Twitter's coming IPO likely will make its early investors rich

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Posted: Sunday, October 6, 2013 12:00 am

SAN FRANCISCO — If Lady Gaga were to send a message to her 40 million Twitter followers summarizing the company's debut on Wall Street, it might very well say: “Twitter IPO. Mobile. Born This Way.”

Twitter, which was built on messages so short that they could be texted on a cellphone, revealed last week just how central smartphones and tablets are to its business — underscoring the technology industry's rapid transition to a mobile world.

But despite clear evidence that it is quickly increasing its revenue from mobile advertising, the company also disclosed that it had not yet turned a profit, that it had been steadily losing money and that its user growth had been slowing significantly since the end of last year.

Last month, the company announced that it would go public but had filed confidential papers. On Thursday, it made its prospectus public, providing a first glimpse at its financial health.

The Twitter initial public offering — the most hotly anticipated stock sale since Facebook went public last year — will make early employees and investors in the company very rich.

Evan Williams, one of the company's founders, owns 12 percent of the company, a stake valued at $1.2 billion in August, when the company last priced its employee stock options. Jack Dorsey, another co-founder, owns stock worth about $483 million.

The investment firms Benchmark Capital, Union Square Ventures and Spark Capital are also large stockholders, as is DST Global, a Russian firm that made a fortune on its sizable early investments in Facebook.

Twitter's impending public offering seizes on the continued growth of social networking and mobile devices, two trends the company has ridden to enormous growth. Founded seven years ago as a side project in a floundering startup firm, it is now one of the world's biggest public forums, ranking alongside Facebook. Aspects of the service, like hashtags denoting specific discussion topics, have infiltrated popular culture.

The company has turned its deceptively simple product, messages no longer than 140 characters, into a global phenomenon. It has found a way to make money through advertising, notably through sponsored tweets that resemble regular users' posts.

And much of that advertising revenue is on mobile.

In its filing, Twitter said that 75 percent of its users entered the service through mobile devices during the second quarter and that 65 percent of its revenue came from mobile ads.

That is sharply higher than the numbers of Twitter's much bigger rival, Facebook, which had virtually no revenue from mobile when it went public last year — and struggled to prove to investors that it could be a truly mobile company.

Twitter earned far more of its advertising revenue from U.S. users than from non-U.S. users, which analysts said was an area in which it needed to improve.

Zachary Reiss-Davis, an analyst at Forrester, said the social network would eventually need to show how it could evolve its advertising efforts and make its offerings more sophisticated.

“Twitter has done a good job of growing its international user base, but now it has to work with marketers to create advertising experiences that work for those international users and for marketers,” he said.

Twitter's prospectus also offered a look at how it has grown; it reported that it had 218.3 million average monthly active users in the second quarter, up 44 percent from the same period a year ago. But at the end of December, it said it had about 200 million users, suggesting that growth was slowing.

Its revenue for the first half of this year was $253.6 million, more than double the amount it brought in during the same period last year.

Yet Twitter has been steadily losing money, reporting a net loss of $79 million last year and $69 million for the first six months of 2013, although some analysts said such losses were not unreasonable for a young, fast-growing company

Twitter has not set a price for its offering. But when it last set an internal price for employees, in August, it valued the stock at $20.62 a share, suggesting a value at that time of $9.7 billion. That figure is equal to 22 times the sales that the company posted in the 12 months through June. Such a valuation is high, even for a young technology company, analysts say.

But Twitter has shown steady growth in advertising sales, and investors will value the stock based on their expectations of future revenue and profit.

Facebook's stock market value is 12 times the sales that analysts expect the company to achieve next year. Some expect Twitter to reach $1 billion in sales next year. If the company were to trade at 12 times that estimate, it would be worth $12 billion. Some analysts will probably argue that Twitter is growing faster and therefore deserves to trade at a higher multiple of sales, which could push up Twitter's stock market value.

In a seven-sentence letter to prospective investors, Twitter characterized itself as a service “shaped by the people, for the people.”

“The mission we serve as Twitter Inc. is to give everyone the power to create and share ideas and information instantly without barriers,” the company said.

The social network disclosed that it planned to use the ticker symbol TWTR, but it did not specify a stock exchange. It also listed a $1 billion fundraising target, a pro forma number meant to calculate listing fees.

With the regulatory filing Thursday, Twitter now has to wait at least three weeks until it kicks off a publicity campaign to potential investors across the country.

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