FORTUNE -- One of the long-time knocks on Twitter is that it doesn't do a very good job of innovating. Users came up with hashtags. TweetDeck was created by another company that Twitter had to buy. Twitter is reportedly considering shutting down a music site that it launched earlier this year. Go to Twitter.com and you will basically see the same thing you did five years ago. FastCompany booted Twitter from its list of most innovative companies this year.
This is apparently not for lack of trying. Twitter, which priced its IPO Thursday at $17-$20 per share, giving it a valuation of $10 billion, spends a lot on research and development. According to its IPO document, in the third quarter of the year, Twitter shelled out nearly $90 million on R&D. That was equal to more than half, 52%, of the company's revenue in the same period. It is Twitter's largest cost, nearly 50% more than it spent on marketing. And it's far more than most of its rivals spend. Facebook, for instance, spent just 14% of its revenue on R&D in the the quarter right before it went public. It has since ramped up that spending to 26%. But Facebook (FB) makes money, unlike Twitter.
There is no sign that Twitter is working on anything that cool. Twitter actually gives very little detail about what it spends its R&D budget on in the offering documents for its IPO. It says that R&D expenses are to "improve our products and services." And it doesn't appear that Twitter is building some kind of high-tech lab or supercomputer. In fact, the bulk of Twitter's R&D expenses go toward personnel-related expenses. And a good portion of that expense, about a quarter, was the cost of handing out stock options.
Twitter doesn't say how many employees work in its R&D groups. The company has a total of 2,300 employees. That would be $104,000 per employee if all of its employees were in R&D, which they are not.
In all, Twitter says on its income statement it has spent close to a quarter of a billion dollars on R&D in the past year. Since the beginning of 2010, Twitter has logged a $428 million expense for R&D. But that isn't actually all the money the company has spent on R&D. In reality, it has spent more than that.
Twitter, like other technology companies, capitalizes some of its software and other development costs. That means that while Twitter pays for those R&D expenses upfront, that cost doesn't actually show up on its income statement. Instead, Twitter expenses the cost in chunks over the next few years. The rules allow that as long as you think the R&D expense will add to your sales over the next few years. In addition to its regular R&D expenses, Twitter spent another $87 million on capitalized software and other development costs since the beginning of 2011.
Some analysts who have looked at Twitter's IPO filing have said its finances may be better than they appear. Take away the R&D expense and Twitter would be profitable. But considering the R&D expense likely makes up such a large part of what the company spends on employees, it's unlikely to go away any time soon, unless Twitter expects to start downsizing. In fact, in the IPO documents, Twitter says that it expects R&D expenses "will increase in dollar amounts for the foreseeable future."
"I can only assume a lot of it is on making the site seamless, delivering to mobile, and building out servers that can accommodate video. That's a lot of buildout," says Michael Pachter, an analyst who follows social media companies at brokerage firm Wedbush Securities. "I don't know what they're doing to innovate, but I think it is early to criticize them for lack of creativity."
Why is Twitter using the same accounting tricks that have been criticized so many times before?
FORTUNE -- When it comes to its bottom line, Twitter would like potential investors to put on some heavily tinted rose-colored glasses.
In the registration statement for its upcoming IPO, which was filed on Thursday, Twitter said through the "eyes of management" the company had a profit of just over $21 million in the first six MOREStephen Gandel, senior editor - Oct 8, 2013 5:00 AM ET
To sway shareholders on next week's chairman vote, Jamie Dimon's supporters say focus on the bank's bottom line. They're hoping you will miss some accounting moves that have significantly boosted profits.
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Once again, the bank seems to have failed to tell investors how large its legal bills would actually be.
Correction and Update: 1/8/13, 11:30 AM.
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FORTUNE -- Here is perhaps the most amazing thing about JPMorgan Chase's (JPM) $5.8 billion trading loss: Take a look at the firm's overall results, and it's like the London Whale's misstep, one of the largest flubs in the history of Wall Street, never happened.
Back in mid-April, about two weeks before talk of the trading losses MOREStephen Gandel, senior editor - Jul 13, 2012 1:08 PM ET
Banks are still using the just trust us method to value hundreds of billions of dollars of assets left over from the financial crisis.
FORTUNE -- The stress tests, which are expected to be released by the Federal Reserve next week, will likely show that banks are better prepared for a financial crisis than they were three years ago. The tests are also likely to show the banks haven't abandoned the MOREStephen Gandel, senior editor - Mar 5, 2012 11:27 AM ET
In the latest sign of a happy, healthy economy, a company that everyone agrees should be put out of business climbed to No. 5 this year on the Fortune 500 list.
The company is Fannie Mae (FNMA), the government-controlled mortgage investor whose collapse three years ago was a major milestone along the road to national financial ruin.
Much has been made of how Fannie and its little brother Freddie Mac (FMCC) have MOREColin Barr - May 5, 2011 2:16 PM ET
The cost of doing business is just lower in India – even if it's fraudulent business.
That's the takeaway from Tuesday's announcement that the Securities and Exchange Commission has settled with an Indian computer services company and its auditors, both of which were charged by the agency in a billion-dollar fraud uncovered more than two years ago.
Without admitting or denying anything, Satyam Computer Services settled a charge of falsifying its books, MOREColin Barr - Apr 5, 2011 1:17 PM ET
Warren Buffett's Berkshire Hathaway took a nearly billion-dollar hit on its stock portfolio after regulators questioned the firm's accounting.
Berkshire (BRKA) wrote down the value of its holdings in three big companies by $938 million at the end of 2010, reflecting a two-year-long slump in their share prices. The company cut the value of its investments in reinsurer Swiss Re, drugmaker Sanofi (SNY) and regional bank U.S. Bancorp (USB).
But correspondence the Omaha-based MOREColin Barr - Mar 28, 2011 2:16 PM ET
Don't look for indictments in Andrew Cuomo's case against the accounting firm. That could kill the business, and no one wants that.
If you're going to screw up, make sure you're working at a company that regulators aren't going to allow to fail. That's the lesson not only for big financial companies, but for the Final Four big national accounting firms as well.
Take Ernst & Young, which is a target of MOREAllan Sloan, senior editor-at-large - Dec 21, 2010 11:23 AM ET
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