Twitter Continues To Excessively Reward Its Employees

| About: Twitter, Inc. (TWTR)


Market considered Twitter's earnings a beat and shares surged this week.

Twitter lost $144.5 million in Q2 2014 compared to a loss of $ 42.2 million in Q2 2013.

Stock based compensation was $158.4 million in Q2 2014 or 50.7% of total revenue.

Twitter may have beat non-GAAP expectations, but I will not to reconsider my negative outlook.

Based on the market's reaction, Twitter (TWTR) reported very strong second quarter earnings this week. For sure, Twitter managed to increase revenue by 129% compared to last year's second quarter. Bottom line, non-GAAP earnings per share of $0.02 a share surprised the market as well. However, Twitter continues to grant too much stock based compensation to its employees. For example, peer firms Facebook (NASDAQ:FB) and LinkedIn (LNKD) recorded much less stock based compensation expenses in the second quarter of 2014.

Previously, I wrote this article: "Twitter's Stock Based Compensation Expenses Raise Another Red Flag." I argued that the amount of Twitter's stock based compensation expenses do not provide long-term value for shareholders. Further, the stock based compensation schema dilutes the position of Twitter's other shareholders. Therefore, I marked Twitter's stock based compensation expenses as a red flag to look at in future earnings report.

In the second quarter of 2014, Twitter recorded a total sum of $158.4 million as stock based compensation expenses, up from $126 million in the first quarter. Stock based compensation expenses in terms of revenue increased as well in the second quarter (50.75%) compared to the first quarter of 2014 (50.29%). Again, Twitter spends a lot more in stock based compensation than its peers Facebook and LinkedIn (see table below):

SBC expense Q2 % of revenue Q2 Q1
Twitter $158 million 50.75% 50.29%
Facebook $314 million 10.80% 10.79%
LinkedIn $ 75 million 14.01% 14.33%

According to the data in the table above, Twitter was by far the most generous company among its peers to grant over 50% of its revenue as stock based compensation to its employees. In fact, Twitter was the only company to significantly increase its compensation in the second quarter compared to the first quarter. In terms of total revenue, Facebook's expense was stable q-o-q and LinkedIn even managed to decrease its q-o-q expense.

What worries me the most is Twitter's guidance regarding its stock based compensation expenses. The company projects its full-year stock based compensation expense to be in the range of $640 million to $690 million. Revenue is expected to be in the range of $1,310 million to $1,330 million. Therefore, Twitter expects stock based compensation expenses in terms of revenue to be in the range of 48% to 53% for the full-year of 2014.

Based on the historical earnings reports and Twitter's guidance for the rest of this year, it is fair to say that the potential trend is confirmed. As such, investors should expect large amounts of stock based compensation expenses in the future. As I already mentioned, this will dilute the positions of current shareholders. Considering Twitter's $26 billion market capitalization, the dilution for stock based compensation will be in the range of 2.5% to 2.7% for the year 2014 alone.

Further, I wonder what will happen with the moral of Twitter's employees when the market valuation of Twitter finally comes down and their shares and option packages suddenly are worth significantly less. I doubt they will be as loyal to the company as they are right now. So, Twitter also creates a potential threat to its business instead of creating long-term commitment among its employees.

Finally, I conclude that Twitter and its employees have become even more greedy than they were in the first quarter of this year. As a result, Twitter will not be able to turn its net loss under GAAP into a net profit anywhere soon. On top of that, the position of current shareholders will dilute and Twitter may have created a potential threat to its business instead of creating a long-term commitment. Therefore, I still do not consider Twitter an attractive investment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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