Twitter's (TWTR) CEO Dick Costolo on Q2 2014 Results - Earnings Call Transcript

Twitter's (TWTR) CEO Dick Costolo on Q2
2014 Results - Earnings Call Transcript
Twitter, Inc. (NYSE:TWTR)
Q2 2014 Earnings Conference Call
July 29, 2014 5:00 PM ET
Executives
Krista Bessinger
Dick Costolo - CEO
Mike Gupta - CFO and SVP, Strategic Investments
Anthony Noto
Analysts
Anthony DiClemente - Nomura Securities
Douglas Anmuth - JPMorgan
Heath Terry - Goldman Sachs
Peter Stabler - Wells Fargo Securities
Justin Post - Bank of America Merrill Lynch

Eric Sheridan - UBS
Youssef Squali - Cantor Fitzgerald
Mark Mahaney - RBC Capital Markets
Brian Wieser - Pivotal Research
Dan Salmon - BMO Capital Markets
Ben Schachter - Macquarie Capital
Carlos Kirjner - Sanford C. Bernstein
Arvind Bhatia - Sterne Agee
Brian Nowak – Susquehanna Financial Group
Operator
Good day, ladies and gentlemen and welcome to the Twitter Second
Quarter Earnings Conference Call. At this time, all participants are in a
listen-only mode. Later, we will conduct a question-and-answer session
and instructions will follow at that time. (Operator Instructions) As a
reminder, this conference call is being recorded. I would now like to
introduce your host for today’s conference Krista Bessinger, Senior Director
of Investor Relations. Ma’am you may begin.
Krista Bessinger
Thanks, Sam and good afternoon. Welcome to our Q2 earnings call and
thank you for joining us. We have with us today our CEO, Dick Costolo;
Current CFO and SVP of Strategic Investments, Mike Gupta and incoming

CFO, Anthony Noto. We'll begin with approximately 15 minutes of prepared
remarks followed by Q&A. During the Q&A, we will take questions
submitted via Twitter in addition to questions from conference call
participants. Questions submitted via Twitter should be directed to
@TwitterIR using the #TWTRearnings.
We'd like remind everyone that we will be making forward-looking
statements on this call, such as our outlook for Q3 and 2014 and our
operational plans and strategies. Actual results could differ materially from
those contemplated by our forward-looking statements, and reported
results should not be considered as an indication of future performance.
Please take a look at our filings with the SEC for a discussion of the
factors that could cause our results to differ materially. The
forward-looking statements on this call are based on information available
to us as of today's date, and we disclaim any obligation to update any
forward-looking statements except as required by law.
During this call, we will discuss certain non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures
are provided in our earnings release. These non-GAAP measures are not
intended to be a substitute for our GAAP results. Also, please see our
earnings slide deck posted on our IR site for additional information about
metrics we will discuss on this call. An audio replay of this call will also be
available via Twitter and on our Web site in a few hours.
And with that, I would like to turn the call over to our CEO, Dick Costolo.

Dick Costolo - CEO
Thanks, everyone for joining us this afternoon. We had a strong quarter.
We made progress on multiple fronts across the business and our financial
performance was truly exceptional. I would like to run through a few
highlights here and then we can dive into the details. We generated $312
million in revenue which represents 124% growth on a year-on-year basis,
that’s our fourth consecutive quarter of accelerating revenue growth. Ad
revenue growth also continues to be remarkably strong, and accelerating
to 129% year-over-year. That growth is primarily driven by higher
engagement which translates into improved ROI for our marketers.
Our monthly active users also grew to 271 million in the quarter, an
increase of 16 million, the highest number of absolute net new user adds
in five quarters. And then finally, we generated $54 million in adjusted
EBITDA, more than doubling margins year-over-year to 17%. Later on the
call, Mike will provide more details on this past quarter’s results and
Anthony will talk more about our going forward outlook. I would like to
start by talking a little bit about the progress we are making on our
consumer products.
First, during the World Cup, we delivered a kind of events experience that
I have wanted to see from us for some time. We served up tailored
experiences for each individual match and for the overall World Cup and
these experiences felt alive. They felt wonderfully complementary to the
matches themselves. That has given me confidence that we can create
great user experiences by organizing content around topics and live
events. Second, we have a team focused specifically on building a fast and
frictionless Twitter experience for users in geographies with sub-optimal
connectivity. We are seeing really positive results from the work there and

I am excited about our growth opportunity in developing markets around
the world.
I want to continue to highlight the reach and impact of Twitter across the
mobile landscape beyond our owned and operated properties. As one
example, during the Germany-Brazil World Cup game alone, we had
approximately 2 billion Tweet impressions off of Twitter in addition to the
4.4 billion impressions on Twitter’s owned and operated properties. So, it’s
nearly 6.5 billion impressions in a single match, highlights the continued
expansion of our global reach and impact.
And beyond our 271 million monthly active users, there are hundreds of
millions of additional unique visitors who come to Twitter every month but
don’t log-in. When you consider the combination of monthly active users
and unique visitors, the size of our audience on our owned and operated
properties is two to three times that of just our monthly active user base,
which we believe ranks us among the top-10 largest digitally connected
audiences in the world.
We have started to experiment with improving the experience for this
group of unique visitors. Profile pages are an example of the limited
content we offer to unique visitors who come to Twitter and don’t log-in
today. In the last quarter, we improved profile pages to make them more
engaging, more visually appealing to everybody who comes to Twitter,
whether they are logged-in or logged-out. And we will run experiments and
continue to run experiments to improve the overall experience for
logged-out unique visitors. To be very clear, our central focus remains on
improving product experiences for our monthly active user base. But make
no mistake, our total audience and reach represent a significant

