investors often care about several key numbers: its monthly
active user (MAU) growth, its average revenue per user (ARPU),
and its continued lack of profitability. However, there's one
figure Twitter glosses over that shouldn't be ignored: the
amount it spends on stock-based compensation.
Last quarter, Twitter reported a net loss of $125 million,
which was mostly attributed to
in stock-based compensation expenses. Like many companies,
Twitter excludes stock-based compensation from its "adjusted"
earnings, but investors should nonetheless consider it a major
weight on its bottom line.
Why stock-based compensation matters
Over the past 12 months, Twitter had a negative free cash flow
of $120 million. Companies with cash flow problems often use
stock-based compensation to attract new employees. This
practice surged in the 1990s because of the combination of
promising tech start-ups entering the market, new limits on
executive compensation, and murky accounting practices.
Stock options granted to employees were subsequently treated
as free currency, which weren't initially reported as "real"
expenses. But when the options were exercised later, companies
incurred large expenses that were then excluded from non-GAAP
earnings. In 2006, companies were finally required to value
options as an expense when granted. This caused many companies
to replace options with restricted stock, which couldn't be
sold for several years, since options no longer provided an
Enriching employees at the expense of investors
In the third quarter of 2014, Twitter paid out 47% of its
revenue as stock-based compensation -- more than
in the S&P 1500 Composite Index. Last quarter, Twitter paid
out 37% of its revenue as stock-based compensation. Only one
S&P 1500 company --
-- paid out a higher percentage.
Twitter hasn't ever posted positive earnings per share
without excluding stock-based compensation. In other words,
Twitter pays its employees handsomely while failing to deliver
any real profits to investors. Looking ahead, Twitter plans to
pay out $700 million to $750 million in stock-based
compensation in fiscal 2015, which would be equivalent to
around 30% of its expected annual revenue.
In 2014, Twitter paid out 57% of its stock-based
compensation to R&D employees, or software engineers.
According to Glassdoor, Twitter paid its software engineers an
average base salary of $128,000 per year, which is
above the national average,
an average of $66,000 in annual stock bonuses.
As Twitter issues more shares to pay its employees, it also
dilutes the shares of existing shareholders. Over the past
year, Twitter's share count soared 74%, according to FactSet.
's share count only rose 10% during that period.
Investors aren't getting their money's worth
I wouldn't mind Twitter paying its employees so well if the
company was making clear progress. Unfortunately, Twitter is
suffering from stagnant MAU growth and is
diluting its brand
by expanding into too many businesses.
In the first three quarters of 2014, MAUs respectively rose
25%, 24%, and 23%. In the fourth quarter, that growth slowed to
just 20%, with 288 million MAUs. Back in 2013, CEO Dick Costolo
claimed that Twitter would have 400 million MAUs by the end of
Faced with slowing MAU growth, Twitter is trying to maximize
ARPU by adding new services like video ads, video editing
tools, online payments, e-commerce partnerships, and group
chats. But by doing so, Twitter could become a clumsier version
of Facebook and clutter up its News Feed with too many ads and
Meanwhile, news agencies, high frequency trading firms, and
to Twitter's "firehose" feed of tweets. Firehose subscriptions
accounted for nearly 10% of Twitter's top line last quarter,
but they arguably encourage the company to turn a blind eye to
the spread of spam accounts across the network, since they
expedite the spread of individual tweets. Twitter acknowledged
that 8.5% of its MAUs included these fake accounts, bots, and
"third-party applications" last quarter, but it has done little
to curb that growth.
Why Twitter needs to reduce stock-based compensation
Diluting existing shares to compensate employees with options
or restricted stock might seem lucrative when a company's stock
is stable or rising, but
has slumped 13% over the past year.
To be fair, Facebook, Google,
all exclude stock-based compensation from their non-GAAP
adjusted earnings. But unless Twitter solves its core problem
-- its lack of free cash flow growth -- it will keep using
stock-based compensation to pad its software engineers'
extravagant salaries. That practice will keep its bottom line
in the red for the foreseeable future.
1 great stock to buy for 2015 and beyond
2015 is shaping up to be another great year for stocks. But
if you want to make sure that 2015 is
best investing year ever, you need to know where to start.
That's why The Motley Fool's chief investment officer just
published a brand-new research report that reveals his top
stock for the year ahead. To get the full story on this
year's stock --
simply click here
1 Number That Should Make Twitter Inc.
originally appeared on Fool.com.
owns shares of Facebook. The Motley Fool recommends Amazon.com,
Facebook, Google (A shares), Google (C shares), LinkedIn,
Salesforce.com, and Twitter. The Motley Fool owns shares of
Amazon.com, Facebook, Google (A shares), Google (C shares),
LinkedIn, and Twitter. Try any of our Foolish newsletter
free for 30 days
. We Fools may not all hold the same opinions, but we all
considering a diverse range of insights
makes us better investors. The Motley Fool has a
Copyright © 1995 - 2015 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a