Peter DaSilva for The New York TimesAn open work area at Twitter’s headquarters in San Francisco. The company quietly filed with regulators this summer to sell shares in an initial public offering.Twitter, which began as a side project in a small but failing start-up seven years ago and grew into one of the world’s largest platforms for public conversation, is about to take its biggest step yet into maturity: selling stock to the public.
The company announced on Thursday — in a tweet, one of the 140-character messages that are the backbone of the service — that it had filed paperwork with regulators to eventually sell shares in an initial public offering. However, it had filed the first documents months earlier under a special provision of securities law that allows a company with less than $1 billion in annual revenue to keep its financial data secret until it begins actively marketing its stock to investors.
Twitter’s caution follows the disastrous I.P.O. of its archrival, Facebook. In May 2012, Facebook sold $16 billion in stock to investors, only to see its share price sliced in half in the ensuing months as shareholders worried that the company could not make money from its billion users.
But investors have recently become enamored of all things social and mobile, and have become particularly enchanted by the fast growth of mobile advertising revenue at social networking companies. Facebook’s shares hit a record high this week and ended Thursday at $44.75, well above the $38 I.P.O. price. LinkedIn, the business-oriented social network, is trading at nosebleed levels, even after selling another $1 billion in stock to investors in a secondary offering.
This is an opportune time for Twitter to join their ranks. Its service is considered well suited for mobile phones, with its core tweets resembling simple text messages, and it has been rapidly growing both in global users and in its advertising offerings. The microblogging service already has well above 200 million active users and is fast approaching 300 million, according to memos shared with staff members.
By its own estimates, Twitter was profitable in December of last year and generated more than $100 million in revenue in the final quarter of 2012, according to numbers in an e-mail shared among staff. These numbers could not be independently verified. But it has not been consistently profitable in 2013 because it has reinvested money in acquisitions, said people with knowledge of Twitter’s financial data who declined to be named.
The company makes most of its money from a type of ad called a sponsored tweet. The messages look nearly the same as any other message on the service, and are inserted into the stream of other tweets that users get from the accounts they follow. Advertisers typically bid for their messages to appear near certain demographic groups or around certain keywords. Twitter is expected to post around $600 million in revenue this year and close to $1 billion next year, according to internal projections and estimates by the research firm eMarketer. While it is unclear how much money Twitter will seek in its offering, the amount is certain to be in the billions of dollars.
The company needs to build a war chest to continue financing its global expansion, including acquisitions like its $300 million purchase Monday of MoPub, an advertising technology company. And it needs cash to take on the much larger and better-financed Facebook as they both vie to create new products that will help advertisers reach consumers on the go.
Twitter’s service is simpler than the more popular Facebook, but also more confusing for novices. Messages flow in continuously, most recent on top, without regard to their importance. Yet the service, which allows users to post anonymously, has become an important source of user-contributed news and a tool for organizing mass movements like the Arab Spring revolutions.
The I.P.O. provides a way for employees and the company’s venture capital shareholders to easily sell some of their shares.
Since Twitter received its first venture investment in June 2007, the company has taken more than $1 billion in venture funding from firms including Union Square Ventures, Bezos Expeditions, Spark Capital and Institutional Venture Partners.
Twitter notified its employees of the public offering during a global meeting on Thursday, catching most of them by surprise, according to several employees who were in attendance at the meeting.
Although Twitter made the news public on Thursday, the company first filed for its public offering with the Securities and Exchange Commission earlier this summer under the Jumpstart Our Business Startups, or JOBS Act, according to several people with knowledge of the company who spoke on condition of anonymity.
It has used the confidentiality afforded by the act to tweak numbers and estimates and consult with the S.E.C. staff, in part to avoid the calamities that befell Facebook during its public offering, these people said.
While the company hopes to go public by the end of the year, the actual public offering could take place in early 2014, according to people who were briefed on the matter.
Goldman Sachs is leading the underwriting for the offering, according to people briefed on the matter. It was not yet clear which other banks would participate, but JPMorgan Chase and Morgan Stanley are likely to be involved, according to several people knowledgeable about the deal. Twitter first started as a side project from Odeo, a podcasting company started by Noah Glass and Evan Williams, in early 2006. The original concept was an amalgamation of ideas from Mr. Glass, Mr. Williams and two employees of Odeo, Jack Dorsey and Biz Stone, who wanted to build a service that would allow people to connect with friends and share similar musical tastes.
In its early years, Twitter was regarded as a management disaster and only recently took on the appearance of being ready to bear the scrutiny of a publicly traded company.
All of the founders have since left the daily operations of the company, and Dick Costolo is the company’s chief executive. Mr. Costolo joined Twitter as the company’s first chief operating officer, but took over as the chief executive in October 2010 after Mr. Williams stepped down. Mr. Williams and Mr. Dorsey are still on the company’s seven-person board.
Trading in Twitter shares has gone on for years, even though the company is not yet public, because of the robust secondary market for stock in technology companies. Firsthand Tech Value Fund has bought more than one million Twitter shares on the secondary market, acquiring them at an average cost of $17 a share, which the portfolio manager Kevin Landis said valued Twitter at around $9 billion. It most recently bought shares earlier this year for about $16.50 a share.
Michael Pachter, an analyst at WedBush Securities, said Twitter is now valued at $15 billion to $16 billion based on buying in the private market.
“Over the last couple of months, shares in the secondary market have risen to between $20 and $30. That’s what the private market values it right now, not that investors have any information, but that’s what they are willing to pay.”
Mr. Landis said that in recent months Twitter had put restrictions on shareholders, prohibiting them from selling shares on the secondary market. “We’d gotten indications that the market was getting tighter because there were fewer sellers,“ he said, adding that the restrictions were a sign that Twitter was preparing to go public.
Longtime investors welcomed the news of the offering. “It’s a great time for the company to be going public,“ said George Zachary, a general partner at Charles River Ventures, which invested $250,000 for 1 percent of Twitter its first funding round. “Their I.P.O. is well timed. The recent rise in Facebook stock price is probably going to bode well.”
Vindu Goel and Nick Bilton reported from San Francisco, and David Gelles from New York. Alexandra Stevenson contributed reporting from New York.