Twitter reveals rip-roaring growth, big losses ahead of IPO

Reuters

* First disclosure shows revenue almost tripled in 2012

* Filing shows business heavily reliant on advertising

* Initial public offering targets $1 bln fund-raising

By Gerry Shih and Alexei Oreskovic

SAN FRANCISCO, Oct 3 (Reuters) - Twitter Inc, racing towardthe largest Silicon Valley IPO since Facebook Inc's 2012coming-out party, hopes to woo investors with rip-roaringrevenue growth despite having posted big losses over the pastthree years.

The eight-year-old online messaging service gave potentialinvestors their first glance at its financials on Thursday whenit publicly filed its IPO documents, setting the stage for oneof the most-anticipated debuts in over a year.

Twitter's debut will be the culmination of its journey froma side-project to a sociocultural phenomenon, one that hasbecome a communications channel for everyone from the Pope toPresident Barack Obama. Last month, Iranian President HassanRouhani used Twitter to disclose a "historic" phone conversationwith the U.S. President.

The service's emphasis on real-time communication - whetherit be about breaking news or chatting with friends about a TVshow on air - sets it apart from rivals such as Facebook.

Now, though, the company must prove to Wall Street it cancontinue to make money, even as growth slows after a period ofexplosive expansion around the world.

In Thursday's filing, the first public disclosure offinancial figures, Twitter reported that revenue almost tripledto $316.9 million in 2012. In the first half of 2013, it postedrevenue of $253.6 million but had a loss of $69.3 million.

The numbers were mostly in line with the estimates ofoutside analysts. The company began selling advertising inearnest only in 2010, devising a means for ads to appear in themessage streams of users that has proven effective for bothdesktop computers and mobile devices.

The losses are "a non-issue," said Brian Wieser, analyst atPivotal Research Group. "It would have been a surprise if theyhad a profit."

In the laundry list of risk factors that's typicallyappended to all company IPO filings, Twitter warned it washeavily reliant on advertising revenue. It said more than 87percent of its revenue came from advertising in the first halfof 2013.

The prices Twitter can command for ads has actually fallenover the past five quarters. But the company said that declinewas the result of a conscious effort to rapidly expand itsavailable inventory and change its algorithms to distribute adsmore frequently throughout each day.

Revenue has risen because the strategy attracted moreadvertisers, especially small- and medium-sized businesses andinternational clients, it said.

Still, the company acknowledged the uncertainty of thevolatile and highly competitive online advertising market.

"Advertisers will not continue to do business with us, orthey will reduce the prices they are willing to pay to advertisewith us, if we do not deliver ads in an effective manner, or ifthey do not believe that their investment in advertising with uswill generate a competitive return relative to alternatives,including online, mobile."

CULMINATION

Twitter's target is to raise $1 billion, a figure devisedmainly for registration purposes and that will change as thecompany embarks on a roadshow to sell its IPO to investors.

Assuming everything goes smoothly, it could begin trading inNovember, though it has not revealed which U.S. exchange -- theNew York Stock Exchange or the Nasdaq -- it has chosen.

Wherever it lists, its debut is likely to cause waves acrossWall Street and the industry, potentially breathing new lifeinto the market for consumer Internet companies and influencingthe value of all social media companies.

Some analysts estimate Twitter could be worth as much as $15billion. That's a fraction what Facebook was worth at the timeof its debut, but Twitter's profile is just as high.

Indeed, its more established rival is borrowing a few pagesfrom Twitter's book, particularly in its approach to mobileadvertising. On Thursday it announced an advertising initiativefor its Instagram unit, which competes most directly withTwitter.

Since Twitter was spun out of a struggling San Franciscostartup in 2006, it has grown to approximately 2,000 employeesbased in 15 offices around the world. Along the way, it helpedcreate new ways for advertisers and corporations to reachaudiences, from a "promoted tweets" model now replicated byFacebook and other Internet platforms, to its "second screen"approach to encouraging real-time debate around televisionprograms.

More importantly, it has helped redefine the nature ofglobal communications, linking once lofty and unreachablepoliticians, celebrities and journalists with millions aroundthe world.

Its staunch advocacy of free speech around the world -nothing other than direct personal threats are barred fromTwitter - has helped it become an important avenue through whichnews and viewpoints are shared, from the first inklings of theU.S. military assault on Osama bin Laden's compound to Obama'stweeting "Four more years" when he won re-election.

Twitter's IPO has already drawn multiple comparisons toFacebook. When the world's largest social network debuted,concerns centered around its inability to fully earn revenue offmobile users.

Twitter appears to have less of an issue with mobile. About65 percent of its revenue derives from mobile users, it said.

The service had 218.3 million monthly active users, onaverage, in the three months ended June 30. Three-quarters ofits monthly active users are considered mobile users, it said inthe filing.

But Twitter managed only average revenue per user in thesecond quarter of 2013 of 64 cents compared to Facebook'sroughly $1.60, according to Reuters' calculations.

TAKE HEART

Investors can still muster some cheer from Facebook'srevenue and profitability track. The social networking sitepulled in $272 million in revenue in 2008 but lost $55 million,according to Facebook's S-1 document. In 2009, it swung to aprofit of $262 million after increasing its revenue nearlythree-fold to $777 million. Facebook is now solidly profitable.

Twitter, which went through a period of management turmoiland internal strife in its early years, did not append a letterfrom the founders to the filing, unlike Internet companies suchas Facebook and Google before it.

Co-founder and former CEO Evan Williams is Twitter's largestshareholder, with 12 percent of the shares, while co-founder andchairman Jack Dorsey owns 4.9 percent. Biz Williams, anotherco-founder, does not appear on the list of top shareholders.Current CEO Costolo owns 1.6 percent.

Among institutions, Benchmark and affiliated entities own6.7 percent of shares, while Rizvi Traverse Management, SparkCapital, Union Square Ventures and DST Global are eachshareholders of 5 percent or more.

Suhail Rizvi, the little-known head of Rizvi Traverse whohas helped himself and his investors amass stakes in Twittersince 2011, would count among the largest institutionalshareholders, according to sources familiar with itsinvestments.

Twitter intends to list common stock under the symbol"TWTR." Goldman Sachs, Morgan Stanley, JPMorgan, BofA MerrillLynch, Allen & Co, Deutsche Bank Securities and Code Advisorsare managing Twitter's IPO.

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