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This blog is an extension of our blog on #Twitter Truths: Who becomes rich in an IPO?

A Case Study of Twitter, Inc.

We have discussed how to identify and model the revenue drivers in almost all our classes of financial modeling leading to valuation. We have also published a detailed blog on this. Please access the blog on the link and read the same before proceeding to read this article.

We have always maintained the point that one must understand the company and its business model very well before even attempting to identify the revenue drivers. Let’s spend a few minutes understanding Twitter, Inc. (‘Twitter” or the “Company”) and its business model.

(Most of the information below has been reproduced from Form S – 1 and the subsequent amendments filed by the Company)

Twitter is a global platform for public self-expression and conversation in real time. By developing a fundamentally new way for people to create, distribute and discover content, it has democratized content creation and distribution, enabling any voice to echo around the world instantly and unfiltered. Tweets are limited to 140 characters of text. This constraint makes it easy for anyone to quickly create, distribute and discover content that is consistent across Twitter’s platform and optimized for mobile devices. As a result, Tweets drive a high velocity of information exchange that makes Twitter uniquely “live.” Users can follow other users including friends, celebrities, athletes, journalists, sports teams, media outlets, and brands.

People are at the heart of Twitter. People come to Twitter for many reasons, two of the most significant are:

1. The breadth of Twitter content and

2. The broad reach. X

The Company has already achieved significant global scale, and continue to grow. We have more than 230 million MAUs, and more than 100 million daily active users, spanning nearly every country. The users include millions of people from around the world, as well as influential individuals and organizations, suchas world leaders, government officials, celebrities, athletes, journalists, sports teams, media outlets and brands. The users create approximately 500 million Tweets every day.

Twitter is a public, real-time platform where any user can create a Tweet and any user can follow other users. It does not impose restrictions on whom a user can follow, which greatly enhances the breadth and depth of available content and allows users to discover the content they care about most. Additionally, users can be followed by thousands or millions of other users without requiring a reciprocal relationship, which is referred to as an asymmetric follow model. This asymmetric follow model significantly enhances the ability of the users to reach a broad audience. The public nature of Twitter’s platform allows us and others to extend the reach of Twitter content beyond its properties. Media outlets distribute Tweets beyond our properties to complement their content by making it more timely, relevant and comprehensive.

Tweets have appeared on over one million third-party websites, and in the third quarter of 2013 there were approximately 48 billion online impressions of Tweets off of their properties.

Twitter provides a compelling and efficient way for people to stay informed about their interests, discover what is happening in their world right now and interact directly with each other. It enables the timely creation and distribution of ideas and information among people and organizations at a local and global scale. Its platform allows users to browse through Tweets quickly and explore content more deeply through links, photos, media and other applications that can be attached toeach Tweet. As a result, when events happen in the world, whether planned, like sporting events and television shows, or unplanned, like natural disasters and political revolutions, the digital experience of those events happens in real time on Twitter. People can communicate with each other during these events as they occur, creatingpowerful shared experiences.

Revenue Drivers

The Company derives its revenue primarily from two sources:

1. Advertising Revenue:

Twitter’s scale and deeply engaged user base create valuable opportunities for advertisers to leverage the platform. Advertisers can communicate directly with their followers for free, or they can purchase Twitter’s advertising services to reach a broader audience. As users engage with the platform, Twitter learns about their interests. Twitter integrates this user data into a set of promoted products allowing advertisers to run more targeted and relevant campaigns on Twitter. Additionally, advertisers are increasingly supplementing their offline advertising campaigns with content from their Twitter campaigns.

Why Advertisers come on Twitter?

A. Twitter provides compelling value to the advertisers by delivering the ability to reach a large global audience through our unique set of advertising services, the abilityto target ads based on its deep understanding of users and the opportunity to generate significant earned media. Advertisers can use Twitter to communicate directly with their followers for free, but many choose to purchase its advertising services to reach a broader audience and further promote their brands, products and services.

B. Advertisers can market on its platform in a variety of ways, from broad global campaigns to highly-targeted local ads. The Company’s Promoted Products enable advertisers to promote their brands, products and services, amplify their visibility and reach, and complement and extend the conversation around their advertising campaigns.

C. By leveraging our targeting capabilities, advertisers can reach users that are more likely to engage with their ads and improve the return on their spending on advertising.

2. Data Licensing Revenue

Twitter sells data licenses, providing data partners with detailed historical and real-time analytics regarding users’ interactions with the platform. In the first 9 months of 2013, 11% of Twitter’s revenue came from Data Licensing, but the company expects this percentage to decrease over time as this segment is growing slower than the advertising segment. Data partners pay a monthly licensing fee to use the data, over the period in which the data is made available to them (typically 2 years). Twitter’s top five data partners accounted for roughly 73% of its data licensing revenue in the first 9 months of 2013. Some of the key resellers of Twitter’s data licensing business include Datasift, Gnip and Topsy.

