Tags: Twitter | Facebook | roadshow | IPO

Twitter Roadshow Mum on Profits Sparks Questions About Value

Thursday, 31 October 2013 11:26 AM

Twitter Inc. sought to drum up investor interest this week for its initial public offering by talking about mobile growth and advertising capacity. Notably absent from the list: profits.

As the money-losing company held roadshow meetings in New York and Philadelphia, Twitter executives discussed no plan for breaking even, according to people with knowledge of the discussions that took place at New York’s Mandarin Oriental yesterday and at the Philadelphia Ritz-Carlton on Oct. 28. That left some attendees questioning the value of Twitter as a long-term investment, said Max Wolff, chief economist and strategist at ZT Wealth, who had spoken to investors who attended the Philadelphia meeting.

Investors are looking for sustainable business models after Internet companies such as Groupon Inc. saw their shares crater when they went public without profits. Twitter contrasts with its social-networking peers, Facebook Inc. and LinkedIn Corp., which were making money at the time of their IPOs. While Facebook fell after its IPO, it has since climbed back, fueled by profits and sales growth, with the world’s largest social- networking provider yesterday posting third-quarter results that topped analysts’ estimates.

Road Map

“People were surprised that we don’t have more of a road map for when Twitter will break even,” said Wolff. “You’ve actually seen their losses increase, so that’s created a bit of concern.”

Twitter is unlikely to make a profit until 2015, according to the average of analysts’ estimates compiled by Bloomberg. LinkedIn was profitable for several quarters before its May 2011 IPO, while Facebook had been making money for years. Even Zynga Inc., which has lost more than half its value since its December 2011 IPO, was profitable when it went public. Groupon started making money two quarters after being a public company, before slipping back into losses.

Twitter is limited by what it can say on the roadshow if it didn’t include the information in its offering prospectus. The company didn’t disclose a profit plan in that document.

“It’s either they don’t want to reveal how they’re going to monetize or they don’t really know,” said Jeff Sica, president and chief investment officer of Sica Wealth Management LLC, who also spoke to attendees of the Twitter roadshow in Philadelphia. “I didn’t get the sense that people are going to be enthusiastic.”

Facebook Impact

Jim Prosser, a spokesman for Twitter, declined to comment.

Facebook yesterday said it will limit news feed advertisements that have driven revenue gains, a move that will have an impact on Twitter, said Gene Munster, a senior research analyst at Piper Jaffray Cos., in an interview on Bloomberg Television’s “Surveillance” with Tom Keene and Scarlet Fu.

“This is something that Twitter investors will start to extrapolate a year or year-and-a-half down the road,” Munster said. “The good news for Twitter is that Facebook’s stock is in a much different place today than it was nine months ago.”

Facebook shares are now trading almost 30 percent higher than their IPO price. They have gained 84 percent this year, compared with a 24 percent gain in the Standard & Poor’s 500 Index.

Business Model

Twitter, based in San Francisco, is seeking as much as $1.4 billion in its offering, compared with the $16 billion Facebook raised in its record sale for an Internet company in May 2012, according to data compiled by Bloomberg. At the top of the proposed price range, Twitter would be valued at $10.9 billion. It will give a final price for its shares next week and will be listed on the New York Stock Exchange.

Chief Executive Officer Dick Costolo was in New York yesterday for one of several meetings in major cities to explain why investors should buy into the company’s nascent business model. Twitter, which generates revenue through advertising posts on its short-messaging service, warns in its offering prospectus that losses may continue as it spends to grow its business.

It’s a model that makes the company weak from a financial health perspective, said James Gellert, CEO of Rapid Ratings Inc., a New York-based firm that uses quantitative models to grade securities.

Net Loss

For the third quarter, Twitter said its net loss expanded to $64.6 million from $21.6 million a year earlier. While the company has more than doubled revenue annually, to $534.4 million in the 12 months through Sept. 30, user growth is slowing and becoming more costly, filings show.

The service had 231.7 million monthly users in the three months through September, up 39 percent from a year earlier. That compares with 65 percent growth in the previous year.

Twitter may be taking advantage of an opportunity to spend while the market will allow it, which may reap bigger benefits if research and development costs pay off, said Jeremy Levine, a venture capitalist at Bessemer Venture Partners. He’s on the board of Pinterest Inc., the Internet-scrapbooking site which was valued at $3.8 billion in a financing last week and doesn’t yet have a revenue model.

“When you’re growing really fast you can very quickly become quite profitable if you stop adding to your expenses,” Levine said. “The minute the market thinks they won’t grow very fast, they will need to become profitable right away.”

Twitter’s prospectus offers several alternative metrics that don’t conform to generally accepted accounting principles. Such measures, known as pro forma or dubbed by some as earnings without the bad stuff, came under attack in the waning days of the late 1990s technology bubble, though the metrics remained common.

Pro Forma

Many technology companies use a metric known as Ebitda, or earnings before interest, taxes, depreciation and amortization. Twitter offers prospective investors an “adjusted Ebitda,” which also excludes stock-based compensation expense and investments in servers, leases and networking equipment to support the company’s expansion, its filing shows. Based on that metric, Twitter reported positive 2012 results of about $21.2 million, instead of the $79.4 million loss it reported according to generally accepted accounting principles.

Twitter doesn’t tell investors how many advertisers it has, how often they are coming back for more business or how much they are spending on average.

Getting Visual

While it hasn’t outlined a path to profits, Twitter is planning to enhance its advertising products to beef up revenue. This week, the company enabled users to see photos in their main stream of content, something that advertisers will be looking to take advantage of.

Twitter has also emphasized its plans to shrink losses in materials prepared ahead of the roadshow. In a video for the marketing tour, Chief Financial Officer Mike Gupta says the company, which has lost almost $500 million since it was founded in 2007, has room to “significantly expand” margins.

Some investors said the lack of profits doesn’t bother them as much as how the company will do with revenue.

“Everyone’s interested in the growth story, in terms of how they will find new advertisers and users,” said Akram Yosri, managing partner at 3i Capital Group, who dined on chicken at the Mandarin Oriental meeting yesterday. He said his firm will invest in Twitter if it can get into the deal.

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Twitter Inc. sought to drum up investor interest this week for its initial public offering by talking about mobile growth and advertising capacity. Notably absent from the list: profits.
Thursday, 31 October 2013 11:26 AM
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