Wall St. Speaks Out on the Twitter Challenge - Brian Wieser, Pivotal Research

Twitter39s CEO Dick Costolo has announced he is departing the company and will be replaced by one of the company39s founders on an interim basis While the change appears to be of Costolo39s making prior to this event there were issues causing generally unwarranted dissatisfaction among the investment community and among some press towards Twitter which reflects broader issues about venture stage enterprises which have public securitiesThere has long been a gap between the expectations put forward by Twitter39s management around the potential ubiquity of the company39s core product among consumers and the reality of its nichey scale Further in recent quarters investors were concerned about turnover in the company39s management during its time as a public company which never really allowed the company to escape the perception that Twitter was the quotclown car that fell into a gold minequot And then came the revenue miss during the first quarter conveying that guidance provided mere weeks earlier was offbaseHowever what investors generally failed to understand about the company amp8211 and perhaps what management failed to fully communicate amp8211 was that Twitter was and remains a venturestage enterprise It just happens to be traded publicly For a company to invent what is essentially a different means of communication let alone use as an advertising and marketing vehicle involves an awful lot of aspiration As we39ve noted previously in this context sometimes it is necessary to aim for the stars lest one never reach the moon Getting to the moon is a pretty remarkable place to arrive at even if it39s not as lofty as originally intended Product iterations and people iterations are necessary byproducts of the effort necessary to attempt to achieve those aspirations and we can certainly look at some of the turnover within Twitter as reflecting of that iterative nature We39re reasonably sure that similar iterations occur in a lot of other venturestage companies if under less visibility And as for missing guidanceamp8230well one quarter doesn39t a year or business make While we would think that a company as large as Twitter should have systems in place to better assess coming quarters a slowdown this year never necessarily impacted the longrun share of digital ad revenue the company was capable of generating Of course confidence might have reasonably been diminished slightly but the market39s reaction to the first quarter was always an overreaction which is largely why we upgraded the stock to Buy following the stock39s falloffAll of these issues should not be viewed as unique to Twitter We can only wonder how Facebook would have behaved as a stock were it traded at a similar stage of its commercial development in say the year 2010 at which point it too had been generating revenue for only five years 2012 was rough enough and Facebook was two years more mature than Twitter at that time There are dozens of largeish private companies we track in the ad tech space who almost certainly experience similar issues without anything like the glare that Twitter experiences While the market39s lack of receptivity to smaller public companies these days is the primary reason being private is a better choice for many early stage companies doing what Twitter has to do amp8211 aspire iterate and under or overestimate a quarter39s results ahead of time amp8211 is made easier in privateWith Costolo39s departure from the executive suite at Twitter though not the Board little changes on these matters Twitter39s new CEO whomever she or he is will undoubtedly set stretch goals for the company They will probably restructure management a few times And they will probably hit or miss revenue growth in any given quarter Should Twitter do what many mature companies do instead setting sights lower aggressively managing financial expectations and perhaps massage numbers a little here and there and retaining certain managers in a pen for future potential use or just to keep them off the market We think most would agree quotnoquotStill we do think that whomever is running Twitter going forward will need to focus its dialog with the investment community on the commitments they know they can meet and on areas in which they have been successful like commercial traction with large brands and what seems to us to have been a number of clever strategies to support a strong longterm position within the advertising industry More clarity on emerging revenue stream segments will be helpful too Twitter has a very good story to tell on its MoPub and TellApart acquisitions among others but very little in the way of disclosures More of a display to the investment community of what we think is still a deep bench of management talent at levels below the top wouldn39t hurt eitherBut mostly we think that investors will need to be continually reminded that an investment in Twitter provides public market investors a way to play in venture for better and worse The same should be true for all companies at a similar stage of their developmentREPORT INCLUDING DISCLOSURES CAN BE FOUND HERE Madison and Wall 61215pdf The opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillagecom management or associated bloggers

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Wall St. Speaks Out on the Twitter Challenge - Brian Wieser, Pivotal Research

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