Thursday, October 13, 2016

Measuring how bad Twitter is

My last blog post (exposing Twitter's excessive costs) prompted horror story emails on Twitter.

But the best thing sent to me was a financial history of Facebook. The first copy came from Twitter.

Here are the numbers.

Year Ended December 31,
(in millions, except per share data)
Consolidated Statements of Income Data:





Total costs and expenses(1)





Income from operations





Income before provision for income taxes





Net income





Net income attributable to Class A and Class B common stockholders





Earnings per share attributable to Class A and Class B common stockholders (2):










Total costs and expenses include $1.84 billion$906 million$1.57 billion, $217 million, and $20 million of share-based compensation for the years ended December 31, 2014201320122011, and 2010, respectively.
See Note 3 of the notes to our consolidated financial statements for a description of our computation of basic and diluted earnings per share attributable to Class A and Class B common stockholders. 

When Facebook had $1.974 billion of revenue it had $1.008 billion of income before taxes.

Twitter is kind of different.

Year Ended December 31,






(In thousands, except per share data)

Consolidated Statement of Operations Data:







Costs and expenses(1)

Cost of revenue






Research and development






Sales and marketing






General and administrative






Total costs and expenses






Loss from operations





Interest expense





Other income (expense), net





Loss before income taxes





Provision (benefit) for income taxes





Net loss






When Twitter had $450 million of operating losses and $533 million of losses before tax.

There was about $1.5 in difference in costs.

Facebook does more, had more growth runway and had much lower costs.

I received a lot of anecdotes and wild parties and profligate spending, and the plural of anecdote is data - but few things are as convincing as the raw numbers.

The conclusion is inescapable. Jack Dorsey - the Twitter CEO - should be fired.

This should happen regardless of whether Twitter is bought or not. He simply does not deserve the job.


PS. Twitter staff - I am not exaggerating. Look at the young man on your left and the young woman on your right. Only one of you three will keep your job.

Don't worry. It should be worse in the C-Suite.

Prepare resumes.

Tuesday, October 11, 2016

Some comment on the Twitter buyout rumours

Twitter is wildly addictive. This is well known and there are people who check twitter more obsessively than anyone checked email.

Twitter is also a chaotic world full of trolls, useless information, porn-spam and videos of kittens.

It is also - as anyone cares to notice - for sale.

The gossip - and I have no reason to doubt this - is that there are on the Twitter board two factions:

  • The CEO Jack Dorsey who wants to run the company and
  • The board who - sick of pointless losses and running out of money - wants to sell it.
This leads to probably the most leaky sales process I can ever remember - with almost daily rumours about who is interested and who is not interested. The current rumour mill says all the "strategic buyers" are not interested.

In this blog post though I just run through the numbers and try to delineate what as a regular user (but an outsider) should be done. But I will cut to the chase now. This company should be and probably will be bought by an aggressive financial buyer. And Jack will be fired. (And - I think - the world will be a better place for that.)

Just the numbers 

You can find time series quarterly P&Ls (standardised by Thomson Reuters) here. An annual series is below.

Period End Date31-Dec-2015 31-Dec-2014 31-Dec-2013 
Net Sales2,218.01,403.0664.9
Total Revenue2,218.01,403.0664.9
Cost of Revenue, Total729.3446.3266.7
Cost of Revenue729.3446.3266.7
Gross Profit1,488.8956.7398.2
Selling/General/Admin. Expenses, Total1,132.2804.0440.0
Selling/General/Administrative Expense892.3583.7270.5
Labor & Related Expense239.9220.3169.5
Research & Development806.6691.5594.0
Total Operating Expense2,668.11,941.91,300.7
Operating Income(450.0)(538.9)(635.8)
Interest Expense, Net Non-Operating(98.2)----
Interest Expense - Non-Operating(98.2)----
Interest Income(Exp), Net Non-Operating--(34.0)(6.9)
Interest Inc.(Exp.),Net-Non-Op., Total(98.2)(34.0)(6.9)
Other, Net14.9(5.5)(4.5)
Other Non-Operating Income (Expense)14.9(5.5)(4.5)
Net Income Before Taxes(533.3)(578.4)(647.1)

Here is what to notice. Revenue has gone up very nicely - from $664 million to $2.2 billion and is still increasing. And costs have gone up commensurately. Losses seem stubbornly stuck at half a billion per annum. That is real money - just burnt - and burnt by a business that is already established.

