Twitter IPO: Out of control risk factors

In the fourth of our series covering risk factors in Twitter's S-1 filing we look at factors that are out of Twitter’s control which could affect its business post IPO.
Written by Eileen Brown, Contributor
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(Image: Wikimedia Commons)

Twitter has submitted its filing to the U.S. Securities and Exchange Commission (SEC) listing potential risks to the business across several different areas. In this series, we look at each of these risks in turn and what this means for anyone planning to invest in the company.

From the filing (in bold):

"User growth and engagement depend upon effective interoperation with operating systems, networks, devices, web browsers and standards that we do not control."

Twitter is very much at the mercy of software manufacturers and policy makers. Any change in a browser might make Twitter impossible to use without a code rewrite. 

Mobile operating systems change, apps no longer work as devices are upgraded. Twitter needs to ensure that its products work across all existing — and new — platforms.

"Action by governments to restrict access to our products and services or censor Twitter content could harm our business and operating results."

China has currently blocked access to Twitter, restricting its growth. Other countries including Iran, Libya, Pakistan and Syria have intermittently restricted access to Twitter. The company believes that access to the platform has been blocked in these countries primarily for "political reasons."

Other countries may block access to certain services that Twitter provides in accordance with local laws.

"Negative publicity could adversely affect our business and operating results."

All businesses can suffer if negative publicity spreads about the product or service. If Twitter experiences an outage it is widely reported online.

If outages or hacking attempts happen on a regular basis, perception about the brand might drive users away.

"Our international operations are subject to increased challenges and risks."

As Twitter gains more prominence in other countries it needs to attract and retain employees who cannot only speak the local language, but who also can maintain company culture across the world. 

Keeping Twitter culturally relevant locally is also important. Alternatives, like Sina Weibo in China, LINE in Japan, and Kakao in South Korea, capture local user attention in that country.

Twitter has to ensure that it not only satisfies its users in the US — but also in markets where it has stiff competition and little local presence.

"Our business is subject to complex and evolving US and foreign laws and regulations. These laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations or declines in user growth, user engagement or ad engagement, or otherwise harm our business."

US law differs from European law — especially with respect to data protection. Foreign data protection, privacy, consumer protection and content regulation are often more restrictive than those in the United States.

The US government has announced that it is reviewing the need for greater regulation for the collection of information concerning user behaviour on the Internet. This includes regulation aimed at restricting certain online tracking and targeted advertising practices.

Twitter currently does not collect much personal information. If laws change around the world, Twitter might need to change its platform to comply with these laws and collect personal data such as age that it does not currently have.

"Regulatory investigations and settlements could cause us to incur additional expenses or change our business practices in a manner materially adverse to our business."

Audits and investigations could result in a decision forcing Twitter to change the way that it currently operates. It could result in fines, a change in practice or a change in its service offering. Significant fines following the result of an investigation could affect its business profits.

"We may face lawsuits or incur liability as a result of content published or made available through our products and services."

Twitter users insult, defame, and flame other users, sometimes intentionally, sometimes not. This published content could result in negative publicity for the user as well as Twitter. Any claim against Twitter for defamation needs to be defended — at a significant cost to the company.

"Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand."

Intellectual property rights differ around the world. What may be enforceable in the US might not have any standing in other countries. Twitter tries to protect its trademarks and works to make sure that its partners protect its trademark. 

Discovering and eliminating unauthorised use of Twitter’s trademark is a cost to Twitter’s business. Applying for, maintaining, and managing its patent applications around the world is also expensive for the business — as is fighting cases of patent infringement.

"We are currently, and expect to be in the future, party to intellectual property rights claims that are expensive and time consuming to defend, and, if resolved adversely, could have a significant impact on our business, financial condition or operating results."

Twitter is concerned that larger companies — with more patent and intellectual property "portfolios" than it has may enter into litigation with it on allegations of infringement.

It is currently involved in a number of intellectual property lawsuits and it expects claims such as this to grow. Future lawsuits might result in substantial monetary settlements or decisions that require Twitter to cease some of its services. This could impact its business.

"If currency exchange rates fluctuate substantially in the future, our operating results, which are reported in US dollars, could be adversely affected."

Currency rates fluctuate constantly — especially in the global economic downturn.

Some countries are faring better in this crisis than others. As all Twitter revenue around the world needs to be converted into US dollars for reporting reasons then the results may differ depending on the global economy.

"Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by man-made problems such as terrorism."

Twitter is located near a seismic hotspot — the San Andreas fault. Since the San Francisco earthquake in 1906 the region has been waiting for the next big one.

Elevated wave heights from the Japan Tsunami reached the shores of California, fortunately not causing any damage. Twitter is not the only company in the Bay area with these concerns.

"We may have exposure to greater than anticipated tax liabilities, which could adversely impact our operating results."

If tax laws change in the US, Twitter might be negatively impacted by the decision. Twitter values its technology and its intellectual property. The government might disagree with how much Twitter values it, which could impact its operating results.

"If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings."

Companies must record their transactions accurately and completely. Generally Accepted Accounting Principles (GAAP) requires companies to record intangible assets such as customer goodwill, patents, trademarks, software and copyrights.

Twitter’s talented employees are also regarded as intangible assets. If a technically brilliant employee leaves, then Twitter’s intangible assets have been reduced.

"Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited."

If Twitter changes five percent of its shareholders then it is deemed to have “changed ownership”. If this is the case then it might no longer be able to use the sums it carried forwards in previous reporting periods.

This amounts to $298.8 million US federal net operating loss carryforwards and $216.7 million state net operating loss carryforwards as of December 31, 2012. It Twitter cannot carry this amount forward then it could affect its financial position.

Based on the above risk factors would I buy Twitter shares? 

A lot of these clauses could affect any business, large or small. Earthquakes and fire can affect anyone in the at risk region and terrorism cannot be predicted.

Software vendors need to write their operating systems and publish access to their APIs for partners to access with their code. Negative publicity causes a ripple in company perception – but proactive steps taken can mitigate the risk accordingly.

Changes in government decisions, taxation and laws affect us all, and we can't predict how our own government will interact with other governments in other countries. 

Based on these risks, I would buy Twitter stock.

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