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Twitter IPO Watchers Seek User Revenue That Tops Facebook

Photographer: David Paul Morris/Bloomberg

A pedestrian checks his mobile phone in front of Twitter Inc. headquarters in San Francisco, California. Close

A pedestrian checks his mobile phone in front of Twitter Inc. headquarters in San Francisco, California.

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Photographer: David Paul Morris/Bloomberg

A pedestrian checks his mobile phone in front of Twitter Inc. headquarters in San Francisco, California.

Investors awaiting their first peek at Twitter Inc.’s financials will focus on one key data point: how much the microblogging service makes from each pair of eyes.

Twitter, which said last month that it confidentially filed for an initial share sale, will publicly disclose its prospectus this week, according to people with knowledge of the matter. Money managers such as Manulife Asset Management LLC and Thornburg Investment Management Inc. want to know how good a job Twitter is doing wringing revenue from each user -- and how it stacks up against competitors.

The metric to beat is about $2.17 per user. That’s what Facebook posted for the second quarter, based on company filings as well as data from digital-media research firm ComScore Inc. (SCOR), which includes only desktop visitors. LinkedIn Corp. (LNKD) comes in at about $1.93 per user, using the same metrics. Twitter had 181 million unique visitors in the second quarter, according to ComScore, meaning it would need quarterly sales to be at least $393 million to top Facebook.

“The big thing is, what is their revenue per user and compare that to Facebook,” Tim Cunningham, a fund manager at Thornburg Investment Management, which oversees about $91 billion in assets, said by phone from Santa Fe, New Mexico. “The biggest problem with these companies is they have not figured out a great way to monetize their users.”

Cunningham said while his fund is eyeing Twitter for a potential investment, it’s waiting for the filing to get more information.

Smartphones, Tablets

A big question for investors when Facebook went public last year was the company’s ability to make money from people who access the social network on wireless devices. Mobile monetization is less of an issue for Twitter, which gets more than half of its revenue from ads on smartphones and tablets, according to EMarketer Inc., outpacing bigger competitors including Facebook.

Jim Prosser, a spokesman for Twitter, Doug Madey, a spokesman for LinkedIn, and Tucker Bounds, a spokesman at Facebook, all declined to comment on the revenue per user comparison.

Facebook, after increasing the price and number of shares, debuted in May 2012 in the biggest IPO for a technology company. The social network lost half of its value following its offering as it struggled to profit from its growing base of mobile users.

Mobile Centric

Twitter is more “mobile-device centric,” said Michael Scanlon, managing director at Manulife Asset Management.

About 60 percent of Twitter’s active users access the site from a mobile device at least once every month, the company said in a blog post in February. At the time, twitter had 200 million active users, according to the post.

The average revenue per user metric is how investors truly measure the “hook” of the social media business and what they’ll be looking at when valuing the company, he said.

Reaching second-quarter sales of $393 million would be a stretch for Twitter, which is projected by EMarketer to post $582.8 million in revenue for the full year. Twitter’s ability to surpass its $10.5 billion private-market valuation may be complicated if its monetization rates turn out to be much lower than that of Facebook and LinkedIn, investors said.

If Twitter “starts to get priced to the point where the revenue multiple is far in excess of where these other guys are trading relative to their growth prospects, that valuation could cause us not to buy shares,” Scanlon, who helps manage $3 billion including the John Hancock Balanced Fund (SVBAX), said from Boston.

‘Engaged’ Users

As of yesterday, Facebook is trading at about 20 times sales over the past 12 months, after debuting at 12 times in May 2012, data compiled by Bloomberg show. LinkedIn’s multiple jumped to 22 times sales, more than triple where it started trading two years ago. Facebook revenue per user in the second quarter was $1.60, according to a July regulatory filing from the company. That measure includes mobile users, and comparable data isn’t available for Twitter.

Investors were spooked in February when Facebook forecast average revenue per user to decline as the social network expanded globally to areas where ad spending is lower. Unlike Facebook and Twitter, LinkedIn generates about three-quarters of its revenue from subscriptions and premium services.

Lou Kerner, founder of the Social Internet Fund, says at the IPO stage, investors should focus less on Twitter’s revenue and more on the growth rate of an engaged user base.

“I don’t care if their revenue is zero,” Kerner, who invests in private shares of rapidly growing mobile and social media companies, said by phone from New York. “What’s important is that they have an engaged user base because advertisers will pay to reach them.”

To contact the reporter on this story: Leslie Picker in New York at lpicker2@bloomberg.net

To contact the editors responsible for this story: Jeffrey McCracken at jmccracken3@bloomberg.net; Pui-Wing Tam at ptam13@bloomberg.net

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