Twitter Cost Guidance disappoints by skipping stock compensation costs

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By Jacob Maslow

Twitter HashtagAll told, Twitter’s recent cost containment guidance had a lot for Twitter (NYSE:TWTR) backers and fans to be hopeful for. It appears that Twitter execs have been paying attention to the company’s stock analysts and have decided to take its mammoth costs by the horns. Accordingly, the company plans to pare down the cost of revenue to clock to 20 to 22% of revenue. This is quite a nice drop from 2014’s 31.8% cost of revenue to clock figure. In terms of sales and marketing costs, the company issued guidance that it will rein in this cost item to around 22 to 24% of revenue. This is quite a stark change from 2014’s 43.8% rate. As for research and development expenses, the company says it will devote 15 to 17% of revenues to this line item down from last year’s 49.3% of revenue. The company also projected lower general expense and administration costs.

From a purely surface perspective, it appears that this cost guidance is precisely what would be Twitter investors would want to see as they decide whether to buy the microblogging platform’s stock or not. As impressive as these project cost cuts may be, Twitter left a key cost off the cutting floor and this factor might keep otherwise eager investors on the sidelines.

One of Twitter’s biggest costs is stock-based compensation. Just how big is this cost on Twitter’s bottom line? In 2014, the company spent 45% of its revenue or $631.6 million on stock-based (usually options) compensation. Unfortunately, its stock-based compensation costs are so high that even if Twitter were successful in sticking to its cost guidance above, leaving stock-based compensation costs out of its cost reduction program is sure to keep its bottom line looking weaker than it actually is.

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