Twitter IPO: Some Thoughts

The wait is finally over. After months of maintaining silence over its plans and performance, social media icon, Twitter, has finally decided to go public. The company filed for an IPO under the JOBS Act, which lets companies with less than $1 billion in revenues file confidentially. Companies have to make public their documents at least three weeks before the road shows begin. That deadline ended for Twitter late last week when it decided to make its documents public.

Twitter’s Financials

As expected, Twitter’s results showed rapid revenue growth and widening losses. But it is the slowing of user base that is worrying. Twitter claims to have more than 218.3 million monthly active users and more than 100 million daily active users worldwide. Twitter has 25% of its user base residing in the U.S. The site generates more than 500 million Tweets daily. Twitter is still dwarfed by Facebook, which ended the June quarter with 699 million daily active users and 1.15 billion monthly active users.

Here are the eagerly anticipated financial details: Twitter saw revenues grow 198% over the year to $316.9 million in 2012. Net loss for the year fell 38% to $79.4 million last year, while adjusted EBITDA grew 149% to $21.2 million. For the six-month period ending June 2013, Twitter saw revenues grow 107% to $253.6 million. But losses have widened during this period, increasing 41% to $69.3 million.

The company earns 87% of its revenues from advertising and the remaining 13% by licensing its data to companies that analyze Tweets for insights on events and social trends. During the previous quarter, more than 65% of advertising revenues came from mobile devices.

Twitter has invented its own metric to measure performance – revenue per timeline view. Timeline views are the number of timelines requested when a user visits Twitter, refreshes a timeline or views search results while logged in to the website. According to the results, advertising revenue per timeline view grew 26% over the year to $0.80 for the quarter ended June 2013. The U.S. accounts have an average of $2.17, while international accounts average $0.30 on the metric.

Prior to the IPO filing, Twitter raised $1.16 billion in funds from investors that include Charles River Ventures, Union Square Ventures, Marc Andreessen, Bezos Expeditions, Spark Capital, Digital Garage, Benchmark, Institutional Venture Partners, T. Rowe Price, Morgan Stanley, Kleiner Perkins Caufield & Byers, DST Global, DFJ Growth, and individual investors, including Dick Costolo, Naval Ravikant, Ron Conway, Chris Sacca, Greg Yaitanes and Brian Pokorny, to name a few.

Twitter’s Worries

According to researcher eMarketer, Twitter should generate $582.8 million in advertising revenues this year and will grow to earn $1 billion revenues by 2014. But Twitter’s financials and user metrics highlight concerns about this growth. The current run rate falls short of eMarketer’s projected revenues.

User growth has slowed down. During the second quarter of this year, the number of monthly active users grew 7% sequentially compared with growth of 10% and 11% reported in earlier quarters. Also worrying is the decrease in ad rates, which fell 46% sequentially in the previous quarter. Revenue per user isn’t very impressive, either. According to analyst calculations, Twitter earned $0.64 revenue per user during the second quarter of 2013 compared with Facebook’s $1.60.

Twitter’s Acquisitions

Twitter is increasing efforts to grow revenues. Recently it announced the $350 million acquisition of MoPub to drive mobile advertising. MoPub is a mobile ad solution that helps mobile publishers manage ad inventory to drive improved sales performance. It is best known for MoPub Marketplace, which is a real-time bidding exchange to enable advertisers to bid for impressions when they became available. MoPub is estimated to be operating at a revenue rate of $100 million, and its customer list includes WordPress and OpenTable. Twitter plans to leverage MoPub’s technology to build real-time bidding into its own ad platform.

Last month, it also acquired a social TV tracking site, Trendrr, for an undisclosed sum. Trendrr’s products include Trendrr.TV and Curatorr. Trendrr.TV provides tools to track TV engagement across social networks, and Curatorr enables analysis of this data by sorting through social streams to visualize data and to identify high-quality Tweets. Twitter plans to use Curatorr’s capabilities to enhance its analytics for TV advertisers.

Twitter’s IPO filing values the company at $9.7 billion. It plans to raise $1 billion from the IPO expected by next month under the ticker TWTR. It has yet to select the stock exchange. Analysts estimate that Twitter could be worth $12 billion-$20 billion on trading.

Business Model

My assessment is that Twitter needs to monetize its traffic and data through a well thought through platform eco-system that gives the company a strong revenue stream. My recent Harvard Business Review article talks about how some other companies are doing this effectively. So far, Twitter’s efforts in this area have been timid and inadequate.

In addition, while the currency holds its luster, Twitter should go out and acquire more companies with serious, proven and profitable monetization models. Similar to MoPub, there are numerous other companies that fit that bill, and could offer Twitter an opportunity to build a portfolio of product lines that mitigate the business model challenges of its current core business.

Twitter’s core business has massive business model challenges. We’ve already seen the fates of Groupon and Zynga, two other companies that had their moments of glory, and then imploded under the scrutiny of the public market. Twitter should learn from these case studies, and manage its own IPO and post-IPO window much more judiciously.