opportunity and we will continue to invest in maximizing the size of our
audience.
We are already the world’s real-time information network and by giving
everyone the best of Twitter, no matter where or how they consume our
content, logged-in as unique visitors or in syndication we will position
ourselves to reach the largest audience in the world and every person on
the planet. I want to conclude my introductory remarks by expressing my
personal thanks for Mike, who as you saw will be transitioning from the
CFO role into a new one, heading the Company’s strategic investments. I
am excited obviously for Mike and for the Company as he takes on this
new challenge. And we have also brought on a stellar individual in our new
CFO Anthony Noto, who will join us for Q&A and looking forward guidance.
Mike and I had the good fortune to work closely with Anthony during our
IPO process and we are lucky to now get to work day-to-day with him
in-house.
With that I will hand it over to Mike to jump into the financials.
Thanks, Dick and good afternoon everyone. I will discuss our financial and
operating performance for Q2 and then hand it over to Anthony to cover
guidance before we open the call for your questions. Q2 was another very
strong quarter for Twitter with continued acceleration across both total
revenue and ad revenue on a year-over-year basis. Total revenue reached
$312 million, up 124% from the year ago period, faster than the
year-over-year growth we saw in the prior three quarters. Ad revenue
reached $277 million, up 129% from last year. This is the highest rate of

year-over-year growth that we have seen in advertising revenues in the
last six quarters.
Strength in our advertising business is broad-based across all channels and
geographies with particular strength in international markets due to strong
advertiser demand around the World Cup. Our promoted products continue
to deliver high levels of engagement and marketers are increasing budget
and spending in response to the ROI that they are seeing on our platform.
In Q2, international revenue accounted for 33% of total revenue, up 168%
year-over-year. We now have a sales presence in more than 40 countries
around the world. And we see a significant room for international revenue
growth as we continue to expand the direct sales, sales support staff,
reseller efforts and the continued roll-out of our self-service advertising
platform. In Q2, we introduced self serve ads in three new countries Spain,
Israel and South Africa. While self-serve advertising touches less than
40% of our global user base today, we intend to roll-out our self-serve
platform to many more countries over the course of the year.
Mobile also continued to be a strong driver in the quarter with 81% of total
ad revenue generated from mobile devices. This is up from 67% in the
prior year. Data licensing and other revenue contributed $35 million in the
quarter, an increase of 90% year-over-year. This line item includes
significant contributions from both our mobile ad exchange and the Gnip
data licensing business.
Turning to expenses, unless otherwise noted, my comments will focus on
our non-GAAP financial measures which excludes stock-based
compensation, amortization of acquired intangible assets and income tax

effects related to acquisitions. For the GAAP financial measures as well as
the reconciliation between the non-GAAP and GAAP financial measures,
please refer to our earnings release posted on our IR Web site. In Q2,
total expenses were $296 million, up 94% year-over-year. The increase
was driven primarily by headcount and related overhead cost as we
continue to invest in our workforce, scale our business and drive continued
product innovation. We ended the quarter with approximately 3,300
employees.
Operating expense by line item was as follows; cost of sales for the
second quarter was $80 million, R&D costs were $85 million, sales and
marketing costs were $101 million, and general and administrative costs
were $35 million. This resulted in adjusted EBITDA for the second quarter
of $54 million compared to $10 million in the prior year period,
representing an EBITDA margin of 17% in Q2, more than double
year-over-year. Non-GAAP net income was $15 million in the second
quarter, up from a non-GAAP net loss of approximately $16 million in the
same period a year ago. Our GAAP net loss in the second quarter was $145
million which includes $158 million of stock-based compensation expense.
Before turning to metrics, I will cover a few items related to cash and
CapEx. We ended the quarter with roughly $2.1 billion of cash and
marketable securities. Cash flow from operations is $82 million and CapEx
was $75 million, $31 million of which was financed through capital leases,
the remaining 44 million was purchased outright.
Now I would like to turn to our operating metrics, as Dick mentioned,
ongoing product improvements are continuing to drive growth across all
key metrics including users, engagement and monetization. First on users,

we saw improved growth in monthly active users in the second quarter
with average MAUs reaching 271 million, reflecting 16 million net
additions, up from 14 million Q1. We saw strong growth in both U.S. and
international markets. U.S. MAUs reached 60 million, reflecting 3 million
net additions in the second quarter, consistent with the 3 million net
additions we saw in Q1. And international MAUs reached 211 million,
reflecting 13 million net additions, up from 11 million net additions in Q1.
Timeline views increased to approximately 173 billion, up 22 billion or 15%
from the same quarter last year and up 16 billion or 11% from the first
quarter. Timeline views per MAU were also up modestly
quarter-over-quarter. Note, that these timeline view metrics do not include
the curated World Cup experience that Dick spoke about earlier.
Going forward, we will continue to improve the product to make it easier
and more efficient for users to find the content they are looking for. As we
succeed in doing this, we expect to see the current trend of year-over-year
declines in timeline views per MAU to continue along with improving
interactions for timeline views consistent with what we have seen in
recent periods.
Switching to monetization, ad revenue per 1,000 timeline views continues
to accelerate, reaching $1.60 in Q2, up 100% year-over-year and up 11%
sequentially. U.S. ad revenue per 1,000 timeline views reached $3.87, up
79% year-over-year. And international ad revenue per 1,000 timeline views
reached $0.75, up 152% year-over-year. We continue to see steady
improvement in monetization and we expect those trends to continue. We
do not see any structural reason that the levels of monetization for our

