Twitter Inc. does not break out its daily active user numbers in its financial reports, but analysts and accountants say the company’s reasoning is fishy.
In an exchange with the Securities and Exchange Commission in June, Twitter
said that it uses percentage changes rather than exact numbers for daily active users, or DAUs, numbers, because those numbers are a “performance indicator” that can only be related to its number of monthly active users. Simply put, Twitter is saying the year-over-year percentage changes in daily active users show how engaged or unengaged the company’s monthly active users have become.
But analysts and accounting experts say the company needs to disclose the exact DAU numbers, as they are a key indicator for growth at the company, particularly as monthly active user growth lags, and as the exact DAU numbers are likely reported to management.
“It’s like an investor trying to put together a puzzle and the company is trying to withhold the last piece of the puzzle,” said Tom Selling, publisher of The Accounting Onion.
“It’s like an investor trying to put together a puzzle and the company is trying to withhold the last piece of the puzzle.”
Twitter had a few back-and-forth letters with the SEC on this topic and others, with Twitter saying in a letter from its lawyers that the “absolute number of DAUs is less important than the percentage change in DAUs because the key factor is whether engagement is increasing or decreasing.”
In its most recent quarter, Twitter broke out the fact that it had 328 million monthly active users, the same number as last quarter, and 12% year-over-year growth in DAUs. However, as that 12% metric is less than the 14% increase reported in the previous quarter, these monthly active users are presumably less engaged.
But at the same time, Anthony Noto, Twitter’s chief financial officer, said on the company’s earnings call that the company had shifted its focus more to daily user growth.
“We have elevated the importance of DAUs as a key driver of overall growth both from an audience standpoint, engagement standpoint and also from an advertising standpoint,” Noto said on the call.
Twitter said that if it were to disclose exact DAU numbers, analysts and investors would inevitably try to compare it with other social networks, but those comparisons would not be exact.
“The company also focuses investors on percentage change rather than absolute DAU numbers to avoid confusion when comparing the company with other companies that disclose information regarding DAUs, but use different definitions of DAUs that may include different segments of their respective user bases,” Twitter’s lawyers said in the letter dated June 2, 2017, responding to inquiries from the SEC.
However, Selling argued against the idea of exact numbers causing “confusion” among investors.
“As an investor, that insults my intelligence,” Selling said. He is not an investor in Twitter.
Instead, he argues DAU metrics would help investors zero in on whether it’s engagement or user numbers that are driving or pulling from growth each quarter.
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What’s concerning to Olga Usvyatsky, vice president of research at Audit Analytics, is the fact that Twitter changed how it defines DAUs in the third quarter of 2013, in addition to taking away its previous ratio of monthly active users to daily active users.
“Any change is a red flag,” Usvyatsky said.
Twitter now has a lengthy description of DAUs, defined as Twitter users who logged in or were otherwise authenticated and accessed Twitter across its website, mobile app or mobile website on any given day.
While Twitter calls its monthly average user metric a “measure of the company’s logged-in audience,” James Cakmak, an analyst at Monness, Crespi, Hardt, said analysts and advertisers have been focused on DAU trends, as the platform is designed for frequent use. That number is now more important than ever, he said, as monthly active user numbers are flat and DAUs are emerging as the primary driver of growth.
“The primary and only driver really appears to be on the DAU side,” Cakmak said.
Twitter shares have lost 7% in the past three months, compared with the S&P 500’s
gain of 4%.
Twitter may also be trying to avoid a comparison with Facebook Inc.
which has a much larger user base. Facebook has a fairly standard DAU definition — a registered Facebook user who logged in and visited Facebook through its website or a mobile device, on a given day, but it also includes Facebook users who log in to Messenger.
Facebook was also questioned by the SEC on user metrics, but the regulator’s focus related to its definition of mobile DAUs versus mobile-only DAUs, which do carry complicated, yet slight differentiations.
Electronic Arts Inc.
and Glu Mobile Inc.
have also been questioned by the SEC on their DAU metrics.
The SEC has been cracking down on the way companies report earnings, with part of the push deriving from the idea that companies should be reporting metrics to the public the same way they are reported to management. Because management likely knows the DAU numbers and because the SEC has already sent letters on the topic, Selling expects more letters to come.
“I wouldn’t be surprised if the SEC pursued this further,” Selling said.
The lack of a clear number has driven analysts to estimate the DAUs, with Cakmak’s estimate coming in at around 100 million to 125 million, which would put Twitter below both Facebook, at 1.28 billion DAUs and Snap Inc., which had 166 million DAUs. However, other analysts have estimated the number at up to 180 million.
“The reasoning certainty suits their cause, but in practice doesn’t make much sense,” Cakmak said.