Twitter reveals massive growth, big losses ahead of IPO

Friday 04 October 2013 18.09
Twitter heading towards largest Silicon Valley flotation since Facebook's IPO in 2012
Twitter heading towards largest Silicon Valley flotation since Facebook's IPO in 2012

Twitter, racing toward the largest Silicon Valley IPO since Facebook's 2012 flotation, hopes to woo investors with massive revenue growth despite having posted big losses over the past three years.

The eight-year-old online messaging service gave potential investors their first glance at its financials last night when it publicly filed its IPO documents.

This has now set the stage for one of the most-anticipated debuts in over a year.

Its debut will be the culmination of its journey from a side-project to a sociocultural phenomenon, one that has become a communications channel for everyone from the Pope to the US President Barack Obama.

The service's emphasis on real-time communication - whether it be about breaking news or chatting with friends about a TV show on air - sets it apart from rivals such as Facebook.

Now, though, the company must prove to Wall Street it can continue to make money, even as growth slows after a period of explosive expansion around the world. 

Read a timeline of the Twitter story

In last night's filing, the first public disclosure of financial figures, Twitter reported that revenue almost tripled to $316.9m last year. In the first half of 2013, it posted revenue of $253.6m but had a loss of $69.3m.

The numbers were mostly in line with the estimates of outside analysts. The company began selling advertising in earnest only in 2010, devising a means for ads to appear in the message streams of users that has proven effective for both desktop computers and mobile devices.

In its IPO filing, Twitter warned it was heavily reliant on advertising revenue. It said more than 87% of its revenue came from advertising in the first half of 2013.

The prices Twitter can command for ads has actually fallen over the past five quarters. But the company said that decline was the result of a conscious effort to rapidly expand its available inventory and change its algorithms to distribute ads more frequently throughout each day.

Revenue has risen because the strategy attracted more advertisers, especially small and medium-sized businesses and international clients, it said.

Still, the company acknowledged the uncertainty of the volatile and highly competitive online advertising market.

"Advertisers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us, if we do not deliver ads in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to alternatives, including online, mobile."

Twitter's target is to raise $1 billion, a figure devised mainly for registration purposes and that will change as the company embarks on a roadshow to sell its IPO to investors.

Assuming everything goes smoothly, it could begin trading in November, though it has not revealed which US exchange -- the New York Stock Exchange or the Nasdaq -- it has chosen.

Wherever it lists, its debut is likely to cause waves across Wall Street and the industry, potentially breathing new life into the market for consumer Internet companies and influencing the value of all social media companies.

Some analysts estimate Twitter could be worth as much as $15 billion. That is a fraction what Facebook was worth at the time of its debut, but Twitter's profile is just as high.

Indeed, its more established rival is borrowing a few pages from Twitter's book, particularly in its approach to mobile advertising. On Thursday it announced an advertising initiative for its Instagram unit, which competes most directly with Twitter.

Since Twitter was spun out of a struggling San Francisco startup in 2006, it has grown to approximately 2,000 employees based in 15 offices around the world. Last week the company announced the creation of 100 jobs in Dublin, bringing its total Irish workforce to 200.

Along the way, it helped create new ways for advertisers and corporations to reach audiences, from a "promoted tweets" model now replicated by Facebook and other Internet platforms, to its "second screen" approach to encouraging real-time debate around television programmes.

It has also helped redefine the nature of global communications, linking once lofty and unreachable politicians, celebrities and journalists with millions around the world.

Its staunch advocacy of free speech around the world - nothing other than direct personal threats are barred from Twitter - has helped it become an important avenue through which news and viewpoints are shared, from the first inklings of the US military assault on Osama bin Laden's compound to Obama's tweeting "Four more years" when he won re-election.

Twitter's IPO has already drawn multiple comparisons to Facebook. When the world's largest social network debuted, concerns centered around its inability to fully earn revenue off mobile users. But Twitter appears to have less of an issue with mobile and it said that about 65% of its revenue derives from mobile users.

The service had 218.3 million monthly active users, on average, in the three months ended June 30. Three-quarters of its monthly active users are considered mobile users, it said in the filing.

But Twitter managed only average revenue per user in the second quarter of 2013 of 64 cents compared to Facebook's roughly $1.60, according to Reuters' calculations.

Investors can still muster some cheer from Facebook's revenue and profitability track. The social networking site pulled in $272m in revenue in 2008 but lost $55m, according to documents. In 2009, it made a profit of $262m after increasing its revenue nearly three-fold to $777m. Facebook is now solidly profitable.

Twitter, which went through a period of management turmoil and internal strife in its early years, did not append a letter from the founders to the filing, unlike Internet companies such as Facebook and Google before it.

Co-founder and former CEO Evan Williams is Twitter's largest shareholder, with 12% of the shares, while co-founder and chairman Jack Dorsey owns 4.9%. Biz Williams, another co-founder, does not appear on the list of top shareholders. Current CEO Costolo owns 1.6%.

Twitter intends to list common stock under the symbol "TWTR."

Keywords: ipo, twitter