US ad revenues collapse. Twitter cuts costs to manage its decline.

Twitter reported its first quarter “earnings” this morning – “earnings” in quotes because, as always, it’s actually a loss, this time of $61 million for the quarter. That’s according to Generally Accepted Accounting Principles (GAAP). Under its own metrics, after taking out the expensive bad stuff and making some other adjustments, worth in total $143 million, Twitter converts this loss to a “non-GAAP net income” of $82 million.

Such miracles happen on Twitters financial statements on a quarterly basis. But more on that “expensive bad stuff” in a moment.

Behind its usual slew of dazzling homemade metrics, Twitter also reported a less dazzling reality: global revenues dropped for the first time ever on a year-over-year basis, by 8% to $548 million. In the US, revenues plunged 13%!

Why? Its side business is doing well. Revenues from “data licensing + other” – is that where it’s monetizing user data? – rose 15.6% to $74 million.

But advertising revenues, the core of its business model, are collapsing, particularly in the US.

Advertising revenues dropped 10.7% year-over-year globally to $474 million. While international ad revenues inching up 1% to $190 million, ad revenues in the US plunged 17% to just $284 million. In other words, Twitter in the US, in terms of revenues, is dying.

“There is still work to be done to translate” all these dazzling homemade user metrics “into revenue growth,” the report observed laconically. When a young company that went public with enormous hype a few years ago is doing what IBM is doing – presiding over declining revenues – it’s not a sign of vibrant potential.

But, seeing the writing on the wall and wanting to hang on for a while longer, Twitter has turned into a cost cutter. It has laid off a bunch of people, has lowered its footprint in San Francisco by subleasing a big part of its office space, and has trimmed expenses elsewhere, which produced some results:

Research and development expense down by $27 million

Sales and marketing expense down by $93.6 million

Total “expenses and costs” from operations dropped by $65 million. So despite dropping revenues, its loss from operations fell by $19 million. That’s the cost-cutter model.

But how did Twitter get from a GAAP net loss of $61 million to “non-GAAP net earnings” of $82 million – a $143 million swing? Its “non-GAAP net earnings” exclude, among other things, these goodies worth in total of $241 million:

Stock-based compensation $117 million. This is down 22% from a year ago, as part of its overall cost cutting program and layoffs. While this is not a “cash” expense, it’s a real expense (employee compensation) and plays out in form of stockholder dilution.

Depreciation and amortization expense of $103 million

Interest expense of $18 million (since interest expense doesn’t matter)

Provision for income taxes of $3 million

So how is Twitter doing in the shareholder dilution department? The number of shares outstanding jumped from 691.6 million a year ago to 722 million in Q1 2017. That’s 30 million additional shares issued in one year, a result in part of its stock-based compensation plans, and its ongoing program of shareholder dilution.

“We’re proud to report accelerating growth in daily active usage for the fourth consecutive quarter, up 14% year-over-year,” explained part-time CEO Jack Dorsey. He did concede that the company was facing “revenue headwinds,” which is the single most important metric of long-term potential.

In other words, Twitter is doing what IBM has been doing for years: it’s cutting costs in face of falling revenues in order to hang on for a while longer. It’s managing its own decline.

But don’t despair. It was all “better than expected” – or at least some of the dazzling metrics were “better than expected” – and Twitter shares jumped 10.5% this morning to $16.21, though that’s still down a bunch from its IPO price of $26, and down nearly 80% from its all-time high.

So short Twitter? But note that in this crazy market, the bloodletting among Tesla shorts has become legendary. Read… 4 Short Sellers Explain Why They Target Tesla – But Don’t Try to Do this at Home

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