Twitter Q2 2018 Earnings Report SAN FRANCISCO, CALIFORNIA

July 27, 2018

PRESENTATION

Krista Bessinger,Twitter, Inc. - Vice President, Investor Relations

Hi, everyone, and thanks for joining our Q2 earnings conference call. We have with us today our CEO, Jack Dorsey; and CFO, Ned Segal. We hope you had a chance to read our shareholder letter published on our Investor Relations website this morning.

Like last quarter, we'll begin with just a few prepared remarks before opening the call directly to your questions. During the Q&A, we'll take questions asked via Twitter in addition to questions from conference call participants. Questions submitted via Twitter should be directed to @TwitterIR using the #TWTR.

We would also like to remind everyone that we'll be making forward-looking statements on this call such as our outlook for Q3 and the full year of 2018 and our operational plans and strategies. Actual results could differ materially from those contemplated by our forward-looking statements, and the 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. Also, 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.

Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our shareholder letter. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety is being webcast from our Investor Relations website. An audio replay of this call will also be available via Twitter and on our website in a few hours.

And with that, I would like to turn it over to Jack.

Jack DorseyTwitter, Inc. - Co-Founder and CEO

Good morning from San Francisco, and thank you all for joining us. As you saw from our results, we reported a solid quarter, we achieved strong revenue growth, made important progress in our health initiatives and rolled out product updates that make it easier to find and follow breaking news and events. These efforts deliver real tangible improvement to the experience people have.

Before I talk in detail about each of those items, I want to take a step back and provide some context to our results. A few weeks ago, a reporter tweeted, "What app has changed your life the most in the past 10 years?" Musa Tariq responded, "Twitter. Introduced me to my wife, some of my best friends, my mentors, my best hires and colleagues, and through it I learn from people I only could have dreamt of prior to its existence." That experience, like millions of others, illustrates unique value of Twitter and shows the important role it plays in everyday life.

Here are 3 other recent moments we wanted to highlight. People use Twitter to talk about what's happening. There were 72,000 tweets per minute at the end of Game 1 of the NBA Finals when J.R. Smith dribbled out the clock instead of taking a shot. Dub Nation thanks you, J.R.

Twitter provokes conversation. When Serena Williams tweeted, "She took her first steps. I was training and missed it. I cried." it prompted an outpouring of support and started a dialogue about the challenges working mothers face.

Twitter catalogs defining moments in history. Some of the most memorable moments in the World Cup happened on Twitter, in addition to those on the field, with 115 billion impressions during the tournament.

We see these types of moments everyday, to bring us together when we agree, and all too often divide us when we don't. But they inspire us to do better, and they provide the context for the actions we're taking to prioritize the long-term health of Twitter over near-term metrics.

We believe that Twitter's value as a daily service is enhanced when the conversation on the platform is healthier and people feel safe freely expressing themselves. During the second quarter, we launched new tools to address behaviors that distort and detract from the public conversation and introduced new measures to handle spam, malicious automation and platform manipulation.

We also acquired Smyte, a technology company that specializes in safety, spam and security issues to help us address these challenges faster. This is important work that complements what we're doing to connect people with interest and help them discover information. We've introduced new machine learning algorithms that organize the conversation around events and make it easier for people to find and follow topics, events and interests.

We're also making these experiences more accessible by surfacing them on the timeline, in Explore and in search results, as you likely saw during the World Cup. These types of product improvements are contributing to healthy daily active usage growth, which is 11% year-over-year during the second quarter. The momentum on the platform is translating into success with advertisers, with total revenue increasing 24% year-over-year in the second quarter. We're receiving positive feedback from customers about our efforts to enhance advertiser transparency and improve the health of the public conversation.

Earlier this month, Keith Weed, the Chief Marketing Officer of Unilever, the second largest advertiser in the world, publicly praised our efforts. Keith, who is named by Forbes as one of the world's most influential CMOs, tweeted, "Pleased to see Twitter taking a big stand against the fake followers polluting the digital ecosystem. Great step forward which strengthens the industry. I hope to see more following."

