Twitter's finances have ruffled feathers, but it's no dead parrot

10th Feb 2014

We’ve all got some kind of stake in Twitter, even if we’re not about to invest money in it. We use it daily to tell people our latest news, to keep our customers updated and informed, and to target new users with our services. Some of us are even tracking Twitter data to try and understand our marketplaces better.

So, last Wednesday when the social network’s financial figures were broadcast to the public for the first time, we were all involved, even if we weren’t that aware. The market bell rang, then for the first time since its IPO, Twitter published its quarterly figures, and then alarm bells rang out as folk deciphered what it all meant.

Put simply, the social network is currently experiencing somewhat of an interrogation. Despite its IPO, it announced losses of $645 million for 2013 and a major slowing in user rate, averaging 241 million monthly users in the last quarter of the year, up just 3.8% on the previous quarter, compared to 10% seen at the beginning of 2013.

And while many will point at the fact that a loss was expected given the late-year arrival of the IPO, and that revenue rose 110% to reach $665m in 2013, it is the announcement of the slowing user rate that has tongues wagging and people clambering to sell off stock.   

"Twitter needs to answer the question about whether it can ever become a mass-market product, or whether it's more destined to be a niche for news junkies," said Robert Peck, an analyst at SunTrust Robinson Humphrey Inc. in New York.

"Depending on how fast it's growing, that's what we're willing to pay for it."

Despite the furor (it saw $4bn wiped off its value in one day), the issues related to Twitter’s position within a public marketplace may well be teething problems. CEO, Dick Costolo has already vowed to address the issue of growth. And associate professor of strategic management at Warwick Business School, Sotirios Paroutis suggests the spending seen in 2013 may well be related to setting up new products that could reap the rewards through this year:

“At present, most of Twitter’s R&D spending goes towards personnel-related expenses and in the long term they have a number of products still to be fully utilised.

“There is Twitter Amplify, which allows advertisers to send out a promoted tweet to coincide with ads on TV, and in December it introduced its Tailored Audiences where a company can send a tweet to people who have been searching for terms on the Internet related to its product. It will take time for advertisers to learn how to utilise fully these new tools, but once they do, Twitter will be in a much better position. Already their advertising revenue per 1,000 timeline views has increased to $1.49 in Q4, up 76% from last year, showing that this is an area they are starting to improve on.

"Further, 75% of their advertising revenue comes from mobile usage, compared to Facebook’s 3%. So they have a good position in the mobile space. As Dick Costolo revealed during the earnings call, recent changes in their mobile apps caused the Q4 decline in timeline views but helped increase the value of each view.”   

Part of the drop in share price can also be attributed to the network’s initial over-value, and the deluge of early stock trading it experienced upon opening its IPO; much in the same vain as Facebook, when it initially floated on the stock exchange.  

“The losses do not mean Twitter’s business model does not work,” says Dr Paroutis. “Facebook reported very good results, so the market is comparing Twitter to that. Facebook was profitable for three years before it entered the market, while Twitter was in a different situation.

"The question then is whether these new products that Twitter is providing advertisers with will affect the user experience. This is a delicate balance they have to strike; while they are adding new services these should not over-complicate the user experience.”

So, despite the growing fear among some financial experts, it appears there are a number of moves Twitter still has to play, before it can be deemed an unsafe venture.

“The long-term prospects could be positive as long as Twitter can rationalise its costs and continue to grow revenue in the next few quarters,” says Dr Paroutis.

Whether or not they do is something we should all have our eyes on in the coming months. But for now, keep calm and carry on Tweeting. 

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