term growth.

Costolo's departure was inevitable

SAN MATEO, Calif. — The end of Dick Costolo's embattled stint as Twitter CEO was as unremarkable as anything coming out of the social media company lately.

While Facebook was wowing reporters and analysts with a virtual-reality demonstration of Oculus Rift today, and Apple and Google announced a raft of software updates for developers the past few weeks, Twitter was seemingly stuck in neutral.

They created buzz. Twitter produced zzzzzz.

Facebook CEO Mark Zuckerberg doesn't hesitate to tinker with the company he co-founded, like a mad scientist with a master plan. Google shoots for the moon with risky, ambitious projects on earth and beyond. Apple seems intent on diving into established markets and remaking them.

Twitter? Same look, feel and user experience. It's not a surprise, then, that the company's user growth was tepid like the product.

In what passes as innovation at the San Francisco company these days, Twitter on Thursday said it would lift a 140-character limit on direct messages.

So with Costolo finally stepping down and Jack Dorsey filling in as interim CEO, Twitter made a change that was long overdue.

"Unfortunately this news isn't surprising," Forrester analyst Nate Elliott said. "The bottom line is that Twitter isn't very good right now at serving either its users or its marketers."

Twitter's monthly user base will grow just 14% this year, slowing from more than 30% two years ago. By 2019, its user growth rate will be 6% worldwide, according to eMarketer. Put another way: Facebook has nearly 1 billion more users.

"I believe now is the right time for Twitter to focus on finding a new leader for the years ahead," Costolo said in a conference call. "You want to do these things when the organization is strong, when it's robust, when there's a clear plan and a clear path forward. And that's where we are today."

Not everyone agrees with that assessment.

Twitter has persistently struggled with profitability and while analysts believe Costolo was an adequate CEO, Twitter didn't roll out innovative ad products fast enough to make itself essential to people's daily lives.

Which brings us to Jack being Back.

The charismatic, press-savvy Dorsey created the Twitter service and knows it as well as anyone. The scenario of co-founder riding to the rescue isn't exactly Steve Jobs coming to Apple's aid in the late 1990s, but Dorsey is the rare tech exec who innately reads the DNA of a company.

Things won't change overnight — it took Jobs a few years to whip Apple into shape — but Twitter took a step in the right direction.

Change is essential in Silicon Valley.

Twitter easily topped Wall Street's quarterly earnings and revenue expectations, sending its shares higher in after-hours trading Tuesday.
The social media company posted earnings of 7 cents per share on $502 million in revenue.
Analysts expected Twitter to report earnings of 4 cents per share on $481 million in revenue, according to a consensus estimate from Thomson Reuters.