monthly active users can’t reach or exceed that of our industry peers
overtime.
In Q2, ad revenue grew 129% on a year-over-year basis, despite a 35%
decline in cost per ad engagements. The increase was driven by total ad
engagements which grew more than 250% year-over-year, reflecting higher
quality ads, improved prediction and targeting and the increased use of
rich media by advertiser. On a sequential basis cost per ad engagement
increased 18%. This is our first increase in reported CP that was due
impart to strong advertiser demand around the World Cup and a mix shift
towards higher performing and higher priced ad units. Ad engagements
also increased 4% quarter-over-quarter, significantly improving overall
yield.
Before turning it over to Anthony for the financial outlook, I want to take a
moment to say thank you. As Dick mentioned, I will be transitioning out of
the CFO role to head up Twitter’s strategic investment arm. Over the past
few weeks, I have been working closely with Anthony to ensure a
successful transition. I am looking forward to starting my new role and
importantly I continue to be optimistic about the future of Twitter.
With that, here is Anthony.
Anthony Noto
Thank you, Mike. I am incredibly excited to be here and it’s a privilege to
be part of the Twitter team especially given the opportunity in front of us.
I want to highlight a couple of recent initiatives on the advertising front
before turning to guidance. We have had great success in advertising,
helping fuel our growth has not only been the success of our existing

products, but also the steady pace at which we have brought new
advertising products to market. Our innovation continues. Just a few weeks
ago we announced the general availability of our mobile app promotion
suite both emerging apps as well as brands in highly competitive
categories are seeing great results.
In August, we will launch the beta version of our new promoted video
offering which provides a way for high quality content producers and
brands easily upload, share and measure the distribution and effectiveness
of their video content on Twitter. And finally, we have closed the
acquisition of TapCommerce, an important asset we have added to our
mobile ad technology stack. Now with our existing ad tech stack, we can
help advertisers drive conversions and ROI with mobile consumers on and
off of Twitter.
With that I want to now switch to outline our guidance for Q3 and the full
year of 2014 then Dick, Mike and I will take your questions.
For the third quarter of 2014, we expect total revenue to be in the range of
$330 million to $340 million with an adjusted EBITDA in the range of $40
million to $45 million. We also expect stock-based compensation expense
in the range of $180 million to $190 million. For full year 2014 for total
revenue, we are raising our range to $1.310 billion to $1.330 billion which
is $95 million above our previous range at the midpoint. The increase in
revenue guidance for full year of 2014 reflects our Q2 outperformance and
our increased expectations for the remainder of the year.
Moving onto adjusted EBITDA, stock-based compensation and CapEx, we
are raising our range for adjusted EBITDA to $210 million to $230 million.

We continue to expect stock-based compensation expense to be in the
range of $640 million to $690 million. We continue to expect CapEx to be
between $330 million and $390 million.
With that, I would like to take your questions. Operator, if you would
please announce the first question.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) Our first question comes from Anthony
DiClemente of Nomura. Your line is now open.
Anthony DiClemente - Nomura Securities
Two questions, one for Dick and one for Anthony, Dick you talked in your
prepared remarks about the growth of off-network. So how big Twitter can
be over and above kind of just the existing Twitter users? And I just
wondered you talk about impressions, if you could talk a little bit about
what that contribution could be in terms of revenue perhaps what
off-network revenue was in the quarter? And then just thinking about how
should I, how should we think about revenue per user in the context in fact
that’s probably more -- probably an increasing percentage of your revenue
is coming from off-network?
And then Anthony if I may, you were at the NFL, one of the biggest media
enterprise in the world, you’ve been a media analyst, you’ve been a media
Internet banker, we’d just love to hear you talk about the opportunity that
you see for Twitter as a media company as opposed to Twitter as a social
network perhaps? And then within that, where do you see the curation of

content fitting into that equation for example reverse chronological on the
timeline do you think that changes and where do you see Amplify fitting
into Twitter’s media strategy? Thanks.
Dick Costolo - CEO
Thanks, Anthony, this is Dick. So as regard to your first question which
was in relation to my prepared remarks about our reach and impact off of
Twitter and the World Cup impressions in syndication and then the size of
the logged out audience, I will say this: we see that as a big opportunity
obviously. Why are we sharing all that information with you now? One is
we’ve made changes we like to the profile pages that make them more
engaging and visually appealing and that has led us to be excited about
other experiments that will be running for those audiences and those -- as
those changes become more visible to you, I want you to have context for
why you are seeing them vis-à-vis revenue contribution of those
audiences, we’re focused 100% on user experience today and we are not
monetizing those audiences. As we eventually think about that, it will
probably over the long term in the context of the way we same kinds of ad
units we deliver to our own network logged in users but we are focused
right now on leveraging the content that’s created by the majority of those
271 million monthly active users that come to the site to create the
appropriate experiences for both the unique visitors and syndicated
audience.
Anthony Noto
In terms of the opportunity for Twitter, I wouldn’t try to characterize this
as a media company, or a technology company, the bulk of our employees
are technology people and so we’ve always said that we are a technology
company first and we are using a very simple format with a very

complicated technology to be able to become the largest information
network in the world. And I came here with one belief and since being
here, that belief has only been reinforced and that’s that we can build the
largest audience in the world. Dick talked about that in his prepared
remarks and that’s something I came here believing was the case and I
believe it more now that I have been here for five weeks.
To your point about curation fit, what I would say is Dick made some
comments about tailored audiences and tailored audiences are challenging
to do and the company has did a enormously successful job as it relates to
the World Cup in creating a tailored experience for those that were
interested in it to really drive engagement. I think Twitter is unique in that
most technology companies disrupt other industries and disrupt other
business, but Twitter actually makes other companies and other brands
better than it otherwise be. I think that’s a unique complementary nature
of our information network that really makes us partner with so many
types of companies which increases the amount of information we have
and content which aggregates a larger audience and it just continue that
virtual cycle.
As it relates to the third part of your question Amplify fit, Amplify is a
great example how Twitter makes other companies and brands better.
Amplify allows us to partner with TV companies or content creators,
increase the tune-in to their audiences. One example you mentioned the
NFL, last year Twitter created a partnership with the NFL help drive tune
in. This summer their games during the week that were less viewed or
there was a lower awareness of the product beyond being on days other
than Sunday and Amplify is the perfect example of how we can increase

