Earlier this morning, Twitter released its S-1 filing with the US Securities and Exchange Commission, finally making public information around revenue, expenses and the company’s present financial position.
When Twitter announced it had confidentially filed last month, the big questions most analysts had revolved around a few key areas, namely user growth, revenue growth, and costs. Was Twitter looking to raise via an IPO because it was running out of cash? Or was it looking to float because its growth trajectory was better than most assumed and it wanted to capitalise on the positive share price momentum of the likes of Facebook and LinkedIn over the past three months?
Whilst key financial information is disclosed, it is still unclear on the valuation Twitter will seek to raise at. What is known is the company will seek to raise $1 billion and that the S-1 states that in August of this year, the company valued its restricted stock at $20.62, which implies value in the vicinity of $US11 billion.
However, this was an “arm's length” valuation based on secondary market trading and in no way implies that Twitter will go to IPO with a similar valuation. That said, you can be sure the initial price will not be lower than $20.62.
So what do we now know about the current state of Twitter?
Its revenue is growing fast. Really fast. In 2011, its revenue grew 276 per cent from $US28.3 million to $US106.3 million, and in 2012 it grew by 198 per cent to $US316.9 million. Twitter’s 2013 revenue looks likely to hit $US660 million, which would mean 2013 year on year growth of 108 per cent. These numbers are impressive considering Twitter’s slow international expansion and limited advertising product suite. The S-1 outlined that 15 per cent of Twitter’s revenue comes from ‘data licencing’.
Right now, revenue wise Twitter is in a similar place to Pandora. For the six months ended June 30, Twitter generated $253 million in revenue, while for the same period Pandora generated $US282 million. Twitter claims 230 million monthly users, while Pandora has 71.2 million (important to note Pandora operates in limited markets outside of the United States).
For the six months ended June 30, Twitter reported a net loss of $US69.2 million, while for the same period Pandora reported a net loss of $US36 million. Both companies rely heavily on successful international expansion to boost user numbers and revenue, both are highly dependent on content created by others (Pandora relies wholly on music owned by labels and publishers, Twitter relies on user created content) and both are heavily reliant on advertising revenue.
Pandora is able to extract around $US9 per annum from its users in terms of revenue, whereas on 2013 revenue estimates, Twitter will be closer to $3. It’s worth pointing out that Pandora has a current market cap of $US5 billion, while Twitter is likely looking for three to four times that valuation.
While Twitter’s recent revenue growth is impressive, these increases in revenue have come with significant cost increases. Twitter has never turned a profit, it has in fact lost $US344 million over the past three and a half years and $US418 million since it was established.
Considering its historical cost base in relation to revenue, Twitter is likely to report a net loss of around $US100 million for full year 2013, based on revenue of $US660 million. Stock-based compensation accounts for about 10 per cent of expenses, although key executives such as CEO Dick Costolo, sales chief Adam Bain and engineering head Chris Fry are receiving the majority of their compensation presently in stock.
Between the three of them, they received under $US550,000 in compensation. Combined, they have been awarded over 25 million shares presently valued at over $US500 million.
Twitter isn’t in a bad place, cash-wise. At June 30 it had $US164 million in cash or cash equivalents, with $US210 million in short term investments. However, it isn’t enough to really fuel growth via acquisition, given some cash is needed to address the trading deficit the company finds itself in. Large, strategic acquisitions don’t come cheap, especially in a market with cashed up players such as Google and Facebook. The IPO will allow Twitter to bolster its cash reserves in order to be more aggressive in this area.
Oddly, the S-1 is very light on details on what Twitter plans to do with funds raised via the IPO, aside from using portions to fund 2013 capital expenditure and tax withholdings.
Twitter’s current financials shouldn’t be of too much surprise to investors and analysts. Expenses may be marginally higher than anticipated, resulting in a larger net loss in 2012 and forecast for 2013 than expected, but revenue is well within predictions.
The only area of information that might be a red flag is user growth. Twitter reported 218 million active users in June. While that is a 44 per cent increase on the 12 months period, it is a long way behind the scale of Facebook, which boasts monthly active users north of 1 billion. 218 million puts Twitter in a similar bucket to LinkedIn, which is claiming monthly usage of 189 million.
Usage growth is a concern - between March 30 and June 30 2013 Twitter only added 14 million new users. In the same period in 2012 it added 13 million. CEO Costolo has been very vocal about the importance of user growth for the company in the media this year, telling Bloomberg, “our user growth drives everything. All of the benefits of the business and growing the business and extending the platform are derived from that”.
It has also been reported Costolo told employees the company expected to get to 400 million users by the end of 2013. It is likely Twitter will fall well short of this figure, with end of year monthly user numbers likely to be between 240 to 260 million.
A key question is how Twitter, now seven years old, can really supercharge growth at this stage of its existence. One key strategy the company is using is trying to attach itself to real-time events that have large scale passionate followings - namely professional sport and broadcast TV. This approach has seen Twitter strongly integrate itself into sports leagues such as the NBA, NFL and AFL locally, as well as television formats across drama, current affairs, reality and sport. Twitter knows the power of celebrity: 43 of its top 50 most-followed users are either singers, actors or athletes. It realises that becoming more deeply involved with these individuals is critical to holding the public’s attention.
The S-1 document even promotes the service’s close ties with celebrity. A closer association with celebrity is likely to fuel growth to an extent, but what happens if the celebrities and athletes want to be compensated for their promotion and contribution to a company, likely to be worth $US15-20 billion? What about the TV networks and sports leagues currently giving Twitter a free pass and hundreds of millions in free promotion by carrying its logo and directing their viewers and fans to the platform? This reliance on third parties to fuel growth is perhaps the largest risk the business faces.