Twitter's (TWTR) CEO Dick Costolo on Q4 2014 Results - Earnings Call Transcript

Feb. 5.15 | About: Twitter, Inc. (TWTR)

Twitter, Inc. (NYSE:TWTR)

Q4 2014 Results Earnings Conference Call

February 05, 2015, 05:00 PM ET


Krista Bessinger - IR

Dick Costolo - CEO

Anthony Noto - CFO


Mark Mahaney - RBC Capital Markets

Paul Vogel - Barclays

Ross Sandler - Deutsche Bank

Doug Anmuth - JPMorgan

Heath Terry - Goldman Sachs

Eric Sheridan - UBS

Justin Post - Bank of America Merrill Lynch

Anthony DiClemente - Nomura Securities

Ben Swinburne - Morgan Stanley

Ron Josey - JMP Securities

Mark May - Citi

Youssef Squali - Cantor Fitzgerald


Good day, ladies and gentlemen and welcome to the Twitter Fourth 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 turn the call over to Krista Bessinger, Senior Director, Investor Relations. Please go ahead.

Krista Bessinger

Thanks Nicolas and good afternoon. Welcome to our Q4 earnings call and thanks for joining us.

We have with us today our CEO, Dick Costolo and CFO, Anthony Noto. We'll begin with approximately 20 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 Q1 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. These 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 press release. These non-GAAP measures are not intended to be a substitute for our GAAP results. 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 the call over to our CEO, Dick Costolo.

Dick Costolo

Hi everyone and thanks for joining us.

I'll be giving you an overview of our financial results and then I would like to spend some time following up on the product initiatives we discussed at our Analyst Day in November regarding all the work we're doing to grow our audience and our business.

Before we jump into the financial results, I want to point out that our pace of execution across the company, which I noted is an area of focus in our Q3 call is already improved and I am delighted about that and about the results I am seeing from the team.

You already see evidence of this improvement in our recent cadence of product launches that are making Twitter better for current users, people who are new to Twitter, developers and marketers.

Okay, financially we had another great quarter with strong revenue growth and very strong profit. Total revenue was $479 million, up 97% year-over-year, adjusted EBITDA was $141 million, more than doubling since last quarter when it was $68 million and up, 216% year-over-year.

Our adjusted EBITDA reached 30% margins, also up significantly from 18% margins in Q4 of 2013. That quarter closed out a very strong year of financial results for us. In 2014, we had $1.4 billion in revenue, up 111% year-over-year.

Our revenue growth accelerated in 2014 compared to 2013, which was itself a year of significant growth for us. So I want to publicly congratulate everybody involved in building the business engine at Twitter. It's a remarkable collection of people really doing tremendous work.

Okay, moving on to operating metrics. We ended the quarter with 288 million monthly active users. We added four million users this quarter and 47 million across 2014. There are quarter-specific factors that impacted our net ads in Q4, which include seasonality and a couple issues related to the launch of iOS8, we will discuss that in more detail later in this call.

Importantly, I want to highlight that the user numbers we saw in January of this year indicate that our MAU trend has already turned around and our Q1 trend is likely to be back in the range of absolute net ads that we saw during the first three quarters of 2014.

We have a number of projects underway to growth our user base and provide a compelling valuable experience to anyone in the world, whether they have a Twitter account or not. I would like to give you an update on a number of those improvements we made that served the three objectives I discussed with you at Analyst Day and also on our Q3 call.

First three objectives are one; strengthen the core. Two, remove barriers to consumption and three; build new applications and services. When I talk about strengthening the core, what I mean making Twitter more engaging, valuable and easy for logged in users.

On our Q3 earnings call and again at our Analyst Day, we outlined three specific things we would do in this area. One, introduce better media creation and consumption. Two, enhance private messaging between users and groups and three, improve the new user experience and it easier for people to immediately get value out of Twitter, the moment they sign up.

We have launched or have begun testing products in each of these areas. Let me talk first about native mobile video. We're clearly at the very beginning of mobile video sharing and we'll see with video what we've seen with photos on abundance of creation and consumption happening from the device we have with us all the time.

We started our foray into video with Vine, which continues to do quite well and is seeing significant growth in consumption, they're now seeing, they're now seeing more than 1.5 billion Vine loops a day and we've also been bringing video to Twitter through publishers and advertisers over the last several months via both our amplify program and our rollout of tools to professional publishers.

The data all tell us that people love watching video on Twitter and marketers are seeing great engagement along with tons of earned media.

Just last week, we brought native mobile video to all Twitter users. Now anyone can capture, edit and share videos right within the Twitter app. In expanding video to more people, we want to develop features that make video fast and easy. The simple video editor now in the tweet composer makes it super easy to capture moments as they happen with video on Twitter.