that tune-in, create a bigger audience for the content producer and the
content licenser which drives more advertising dollars ultimately it will pay
more for that content and that content producer want to partner with
Twitter.
Operator
Our next question comes from Douglas Anmuth of JPMorgan. Your line is
now opened.
First I was hoping that you could just comment on the trajectory of MAUs
through the months of 2Q and then you talked about how it’s more
products and the experiences rather than the World Cup itself, but how do
you maintain some of the new users that may have come in around that
event? And then can you also just comment on your early thoughts on
commerce on the platform and how that’s rolling out through cards at this
early stage how successful that’s been? Thanks.
Dick Costolo - CEO
Sure Doug. Thank you. On the trajectory of MAUs we don’t give a
perspective on each monthly MAU number but on overall quarter as
mentioned we’re quite pleased with the outcome of 60 million new monthly
active users sequentially, but the thing I would note which needs to be
clear is that the World Cup itself didn’t really add to the MAU net ads it
helped drive engagement and it is a product that is really focused on
engagement the way we have positioned it now. So in terms making end
users you don’t really see that we benefited from new MA user growth
because of the World Cup.

The last question you asked was about commerce I think Nathan Hubbard
is leading that charge for us we’re excited about it commerce has been
occurring on Twitter for some time even before the initiatives that Nathan
is behind. We recently completed the acquisition of CardSpring which is an
important proportional platform so it complements our commerce strategy
and we’re very excited about the opportunities lies ahead of us and we’ll
give you further updates as they occur.
Thank you.
Krista Bessinger
Great, thank you. And the next question comes from the Twitter account of
Colin Sebastian at R. W. Baird and he asks, how much usage improvement
is attributable to the World Cup and are the buy buttons indicative on an
ecommerce push?
Dick Costolo - CEO
Thanks Colin, this is Dick. As I mentioned and as Anthony has reinforced
it’s really been the case that the World Cup experiences drove
engagement, increased engagement from our existing users and it’s been
the product changes that we’ve made over the course of the year that have
driven new user growth. So that’s how I would categorize that, vis-à-vis
the buy button specifically that’s another example of the kinds of
explorations we’ve got Nathan and his team are focused on and you will
continue to see explorations and other experiments like that.
Krista Bessinger
Great, thank you. Next question please operator.

Operator
Our next question comes from Heath Terry of Goldman Sachs. Your line is
now open.
Great, thanks. Dick is it possible to parse some of the impact that you’re
seeing from the new features and some of the user services that you’ve
rolling out over the course of the last couple quarters in terms of what
that’s having on users and engagement and as Daniel begins to have his
finger prints more on the user experience, what kind of I guess sort of road
map or timeline would have investors thinking about in terms of really
seeing his version of what Twitter is going to look like.
Dick Costolo - CEO
Thanks Heath. So vis-à-vis your question about parsing the impact from
new users on MAU and/or engagement I would say that we don’t think of it
that way and view it as the collection of changes that we’re making in
service to delivering value more immediately to users when they come to
the platform and create account to log in that are driving that growth. It’s
the combination of those things that we have described from the beginning
of the year that we’re moving forward on now and not -- we don’t slice
those up by feature vis-à-vis the road map and the timelines being
Daniel’s vision for Twitter I would say a couple of things specifically.
One, the product road map that we talked to you about at the beginning of
the year and last quarter is the road map that we continue to leverage and
continue to move down the path on and those include organizing content
for new users and as I mentioned in my remarks I loved the way we did
that during the World Cup with those experiences making it easier to

on-board new users and as I mentioned last quarter the continued work on
the direct messaging platform that we will be focus the remainder of the
year.
Not only has Daniel made a great impact in coming to the company along
with Anthony and quickly I would say quickly integrated into the fabric of
the way we do things here but we’ve also added a number of other folks to
the product team or the product leadership team that have done a
similarly great job and I like the way they have come in adopted the work
that the teams have already been doing in service to their road map and
are continuing with that same road map down the future path.
Great. Thanks Dick.
Krista Bessinger
Thank you. Next question please operator.
Operator
Our next question comes from Ross Sandler of Deutsche Bank. Your line is
now opened.
Ross Sandler - Deutsche Bank
Thanks guys. Just another product related question I guess for Dick. So
following up on the comments on non-logged-in experiences, what kind of
additional products could we see for that cohort of users? And there has
been some chatter out there that Twitter could at some point roll out
timeline based on algorithm versus self curation or setting up your own

follow list, how complicated is that and how long until we could potentially
see a product like that shift? Thanks.
Dick Costolo - CEO
Yes. Thanks Ross. Vis-à-vis the additional products we could see I
mentioned that I really again the kinds of experiences we created around
topics and live events during the World Cup. We will run a number of
experiments to that broader audience those unique visitors I talked about
and I wouldn’t want to be specific about the sequence with which roll
those out or when you would see those. On your second question,
algorithmic timelines for example versus manually curated follow lists I
think it’s fair to say that we are not ruling out any kinds of changes that
we might deliver in the product in service to bridging that gap between
signing up for Twitter and receiving immediate value and you will see a
number of kinds of experiments that we produce there.
Krista Bessinger
Thank you. Our next question comes from the Twitter account of Rich
Greenfield at BTIG and he has a two part question. The first part of the
question is about U.S. user growth and he says, what is the biggest
challenge to growing domestic users to 100 million plus? Does the product
need to radically change?
Dick Costolo - CEO
Yes. Thanks Rich, it’s Dick. The short answer is as I just referred to, it’s
that delivering immediate value to new users when they come to the
platform and signup for Twitter and shortening that distance between
signup and receiving immediate value and no, the product does not need

