(Updates share price in seventh paragraph.)
Dec. 6 (Bloomberg) -- Twitter Inc., leading up to its Nov. 6 initial public offering, faced questions from the U.S. Securities and Exchange Commission about slowing user growth and whether people were losing interest in viewing ads -- the company’s main source of revenue.
The SEC called for details on how the microblogging website planned to deliver on its promises of fast growth, according to filings released today. Though Twitter’s revenue had more than doubled over the past year, increases in users had slowed and there was no clear path to making a profit.
In its response, Twitter said its revenue growth would become increasingly dependent on its current users becoming more engaged -- as measured by how often they view their timelines -- since it expected the addition of new accounts to slow. Algorithms to target ads to users with related interests will be used to make them more effective and valuable to marketers, the San Francisco-based company said.
“With Twitter, one of the reasons that we have questions about the company and the stock is that we are not so sure how sustainable strong growth in users and engagement will be,” said Scott Kessler, an equity analyst at S&P Capital IQ, who has a sell rating on the company and a $30 target. “It seems based on what was released that there was a pretty rigorous set of communications incurred.”
Jim Prosser, a spokesman for Twitter, didn’t respond to a message seeking comment.
Twitter still needs to deliver on its business model. Its loss widened to $64.6 million in the September quarter from $21.6 million a year earlier, and it’s unlikely to be profitable until at least 2015, according to the estimates of analysts compiled by Bloomberg. LinkedIn Corp. and Facebook Inc. were both profitable at the time of their IPOs.
Even so, Twitter shares have gained 73 percent since the IPO. The stock fell 1.5 percent to $44.95 at the close in New York.
In the SEC correspondence, Twitter declined to disclose more detailed information about its advertising business despite prodding from the agency. The company argued that it shouldn’t be giving metrics on advertiser retention because “management does not focus on advertiser retention trends” and “such information could be misleading to investors.”
The SEC also asked Twitter to disclose the number of ad engagements per 1,000 timeline views, which Twitter said “would decrease the effectiveness of the company’s presentation” and “could impair its future negotiations with its advertisers and provide sensitive information to its competitors.”
Twitter has touted its high level of engagement with mobile users -- an area where other Web companies have struggled. About three-fourths of Twitter’s active users accessed the service from mobile devices in the three months ended in September, compared with 69 percent in the year-earlier period, according to the company’s IPO filing. More than 70 percent of advertising revenue comes from those devices, a higher proportion than at Facebook.
Twitter’s patent policy also was questioned by the SEC. The company lets its engineers and designers own their inventions and doesn’t pursue offensive litigation without the inventor’s permission.
Twitter had just nine patents and 95 pending applications as of Sept. 30, far fewer than its competitors or other companies in the industry. The company said in response that it could be a target for litigation and would be limited in its ability to fight back by asserting its own patents.
Its ability to fight infringement allegations is already being put to the test. Twitter disclosed last month that International Business Machines Corp. sent a letter “alleging that we infringe on at least three U.S. patents held by IBM, and inviting us to negotiate a business resolution of the allegations.”
IBM said the patents relate to a networking technique based on common contacts, a way to show advertisements without interfering with an interactive site, and using interconnected computers to reduce Web traffic. The Armonk, New York-based company has been the biggest recipient of U.S. patents for the past two decades and gets about $1 billion a year in licensing revenue.
The SEC also asked for translations of some of Twitter’s lingo. That included the company’s claim that it has a “virtuous cycle of value creation,” meaning that more activity on Twitter leads to additional content, attracting more users and advertisers. Twitter defines itself as the “social soundtrack to life in the moment,” another expression that drew a query from the SEC. The idea is the company lets users easily share their experiences in real time.
In addition, the commission asked Twitter to “highlight” for investors how much its chances of becoming profitable might be hurt by its accumulated stock-compensation packages.
The company disclosed in its IPO filings $234.2 million of pre-2013 costs for restricted stock units as of June 30, 2013, that it hadn’t yet had to recognize under accounting rules.
Additional stock awards of $296.7 million would be charged off over about four years, as would post-June 30 stock compensation totaling $452.9 million, it said. Twitter has compensated employees of acquired companies and outside consultants with stock, as well as its own employees, it said in filings.
--With assistance from Linda Sandler in New York and Brian Womack in San Francisco. Editors: Nick Turner, John Lear