We're making progress, and we'll continue to invest heavily in making Twitter a healthier service because it's the right thing to do for Twitter as a platform, for the long-term health of our business and for society as a whole.

With that, I'll now turn it over to Krista for questions.

QUESTION AND ANSWER

Krista Bessinger,Twitter, Inc. - Vice President, Investor RelationsGreat. Thanks, Jack. Chelsea, can you please poll for questions?

Lloyd Walmsley,Deutsche Bank

Thanks for taking my question,I have 2. Looking, I guess, just at Japan and the strength you're seeing there, can you give us a sense of maybe the extent to which there's unique aspects to the country, either on the user-related attributes side or perhaps the ad community side that is driving that success, and with a particular eye on maybe thinking through whether it may or may not be a good case study to employ in other geographies, and whether you feel like the strong growth there is sustainable? And then second one, maybe for Jack. You framed up in the shareholder letter the investment in security product as taking away from product development with the focus on audience growth. But wondering, is there a benefit that you get from improving the safety of the platform in terms of either better retention or audience growth? That would seem like that in and of itself helps improve the product in a meaningful way, but curious just to get your views there.

Ned Segal,Twitter, Inc. - CFO

Great. Thanks, Lloyd. It's Ned. I'll take the first question. On the strength in Japan, I think there's a few things to point to there. The first is on the audience side, we definitely learn things from Japan. There are some ways that are -- it's unique just like any country might have some unique aspects. But as we continue to build a global Twitter, we look to draw from one geography and bring that to another. So when we find great use cases or needs that help us broaden the ability to help people find what's happening or what people are talking about on Twitter, we build that for the whole world as opposed to for one geography. Bookmarks are a great example of that, where we saw a need for that, they came out of countries like Japan. 280 characters is another where you were able to say more in fewer characters in Japanese than you were able to in other languages, so we extended the character limit for other types of languages. There also are some unique things about the ad market in Japan. It's a more concentrated agency market. And I think our success recently has to do with both sides of the ledger, where we worked hard on audience and engagement and listened, but also where we have executed well on the agency side in this more concentrated market, and we're starting to see that bear fruit. We're pleased with our results in Japan. We're pleased more broadly internationally as well where we grew 44%. International is now over half of revenue, and we expect it to continue to grow faster than the U.S. even though the U.S. actually did accelerate this quarter from about 10% to 15% revenue growth.

Jack DorseyTwitter, Inc. - CEO

And, hey, Lloyd, as you point out, we do believe that our health work and our focus on improving the health of the public conversation on Twitter is a growth vector over the long term. We want to make sure that we're building this into our DNA. We want to make sure that we are being -- we're able to measure it and held accountable to it as well. But one of the big reasons that we're doing it is, when we do focus on removing some of the burden of people reporting or blocking or muting, we do see positive results in our numbers. And it's still early. We have a lot more work to do, especially in applying machine learning and deep learning and newer models to recognize behavior on the network and shut it down early. We do believe, ultimately, over time, that this will help our growth story and encourage more people to stay with Twitter and also tell their friends, family and colleague about all the value they're getting out of it. It helps us with our job of helping to inform people about what's happening in the world. And the more we can do that, the more we can encourage people to participate in an active conversation. So over the long term, absolutely, and it's something that we're really focused on.

Heath Terry,Goldman Sachs

Ned, I was wondering if maybe you could give us a little bit more context around the MAU and DAU numbers this quarter. I know you talked about most of the accounts that were impacted by the information quality initiatives, being accounts that were never included in those numbers. But to the extent that there was an impact, is there any sort of like-for-like comparison that you can just sort of help us with to bridge this quarter? And then to the extent that these initiatives around information quality and the efforts around surfacing information through machine learning and AI are having an impact beyond just DAU growth and then actually are impacting either the minutes or some other measure of engagement around the amount of time that users are spending on Twitter, any insight that you could share into that would also be helpful.

