Markets all of a Twitter as online giant set for $1.1bn float on stock market

Beloved of teens, big business and world leaders, the broadcast platform will make its founders billions –but it’s yet to turn a profit

New York

A dramatic image of passengers being evacuated off US Airways Flight 1549 when it crash-landed in New York’s Hudson River in 2009 was a milestone for Twitter.

The microblogging platform had been steadily growing in popularity ever since it was launched in 2006. But the snap of the jet partly submerged highlighted the power of the service. Showing that its 140-character messages could not only be fun, but deliver news and accompanying images instantly to new audiences, meant that the traditional media outlets began to take their cue from the website.

As the company prepares to launch on the stock market, Twitter has become the preferred do-it-yourself broadcast platform for teenagers, big business and international leaders alike.

When the Iranian President, Hassan Rouhani, visited New York to attend the UN General Assembly last week, bringing with him hopes of a thaw in US-Iranian relations, politicians, journalists and analysts kept close tabs on his Twitter feed to gauge the views of the new Tehran regime.

The ever-smiling president didn’t disappoint, keeping them engaged with updates throughout his sojourn, including one after a historic phone call with President Obama. “In phone convo, President #Rouhani and President @BarackObama expressed their mutual political #will to rapidly solve the #nuclear issue”, he said in a message that has been retweeted over 1,700 times.

But while the company’s popularity is well documented, little was known until this week about its inner workings – about how it might make profits, who stands to benefit most when it floats, and what might lie in store for investors who decide to buy its shares. After all, going public means that it must be more than the in-thing online: it must show that it is also a worthwhile investment.

In documents filed late on Thursday with the Securities and Exchange Commission, the US market regulator, Twitter revealed that it continues to make a loss – despite attracting more than 200 million active users every month, sending out 500 million-plus tweets every day. In fact, it sunk deeper into the red in the first six months of 2013, losing $69.3m (£43m) as acquisitions chipped away at its bottom line.

But – and this is the likely clincher for investors – revenues are growing and, as the company said in its filing, “mobile has become the primary driver of our business”.

This matters because of the growing number of users who browse the web on their tablets and smartphones, rather than on their laptops or desktops.

Facebook’s experience on the public markets is a case in point (and a cautionary tale for tech companies such as  Twitter that want to raise money on the stock market). The social media giant is vastly bigger than Twitter, with more than a billion users. But when it floated last year, investors balked at its initial valuation of $38 per share. The stock soon sunk below that level, and only recovered this year after investors began to grow more confident in Facebook’s ability to generate mobile advertising dollars.

In Twitter’s case, the SEC filing showed that 75 per cent of the micro-blogging service’s average monthly users access the platform from mobile devices. More importantly, over 65 per cent of its advertising revenues come from mobile.

Overall, from 2011 to 2012, revenue increased by 198 per cent to $316.9m and in the six months ending 30 June 2013, revenue climbed by 107 per cent to $253.6m. All this as international revenue surges: $62.8m in the first six months of 2013, after coming in at $53m in the whole of 2012.

Not that the company makes all of its money from advertising. Although it is sitting on a smaller pool of data compared with behemoths such as Facebook and Google, 13 per cent of its sales come from data licensing, where clients pay for data from Twitter.

Would-be shareholders would want confidence that these figures will continue to improve, and thus keep driving up the share price after listing, as Twitter does not “expect to pay any dividends in the foreseeable future”.

Of course, no technology flotation story is complete without tales of paper billionaires, the founders and early employees whose faith in a young business often turns into millions –and sometimes hundreds of millions or even billions – of dollars when the firm lists.

At Twitter, the biggest individual winner looks set to be co-founder Evan Williams, 41, who owns 12 per cent of the business.

Based on a reported valuation of $9bn, he appears to be on the cusp of entering the select club of billionaires, with his stake likely to be valued somewhere in the region of $1.1bn.

Another co-founder, Jack Dorsey, 36, who chairs the company’s 12-strong board, could see his 4.9 per cent stake valued at just under half a billion.

* Shares of a US firm named Tweeter Home Entertainment Group surged on the stock market yesterday as investors appeared to have begun buying shares on a huge scale in the mistaken belief that they were purchasing Twitter stock, despite the online giant still being a little way from floating.

Tweeter, a specialty consumer electronics retailer, saw its 5 million shares rocket in value by more than 1,000 per cent. Trading in the shares had closed on Thursday night at a price of less than a penny a share, but at one point yesterday they hit a high of 15 cents each. This later dwindled to 4.7 cents apiece, neverthless still representing a 623 per cent rise.

Reuters

Q&A: Twitter trading – is it worth the effort?

Q. Recent flotations of internet businesses haven’t gone so smoothly, so will Twitter be any different?

A. Alarm bells should be triggered by the fact that the company has yet to turn a profit. But revenues are soaring – up over 100 per cent in the last six months – and recent acquisitions like social TV analytics firm Bluefin show the company is taking advertising seriously.

Twitter is betting big on the so-called “second screen” phenomenon, tailoring adverts to users who are watching TV while simultaneously tweeting.

The company has warned potential investors there will be no dividend for the foreseeable future, so a lack of profit may turn out to be a plus – the stock will need plenty of good news to keep it rising and Twitter seems to have a clear growth plan to keep key numbers on the up. But as forbearers Zynga and Facebook have seen, the best laid plans often go awry.

Q. Given that the flotation will be in America, can I buy shares if I want to?

A. It may not be possible for UK investors to buy shares in Twitter at the time of the Initial Public Offering. Most of the shares at IPO time go to institutional investors, and this would reduce costs and price volatility for Twitter.

The IPO process takes a while, and it may not be until a couple of weeks after the IPO that shares become available on the New York Stock Exchange. The good news is that it is relatively easy for British investors to buy US stocks. UK stockbrokers such as Halifax specialise in the US and transaction costs are only a little higher than buying and selling shares in UK-listed companies

Oscar Williams-Grut and Julian Knight

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