Can Twitter meet the IPO test?

Twitter's IPO filing last week has renewed hopes of an investment boom in consumer tech. After Facebook's fizzle last year, its numbers had better stack up.

It’s official. Twitter has commenced proceedings to file for IPO. The company announced it Thursday afternoon, US time, via Twitter. “We’ve confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale,” it said.

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While the reveal around the company’s IPO plans was done in a very public fashion, the mode of filing is far from it. Twitter has chosen to confidentially submit its S-1 under a provision in the ‘Jumpstart Our Business Startups Act’which allows companies with annual revenues under $1 billion to not have to reveal financial information to investors until 21 days before the road show begins. Reports indicate that since the JOBS act was introduced in 2012, 90 per cent of companies eligible have chosen to file confidentially.

The introduction of confidential filing was brought about as a way of removing barriers for ‘emerging growth companies’ to consider the IPO process. It was thought that the disclosure required in an S-1 forced companies to divulge too much competitive information in the process, which created significant risk given 50 per cent of companies that pursue an IPO do not follow through with the process.

Although Joe Public investors can’t view Twitter’s S-1 until, at the latest, three weeks before the listing date, select institutional investors will be able to take a look under the hood before this. These meetings will give Twitter a good idea of the demand for the stock and large-scale institutional investor thoughts around the value of the company. It is reported that Twitter is seeking to IPO with a valuation of around $14 billion, however these numbers always subject to change – as we saw with the Facebook IPO.

An additional benefit of the JOBS loophole is that it reduces the issues caused by the traditional S-1 requirement – where a company will disclose significant financial and strategic information within the document, but then be bound by the ‘quiet period’ rule which prohibits companies filing for IPO from making any public comment on their company’s prospects beyond those already included in the public S-1 filing. This conundrum caused challenges for high profile IPOs from Google, Facebook and Groupon.

With the filing of the Twitter S-1 we really only know two things for sure – the company has generated less than $1 billion in the past year, and it plans to at least test the waters on the IPO process. Both of those things we knew already. The two numbers people really want to know, revenue and profit, have little consensus.

According to eMarketer estimates which appear to be the most widely used, Twitter is on track to generate $582 million in revenue for calendar year 2013, following on from 2012 revenues of $288 million and 2011 revenue of $139 million. Twitter hasn’t publicly confirmed or denied the e-marketer numbers, which are said to be devised through “analysis of estimates from research sources that track media buying trends, advertising and other revenue indicators; Twitter usage statistics from research firms and user surveys; and eMarketer interviews with executives at ad agencies, brands, online ad publishers and other industry leaders.”

How much of this revenue is ending up as profit is a mystery. However an IPO process must mean that either Twitter needs a big wad of cash to turbocharge its expansion through increased headcount or asset acquisition, or that its business has begun to really scale and buoyed by the recent performance of Facebook (up 88 per cent in the past three months) and LinkedIn (up 49 per cent in the past three months) it feels right now is a good time to go to market. Reports indicate Twitter currently has around 1,200 employees and is currently looking to hire another 330 more. If the eMarketer numbers are accurate and if operating costs are in line with other social networking sites, such as Facebook, at around 25 per cent of revenue and employee costs follow a similar per-head plus multiplier estimate of the rest of the industry, it is likely Twitter will record a small loss in 2013. However, there are a lot of ‘ifs’ in that equation.

Regardless, profit has never been an urgent priority for Twitter, which has been well funded in its seven-year history. It raised $57 million in its first three years, before going on to raise $1.1 billion in 2010 across two rounds (including one by Russian investor Yuri Milner for $800 million) and another $300 million in 2011. Add these up and the company has seen $1.47 billion in funding, creating a significant pool of hungry venture capitalists such as Union Square, Digital Sky Technologies, Spark Capital, Bezos Expeditions and Digital Garage, as well as Saudi prince Alaweed bin Talal looking for an IPO payday.

Ben Shepherd is a media and technology consultant. He can be found on LinkedIn and on Twitter.