Twitter Inc.’s initial public offering documents suggested a valuation of $12.8 billion for the microblogging service, underscoring the seven-year rise of a still unprofitable company that has helped revolutionize how people share information.
In the most anticipated technology offering since Facebook Inc. (FB), San Francisco-based Twitter made public its S-1 prospectus yesterday and said it’s seeking to raise $1 billion. Twitter pegged the fair value of its common stock at $20.62 a share in August. There are 620 million shares outstanding, according to people familiar with its financials, who asked not to be named because the number was not included in the filing.
The prospectus removes the veil of secrecy that surrounded Twitter’s financials since the company said on Sept. 12 that it had filed confidentially for an IPO. It shows how the microblogging service, founded in 2006, has evolved from a simple site for 140-character updates to a booming online-advertising business that generated revenue of $253.6 million in the first six months of this year.
Brian Blau, a San Francisco-based technology analyst at Gartner Inc., said in an interview.
“Whether it’s worth $12 billion or not is really going to come down to how they can embrace this real-time news and information vision, how they can extend it to other revenue lines and how they can grow around the world.”
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Roadshow Soon
With Twitter taking the wraps off its S-1, the company will soon embark on a roadshow to promote the deal. The IPO will be a test for investors burned in recent years by the offerings of Internet companies such as Facebook, Groupon Inc. (GRPN) and Zynga Inc. (ZNGA), all of which plunged after their offerings. While Facebook shares have since climbed back, Groupon and Zynga are still trading below their IPO prices.
At $12.8 billion, Twitter would be valued at 28.6 times revenue over the past 12 months. Facebook debuted with price-to-sales ratio of about 26, while LinkedIn sold shares for 14.5 times revenue.
The offering will be pivotal for Chief Executive Officer Dick Costolo, who in 2010 became Twitter’s third CEO in as many years. He is credited with bringing management discipline, rapid hiring and a business plan to a company that was bogged down by a lack of focus and frequent technical outages.
Goldman Sachs Group Inc. (GS) was listed as the lead underwriter and was joined by Morgan Stanley, JPMorgan Chase & Co., Bank of America Corp., Deutsche Bank AG, Allen & Co. and Code Advisors. The stock will list under the ticker TWTR.
Twitter’s revenue in the first six months of the year more than doubled to $253.6 million. The company said advertising revenue per timeline view in the second quarter rose 26 percent from the same period a year ago to 80 cents.
Twitter Pricing Implied From Transactions - May 2007 Thorugh September 2013 (Click Image To Enlarge)
Robust Mobile
Twitter also disclosed that a majority of its revenue derives from mobile advertising, an area where rivals have struggled. In the three months that ended in June, more than 65 percent of Twitter’s ad revenue was generated from mobile devices. Facebook said in July that mobile accounted for 41 percent of revenue in the second quarter, up from 30 percent the prior period.
Twitter posted a net loss of $69.3 million in the first six months of 2013, compared with a net loss of $49.1 million in the same period a year ago. The company said that as of June 30, it had incurred an accumulated deficit of $418.6 million.
Clark Fredricksen, vice president at EMarketer Inc. in New York, said.
“They have clearly built their business from the get-go in the direction of where users are spending time, which is on their phones.”
Twitter Revenues and Net Losses by Quarter (In Millions) - Q1 2011 Through Q2 2013 (Click Image To Enlarge)
Risky Business
The company included 32 pages of risk factors, compared with 22 pages in Facebook’s IPO filing last year. Among those are Twitter’s dependence on U.S. advertisers, even as more than three-quarter of its monthly active users are located outside the country. Twitter also cited stiff advertising competition, the company’s youth, and even earthquakes as risks.
One challenge lies in expanding the site’s user base. In June, Twitter had 218 million monthly users, up 44 percent from the year earlier. That was slower than its 78 percent growth the prior year.
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Twitter’s average revenue per user in the latest quarter was 64 cents based on its monthly active users and $139.3 million in sales. That’s less than half Facebook’s $1.60 average revenue per monthly user.
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War Chest
The IPO gives Twitter’s backers and early employees a chance to cash in shares, and will supply the company with a war chest to use on acquisitions and international expansion. The funds will also help the company forge stronger ties with advertisers and media businesses who want to reach Twitter’s growing audience.
Twitter said.
"We intend to use the IPO proceeds to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders.”
The company said it anticipates capital expenditures this year of $225 million to $275 million.
Twitter said its biggest shareholders include co-founder Evan Williams, with a 12 percent stake; venture capital firm Benchmark and partner Peter Fenton with 6.7 percent; co-founder and chairman Jack Dorsey, with a 4.9 percent slice and CEO Costolo with 1.6 percent.
Twitter - Principal Stockholders - Number of Shares Beneficially Owned By Named Executive Officers and Directors and 5 Percent Stockholders - S-1 Filing (Click Image To Enlarge)
Governance Structure
The S-1 also revealed Twitter is different from other Internet companies in its governance structure. Unlike the boards of Facebook, LinkedIn Corp. (LNKD) and Google Inc., which created multiple classes of stock to give extra voting power to their founders, Twitter has just one class.
