Attendees visit the Twitter Inc. exhibition. (Photographer: Krisztian Bocsi/Bloomberg)

Why Twitter's Dorsey Let Wall Street Wunderkind Noto Walk

(Bloomberg) -- Twitter Inc.’s executives gathered from around the world this week at its offices in New York’s Chelsea neighborhood to discuss the state of the company, goals for the year, and management’s broader ambitions. The twice-yearly meeting is usually a chance for Twitter’s leaders to re-commit themselves and air any concerns to their hundred or so peers.

This time, the meeting was hijacked by one particular concern: the resignation of Anthony Noto, Twitter’s chief operating officer. Early Tuesday, Noto informed his colleagues that he was leaving the social-media company to become chief executive officer of online-lending startup Social Finance Inc.

Noto’s departure, which set off a tumble in Twitter shares, comes at a delicate time: after several years of struggling to expand its audience, the company is finally showing some stability and growth. Amid Twitter’s volatile financial performance and executive reshuffling in recent years, Noto has been a reassuring presence, serving as a link to Wall Street and adeptly addressing investor concerns in good times and bad. Since joining in 2014 as finance chief and then as COO, he led the business divisions of Twitter and championed the company’s live-video strategy, a centerpiece of its recovery.

Why Twitter's Dorsey Let Wall Street Wunderkind Noto Walk

For many within the company, Noto’s decision came as no surprise. The former Goldman Sachs Group Inc. banker has always aimed to be a CEO, according to people familiar with the matter. At Twitter, that career path was complicated by co-founder Jack Dorsey’s return to the helm in 2015. More than two years later, with no plans for Dorsey to step down -- even though he’s also CEO of Square Inc. -- Noto’s best option was to take the position at SoFi, said the people, who asked not to be named discussing private matters.

Though the loss of Noto will certainly leave a hole, his absence isn’t seen as a threat to Twitter’s turnaround efforts, according to people with knowledge of Dorsey’s thinking. Since beating Wall Street’s sales estimates in late October, the San Francisco-based company has been upgraded by at least six analysts, who have cited greater user engagement -- the time users spend interacting through the company’s site -- thanks to improvements in Twitter’s product.

"While we are obviously disappointed in Noto’s departure, we do not view it as thesis-changing," Doug Anmuth, an analyst a JPMorgan, wrote in a note to investors. "We continue to believe both the Twitter story and financial results will strengthen over the next year."

Twitter was up 0.5 percent, to $22.88, in early trading in New York Wednesday after closing down 2.4 percent on Tuesday.

In a tweet, Dorsey said he’s sad to see Noto leave, offering his support and gratitude for his accomplishments at Twitter. For Noto’s part, in a statement he said working alongside Dorsey was an "honor," and called his departure “bittersweet." Twitter declined to elaborate on the details of Noto’s departure.

Noto focused on sales and business development -- important for fueling revenue and forging partnerships -- and Dorsey was brought back to Twitter to fix the product and shore up user growth. When it comes to social media, engagement is the most important metric for Wall Street valuations. Since his return, Dorsey has made changes across Twitter’s timeline, notifications, the Explore tab and user interface that have made the platform easier to use, and most of the improvements touted by analysts stem from these initiatives. At the same time, Noto’s strategy of signing up more premium content for live-streaming -- a key element of the company’s plan to boost revenue -- has already been set in motion, and Twitter has an executive bench ready to step up to fill any void.

Noto’s exit may also give Dorsey the opportunity to find a No. 2 who aligns more closely with his product vision. His leaving "could be a good thing, because depending on the level of open-mindedness the board can show, if you do bring a fresh look into this, it can actually be a blessing in disguise," said James Cakmak, an analyst at Monness Crespi Hardt & Co.

The two men have often disagreed on fundamental business strategies, according to people close to Noto and Dorsey. Under Noto’s leadership, the company cut live programming deals related to sports, news and entertainment, including streams from the National Football League, Major League Baseball and National Basketball Association that have helped drive advertising revenue. Still, those deals have yet to be proven to directly correlate with user engagement, analysts said.

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In contrast to Noto, a former U.S. Army captain known for quick, decisive action, Dorsey has a more nuanced management style, the people said. Rather than making video and media content the priority, Dorsey sees Twitter’s power stemming from its ability to help people communicate, and envisions making changes along the way to facilitate that public discussion, they said.

Despite their different temperaments, Noto has been key in cutting through Dorsey’s indecision, according to people familiar with their thinking. During Twitter’s frequent company-wide discussions called "Tea Time," Noto rallied employees around pep talks that explained the strategies the company was pursuing, like live video, and often punctuated his company memos with the two-exclamation-point emoji. Dorsey tended to give more abstract speeches that were sometimes personal stories about the founding of Twitter, his own reflections or his vision for the product, according to one of the people. Losing Noto’s focus and his deal-making abilities does pose some risk to the company’s recovery, Cakmak said.

"The only reason Twitter had a COO is because the CEO didn’t have the bandwidth to run the company on the day-to-day basis,” the analyst said.

There’s no immediate plan to fill the COO position, but the company will assess whether it should recruit for a business executive role, according to a person familiar with Twitter’s plans. The company is determining the future of the business lines that Noto oversaw and whether it will maintain that structure. After that, Twitter will decide if it will recruit someone or promote a current employee to take on a broader executive responsibility, this person said.

For the time being, Twitter is well situated to fill the gap Noto will leave, at least temporarily. Ned Segal, who spent 17 years at Goldman, was hired last year as chief financial officer. Many top managers already directly report to Dorsey, including Bruce Falck, the company’s head of revenue product and engineering. Chief Marketing Officer Leslie Berland, a former American Express Co. executive, was also named head of human resources last year. Matthew Derella, the company’s well-regarded vice president of global revenue and operations, will continue to lead advertising sales.

©2018 Bloomberg L.P.