Ned Segal,Twitter, Inc. - CFO

Great. Thanks, Heath. So a couple of things there. First, if you just look at the quarter and the impact that we saw from some of the work that we did, we mentioned in the letter that there was about a 3 million negative impact to MAU from the combination of our health works and decisions to not renew SMS contracts because there's a better way to provide Twitter to those users over time and GDPR. As we look ahead, and we just did the math on MAU, it was clear that our health initiatives were going to lead MAU to be down in the mid-single-digit millions from what we can tell today. So we thought it was worth sharing that. When we look -- if you just step back from MAU and you look at DAU, we're really pleased with the performance this past quarter, our seventh consecutive quarter of double-digit DAU growth, then we look at all 3 areas that we talked about in the past, organic growth, marketing and the ongoing and continued improvements in the product set as things that contributed to the year-over-year growth we saw. It was broad-based in 5 of our 10 largest markets as well. So definitely, still work to do on both, but pleased with our work to continue that usage of Twitter as a daily utility. You asked if the IQ work or the health work, as we like to call it, has impacted any of the usage metrics. When we look across the various metrics, we stillfeel really good about how things are going on the engagement side. The idea of the work that we do on health, and we definitely see signs of it, is that it improves the public conversation on Twitter, and that's what the work is all about.

Ross Sandler,Barclays

Just 2 questions, Ned, on the advertising business. So trying to understand the trajectory for the second half of this year. You said there was $30 million in the second quarter from the World Cup. So should we just net that out and then kind of look at the run rate in the low 20s for owned and operated as the right way to think about back half? Or any comments on the sequential growth rates for owned and operated? And then the second question is just on off Twitter ad revenue. It looked like if you strip out TellApart, that was kind of flattish and had grown pretty nicely last quarter. So any color on the trajectory we should expect for off Twitter in the back half?

Ned Segal,Twitter, Inc. - CFO

Thanks, Ross. So first, on the ads trajectory, we don't give revenue guidance. We did give EBITDA and EBITDA margin guidance, and we recognize folks will back into other parts of the P&L. When -- there's a couple of things that I wanted to speak to where you asked for more color. So we mentioned we had $30 million of revenue from the World Cup in the second quarter. Remember, the World Cup spanned both the second and the third quarter. We actually had more games and more countries in the 2 weeks of the World Cup that happened in the second quarter. So you should assume that we have more revenue in the first 2 weeks than we had in the second 2 weeks, number one. Two, when you think about the World Cup more broadly, we were really pleased with the performance that we had, both in giving people a great experience on Twitter, we were able to showcase our events and topics infrastructure, and also on delivering for advertisers. But all that $30 million isn't incremental. You could imagine some of it would be ads that would be showing on Twitter anyways in an environment where we're increasingly always on for advertisers, and some of it would be incremental as we have more of the conversation around the World Cup on Twitter than might be happening elsewhere that might have happened in the past. So I'll leave it to you on the sequential growth. And I had to think through that, but there's a little color for you to think about around the World Cup. Your second question was on the Twitter audience platform, so the off-network Twitter ads. And I think you backed into that, that might have been flat. That's just going to bounce around from one period to another, and we're always working hard to deliver for advertisers. And sometimes, you're going to see more of it show up on the platform. And other times, you're going to see it show up off-network.

Douglas Anmuth,JP Morgan

Just want to ask 2. First, just can you talk about how you're thinking about the progress in growing your advertiser base into the back half and in '19? And are you more focused in terms of kind of existing big brands, top 100? Or are you putting the investment dollars toward self-serve and programmatic more? And then secondly, can you just talk about the ad revenue deceleration internationally that we saw 1Q to 2Q? Anything specific to point out there?

