Do you remember when Donald Trump was on Twitter? One of his most famous tweets was “STOP THE COUNT!” — a gem from November 2020. Several weeks later, Twitter permanently suspended The Donald’s account. Naturally, this was met with mixed feelings by users.
The debate around free speech vs hate speech is far from over, with Kanye West now at the centre of such a fight. Twitter is where that battle is likely to play out, particularly now that Elon Musk holds the keys to the business.
Stopping the count was a political ploy by Trump. Stopping the headcount is a financial imperative for US tech firms that appear to be in the business of job creation rather than free cash flow generation. The numbers are shocking, with little regard shown for investors.
Of course, it doesn’t do the industry any favours when employees make “day in the life of” TikTok videos that look more like summer camp than a real job. It’s even worse when those employees are essentially using a competing service to make the video in the first place!
Nobody with a serious investment banking job would ever dream of making a video like that. They barely have the time to even download TikTok, let alone learn how to use it.
You’ll have to forgive me, as an ex-banker, for coming from a world where firms acquire talent and squeeze out every ounce of juice available. In doing so, the talent learns quickly and gets exposed to the engine room of markets, with listings, capital raises and mergers & acquisitions mandates par for the course. For those who run this gauntlet and survive, the reward is a stimulating career with significant bonuses.
Investment banks are people businesses, so they are laser-focused on headcount growth. I know this from experience. Every team needs to fight for additional headcount allocation and strongly justify it, with scrutiny placed on efficiency ratios (cost as a percentage of revenue) and revenue per head.
While I am no fan of Musk, it’s about time someone came in and shook up the tech sector
This discipline appears to be entirely absent in the tech sector. With Elon Musk now in charge at Twitter, the headlines are screaming the news of vast layoffs at the company. While I am no fan of Musk, it’s about time someone came in and shook up the tech sector.
In Twitter’s full-year 2021 report, the company noted a 35% increase in employees. With that kind of growth, you would expect the user experience on the app to be vastly different. Instead, there was little to show for it. Most Twitter users will tell you that the quality of the app has deteriorated in recent times, with timelines full of content that nobody asked for.
What do all these people do? Really, what do they do?
After growing the headcount by 35%, the business spectacularly guided a further 20% in headcount growth in 2022. This level of useless job creation puts Eskom to shame. We are talking about a business that lost $221m in the 2021 financial year, so it’s not as if Twitter was sitting on a cash cow that could afford to provide for this headcount growth.
Unsustainable
Speaking of cash cows (or at least reformed cows), Meta is also doing its bit for the nonfarm payroll numbers, with headcount up 28% year on year in the latest quarter. In this case, at least there’s a decent explanation: the development of the metaverse. When building an entire ecosystem from scratch (including the hardware), investment is needed.
Meta has guided that there will be no further headcount growth in 2023. That sounds great, except the employees hired during the 2022 financial year haven’t yet earned a full year of salaries from Meta. In 2023, there will still be significant expense growth because of annualised salary costs. On top of this pressure, the inflationary environment in the US means that employee costs will grow sharply, even with no headcount growth.
The problem is pervasive in the sector. It hardly matters which tech company you look at: headcount is growing at an unsustainable rate and revenue growth has slowed to single digits. The strong dollar is making the situation even worse.
What happens next? Well, if layoffs spread, it’s bullish for the sector. We know there is a lot of fat that can be cut. Twitter is tiny in comparison with the leading tech firms, but it may give us a window into the near-term future for the sector. There’s only so much pressure that shareholders will be willing to take.
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