In other words costs have gone up by $1.5 billion give or take something. That is billion with a b.

Now if costs were rising that fast and the service were noticeably improving and engagemet growing then you could be tolerant. Making money is far less important in a growing tech company than increasing your relevance and the moat that surrounds your business. (Amazon is the leading example of a company which increases the moat every day.) The short-hand for that thinking is that revenue follows relevance.

But - as a pretty dedicated tweeter (with almost 20 thousand followers) - I have noticed almost no changes in twitter that improve my user experience. It is almost impossible to find out what they spend that $1.5 billion extra per annum on. I gather there are some improvements in the monetisation side but this is just a website - and it does roughly what it did in 2012 - and but spends well over a billion dollars more to do the same thing. [From my perspective the marginal improvement is that I am seeing fewer failed-to-load pages... but that is it.]

Twitter has become a parody of bad Silicon Valley management - the sort of management that existed in the dot-com boom where quite literally burning shareholder funds was considered a mark of innovation. 

The main difference between this and (say) Pets.Com is that underneath is a business that should be salvageable - and should make pot-loads of money. After all if they raised costs by $1.5 billion per annum without achieving jack-shit then costs should be able to be controlled. And if that is possible then Twitter as an LBO works on the back of an envelope at these prices.

Why a financial buyer not a "strategic buyer"

The news of the day is that almost all of the strategic buyers (other big tech companies) have pulled out of the bidding process. There is good reason why that should be the case.

If you run for instance your main agenda should be on growing your business in a disciplined fashion. They are still in the stage of building relevance. And that requires friendly well directed management willing to let staff have their little well-directed flights of fancy (rewarding of course those fancies that grow the business). 

But Twitter is past that. Somewhere near half a billion dollars of costs need to be taken out almost immediately. And that involves firing people and being a general tough-bastard. It's inevitable anyway - because Jack Dorsey burning half a billion dollar per year isn't a sustainable business. The cash eventually runs out. 

The problem is if you mix this with a or similar company it will be really hard to take costs out in a disciplined fashion without upsetting the culture of the home company. Instead this should be fixed (with extreme prejudice by a disinterested outsider) before it is sold again to a strategic buyer.

Or - in summary: the best bastards are from Wall Street. And this needs a Wall Street bastard. 

Carl Icahn - Twitter needs you. 


That said - there are things that need to be done that are not being done under the (seemingly incompetent and fashion obsessed) Jack Dorsey.

First troll detection has to be done much better.  There degree of incompetence in troll-hunting beggars belief. For example I have stereotypically attractive 20 year olds in bikinis who just want to do wicked things to me (and I am not even Donald Trump). I block them all and report them - but somehow Twitter has not managed to stop filling my time-line with porn spam. Blocking this is the sort of pattern recognition that computers should do - and if your spam-to-content ratio gets to high you eventually lose real users.

Also there is a lot of semi-commercial (even scam) spam here. Have a look at this twitter stream:

There are almost 10 thousand tweets - and they are all penny stock promotion mostly for the same penny stock. I think it is Russian but the location says Manchester. (Many scam promotion schemes look the same - and I do not think the penny stock promoters all live in Manchester.) The Tweets include a reference to some hot stock or controversial stock (Apple, Herbalife etc) and then links to a penny stock page. It is really obviously spam. But it has been around for months.

It also has 800 followers and not a single overlap with my followers. In other words almost all the other followers are spam bots too (because I seem to have overlap in followers with all serious financial tweeters). 

I could block five of these a day and there is still an endless supply. It makes searching for news about a stock almost pointless because the ratio of spam to real news is not good. 

I suspect the management incompetence goes further. If they actually fix the spam-bot problem then the truth about the active users numbers will out. It is weak (precisely for the reason above). But weak numbers mean they are all going to need to be fired. 


