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Challenges abound for Twitter heading into IPO

Published:Wednesday | November 6, 2013 | 12:00 AM

Twitter has built a digital town square that's teeming with activity but riddled with financial potholes.

Seven years after co-founder Jack Dorsey sent the first tweet through the online messaging service, more than 500 million posts are shared each day.

But all the chirping hasn't translated to profits - nor is it expected to any time soon.

As Twitter prepares to complete its initial public offering of stock this week, the San Francisco company's history of losses totalling nearly US$500 million is raising questions about its ability to turn a cultural phenomenon into a sustainable business.

Twitter's IPO promises to be another touchstone in the Internet's evolution from a geeky backwater to a wellspring of world-changing innovation and jaw-dropping wealth.

In that sense, the company's stock market debut shares parallels with the IPOs of two rivals: online social networking leader Facebook Inc, which went public nearly 18 months ago, and search engine leader Google Inc, which made the leap to Wall Street in 2004.

But Facebook and Google were already profitable by the time they went public. By contrast, Twitter's coming out is a throwback to the late 1990s, a more perilous time in Internet investing when hundreds of dot-com companies completed IPOs without ever having earned a profit.

"They have a nice and interesting base to build upon, but an exciting business with lots of users doesn't necessarily generate returns," says James Gellert, CEO of Rapid Ratings, a subscription service that examines the financial health of companies.

Rapid Ratings gives Twitter's financial fitness a rating of 19 on a scale of 100. Gellert says that between 1991 and 2011, some 90 per cent of companies that defaulted on their debt received a rating of 40 or below. By comparison, the firm rated Facebook at 73 just before its May 2012 IPO and Google at 80 ahead of its August 2004 offering.

With 232 million users and an IPO poised to raise as much as US$2 billion, Twitter is unlikely to go bust like so many of the companies that disappeared after the dot-com bubble burst in 2000.

So many investors are optimistic about the company's future that Twitter on Monday seized on the demand for its stock and raised the projected price range of its IPO to US$23 to US$25 per share, up from an earlier target of US$17 to US$20.

The stock is expected to begin trading on the New York Stock Exchange on Thursday morning, after setting a final price sometime today, Wednesday evening.

Twitter will have to find ways to get more users to overcome their timidity so they become more active - and more attractive targets for advertisers. According to a recent Associated Press-CNBC poll, 29 per cent of people with Twitter accounts never tweet at all.

One of the company's biggest problems may present its greatest opportunity. Most of Twitter's user growth is outside the US at the same time that the company is gradually introducing more advertisements on its service.

Source of revenue

The ads have quickly turned into Twitter's main source of revenue, which has soared from just US$28 million in 2010 to a projected US$650 million this year.

Even so, there's unevenness in the way Twitter generates its ad revenue. Just 26 per cent of its revenue comes from abroad, even though more than three-quarters of its users - about 179 million people - live outside the United States.

Put another way, Twitter generated US$2.36 per US user in the July-September quarter compared with just 24 cents per user in the rest of the world.

The dramatic imbalance between Twitter's international revenue and its audience size abroad means the company isn't getting enough of a return on its investment into making sure the service works smoothly for users outside the US.

In its IPO documents and video presentation to prospective investors, Twitter says it plans to bring in more international revenue by hiring more sales representatives in Australia, Brazil, Ireland and the Netherlands. The company also says it will introduce technology that will make it easier for marketers in other countries to buy ads.

- AP