As Twitter Inc. hurries to raise up to $1-billion (U.S.) from its much-anticipated initial public offering, investors are taking notice of a worrying sign – slowing growth.
Twitter late Thursday gave investors their first glimpse into the inner workings of the social networking and microblogging company with a regulatory filing that included financial data, user statistics and information about its executive compensation.
Twitter's regulatory filing revealed the company has never made a profit. Last year, it posted a loss of $79-million on revenue of $317-million.
As other hot Internet companies going public have shown before, losses in themselves aren't necessarily a major concern for investors. But as popular as Twitter is, its recent growth rate has cooled. From 2011 to 2012, the company's revenue jumped almost 200 per cent. During the first six months of this year, revenue increased by only 100 per cent, compared with the same period a year earlier.
"There is growth, but at a decreasing rate," said Adriana S. de Lozada, a senior analyst at New York-based PrivCo Media LLC, a research firm focused on private companies. "What that tells you is that they were running out of time to do this IPO."
In some ways, the concerns are similar to those expressed by some investors in the lead-up to Facebook Inc.'s IPO last year.
However, by the time it went public, Facebook had already posted roughly $1-billion in annual profit and had almost one billion users, compared with Twitter's current total of about 200 million.
According to its filing, Twitter values itself at somewhere between $10-billion and $13-billion.
Even as Twitter's revenue has soared, it's not yet clear its growth trajectory is enough to translate into big profits.
"Revenue to profit is a big gap to fill – looking at valuation simply from a revenue perspective is a mistake," said Kai Li, a professor of finance at the University of British Columbia's Sauder School of Business.
"That's what happened to a lot of these companies; they have lots of users but if the users don't bring in profit, it's not a sustainable model."
Twitter's path to profitability may be more challenging than some of its rivals, in part because of something it does better than those rivals – mobile services. The company has succeeded in building a large user and advertising base on handheld devices.
But mobile ads tend to be more difficult to create, in part because of the smaller screens and the perils of showing video content on devices that may be using expensive cellular connections.
That contributes to the challenge some mobile-oriented companies face generating profitable advertising revenue, Twitter's main line of business.
Twitter will enter the public market facing other challenges common in the social media industry. For example, in its filing, the company highlights spam as a serious risk to growth.
The term refers to the large number of fraudulent accounts on Twitter, which either post a deluge of irrelevant tweets or try to get real users to click on links to malicious sites. Such content can be particularly troublesome for the company because advertisers are likely to think twice about advertising on a medium if they suspect many of that medium's user accounts are fraudulent.
"Our actions to combat spam require the diversion of significant time and focus of our engineering team from improving our products and services," the company said in its filing.
And Twitter's business model is susceptible to other headaches.
Because the service is, for many users, essentially a real-time news source, Twitter often sees huge spikes in usage during breaking news events – something that forces the company to invest heavily in server capacity in order to avoid crashing during such times.
But perhaps Twitter's greatest challenge as a public company will be to derive revenue from anywhere outside its U.S. base.
In some large markets, including China, local blogging services already dominate the consumer landscape, and so far Twitter has had trouble making any money in those areas.
To measure advertising dollars, the company uses a measure that gauges advertising revenue per 1,000 views. In the three months ending June 30 of this year, that number was $2.17 in the United States – and just 30 cents everywhere else.
"When you look at the cost of revenue [outside the U.S.], they're simply not breaking even," Ms. de Lozada said.
"That's an imminent issue that Twitter will face going forward."
FIVE FACES BEHIND TWITTER
1. Dick Costolo, chief executive officer
A wry and driven entrepreneur who sold an online news distribution company to Google, Dick Costolo was an early investor in Twitter before then-Twitter CEO Evan Williams asked him to join the company as chief operating officer in 2009. Mr. Costolo wrote a tongue-in-cheek tweet: "First full day as Twitter COO tomorrow. Task #1: undermine CEO, consolidate power." He would become CEO a year later.
2. Jack Dorsey, co-founder and chairman
Widely credited as the man who invented Twitter as it is known, Jack Dorsey served as Twitter's first CEO until he was pushed out by the board in 2008; he remained chairman. In 2012, Mr. Costolo asked Mr. Dorsey to return to the company to play an active role in plotting its consumer-facing product strategy.
3. Adam Bain, president of revenue
Mr. Costolo made his most important hire in late 2010, when he hired Adam Bain away from News Corp., where Mr. Bain oversaw revenue products and sales at Internet properties like MySpace. Twitter's money man has since built Twitter's sales force around the world and overseen the hiring of a significant number of its 2,000 employees.
4. Ali Rowghani, chief operating officer
Along with Mr. Bain, Ali Rowghani is one of Mr. Costolo's most powerful deputies. A former high-ranking Pixar executive , Mr. Rowghani is an influential voice on issues ranging from Twitter's mergers and acquisitions to choosing which outside investors are allowed to hold Twitter shares. He served as chief financial officer until 2012, when he was replaced by Zynga alumnus Mike Gupta.
5. Peter Fenton, investor and director
In early 2009, Peter Fenton's venture capital firm Benchmark Capital invested more than $21-million (U.S.) in Twitter for what is now rumoured to be the largest institutionally held stake in the company. Mr. Fenton served a steadying presence on the board during the company's most troubled years.