to radically change, we have everything we need to deliver that value to
users.
Krista Bessinger
And the next part of Richard’s question is about time line used for MAU. He
says U.S. timeline use for MAU fell sequentially, why? Are new users
increasingly lighter or less engaged users?
Dick Costolo - CEO
So in terms of first part of the question, as it relates to U.S. timeline use
per MAU falling sequentially, the U.S. market benefit in the first quarters
from some big event to drive engagement specifically the SuperBowl as
well as the Oscars and those events are not repeated in the second
quarter including the World Cup which we didn’t count timelines for. So
that’s why you see that trend in U.S., timeline use per MAU. As it related
to the bigger question, our new users increasingly lighter or less engaged
users, we would say that the trend that you are seeing currently in
timeline use per MAU is really driven by product changes as the
predominant driver of that decline.
And essentially what we are trying to do is reduce every friction that
exists. When a user comes online to find information, they want quickly
and easily. And we’ve made small product changes overtime such as media
port and other initiatives that make it a lot of easier for someone to find
that they want and consume more during the time that they are on
Twitter. And so we really encouraged by the trends we are seeing behind
these initiatives and we will continue them as Mike mentioned in his
prepared remarks.
Krista Bessinger

Thank you. Next question please operator?
Operator
Our next question comes from Peter Stabler of Wells Fargo Securities. Your
line is now opened.
Peter Stabler - Wells Fargo Securities
So Dick a question for you, third-party data suggests that twitting activity
along users who signed up in 2012 and 2013 is declining on a sequential
basis. First of all is that the case or not sure of course? And then secondly,
how should we think about that given that marketers tell us that Twitters
are more valuable than passive non-twitting users from an engagement
perspective. Particularly when it comes to re-twitting and earned media
from an advertizing perspective? Thanks very much.
Dick Costolo - CEO
Yes, thanks Peter. I am not going to comment on any third party data or
rumors. It remains the case that the majority of our monthly active users
are content creators on the platform that includes twitting, replying to
twits, et cetera. To your second question, our marketers receive value from
everyone who engages with their twits. And neither we nor our marketers
make a distinction between whether a active user on the platform as they
customer of theirs is a Twitter or non-Twitter and I think that it’s
reasonable to assume that all of our monthly active users get engaged
with our marketers on the platform are just as valuable to them as any
other cohort for the active user.
Krista Bessinger

Operator
Our next question comes from Justin Post of Bank of America Merrill Lynch.
Your line is now opened.
My questions are really on high level on ad loads and engagement. I am
just wondering if you could tell us where you feel you are on advertising
loads. Do you still see a lot of room there? And then on engagement,
obviously tremendous growth there, maybe you could call out a few of the
fabs that are driving higher engagement, are they ad formats on Twitter
cards or is it just better targeting overall by your algorithms? So maybe
give us a little help on that. Thank you.
Dick Costolo - CEO
In terms of ad loads, what I’d say is they increased marginally on a
quarter-over-quarter basis but they are still very low relative to our
industry peers and even the best in class industry peers we still feel like.
We have significant upside as it relates to ad load or coverage. As a least
engagement, I think it’s important to understand that overtime, as we add
new ad formats such as we did this quarter with mobile app downloads, it
will have an impact on engagement rates or clicking rates. Specifically to
think about the app download card, it’s a card that we don’t get paid and
look for with the paper performance mechanism is when the individual
clicks on the twit is actually is in the click on the install button and this is
a much higher hurdle than just clicking on the twit or re-twitting or some
other mechanism to drive engagement. And because that action is further
down the funnel, the clicking rates slightly lower but the price that the
advertiser is going to pay is higher and that’s a great trade off and we will

continue to add different types of add format that could have that type of
impact on the mix overall.
Let me follow up. You mentioned a benchmarking versus competitors.
When you look at some of the big competitors, do you think your activity
as far as time or page views or timeline views is comparable as you think
of that some of the other big social networks out there? Thanks
Dick Costolo - CEO
We can make an apples-to-apples comparison as it relates to the
commonly used term ad load and that’s what I am making the reference
point from.
Great, thanks. I appreciate it.
Krista Bessinger
Great, thank you. And we’ll take the next question from the Twitter
account of Tim W. And Tim asks, do you have any plans to add a special
mobile app portal for the NFL game like you did for the World Cup?
Dick Costolo - CEO
We love the partner as I mentioned earlier Twitter makes other brands and
their content better and so we benefit from a ton of world-class partners.
The NFL is a partner, last year as I have mentioned we entered into
relationship as it related to Amplify Dick mentioned we will continue to
look at opportunities to create tailored experiences and so that’s one area
and Sports League is something we can look at as we do the World Cup
and I know someone at the NFL so maybe I will reach out.
Krista Bessinger

