Why Twitter Will Be Profitable by the End of the Year

Did you really think you’d read that headline six months ago? Well, a lot has changed since then! Claims of Twitter’s profitability arose the week before Christmas last year, when BusinessWeek used the two real-time search deals closed by the company (with Google and Microsoft) to do some basic math. It didn’t hold up, but the new year has brought new revenue. I strongly suspect that 2010 will be Twitter’s first in the black.

What happened at the end of 2009? Well, in October, Twitter locked in $25 million in revenue through the Microsoft and Google data licensing deals. The company also revealed that its annual expenses were around $20 million. So, $25 million minus $20 million equals a $5 million profit, right?

Not really.

The Microsoft and Google deals were multi-year, which means that Twitter couldn’t recognize all that revenue in 2009. The lengths of the arrangements haven’t been revealed, but let’s assume that it’s three years. That would give Twitter around $8 million for 2010.

(We’re going to be playing with a lot of assumptions, here, so don’t forget your grain of salt.)

Of course, $8 million doesn’t cover the company’s expenses. But, Twitter did let the word out at SXSW in March that it had inked six data licensing sales, each of which was good for “six figures” a month. Annualize that, and you have $1.2 million per client, or $7.2 million – assuming the rate is $100,000 per client per month, the lowest amount at which a six-figure deal is possible.

The existing deals plus the six new ones comes to $15.2 million, which gets Twitter closer to the $20 million expense threshold. If the Google and Microsoft arrangements are for two years, then the total so far is at least $19.7 million, which is right around the breakeven mark. Also, rates of better than $100,000 a month for the new clients could kick the number higher. If Twitter’s getting a price of $200,000 a month, the six clients are good for $14.4 million, which makes the company profitable even if Microsoft and Google are on three-year deals.

The remaining revenue stream is the wildcard: advertising revenue. Twitter unveiled its search-based ad model at its developer conference, “Chirp,” last month. While it’s tough to say how much revenue the ads will be good for, the company has signed on some impressive clients (such as Starbucks) and revealed that it now has more than 105 million users.

Even though a mere 25 percent of interaction with the microblogging service occurs on Twitter.com, the company acquired Twitter application Tweetie and indicated that it’s moving into the app space, which will facilitate monetization. And, Twitter has agreed to split ad revenue with other app developers. So, if Twitter can squeeze a few million dollars out of its ads, it will be profitable this year.

While Twitter’s investors can pop the champagne over this news, they shouldn’t break out the good stuff. Whatever profit the company ekes out, based on the assumptions above, will be small relative to the $160 million that’s been sunk into the company. Twitter has a long way to go to deliver a payback for the folks who kicked in the cash.

There is one more lever to pull, and this could make a profound difference for Twitter and its investors. Everything above is based on what we know so far. If Twitter can pick up more data licensing clients, attract many more users and generate more tweets, more bucks will come into the door, leading to greater profits.

It’s easy to be down on Twitter’s small expected profit (given my assumptions), but let’s not forget that a year ago, nobody believed Twitter could turn into the black … with many suspicious of the company’s ability to generate revenue. This may not be the big year for investors, but it’s a hell of a step in the right direction.

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