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Charley Moore, founder of Rocket Lawyer Inc., a startup that provides legal service for customers, including Twitter employees, had this to say.
“Here you have a company that is probably going to be more democratic than some of those other businesses may be. They don’t have any special rights for their major shareholders.”
Twitter has rapidly expanded revenue since introducing advertising in 2010. The company now lets marketers pay to give their posts prominent placement on timelines, where people get updates from the accounts they follow. The company also lets advertisers pay to be placed next to a list of popular topics on Twitter in different geographies.
Costs have soared as Twitter invests in infrastructure and hiring, totaling $316.5 million in the first six months of this year, up 87 percent from the same period in 2012.
Gartner’s Blau said.
“They are building their company for the long term and they have to spend money to do that.”
Twitter has struck deals with video-content owners from the National Football League to Viacom Inc., seeking to get users spending more time on the site and watching more ads. It also bought Bluefin Labs, a Cambridge, Massachusetts-based startup that monitors social-media comments about TV shows, and partnered with Nielsen Holdings NV to measure the amount of online discussion being generated by TV programs.
COMMENTARY: This is one of the most boring digital IPO's I have seen in a long, long time. Twitter conjures comparisons with Zynga and Groupon. Lots of users and revenues, but no hint of a profit anywhere.
I had estimated that Twitter was losing money, but I didn't think they had racked up cumulative net opeating losses (NOLs) of $418 million since they launched in 2006. Having said this, it is not unusual for internet startups like social networks to incur significant NOL's. This was the case for Groupon, Zynga, LinkedIn, Angie's List, Yelp, and even Facebook.
History shows that fast growing digital technology startups must make significant investments in technology and personnel in order to provide users with a great user experience so that they keep coming back, and insure that they can access their personal pages without any hangups on a 24/7, 365-day basis.
Since nearly all social networks, depend on an ad-supported revenue model, without these investments in technology and personnel, social networks would never be able to reach a critical inflection point where the number of user and website traffic metrics attract big advertisers. The obvious question that investors will want to know is Twitter's strategy to grow revenues and generate a profit. Something worth nothing: Only Facebook and LinkedIn have been able to attain profitability after their IPO's. Twitter CEO Don Costolo certainly has his work cut out for him convincing investors during the upcoming roadshow.
The recent runup in Facebook's shares, which had lingered well below its IPO price of $38, and at one point hit a historic low of $19.05 at the end of August 2012, rallied in mid-May 2013 following impressive earnings reports for Q1 2013 and Q2 2013, driven by strong mobile ad revenues, no doubt influenced Twitter's decision to file for an IPO now. But, does an IPO even make sense? Let's take a good look at Twitter.
Who Uses Twitter?
The PEW Research Center's Internet & American Life Survey has updated their annual look at who is using Twitter and other social media sites. In 2012, 15 percent of online adults were using Twitter, a small rise from 13 percent in 2011.
And in 2013? 16 percent of internet users are active on Twitter, and the service still skews favourably towards black and hispanic users, adults aged 18-29, and folks who live in urban areas.
Men are slightly more likely to use Twitter than women – two years ago the exact opposite was true – and almost one-third of Twitter users have at least some college experience. Relatively, Twitter remains unpopular with white users.
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Twitter faces increasing pressure from Pinterest (15 percent of all internet users) and Instagram (13 percent), and is still significantly behind Facebook (67 percent usage) in overall popularity.
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Twitter Must Broaden It's Appeal And Improve Engagement
According to Adam Shlachter, senior vice-president of media at DigitasLBi,
"Twitter needs a larger user base and improved engagement to win business from mass-market clients, according to ad buyers. The company's monthly growth has slowed to 7% and it has less than one-fifth of the audience of rival Facebook. Twitter also needs to become a daily-use tool to assure advertisers access to a consistent audience to tap into ... not an audience that is just churning in and out."
As of last December 2012, Twitter said it had 215 million people actively using their service, with most of those accounts overseas, nowhere near the following of Facebook, with 1.15 billion active users, or Yahoo, with 800 million.
In the U.S., its audience is far smaller. According to Twitter's IPO filing, it had only 49 million active users at the end of the second quarter 2013, up from 48 million in the first quarter 2013, an increase of only 2.1%. By comparison, Twitter had 169 million international users at the end of the second quarter 2013, up from 156 million in the first quarter 2013, an increase of 8.3%. Facebook had 198 million monthly active users in the U.S, at the end of the second quarter 2013, but growth its U.S. growth has peaked, so it too depends on new international users in order to grow its user base.
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The reason for Twitter's slower user growth: Most people know what Twitter is, but many don't know how or why they should use it. Search for "I don't get Twitter" and Google spits out 5.7 billion results.
Now that it is on the verge of selling its stock to the public, Twitter has to prove to investors it can broaden its appeal or risk being pigeonholed as a niche service, analysts say.
Max Wolff, chief economist and senior equity analyst at Greencrest Capital says.
"User base and growth have not been a problem to date, but Twitter is going to have to find a good system to reach tomorrow's Twitter users or eventually it will be a problem."