Great, thank you. And operator we’ll take the next question please.
Operator
Our next question comes from Eric Sheridan of UBS. Your line is now open.
Eric Sheridan - UBS
Thanks for taking the questions. I guess two on costs, one on the gross
margin was up very big year-on-year. I wanted to understand what is
driving that improvement in gross margins and how sustainable it is on a
going forward basis? And then Anthony on the guide for Q3 it applies
EBITDA margins actually go back the other way I wonder what sort of
investments might be driving a treat in the EBITDA margin in Q3 based on
the guidance you gave since it wasn’t called out on the call? Thanks.
Yes hey Eric it is Mike. Just on the gross margin year-over-year what we’re
seeing again is as we’ve talked about it as we make these investments
into the infrastructure to make sure we can scale with users and usage
we’re seeing leverage come into that model as we improve the structure of
our infrastructure in those investments. So really it’s just the scale kicking
in overtime that you are seeing on a year-over-year basis. And we continue
to optimize that infrastructure spend to make sure we’re doing it the most
efficient way possible.
Dick Costolo - CEO
And then Eric on second part of your question as it relates the guidance I
would first start by saying philosophically as we think about guidance, we
really want to balance the opportunities versus the risks in a quarter when
we give you guidance and that’s what the outlook represents. As it relates

to sort of the specific margin question I’ll tell you we want a balanced
growth versus investment, the multitude of growth opportunity we have in
front of us is enormous and we don’t want in anyway short change the
long-term size of the business or opportunity to become largest audience
in the world. And so we also want to be prudent though that we’re not
investing without any constraint.
And if you look at our fiscal year 2014 guidance as a whole we’re guiding
to almost 100% year-over-year revenue growth with margin expansion up
about 500 to 600 basis points which is a significant amount of profit
improvement relative to that fast growth rate. So as you think about the
third quarter specifically want to make sure that we’re still investing in the
growth opportunities the second quarter 75% of the upside revenue
dropped to the bottom line we would have liked to have spend some of
that back given the multitude of growth opportunities we have and just
didn’t have the ability to do it quick enough so we are going do in the third
quarter but still for the full year really deliver that balance of growth and
profitability.
Eric Sheridan - UBS
Great, thank you.
Krista Bessinger
Operator
Our next question comes from Youssef Squali of Cantor Fitzgerald. Your
line is now opened.
Youssef Squali - Cantor Fitzgerald

Thank you very much. Two quick questions, first Dick you talked about the
hundreds of millions of unique that come to Twitter but don’t log in, just
trying to understand why they don’t log in, is it a friction in the process or
is it a lack of a value proposition that these guys are seeing and clearly
what is it that you’re actually doing short-term to kind of remediate there?
And then on the -- my other question is around the MoPub maybe can you
just refresh us on the opportunity around that acquisition and it is
performance and contribution to the quarter? Thank you.
Dick Costolo - CEO
Sure. Thanks Youssef. The answer to your first question, Twitter is
everywhere right it’s all over TV when the NBA commissioner gets on TV
and talked about his sanctions against Donald Sterling there are twits all
along bottom of the screen during the course of that discussion. When
events happen in the world whether it’s the joy of the World Cup or the
tragedy of MH-17 all over television all over the news, all over the news
papers people talk about everyone on Twitter is talking about this, this is
all happening on Twitter right now. So along with this great work we do in
servicing our syndicated audience across the entirety of the web and our
TV and news partners they bring all of this attention to the state as users
come to Twitter looking for the content they’ve been told is happening and
unfolding on Twitter right now and many of them brows around some of
them search, some of them look at profiles and obviously from the
numbers we’re seeing most of them decide not to log in.
So we’re serving this huge syndicated audience we have that growing we’re
serving that 271 million monthly active users who do log in well and that’s
growing and we feel like we provide limited content to those hundreds of
millions of other users who are unique visitors to our proprieties and we

see an opportunity, a bit opportunity to serve them just as well as these
other two audiences. So that’s how I would frame what you’re seeing in
that first group of users there.
Your second question, MoPub, we continue to see just that our big best on
programmatic buying, mobile buying and the accelerated investment in
mobile advertising all map so directly to for the kind of work we’re doing in
MoPub and continue to believe that’s just a significant opportunity for us. I
will kick it over to Anthony to comment on the future opportunities there.
Anthony Noto
Sure, no problem I would say I would characterize that we are seeing very
strong growth of 170 billion ad impressions in the last 30 days request
that were fulfilled out from $130 billion in April, so very strong growth
there. From a bigger picture perspective, I’ve mentioned the closing of the
acquisition of TapCommerce that’s a DSP that we will tie into MoPub which
is a mobile exchange. And essentially it allow us to take the demand that
we’re seeing both into Twitter and across the web and aggregated across
not only Twitter inventory, but network inventory through the exchange
that MoPub can help facilitate on this supply side and tap commerce is a
nice addition adding additional demand on top of the exchange.
Krista Bessinger
Operator
Our next question comes from Mark Mahaney of RBC Capital Markets. Your
line is now opened.
Mark Mahaney - RBC Capital Markets

Two questions please. In a note about the metrics there is that reference
to the 14% of users that making result from automated activity. Can you
give us any context around that was it smaller number in the past or a
higher number? And then Dick over the last three quarters you’ve talked
about it seems like an intense, greater focus on the user expense. So just
at a high level, where do you think you are in terms of getting Twitter to
the optimal user experience and I am sure there is no optimal but as you
-- how much of this is serendipities how much of this is a product plan,
product pipeline that you’ve led out over the last three quarters over the
last year. How much better can user experience should it get and can it
get is the basic question? Thank you.
Dick Costolo - CEO
So I will take that second question first and then would go up from there.
So thanks Mark, vis-à-vis the greater focus on user experience how much
better can it get, to be perfectly frank we think it can be a lot better. We
have I think a lot of great thinking on the teams about how we can make
it better, surfacing that kinds of great conversation, the pop up in
timelines from time to time making sure that for those users we follow
hundreds of accounts, they don’t miss the very, very best pieces of those,
streams as they flow by and then once again for those users who are new
to the platform and are coming to the platforms for the first time getting
them value immediately. So I think it’s a case that we believe that across
the spectrum of our users, even our core users who are on the product
every day, we can deliver much better experience to them and I think the
answer to how much better is significantly.

