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Bigger non-GAAP

10 March 2016 By Richard Beales

Twitter’s efforts to retain talent are sending at least two warnings to investors. One is that the shares the $11 billion microblogging service has previously given employees are not making them think like owners. The other is that its own preferred way of calculating profit is becoming even more divorced from reality.

Jack Dorsey’s company has been giving staffers extra stock and cash to stop them from leaving, the Wall Street Journal reported on March 9. Twitter’s shares have lost nearly two-thirds of their value in the past year, and they now trade around a third below the $26-per-share price set at its initial public offering in November 2013.

Twitter has granted new stock to employees in amounts intended to make up for what they’ve lost, according to the Journal. That ought to have a positive impact on morale. But it defeats the point of giving workers a piece of the action, which is to tie their fortunes to the performance of the business.

Moreover, Twitter already has the bad habit, rife in Silicon Valley, of excluding stock-based pay from its bespoke measures of profit. In 2015, the company lost $521 million by standard accounting. Stripping out share handouts and other items, as it chooses to do for its internal purposes, it made a profit of $277 million.

This gap may get larger still if Dorsey gives everyone more stock. And the implicit recognition that stock awards provide the financial motivation for wavering executives to stay put at Twitter further undermines the idea that they aren’t real expenses.

Taken to an extreme, if Dorsey fails to turn Twitter around, the stock price keeps sliding and he continues to give staff more shares to compensate, other investors will be trapped in a spiral of dilution. Each share held would represent a rapidly decreasing fraction of an increasingly distorted version of profit. The longer Dorsey and his team stick to the idea that handouts of Twitter’s shares cost nothing, the more investors may come to think that’s the right price for the stock.


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