Social networking giant Twitter has filed documents with market regulators stating it wishes to raise £619m from an initial public offering. A closer look at the documents suggests they have taken notes from Facebook’s troubled IPO.
The documents filed last week by Twitter show that the social networking site has 218 million monthly users that sends 500 million tweets a day and is operating on a $69m loss of revenues of $254m. Around 85 per cent of Twitter's revenue last year came from ad sales; the rest was from licensing its data. The company takes in a significant portion of its ad revenue from mobile devices, an important metric often tracked by analysts.As of 2013, over 65 per cent of the company's advertising revenue was generated from mobile devices. More than 75 per cent of Twitter users accessed the site from their mobile phone during that same time period.Although the company has never made a profit, it is still expected to be very popular with investors. "Social media is red hot," said Internet analyst Lou Kerner. "Twitter is front and centre benefiting from market enthusiasm for all things social and remarkably strong metrics."Sources familiar with Twitter’s thinking tell us the company has recently received bids from hedge funds offering to buy shares in the company from employees and investors for between $26 and $28 a share, which would value Twitter at $14bn.
Twitter founders (@ev, @biz, @jack)
For the three months ended June 30, the company’s service had 218.3 million active users a month, 44 per cent more than the period a year earlier. Three-quarters of its users during that period visited Twitter from a mobile device, compared with 66 per cent a year earlier. However, although Twitter has 218 million active users, already user growth is slowing. In the last quarter, Twitter added only 1 million monthly active users in the U.S. All its remaining growth was abroad.Only 23 per cent of Twitter’s active users during its most recently completed quarter were in the US; 77 per cent were from the rest of the world. Its international audience grew 47 per cent compared with a year ago, more than the 35 per cent growth among domestic users. Countries outside of the U.S.—where businesses, Web-based or not, are increasingly looking for growth—represented only seventeen per cent of Twitter’s revenue in the year before its I.P.O. filing; for Facebook, international countries provided forty-four per cent of revenue in the comparable year.“Despite its ubiquity, Twitter’s strength as a business is unclear,” Telis Demos and Yoree Koh wrote in the Wall Street Journal.During the second quarter, Twitter said the average revenue it earned from advertisements shown on Twitter’s timeline to American users was $2.17, while that same figure in the rest of the world was only 30 cents. Revenue from outside the United States accounts for only 25 per cent of the company’s total revenue.The reason for the disparity is that the company is not nearly as far along in building an advertising business outside the United States. Twitter cites multiple reasons for its struggles, including a lack of familiarity with digital advertising outside America, government regulation in the European Union and elsewhere, weaker Internet access and the abundance of users in emerging markets like India accessing Twitter from phones with limited functionality.Another issue is Twitter's vulnerability to Facebook, and other apps and social media, which it warns about specifically in the S-1:“... following Facebook’s acquisition of Instagram, Facebook disabled Instagram’s photo integration with Twitter such that Instagram photos are no longer viewable within Tweets and users are now re-directed to Instagram to view Instagram photos through a link within a Tweet. As a result, our users may be less likely to click on links to Instagram photos in Tweets, and Instagram users may be less likely to tweet or remain active users of Twitter. Any similar elimination of integration with Twitter in the future, whether by Facebook or others, may adversely impact our business and operating results.”
Revenue vs Losses at Twitter
Another issue that may worry investors is that, by far, the largest portion of Twitter's costs is R&D, which it defines in large part as salaries for engineers. Twitter has 2,000 employees. Twitter said, "From January 1, 2010 to June 30, 2013, we increased the size of our workforce by more than 1,800 employees." That is simply staggering for a IT company. Facebook has 5,299 employees, but also has made $1bn in profit last year. Why will Twitter’s IPO succeed where Facebook’s failed? One of the major factors that caused the early stumbles of Facebook’s stock was the fact that the social media giant had only begun its mobile advertising service during the IPO process, causing investor concern that the company would struggle in this area. However, no such concern exists for Twitter. According to projections from March by market research firm eMarketer, Twitter’s mobile advertising revenues are expected to be $309m n 2013, $551m in 2014, and $811m in 2015. Perhaps more importantly, Twitter will be able to learn from Facebook’s mistakes and keep expectations down while using a better pricing strategy than Facebook.Twitter’s public offering, which is likely to take place in early 2014, will be among the most high profile IPO’s since Facebook went public in May of 2012.