Yes, Mark this is Mike. To your first question and I believe the number we
disclosed in a fellow slide below the 14% I think closer to 11 but this
refers to I think it was 12% actually, it refers to automated poling
requests we get from third-party apps and that switches frankly back and
forth depending on the application. So I think of that as the high end and
we think we are within that. But again these are users who are getting
pooled Twitter content and then in any cases they are viewing that content
coming in an automated way.
Krista Bessinger
Operator
Thank you. Our next question comes from Brian Wieser of Pivotal
Research. Your line is now opened.
So while we know the U.S. and the UK are important, I was wondering if
you might be able to rank order the next several markets perhaps for
revenue or perhaps get some identify which countries contributed
disproportionately to growth? And then one separate question just
following up on earlier comment you made, 40% of users live in countries
where self-service advertising is available. I was wondering how much of
your actual ad revenue is self service? Thank you.
Dick Costolo - CEO
In terms of the other countries, in terms of the year-over-year growth rate
in absolute dollars, the U.S., the UK and Japan contributed the most in
year-over-year absolute dollars to give a perspective on that from a

geographic standpoint. In terms of percentage of a revenue that’s coming
through self-service, that’s not a metric that we’ve shared and we are not
prepared to share at this time. We are encouraged by the impact that
self-serve has on the SMB advertiser base and I think it’s a big opportunity
for us obviously if it’s only covering 40% of our user base or less than 40%
of user base at this point, there is a lot of opportunity ahead of us but at
this point the percentage of revenue is not disclosed.
I should actually clarify, is the self-service advertising primarily being used
by the small businesses or do you see opportunity still for the self-service
advertising on the core platform from the bigger brands?
Dick Costolo - CEO
It is primarily SMBs over time as the sophistication of the advertising
agencies using our product increases they could also use it but it’s
primarily SMB.
Krista Bessinger
Thank you. Next question please.
Operator
Our next question comes from Dan Salmon of BMO Capital Markets. Your
line is now opened.
Dan Salmon - BMO Capital Markets
Another sort of commerce related one. I’d love to just cheer a little about
the Amazon cart test that started in the quarter where that might go with
early results you saw from it?
Dick Costolo - CEO

Hi, this is Dick. Thanks Dan. I’ve categorized the Amazon cart test as just
that another test on we don’t have any specific comments or numbers to
share from that test. It’s one of a number of explorations we are doing
around that notion of in the moment commerce that we are all very excited
about and will continue to do more of that.
Krista Bessinger
Operator
Our next question comes from the Ben Schachter of Macquarie. Your line is
now opened.
Hey, guys Facebook highlighted that it’s going to be focusing more on key
public entities that’s [indiscernible] to get more exclusive content from
such entities or do you post on multiple network and then Anthony do you
expect to have any meaningful changes to how your present guidance and
other financial or operational metrics going forward or are you fairly
comfortable with how is presented today? Thanks.
Dick Costolo - CEO
Ben, could you repeat the first part of your question, you broke up as
you’re saying.
So just like Facebook is focusing on getting more content from public
entity such as celebrities, is Twitter going to work to get exclusive content
from such entity or do you think [indiscernible].
Dick Costolo - CEO

Hey Ben, you broke up again, but fortunately you broke up on a different
part this time so I think we got just a bit I would say that we love the
relationships we have with both those kinds of public figures in all walks of
life and the content producers and broadcasters who work with them and
the kinds of content that they deliver into Twitter and more confident and
love the way that we’re growing both those kinds of relationship I think
that will just continue to be a strength for us. And then I think your
second question was future guidance and Anthony?
Anthony Noto
Thanks Ben. I was fortunate as banker start working with Twitter under the
coverage for the speak over a year ago and really getting a good
understanding of metrics and the business and I can tell you in that more
than one year that this change meaningfully in a number of different
regards giving all the initiatives the company has rolled out and successful
in the TV. That’s a long way we’re saying we’ll continuously evaluate what
are the best metrics to disclose that best represent the drivers of our
business as it relates to building shareholder value. And so as we go into
the 2015 planning process we will do a deep dive in all the key metrics and
we entirely represent the company to the public investor and make the
appropriate changes we find in that time was the very beginning of that
there is nothing I will talk about today but it’s a process every year getting
how fast to comes innovating and how quickly the business is changing.
Krista Bessinger
Great, thank you. And the question comes from the Twitter account of John
and he asks, can you talk about the developer strategy at Twitter are
there any new changes?
Dick Costolo - CEO

I will just add that we continue to invest in helping developers build into
Twitter and providing developer tools to the entire mobile app landscape
and just this past quarter Crashlytics, mobile developer FTK added real
time analytics capability to their suite of services but now have crash
reporting, data testing and analytic. So very excited about the suite of
services that they’re building and service to helping developers build better
apps and we’ll continue to make big investments there.
Dick Costolo - CEO
Great, thank you. And next question please operator.
Operator
Our next question comes from Carlos Kirjner of Bernstein. Your line is now
open.
Carlos Kirjner - Sanford C. Bernstein
Thank you. Two quick questions if I may, do you guys believe you can build
an accurate reliable graph for visitors and if yes, how? And if not, is it
reasonable to assume that the monetization potential for visitors will be
significantly lower than the potential for your logged on users. And
secondly what are that would causes for the difference in timeline views
between domestic and international users and how you can do a both?
Thank you.
Dick Costolo - CEO
Hi Carlos this is Dick I will take the first question there. The interesting
thing about the different audiences again when you think them in sort of
three groups those 271 million monthly active users for whom we have a
great interest graph, that audience that we see indication and then thirdly

