Here’s Why Twitter Is Flush with Credit
The financial terms of Twitter’s (NYSE:TWTR) initial public offering bespeak a far different beginning to life as a public company than Facebook’s (NASDAQ:FB) conditions. The latter was extended a credit line of $8 billion, and its IPO raised $16 billion, of which the underwriting banks received 1.1 percent in fees.
Twitter is going public for a sum of $1 billion, with an underwriting fee of 3.25 percent and a credit line of $1 billion from its underwriters that will mature in October 2018. Lead underwriter Goldman Sachs (NYSE:GS) is providing $150 million and Morgan Stanley (NYSE:MS) and JPMorgan Chase (NYSE:JPM) are each contributing $250 million. Bank of America (NYSE:BAC) and Deutsche Bank (NYSE:DB) are also in on the deal, supplying $175 million each. As of Monday, that $1 billion revolving credit facility had not been touched.
Yet some analysts argue that it unusual for such young technology companies like Twitter, Facebook, and Zynga (NASDAQ:ZNGA) to be able to borrow such large sums of money. “It sounds like much, much more than they need to fund their operations,” Wedbush Securities analyst Michael Pachter told Bloomberg, although he did acknowledge that the money will be useful in funding future acquisitions.
Twitter made its largest acquisition to date when it agreed last month to purchase mobile advertising business MoPub for more than $350 million in stock. That purchase gives the social networking site a bigger foothold in mobile advertising, which brings the company 70 percent of its advertising revenue and about 76 percent of monthly users.
MoPub will give Twitter the opportunity to extend its advertising across multiple mobile applications and add real-time bidding to its platform, which will enable advertisers to automate purchases based on events, the company said in its prospectus filed with the U.S. Securities and Exchange Commission. However, the startup did record a net loss of $2.83 million in the first half of this year, and it lost $8.14 million in 2012.
To James Gellert of the credit-research and rating firm Rapid Ratings, Twitter looks “much more like a venture growth company” than its social networking peers LinkedIn (NYSE:LNKD) and Facebook, both of which managed to turn profits before going public. Comparatively, the 140-character microblogging site generated revenue of $317 million last year and lost $79 million. “There’s a lot being bet on Twitter’s ability to achieve things in the future, rather than a historical demonstration of that ability,” Gellert said in an interview with The Wall Street Journal.
The fact the company is still very small and has spent quite a lot on new products recently also makes it a risky recipient of credit for the underwriting banks of Twitter’s IPO.
For Twitter to achieve its goals and to be the financial success that Wall Street is betting it will be, “it has to monetize its biggest asset – its audience — and fast,” Rupert Staines, the European managing director of social advertising specialist RadiumOne, told U.S. newspaper The Guardian. “But it could well struggle to do this. Its environment is not particularly advertiser friendly. Think how quickly tweets appear and then disappear on a timeline; consider the potentially intrusive nature of ads in your conversation stream.”
Ever since rumors of Twitter’s initial public offering broke, comparisons to Facebook have been commonplace. It is an appropriate comparison to make: Facebook was the first technology company of its kind to go private, and concerns for its profitability dogged the company until last month, when analysts from Citigroup finally said that its growth was sustainable.
Because both companies are social networks, the same fears and opportunities exist. The problem for Twitter, as was for Facebook, is how to make money off users of its free service. However, for Twitter, the problem is much bigger. Not only does the site have fewer users than Facebook did at the time of its public debut, but it also makes less money per user. While the average revenue per user disparity could be due to the relative youth of Twitter’s advertising business or its still-improving efficiency efforts, the fact remains that the microblogging site makes approximately 39 cents for every $1 Facebook earns per user and 30 cents for every $1 LinkedIn earns.
That Twitter has not had the same level of success at turning its users into revenue could either be a sign that the company has room for growth or a warning of future profitability problems.
However, Twitter’s popularity is surging. Its reach has spread beyond tech enthusiasts and social networking aficionados, giving it a strong user base that can be harnessed as a massive informational and marketing tool. It’s the opportunity for social media clout and profitability that makes Twitter an opportunity that Wall Street does not want to miss out on.
“In a sector with significant IPO and corporate finance activity like social media, top banks feel they can’t afford to lose,” EA Markets partner Craig Orchant said to The Wall Street Journal. The promise of profits has created competition between Wall Street banks for the opportunity of underwriting a social media IPO, and it has given Twitter a lot of leverage to exact favorable terms. While the underwriting fee of 3.25 percent and credit line of $1 billion may be eclipsed by Facebook’s numbers, Twitter’s deal still above average. Pandora (NYSE:P) and LinkedIn both paid 7 percent to their underwriting banks, and Twitter’s leverage has also helped with its line of credit.
In the third quarter, the company’s revenue more than doubled, jumping from $82.3 million in the year-ago period to $168.6 million. But the company’s loss did grow, to $64.6 million from $21.6 million, according to an earlier SEC filing. In the last quarter, Twitter’s 231.7 million monthly active users each generated about 73 cents in revenue on average, while Facebook’s average revenue per user is $1.60.
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