Ned Segal,Twitter, Inc. - CFO

Thanks, Doug. So first, on the progress on the advertiser base, I'll just start by going back to October when the overall business in the third quarter had contracted, but the top 100 advertisers had grown. That was a sign that our strategy with the largest advertisers was really beginning to work, that they were seeing the ROI that they could get on Twitter, that the ad formats and better relevance were things that were really resonating with them. We have been taking that strategy where we've seen no success and both building on it with those largest advertisers, but also extending it to what we call the torso, which are the next hundreds of advertisers who either don't advertise very much on Twitter or don't advertise at all and should be advertising a lot because those same things that we're doing for the largest advertisers are things from which they can benefit as well. You asked about self-serve. That's an area where we know there's a big opportunity in front of us. There are millions of small businesses who are on Twitter, and local is such a great use case for all of us who use the platform. But we still haven't done enough work there on the engineering side to really deliver for those advertisers the way we probably can over time. We've talked about Twitter Promote Mode, which is our subscription service for them. We've seen early signs of success there. But there's definitely more work in front of us, and we'll have to prioritize it beforeit will really gain the traction that it deserves. Right now, the work that we're doing on the ad platform side continues to be the work that benefits all advertisers, more relevance, better ad formats, et cetera. You asked about international. So international, decelerating off of a high base. We continue to see some real signs of strength there. But in some of the markets that we're growing off of really large numbers, the numbers just end up being a little bit smaller on a percentage basis, but on absolute basis, are becoming meaningful for us as international becomes more than half our revenue this past quarter. Our performance ad products and our China export market were really strong. We saw strength and growth in video in Japan, but we also saw strength in other markets that we're excited about, like the Middle East and North Africa, Brazil, France and Mexico. So there is still -- there's lots of opportunity in front of us internationally, and we think that, that will continue to grow faster than the U.S. in the near term as well.

Krista Bessinger,Twitter, Inc. - Vice President, Investor Relations

Rich Greenfield- Twitter User

Thanks. And we'll take the next question from Twitter. It comes from the account of Rich Greenfield, and he asks, "You cite that DAU to MAU ratio is still well below 50%. Why do you have so many light users? When you look back over the past year, what has been the biggest driver in improvement in that metric? And what is your strategy for the coming year to get towards 50%, if not higher?

Jack DorseyTwitter, Inc. - CEO

Hey, Rich, thanks for the question. So over the past year -- actually, the past 2 years, the biggest impact that we've had in getting people into heavier states of usage has been around relevance. So any time we add machine learning, deep learning models to the timeline to make the timeline and notifications a lot more relevant to people, where people can show up to the app and they immediately see something that's valuable to them, that they want to participate with in a conversation, they want to retweet to their followers, they want to like, we see benefit in our numbers. We have had to balance that over the past few months with our work on health. But generally, the more and more we focus on relevance, the more we see a positive impact on our numbers. And we do believe that we have a long, long way to go and a long roadmap ahead in terms of adding more relevance to both the timeline and notifications. But also, more broadly, we've been talking for some time about biasing more and more the service towards interest and topics. We decided to start with events, better organization around events that are happening right now. World Cup was our biggest scaled event that we've done. The amazing thing about this is we have a general infrastructure to deploy this to any event, whether it be the biggest like the World Cup or even small local news-breaking events, where we can organize the conversation around what's happening now, all the top experts or people on the ground, and a recap of what matters and what's most relevant for people who cannot catch the event live. So a lot of our focus over the next few months and years is going to be making sure that we can continue to organize the events experience in a relevant way, but then broadening it to longer-term topics. If you're interested in deep learning or bitcoin, you can find a community of conversation around it instantly and continue to participate on, which we believe will encourage a lot more participation and a lot more heavier states of usage.

Colin Sebastian,Robert W. Baird

I have a couple of questions. First, I was hoping you could frame the improvement in user engagements that you're generating from Happening Now and the other interest-based notifications, and how much of that might have been specifically related to the World Cup. And then on the expense side, with the sequential decline in EBITDA and the margin, just trying to segment out how much of the trend is specifically related to the shorter-term investments in health and GDPR versus some of the incremental costs of video content and infrastructure and normalized margin trends.

Jack DorseyTwitter, Inc. - CEO

Thanks, Colin. I'll share some early data that we're seeing on the World Cup experience. And just as a reminder, we didn't do this as a one-off. We built in events infrastructure that we can deploy to small local events and global events like the World Cup. And one of the things that we saw, which we're really, really excited about, is people who access the World Cup experience and saw an organized conversation visited more often. So 39% engaged with 2 or more games, and over 22% engaged with 3 or more games. It's early data, but it gives us some insight into how to better organize the conversation to encourage more participation, more sharing, and how we might roll this out to more and more events all

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Twitter Inc. published this content on 08 August 2018 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 09 August 2018 05:54:08 UTC