those hundreds of millions of visitors who come to Twitter there is
frequently tremendous signal from those visitors who come to Twitter,
they may have come directly from specific search intent and then today
already when we look at the kinds of profile that many of them view and
navigate between you get some great signal for the kinds of content
they’ve come to Twitter to consume and we think that long term those
kinds of singles will provide us with the data that we need to deliver the
right kinds of monetization experiences to that audience. Again I would
make very, very clear that we will focus initially and for some time on user
experience and make sure we get that right before we go down their path.
Anthony Noto
I’ll talk about the difference between timeline use per MAU U.S. MAU
versus the international MAU and the difference in magnitude, point there
is the U.S. market obviously more mature as it relates to MAU use one
concentrated geography while the international number represents many
disperse geographies and in each one of those geographies the amount of
content that has been twitted or can be engage with is going to be
different in the level of quality and breadth and depth that we have in the
United States.
And as that breadth, depth and quality improves our content then the
consumption measuring timeline use for MAU also change. The other thing
I say about the international market is they’re all very different than U.S.
the devices they use to access Twitter are very different they talk earlier
about some of the issues we have in developing markets and because of
that different device the experience is different and doesn’t lend itself to
use much consumption, but as devices become more technologically

advance with greater penetration we’ll see those two start to converge
more.
Carlos Kirjner - Bernstein
Thank you.
Dick Costolo - CEO
Great, thank you. And the next question comes from the Twitter account of
Victor Anthony, Capital Market and he says, -- that you can potentially
close the monetization gap with the industry overtime, how do you see
your business model changing in order to narrow that gap and what level
of investment with that require those organically. And so the way I’d
answer the question is taking a step a back and thinking about the big
drivers of monetization. The first obviously the level of monetization is
what’s our ad load. And we are at a very, very low level of advertising load
or coverage and we have the significant opportunity to increase that
especially relative to our public peers but also just generally. The second
driver of our monetization is click-through rate and that’s a function of
improving the prediction of the individual users attractive us to that
advertising or targetability and also formats to more formats that we can
provide advertisers for the specific objective they want to accomplish.
From a market perspective, the better the put through rates can be, the
more appropriate that pay for performance engagement metric can be to
their objective.
And then the last point I’d mention is price. And as we continue to drive
scale which advertisers are looking for in a specific target, we continue to
have new products, that are more targetable and more appropriate for the
specific marketing objective, ROI will go up. And as ROI goes up,

advertiser demand will increase and that will continue to drive price. So it’s
a very wide open opportunity for given where we are in the add load side
of the equation and relative to the number of advertisers in the formats
that we have.
So we think there is a big opportunity to not just reach where industry
peers are but potentially to exceed it. In terms of the investment, we
don’t see a step wise change in our investment in order to get there we’re
just doing more of what we are doing. Building a big audience, giving in
the right ad, products that they want, the right data and measurability and
targeting and ultimately it will continue to drive the growth that we
expect.
Krista Bessinger
Operator
Our next question comes from Arvind Bhatia of Sterne Agee. Your line is
now opened.
Arvind Bhatia - Sterne Agee
A couple of actually, first one is I wonder if you could maybe speak to
some of the user trends post the World Cup? And then also in light of how
might have been exceeding your guidance for EBITDA margins et cetera.
Wondering if that has changed your thinking on the long-term margin
potential, which you’ve led out at 35% to 40% in the past. So wondering if
that’s starting to change in your mind at all? Thank you.
Dick Costolo - CEO

So, on the user trends we don’t update the specific monthly user trends.
There is an implication in our guidance that could tie back to users we
gave you, revenue guidance obviously for the third quarter. We also
provided a perspective on the expected trend in revenue per time line view
as well as in time line view per MAU and the combination of those three
things as well as considerations for seasonality overtime can help you
triangulate into MAU number. Bit we remain very optimistic about the
product changes that we have and we are just balancing the opportunities
versus risks in our guidance to give you a perspective on that specific
question. Your second question is long-term margins and the answer to
that is no. During the IPO road show to company talked about 35% to 40%
long-term adjusted EBITDA margins and that still remains the case for
that.
Krista Bessinger
Thank you. Operator I think we have time for one last question please.
Operator
Thank you. Our final question comes from Brian Nowak of Susquehanna.
Your line is now opened.
Brian Nowak - Susquehanna Financial Group
I have two. If you go back to Mark’s question earlier on the disclosure on
the 14% end users that are being impacted by the application, what would
MAU’s have looked like kind of year-on-year or sequentially if we excluded
any user that didn’t have any active -- any action involved within and
you’ve excluded those guys from the user base? And then secondly, any
help on kind of rough-sizing for duplicative accounts. So if I have three
accounts, one for Michigan Football, one for politics and one for finance,

what -- any idea for kind of duplicative accounts in the MAU number?
Thanks.
Hey, Brian it is Mike. Yes, just on the 14% and as I mentioned it is up
slightly from 12 we saw in Q1. This is I would say is a maximum number
so we have many applications that are pulling into Twitter for Twitter
content. This is predetermined timelines and twits that users are looking
for. So we don’t have a very reliable way to know exactly how many of that
-- how much of that pool of activity is actually user seeing that content. So
we wanted to be conservative here and share kind of the outer bound but,
historically we’ve seen that content is in fact being driven and those
actually active users. But we don’t have an actual number that we can
share. On duplicative accounts, there is some usage of multiple accounts
by single users but again that’s not a number of that we just…
Krista Bessinger
Great. Thank you all for your time. We appreciate you joining us. We look
forward to speaking with you again next quarter. Thank you.
Operator
Ladies and gentlemen, thank you for participating in today’s conference.
This does conclude today’s program you may all disconnect. Everyone have
a wonderful day.
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Twitter's (TWTR) CEO Dick Costolo on Q2 2014 Results - Earnings Call Transcript

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Twitter's (TWTR) CEO Dick Costolo on Q2 2014 Results - Earnings Call Transcript