SEC chair questions growth metrics used by technology companies

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By Sarah N. Lynch

WASHINGTON (Reuters) – Securities regulators are concerned that some metrics of growth used by technology companies are confusing investors, and may not translate into big profits, Securities and Exchange Commission Chair Mary Jo White said Wednesday.

“Consider a company that correctly claims it has a hundred million users, and that the rate of user growth is expected to continue to grow at double-digit rates. That certainly sounds good and it would seem to bode well for the prospects of the company,” White said at a New York conference sponsored by the Practising Law Institute.

“But what if only a fraction of those users are paying customers? What does that mean for future financial results?” she added.

White was careful in her speech not to name any specific companies.

But her comments comes one day before shares of the hotly anticipated microblogging company Twitter Inc will begin trading on the New York Stock Exchange.

Twitter is the most closely watched initial public offering since Facebook Inc, which went public last year.

On Monday, Twitter raised the top end of its price range by 25 percent amid strong demand from investors.

But questions remain about how Twitter and other social media companies can turn a profit.

To date, Twitter has not made a profit, but it has amassed 230 million users over the course of seven years.

Some analysts have said they are concerned about whether the company relies too heavily on advertising revenue and whether it has enough other sources of income.

Facebook has faced similar questions by investors and analysts. Late last month, the company posted strong growth in its mobile advertising business, but investors grew concerned after the company said it had no plans to boost the frequency of ads it shows to users.

Revenue from mobile ads represented 49 percent of Facebook’s total advertising revenue in the third quarter.

White said staff in the SEC’s Division of Corporation Finance has been scrutinizing the “unique financial or operational metrics” that are used by technology companies.

The division is responsible for reviewing financial reporting results and other disclosures of public companies to ensure they are adequate for investors to make informed decisions.

“Our staff’s concern has been the impact on investors of the sheer magnitude of some of these metrics – investors for whom the true meaning of the metric (or more importantly the link from metric to income and eventual profitability) may not be clear or even identified,” she said.

“In the absence of a clear description, it can be hard not to think that these big numbers will inevitably translate into big profits for the company. But the connection may not necessarily be there.”

(Reporting by Sarah N. Lynch; Editing by Jeffrey Benkoe)