Following Twitter’s earnings release last week, I called its refusal to release the number of daily users “indefensible.” But in a series of letters with the U.S. Securities and Exchange Commission, Twitter tried to defend it anyway.
For the moment, the SEC says it’s satisfied with those explanations — though Twitter is still not going to give us the number.
The debate was disclosed yesterday when Twitter made public a series of “Comment Letters” it had exchanged with the SEC. These are typically letters initiated by the SEC when it has questions regarding a company’s securities filings. They remain secret until the inquiry is complete, at which point the company makes the full exchange public.
So let’s start there: On July 3, the SEC said it was satisfied with Twitter’s responses and indicated that it was ending the correspondence for now.
The SEC sent its first letter back on March 31, when it requested more information about several issues. These included how Twitter calculated its tax liabilities, its non-GAAP earnings, and why it stopped talking about metrics like Tweet impressions. The SEC also wanted a clearer definition of the metric “Daily Active Users/Usage.” Was this an average of daily users over the last month of the quarter or over the entire quarter?
In a response on April 28, Twitter said DAUs were calculated over the entire quarter. The company also emphasized what it has said publicly: It’s now more focused on growing DAUs than monthly average users (MAUs):
For the fourth quarter of 2016, the Company’s product strategy was focused on making existing users (i.e., MAUs) more active by improving the relevancy of Tweets sent to them in notifications and in their timelines. The Company believes that these initiatives had a greater effect on more frequent users because, in part, the platform learns more about these users through their interactions with the platform and can do a better job through product improvements providing more relevant content to such users to bring them back on another day.
In a follow-up letter on May 10, the SEC seemed to grudgingly acquiesce. But then it wondered (as many of us have) if DAUs are Twitter’s most important metric, shouldn’t it disclose the actual number? To wit:
Please explain why you present the actual number of MAUs but only the percentage change in DAUs, and tell us how the percentage change information provides an investor with a clear understanding of user engagement on your platform. Also, in the proposed disclosures provided in response to prior comment 2, you state that prior to the third quarter of fiscal 2016, you discussed the ratio of MAUs to DAUs. Please tell us whether management believes this ratio is a key metric used to measure user engagement on your platform or tell us what key metrics you use to measure such engagement.
Twitter replied on June 2 that giving the actual number of DAUs might be too confusing for investors:
The absolute number of DAUs is less important than the percentage change in DAUs because the key factor is whether engagement is increasing or decreasing on a relative basis…The Company also focuses investors on percentage change rather than absolute DAU numbers to avoid confusion when comparing the Company with other companies that disclose information regarding DAUs, but use different definitions of DAUs that may include different segments of their respective user bases.
Twitter cited Facebook as an example. It said Facebook counted DAUs as people who use the Facebook application or the Messenger application. Twitter said such a comparison would not be fair to Twitter:
For example, Facebook discloses total DAU, but includes in that number users who only log into its separate messaging mobile application without breaking out how many DAUs come just from that application. Accordingly, investors would not be able to compare performance between the Company and this other company.
And that was fine and dandy for the SEC, at least for now, though I wouldn’t expect analysts and shareholders, who are perhaps a tad more intelligent than Twitter thinks, to stop asking for the DAU number.
Bloomberg, which first spotted the Comment Letters, did note that Twitter made at least one concession on this issue. It said after its last earnings call, in response to analyst questions, that the number of DAUs is less than 50 percent of its 328 million MAUs.
That’s worth noting because in its letters Twitter had sold the SEC on the idea that the percentage didn’t matter:
Prior to disclosing percentage changes in DAU, the Company discussed the MAU-to-DAU ratio on a few prior occasions to provide investors with a perspective about whether engagement (DAU) was tracking user growth (MAU). Those discussions are no longer relevant given the Company discloses percentage changes in DAU, so investors are able to see how DAU growth is tracking MAU growth. Additionally, the Company notes that disclosure of the MAU-DAU ratio would indirectly disclose the absolute number of DAU, which is a disclosure that the Company believes will shift focus away from the percentage change in DAU, which is currently a more relevant measure of user engagement trends.
Finally, on a fun note, the SEC asked Twitter whether it ever expected to become a taxpayer. In other words: Is the company ever going to generate enough profits to have to pay into the U.S. federal treasury?
Twitter’s response: not anytime soon. Even if the company does ever generate real, actual profits, it has lost so much money over the years that it will likely be able to use those losses to offset any profits in future years:
The Company respectfully advises the Staff that the determination that the Company has not been, and is not expected to be, a taxpayer for the foreseeable future in certain jurisdictions, such as the U.S., was based upon the Company’s GAAP losses in these jurisdictions, which is an approach consistent with the Company’s previous disclosures.
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Author: Chris O'Brien
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