Users Get Focus in Twitter Investors’ Fight Over Lack of Growth

SAN FRANCISCO (CN) – Twitter intentionally misled investors about user engagement before coming clean about the declining number of daily active users, an attorney for Twitter stockholders told a federal judge Thursday.

Attorney Daniel Drosman said Twitter’s stock price dropped after executives like Anthony Noto, Twitter’s chief financial officer, told analysts in November 2014 that its monthly active users would grow to over 550 million. But by 2015, its number daily active users – the primary method of measuring user engagement – was dropping off.

“When you make a point to conceal this information, you do it intentionally,” Drosman said.

He said Noto was evasive with analysts who asked in February 2015 what they should look at to determine whether user engagement was declining or improving.

“He doesn’t tell them about daily active users. It’s very carefully crafted, and it had the intended effect,” Drosman said, noting the analysts went on to unwittingly praise Twitter’s phony growth.

“Noto knows what’s going to make the stock go up,” he said. “He’s a former Goldman Sachs guy.”

Twitter eventually acknowledged user engagement was declining on an earnings call in July 2015, causing stock price to drop, Drosman said.

Drosman and his firm, Robbins Geller Rudman & Dowd of San Diego, are litigating the case alongside South Carolina firm Motley Rice. They represent a class of investors who bought Twitter stock between Feb. 6, 2015 and July 28, 2015.

On Thursday at a hearing on Twitter’s motion to dismiss, Drosman said several confidential witnesses from inside Twitter “paint a very bleak picture” of the site’s daily active users during the class period.

“If DAU [daily active users] remains flat and you’re adding additional MAU [monthly active users], what it says about this new MAU is these aren’t engaged users,” Drosman said. “In any event it’s an adverse trend for DAU.”

The witnesses also claim Twitter faked its monthly user growth by prompting inactive users to log onto Twitter by sending out emails indicating some kind of error with their accounts.

Twitter attorney James Kreissman, with Simpson Thacher & Bartlett in Palo Alto, said the company was as realistic as it could be given its relative immaturity.

“Twitter is a young company in a young industry working hard to be transparent in a rapidly changing environment,” he said, noting Twitter began to highlight ad engagement metrics over daily active users because it helped explain that user engagement varies.

While the class claims ad engagement metrics aren’t reflective of user engagement, Twitter has argued a metric that tracks how users interact with ads on its platform is an “obvious measure of user engagement.”

Kreissman also pointed to a statement that Noto made in April 2015 saying the company was “off to a slow start” in the first quarter of that year.

“Defendants were realistic and transparent with investors about user engagement during the class period. They provided similar amounts of user engagement information during the class period. This isn’t the case where they issued optimistic guidance; in fact, they issued some sober warnings,” Kreissman said.

U.S. District Judge Jon Tigar challenged another quote from Noto that appeared to say nothing about user engagement: “In our more mature markets we have more DAU in emerging markets we have very low DAU. They all migrate to a higher rate over time,” Noto said at the time.

“It doesn’t tell you if user engagement is growing or how user engagement is affecting the finance of the firm,” Tigar said. “Do you think there was a lack of clarity in the company about exactly where the user engagement was? I’m not the best mathematician in the world, but I’m confident based on that statement I have no idea about what’s happening with user engagement. There’s so much left out of that statement that it’s really impossible to know what’s going on.”

Kreissman said Noto was just trying to manage expectations, as there are inherent limitations in relying on daily active users to measure user engagement.

“They are providing the information that they have, and the lack of more detailed information reflects the fact that user engagement is not a plug-and-play kind of number. It’s something the company struggled with repeatedly as a young growing company trying to find its way in the industry,” Kreissman said. “This is not sugar-coating things.”

Tigar took the arguments under submission.

“Thanks for bringing me a very interesting securities case,” he said. “If I didn’t have 300 other cases I would have set a much longer hearing.”

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