The Big Reveal: Twitter's Ad Business Grows, But So Do Losses

User Base Is Mostly Outside the U.S. and Accessing Largely on Mobile

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Twitter has lifted the veil on its financials, revealing that its ad revenue is growing robustly, but that it remains a way off from profitability.

The company -- which will trade under the symbol TWTR -- brought in $253.6 million in revenue in the first six months of the year, up 107% from the same period a year earlier, according to an S-1 filing submitted to the Securities and Exchange Commission Thursday. (Widely cited figures from eMarketer had projected Twitter's revenue for the entire year would reach $582.8 million.) Some 87% of that revenue came from ads, while the balance comes from fees Twitter collects for licensing its data.

Dick Costolo, CEO of Twitter
Dick Costolo, CEO of Twitter Credit: Joi Ito

It plans to raise $1 billion when it starts trading on the New York Stock Exchange.

But Twitter is incurring significant operating losses as it rapidly increases headcount. (It had roughly 2,000 employees as of June 30, up from about 200 at the beginning of 2010.) Twitter's net loss increased 41% to $69.3 million in the first half of this year, and, as of the end of June, Twitter had accumulated a deficit of $418.6 million.

'Timeline views'
In its pitch to Wall Street, Twitter is emphasizing two metrics: monthly active users -- which has become a standard way for social media companies including Facebook to describe their audience size -- and "Timeline Views," which is unique to Twitter. It's defined as the number of timelines -- or streams of tweets -- "requested when registered users visit Twitter, refresh a timeline or view search results" on and mobile and desktop applications. It's being used as a baseline to describe the growth of the ad business, since most Twitter ads (i.e., promoted tweets) are seen in people's streams.

Twitter said that its ad revenue per thousand "timeline views" was $0.80 in April, May and June, up 26% over the same period the previous year.

One of the brightest spots for Twitter is its mobile ad business. It reported that 65% of its ad revenue came from mobile placements in the second quarter, which is almost on par with the 75% of monthly active users who accessed Twitter from mobile devices during that period. By comparison, Facebook generated 41% of its second-quarter revenue from mobile and said it expected that share to be over 50% by year end.

Twitter said desktop ads fetch higher rates as "a result of promoted accounts and promoted trends receiving less prominence on mobile applications."

International user base
One area with room for improvement is international, which hasn't yielded much revenue in relation to its user base. Twitter reported that of its more than 215 million monthly active users, 77% were outside the U.S. in the second quarter, but international revenue, based on the billing location of its advertisers, was only 25% of its consolidated revenue for that period.

Twitter might have trouble growing its revenue abroad due to the U.S-centric nature of its social-TV pitch to advertisers, according to eMarketer's VP-communications Clark Fredricksen.

"On one hand, the rollout of self-serve in other countries will help them get off the ground in places where they don't have direct sales teams," he said. "On the other hand, international might be difficult, particularly given how their pitch centers around the size of the U.S. TV market."

Timeline: Twitter ad launches
Timeline: Twitter ad launches

The filing showed Twitter's U.S. user base growth is slowing. It had 49 million monthly active users in the U.S. at the end of June, an increase of only a million from three months earlier. It added 3 million users in the first quarter.

Twitter acknowledged that such a slowdown will hurt its future results.

"Although our revenue has grown rapidly, increasing from $28.3 million in 2010 to $316.9 million in 2012, we expect that our revenue growth rate will slow in the future as a result of a variety of factors, including the gradual slow down in the growth rate of our user base," according to the filing.

Global competition
Among the risk factors it listed, Twitter mentioned competitors ranging from niche social networks that dominate specific markets -- such as Kakao and Line in Asia -- to giants like Facebook and Google.

Addressing competition with Facebook, it had a specific gripe, hearkening back to the incident late last year when Facebook disabled Instagram's photo integration within Twitter. That meant Instagram photos were no longer viewable inside of tweets and users were prompted to click on a link to leave Twitter to see them.

"Any similar elimination of integration with Twitter in the future, whether by Facebook or others, may adversely impact our business and operating results," according to the document.

The filing also shed light on executive compensation. CEO Dick Costolo received compensation valued at $11.5 million last year, including stock awards, while chief revenue officer Adam Bain received $6.7 million.

A letter from the company -- which wasn't bylined by any particular executive but was signed as @twitter -- was concise, a contrast to Mark Zuckerberg's manifesto about Facebook's hacker ethos in his company's S-1 filing last year.

According to the letter: "The mission we serve as Twitter, Inc. is to give everyone the power to create and share ideas and information instantly without barriers. Our business and revenue will always follow that mission in ways that improve–and do not detract from–a free and global conversation."

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