What's Holding Twitter Back?

Twitter is still operating well in the red. So far this year, Twitter has generated $133 million in red ink. Naturally, investors want to know if or when Twitter will be able to reach profitability.

Twitter's cost structure includes a high level of fixed costs, since its primary cost of revenue is the construction, maintenance, and operation of data centers. Companies with high levels of fixed costs tend to have operating leverage and become more profitable as revenue ramps up. This is precisely what's happened for Twitter; its gross margin was 42% in 2011 and so far this year has been 64%.

Further down the income statement, Twitter's hefty operating expenses are holding it back from current profitability. The company has been spending an awful lot on R&D and sales expenses as it invests in its future. Twitter is hoping to continue international expansion, where it will need to build up local sales teams.

In this segment of Tech Teardown, Erin Kennedy discusses Twitter's profitability with Evan Niu, CFA, our tech and telecom bureau chief.

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The article What's Holding Twitter Back? originally appeared on Fool.com.

Erin Kennedy and Evan Niu, CFA, both own shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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