Twitter’s Value Proposition to Data Partners

A. It offers data licenses that allow our data partners to access search and analyze historical and real-time data on our platform. Since the first Tweet, users have created over 350 billion Tweets spanning nearly every country. Twitter’s data partners use this data to generate and monetize data analytics, from which data partners can identify user sentiment, influence and other trends.

B. Specifically, our platform provides our data partners with the following benefits:

I. Access to Actionable Data: The platform enables data partners to analyze and act upon data that is current, unfiltered and public. The data is the foundation for applications and tools that can draw relationships between social interactions and business results, and even derive signals that influence economic, political and public health and safety decisions.

II. Ability to Create Measurement Standards: It provides data partners with the tools and data to find the right signal for the right audience. Users tweet to express their thoughts and opinions about what is happening around them, creating data that can be analysed to identify trends and other valuable insights.

#Financial Modeling Shashi Bhushan

Mobile as key driver:

Twitter is already successful on mobile. Mobile is the primary driver for Twitter, as 76% of the monthly active users (MAUs) in the most recent quarter accessed Twitter via mobile. Additionally, over 70% of the advertising revenue was from mobile in the most recent quarter. The company believes that mobile users as a percentage of total will continue to grow in the near term.

USA vs. International

The Company believes that advertisers outside of the United States represent a substantial opportunity and hence plans to invest to increase its advertising revenue from international advertisers. Approximately 26% of total revenue in the three months ended September 30, 2013, came from advertisers with billing locations outside of the United States, but approximately 77% of our average MAUsin the three months ended September 30, 2013 were from outside of the United States.

The chart below summarises the revenue drivers of the Company:

#Financial Modeling Shashi Bhushan

I. Monthly Active Users (MAUs):

Twitter users who logged in and accessed Twitter through its website, mobile website, desktop or mobile applications, SMS or registered third-party applications or websites in the 30-day period ending on the date of measurement. Average MAUs for a period represent the average of the MAUs at the end of each month during the period.

II. Timeline Views, Timeline Views Per MAU and Advertising Revenue Per Timeline View:

a. Timeline views are defined as the total number of timelines requested when registered users visit Twitter, refresh a timeline or view search results while logged in on our website, mobile website or desktop or mobile applications. Timeline views and timeline views per MAU are measures of user engagement.

b. Timeline views per MAU are calculated by dividing the total timeline views for the period by the average MAUs for the last three months of such period.

c. Advertising revenue per timeline view is advertising revenue per 1,000 timeline views during the applicable period. Advertising revenue per timeline view is a measure of the Company’s ability to monetize its platform. Advertising revenue is recorded based on the billing location of advertisers, rather than the location of users.

The charts below summarises the revenue drivers assumed over the horizon of projection. Please refer to our detailed financial model leading to valuation of Twitter for detailed assumptions and workings.

#Financial Modeling Shashi Bhushan

#Financial Modeling Shashi Bhushan

#Financial Modeling Shashi Bhushan

We have attempted to model the growth drivers in line with the “Growth Strategy” of the company detailed below:

Growth Strategy

I. Grow Users: Growth in user base and user engagement is a fundamental driver to the growth of business, and there is a significant opportunity to expand user base: Since its inception, the user base has primarily grown organically and virally. Industry sources estimate that as of 2012 there were 2.4 billion Internet users and 1.2 billion smart phone users, of which only 230 million are MAUs of Twitter. Plans to increase users include:

a. Geographic expansions

b. Development and improvement of mobile applications to drive user adoption of these applications

c. Building and acquisition of new technologies to develop and improve products and services and make its platform more valuable and accessible to people around the world

d. Continue to focus on making Twitter simple and easy to use, particularly for new users.

II. Grow Platform Partners:

a. Expand the Twitter Platform to integrate more content.

b. Partner with Traditional Media.

III. Grow Advertisers:

a. Improve the targeting capabilities of advertising services

b. Develop new and unique ad formats for advertisers,

c. Open platform to additional advertisers

Once we have identified and projected all the drivers, we have proceeded to calculate the total revenue and the implied revenue mix as detailed below in the chart and the table:

#Financial Modeling Shashi Bhushan

Once we got the segmental revenue projected based on revenue drivers identified and modeled by us, we can easily calculate the implied revenue mix. The calculation is depicted below:

#Financial Modeling Shashi Bhushan

One should not leave the revenue projections at this stage. We must cross check it by at least one more method to ensure the Company doesn’t grow uncontrollably. By identifying revenue drivers and modeling them to get the revenue, we have actually followed a bottom’s up approach. We can do a cross check by following a top’s down approach. Under this we estimate the size of the market Twitter is operating in and its market share over the period of horizon.(Source: Page 110 of amendment no. 2 to Form S-1)

#Financial Modeling Shashi Bhushan 

Please share your thoughts with us. Feel free to start a discussion below to contribute!

If you want to read deeper into Twitter’s methods about Asset Modeling or Tax Modeling, just follow the link to #Twitter Truths: Road Less Travelled – Capitalization of Expenses.