Twitter Exec's Departure Raises Some Big Questions for Its Business

On the surface, the story of Twitter (TWTR) COO Anthony Noto's departure is a pretty straightforward one: the former Goldman Sachs (GS) banker got an offer to be the CEO of a high-profile tech startup expected to eventually do an IPO -- namely, online lender SoFi --- and seized the opportunity.

But there's one catch: Twitter, whose shares have dropped over 2% on news of Noto's departure, apparently has no plans to hire a successor. Instead, Noto's responsibilities will be handed over to other Twitter execs. In some respects, then, his exit looks similar to that of Twitter's last two COOs.

When Adam Bain -- seen as a CEO candidate before Jack Dorsey was named permanent CEO in Oct. 2015 -- stepped down as COO in November 2016, he was immediately replaced by Noto, who had been serving as CFO since July 2014. Noto subsequently served as both COO and CFO for eight months before Twitter hired former Intuit and Goldman Sachs exec Ned Segal to be its CFO.

Likewise, when Ali Rowghani resigned as COO in June 2014 -- he was widely seen as being pushed out -- Twitter handed his responsibilities to "other members of the Twitter management team." Bain was promoted to COO 15 months later, in tandem with (and perhaps as a consolation prize for) Dorsey being named permanent CEO.

In Noto's case, the responsibilities being handed off to co-workers are pretty significant. At the time that he was named COO, Twitter said that Noto would oversee its "revenue-generating organizations including global advertising sales, data, revenue product, and [mobile ad exchange] MoPub, as well as global partnerships and business development."

He was also said to retain oversight of Twitter's live content efforts, which include the recent launch of Bloomberg's TicToc 24-hour news network and a deal with Fox Sports to air World Cup-related programming this June. In its press release on Tuesday confirming Noto's departure, Twitter notes Matt Derella, its VP of Global Revenue and Operations, will "continue to lead its ad sales efforts." Derella was one of the execs who reported to Noto following his appointment as COO.

Making this shakeup all the more intriguing: Noto was a highly polarizing figure both outside and (reportedly) inside the company. Though the former Goldman banker and NFL CFO had his share of supporters, many were critical over the last few years of both Noto's generous compensation, and Twitter's slumping ad sales.

While Twitter's data-licensing business (15% of Q3 revenue) has seen some momentum, declining ad sales led its revenue to drop on an annual basis during the first three quarters of 2017. Q4 revenue, due to be reported on Feb. 8, is expected on average by analysts to be down 4% to $687 million.

To be fair, Twitter has managed to beat conservative analyst sales estimates for each of the last three quarters, helping boost the company's stock about 37% over the past 12 months. And during Noto's time as COO, the company has made some progress in both growing its video ad sales and (with the help of outside data), improving its ad targeting.

Moreover, as Snap (SNAP) and quite a few ad tech firms can vouch, Twitter is hardly the only ad-dependent Internet company having a tough time battling Alphabet/Google (GOOGL) and Facebook (FB) , whose scale, data and targeting/measurement advantages have helped them steadily take online ad share from many smaller rivals. One could also add that Twitter has seen quite a bit of executive turnover since going public in 2013.

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But Twitter's continued ad sales declines, together with the timing of Noto's exit (just after seasonally big Q4 ended) and the handoff of his responsibilities, are leading some to wonder if the departure is a sign of larger issues at the company. "[W]e believe that Mr. Noto's departure toward the back-end of a multi-year turnaround effort could suggest that the pace of platform improvement/monetization may be moderating," wrote Baird analyst Colin Sebastian.

Twitter's Q4 report should provide some valuable context for Noto's exit in a couple of weeks. In the meantime, investors nervous about what the exit could signify and/or the uncertainty it adds to Twitter's story, and who have seen Twitter's shares rally strongly since October on turnaround and M&A hopes, are deciding this is a good time to take profits.

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