The Twitter IPO has captured the public imagination because Twitter has become such an integral part of popular culture.
It's a real-time spin room for politicians, an organizing tool for government protests, a wire service for breaking news and an online hangout to talk about live events and television shows.
Even its unusual conventions have saturated popular culture. Hashtags, a way of using a word to group tweets by subject, are on movie billboards and television ads. And "tweet" no longer just means the chirping of birds in the Oxford English Dictionary.
Twitter’s Popularity Among Teens
According to a new study from the financial firm Piper Jaffray, Facebook is losing teens in droves (denied by Facebook, naturally), Twitter is more popular among teens than Facebook, and has apparently overtaken Facebook as the most popular social network among U.S. teens.
The study found Twitter was preferred by 26 percent of adolescents while Facebook and its recently acquired unit Instagram were each chosen by 23 percent, down by 10% from a similar study in April 2013.
Twitter, Facebook, and Instagram are considerably more popular among teens than Tumblr and Google+, each of which can only claim less than 5 percent preference among trend-setting teens.
Teens spend a great deal of their time texting messages to their friends using their cell phones, and Twitter's 140-character tweets are a perfect fit, so it doesn't surprise me that teens are turning to Twitter for their favorite pastime. When you combine messaging with Twitter hashtags this is a marriage made in heaven. If Twitter can target more teens, they could dominate in this growing demographic, and this means more advertising dollars.
Twitter's Strategy To Increase Revenues and Generate Profits
So how exactly will Twitter increase revenues sufficiently in order to generate a profit?
In it's S-1 IPO filing, Twitter mentioned several areas to help increase revenues and profitability:
- Integrate More Twitter Partner Content - Twitter signaled intentions to integrate more content via partnerships and acquisitions of technology "to enable our platform partners to distribute content of all forms." In recent weeks Twitter has been working on programs that help TV companies distribute video clips from their shows as the shows air live. Of course, the company released its short video app Vine earlier this year.
- TV Ratings Products - On October 7, 2013, Nielsen introduced its Nielsen Twitter TV Ratings product to measure the reach of TV-related tweets, though interest from advertisers and networks remains to be seen. Measurements will note programming-related tweets and how many times they are seen by accounts. Brands must not forget "the overwhelming majority of conversations about TV shows still take place offline," said Ed Keller, CEO of the Keller Fay Group.
- Self-Serve Ad Platform - Its plans for advertisers include improve targeting capabilities. But the company also says it will launch self-serve ad platforms in select international markets to expand its ad business into new territories. "Finally, we intend to develop new and unique ad formats for advertisers. For example, we recently introduced our lead generation and application download Twitter Cards and Twitter Amplify, which allows advertisers to embed ads into real-time video content.”
- Monetize App Acquisitions - In 2013, Twitter acquired Vine, a mobile application that enables users to create and distribute videos that are up to six seconds in length, and #Music, a mobile application that helps users discover new music and artists based on Twitter data. Twitter is hoping that Vine increases user engagement and advertisers use it to create video ads that are short, yet unobstructive. This has already started to happen, but at a slower pace as advertisers experiment with the new app's value as an advertising tool. As more Twitter users begin using the #Music app, this should increase engagement between users sharing their favorite music with their followers.
A snap response from one ad industry veteran and Pivotal Research analyst Brian Wieser was“positive on the company and its business as a while, as it clearly has established itself as one of the world’s most important media properties, and one which is increasingly important to advertisers.” Wieser noted that the Twitter user base is still small compared to Yahoo, AOL and certainly Facebook. But he also notes that these rivals may be more subject to commoditization than Twitter. Key to the company profitability will be achieving scale and succeeding in an international expansion that is only starting, he says.
Twitter's average revenue per active user is $1.47 compared to Facebook's $4.10. Twitter now has an estimated 554 million registered users or about $0.63 average revenue per registered user. These figures are abysmal to say the least.
Twitter vs Facebook - Revenues, Net Income and Monthly Active Users at the time of IPO filing (Click Image To Enlarge)
With less than half of its users active (554 million registered vs 215 million active) compared to Facebook (presently 1.11 billion registered and 1.11 billion active users), Twitter must find a way to increase user engagement and site stickiness. This is going to be difficult to do with the growth in the number of monthly active users on the decline. Twitter's partnerships with the television networks may become the secret to increasing engagement and site stickiness. Increasing its share of the teen demographic is pivotal to increasing its base and increasing engagement.
Courtesy of an article dated October 4, 2013 appearing in Bloomberg, an article dated October 4, 2013 appearing in MediaPost Publications Mobile Marketing Daily, Twitter's SEC Form S-1 Filing, an article dated February 15, 2013 appearing in AllTwitter, an article dated October 3, 2013 appearing in The Wall Street Journal's Money Beat, an article dated October 7, 2013 appearing in Fast Company, an article dated February 11, 2013 appearing in the Twitter Blog, and article dated October 4, 2013 appearing in Mashable, and article dated October 3, 2013 appearing in PhysOrg, an article dated October 4, 2013 appearing in Advertising Age, and an article dated October 10, 2013 appearing in ValueWalk
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