The Big Hole in Twitter’s IPO Filing; Plenty of Numbers, but No Real Insight Into Its Advertising Business; Twitter remains inscrutable, a “black box.” It’s beautifully-lacquered, with a bow on top. But still a black box

The Big Hole in Twitter’s IPO Filing

Plenty of Numbers, but No Real Insight Into Its Advertising Business

DENNIS K. BERMAN

Oct. 10, 2013 12:13 p.m. ET

Have no fear, Twitter Inc. should be worth piles of money when it sells shares to the public. Back in February, my back-of-the-envelope guess was that it could be valued at more than $12 billion, a level it will probably easily beat. Having spent a week with its 120,000-word IPO document, I’m left with a nagging feeling. The document is full of numbers and charts and graphs that show how the service is growing. But if you look hard enough—heck, if you look at all—you’ll see it has virtually no details about the most important aspects of its business.It’s as if everyone, underwriters and investors alike, have been staring at their smartphones for so long that they’ve scrolled past the basics.

Twitter is widely perceived as a consumer Internet company like Facebook Inc.FB +4.87% or Yahoo Inc., YHOO +2.61% attracting hundreds of millions of users from around the world. Dutifully, the filing is full of juicy figures that show how Twitter is growing, with the number of monthly users up 44% from 2012. Users are also spending lots more time on their Twitter “timelines,” an essential if you want them to look at advertisements.

Ah, advertisements. Now we’re getting to the heart of how Twitter actually makes money. Like NBC and ESPN, Twitter must convince other companies big and small to spend on its service. Nearly 90% of its revenue comes from ad sales, which makes Twitter unabashedly a business-to-business media concern.

One day, Twitter’s ad buying and selling may become mostly automated, like atGoogle Inc. GOOG +1.45% But for now, the most lucrative work is done primarily by hand, with flesh-and-blood salespeople calling on flesh-and-blood ad buyers. The success of these efforts will determine the success of Twitter as a whole. If you were a venture capitalist—say, one of the 36 firms who have already invested in Twitter—you would probably even base your investment on understanding this advertising apparatus.

Any VC worth her salt would want to know: How many advertisers are there and who are they? What’s the average size and duration of most ad campaigns? How many of those advertisers renew? She would also want to see spreadsheets detailing the number and cost of salespeople, to understand how Twitter can “scale” across the world, in the tortured argot of VCs.

Remember, these advertisers are truly Twitter’s customers. And how much detail does the S-1 provide about them?

You know the answer that’s coming. Not a peep on advertiser numbers, quality, or renewals. Not a peep on the sales force, except to state that there will be a “significant increase” to the sales budget that exceeded $77 million for the first six months of 2013. Not a peep showing the actual effectiveness of Twitter’s advertising, save for stating that more effective ads will bring in more money. Fancy that.

If anything, the filing ascribes Twitter’s impressive ad-growth figures to the fact that more people are using the service. And that is “like a car dealer reporting that sales increased because he put more cars on the lot. The cars don’t sell themselves,” says Rett Wallace , CEO of Triton Research, a New York firm that analyzes private companies. “How can you project the performance of a company when you don’t know who is selling and who is buying?”

There’s at least some reason not to disclose such things. Arguably these can be competitive secrets, which Facebook or LinkedIn Corp. LNKD +2.58% or Google could use to their own advantage.

Those fears weren’t enough to stop LinkedIn Corp., which in its 2011 IPO filing, disclosed the number of advertisers and how much selling was done via automation or via humans. (Interestingly, the humans became better sellers over time.) Online music service Pandora Media Inc., which also sells lots of ads, finally coughed up specifics about its local sales force in a conference call in August. The IPO filing of business-to-business software company Workday Inc. went so far to state general terms of customer contracts.

Facebook and Google, it should be noted, still play coy about most of these details. A Twitter spokesman declined to comment.

Were it able to comment candidly, I suspect Twitter would say the IPO represents such a singular opportunity that the nitty gritty of disclosure just doesn’t matter much. There are huge sums moving to mobile advertising and billions to be made. Why quibble?

That’s a fair theory for buying Twitter shares. Investors need to know, however, that they will be buying the shares on a theory, and very few actual facts. In Wall Street parlance, Twitter remains inscrutable, a “black box.” It’s beautifully-lacquered, with a bow on top. But still a black box.