But lets play the numbers

Twitter revenue is still rising and is running about $2.5 billion per annum. It is a website that once ran extremely well on less than $250 million in costs. (No I am not joking.)

If you can't make this have a 40 percent operating margin then - frankly you are inadequately brutal. Personally I think 50 percent is possible.

At this market cap that works extremely well for a financial buyer. Its a no-brainer even.

So expect it to be bought. By some Wall Street bastard armed with a lot of debt. 

And that bastard will fire a lot of people. 

If I worked at Twitter I would be preparing my resume and providing a list of really quick things that can be done to improve the user experience - with the code all mapped out. That largely involves getting rid of spam bots and the like. But unless it radically improves the user experience or monetisation and you can convince the new owners you can implement then you are out. 

And the fashion-obsessed philosopher king. He is out too whether there is a buyer or not. That is necessary to save the company.


PS. Long for the takeout which I see as inevitable. 

Sunday, October 2, 2016

Some comments on the New York Times story about Donald Trump's tax returns

Decades ago - before I was a fund manager - I was the resident expert on tax avoidance working for the Australian Treasury. That was where I started to hone the accounting skills sometimes shown on this blog.

I very rarely do anything in tax - but now I think it is time.

The New York Times has published a story (including extracts) about Donald Trump's tax returns over two decades ago. The money-quote is this:

Donald J. Trump declared a $916 million loss on his 1995 income tax returns, a tax deduction so substantial it could have allowed him to legally avoid paying any federal income taxes for up to 18 years...

According to the New York Times the losses came
... through mismanagement of three Atlantic City casinos, his ill-fated foray into the airline business and his ill-timed purchase of the Plaza Hotel in Manhattan.
There is an issue here.

Donald Trump did not repay all the debt associated with those investments.


  • the loss is a real loss and the Donald was really was out of pocket by $916 million (in which case he has legitimate NOLs)
  • or the loss was passed on to someone else by The Donald defaulting on debt - in which case Donald Trump should be assessed for income from debt forgiveness.

After all if the debt is forgiven it is not Donald Trump's loss. The loss is borne by the person who lent Donald money and did not get it back.

That - clearly stated by example - is why most income tax systems assess debt forgiveness as income.


Okay - I do not know whether Donald Trump had the wherewithal in 1995 to bear $916 million of losses personally. But I doubt it. (If he did his financial career is different from what is popularly accepted.)

So the alternative is the debt was forgiven in some way. But then the story the New York Times is running is wrong - because the $916 million of losses would not have survived the debt forgiveness and hence would have wiped out his NOLs and thus he would not be allowed to shelter his income for the next 18 years.

Unless that is there is an avoidance scheme the New York Times has not worked out. Those schemes go by the name of "debt parking".

Debt parking

Here is how debt parking works. Suppose the debtor (in this case The Donald) is going to get his debt cancelled for (say) 1c in the dollar. When he gets the debt wiped out the debtor (ie The Donald) will have to report assessable income equal to the debt wiped out (in this case 99 percent of $916 million).

The alternative though is for the debtor to set up a dummy party. The dummy party might be his wife or children or some company or trust set up by them or more likely some completely opaque offshore trust.

And that dummy party goes and buys the debt for say 1.1 cents in the dollar. Then they just sit there.

They don't force the debtor (ie The Donald) to repay. They don't make a profit or loss on the debt. And because the debtor never has his debt forgiven he never gets the assessment on debt forgiveness and he gets to keep his NOLs even though the losses did not come out of his pocket.

Every tax system worth its salt has some rules on "effective debt forgiveness" to prevent debt parking. And - from my experience which is now over twenty years old - none of them work entirely.

Now if Donald really has all those tax losses its pretty clear that the debt must be parked somewhere.

There is a vehicle out there (say an offshore trust or other undisclosed related party effectively controlled by Donald Trump) - which owns over $900 million in debt and is not bothering to collect it.

I do not have the time or energy to find that vehicle. But it is there. Now that this blog has gone public journalists are going to look for it.

There is a Pulitzer prize for whoever finds it. Just give me a nod at the acceptance ceremony.


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