We have a lot more coming on the mobile video front and I am personally investing a good deal of time in this area.

Next, I want to talk about private messaging, which we've long made available through direct messages on Twitter or DMs for short. You've heard me talk before about taking public conversations private and we've launched a number of new features and improvements to make that even easier.

Just last week, we introduced group DMs. Now people can have private conversations with a group of people on Twitter in addition to having those one-on-one conversations. When you couple this release with the ability to share, tweet via DM, which we shipped in Q4, you can see some of the work we're doing to more easily move between public and private conversations on the platform.

Importantly, direct messages give people a way to reach and talk to people they're connected to in some cases only connected to on Twitter. Finally, for the new users who sign up for Twitter every day, we're experimenting with instant timelines as a new way to help people get started more quickly.

We discussed the instant timeline capability at our Analyst Day and I am excited that we've already launched instant timeline experiment in our mobile app. The idea behind this capability is to remove the friction of finding a large set of accounts to follow when you first sign up.

So with instant timeline, a new user gets a rich timeline the moment they sign up and by immediately dropping users into a high quality timeline of great content we believe we will be better able to convert those new signups into healthy long-term users.

The second objective I discussed with you is to remove barriers to consumption from our most active users to someone visiting Twitter for the first time to making it really simple for publishers who want embed Twitter content in their websites or apps, we want people to immediately get value out of Twitter and all we see content that is meaningful and relevant to them.

There are more than 6,000 tweets a minute every day. What one person sees on Twitter is just a very narrow slice of all the amazing content we have on the platform and we have an obligation to better organize content and deliver it in compelling ways to our total audience.

As we've discussed with you before, every month more than a half a billion unique visitors come to Twitter but don't log in. I want to now give you three examples of what I mean by removing barriers to consumption, two of which are already out to users and another that's coming in the next couple weeks.

First, we've been working hard on a compelling product for logged out users and just this week we launched an initial experiment of a logged out home page. We're going to learn a lot from this initial experiment and I expect just iterate quickly based on those lessons learned.

The content people see will be based on algorithms as well as curation. Secondly, it has to be just as easy for logged in users who follow a large number of accounts to quickly catch up. A couple weeks ago, we introduced a new feature called Value or Away. The name is fairly self explanatory. It shows you a few tweets you might be interested in that you might have missed if you haven't been logged into Twitter for a few hours.

We've been testing this for sometime internally and I think it's an elegant way of delivering compelling and engaging tweets to users, the moment they come back to the platform.

Finally in a couple weeks for the Cricket World Cup, we're providing global cricket fans with an immersive experience similar to what we provided for the FIFA World Cup last summer.

The difference will be that this time anyone with a feature phone or smartphone will just as easily be able to see and enjoy these experiences even people without Twitter accounts. You may recall we recently announced our acquisition of ZipDial. We'll be working with them to bring key moments and commentary around the Cricket World Cup to a much larger audience on Twitter.

Our third objective is to build an ecosystem of new applications and services. We closed out 2014 with the introduction of fabric, our new mobile software development platform that makes it easy for developers to build great apps.

I believe fabric can become the infrastructure software layer of the mobile application ecosystem. This is a significant opportunity because fabric helps us build the largest audience in the world and creates new monetization opportunities for us.

Fabric makes it easy for applications to integrate tweets and Twitter timelines with just one line of code and as more and more mobile app integrate Twitter content, the Twitter audience grows.

Furthermore with Fabric, we have the technology in place that makes it easy for Twitter to the monetization engine for mobile apps.

So, as I've highlighted on this call, we’ve launched or have public experiments out for nearly all of the new features we talked about at our Analyst Day in November.

Across our three objectives; strengthen the core, remove barriers to consumption and build an ecosystem of new apps and services will leverage the power of our monetization engine and I've got some exciting business updates to discuss with you today on that front as well.

Because our primary ad unit is a Tweet, the ads can go wherever Tweet go and our monetization engine follows our content on sites across the web or another mobile apps.

We recently announced that we started syndicating ads starting with Flipboard, which launch promoted Tweet in its Twitter section on February 1 and just last week we signed an agreement with Yahoo Japan to monetize our syndicated Twitter timeline on their web properties.

By syndicating ads, the same way we syndicate Tweets, the audience that our marketers can reach obviously extends far beyond our owned and operated mobile apps and websites.

These ads leverage the same rich data and targeting that marketers have access to through Twitter today and ultimately the same measurement. Only now we’re bringing this advertising technology to the rest of the mobile ecosystem.

That we’re beginning to realize the potential for our ad product, by showing relevant timely ads wherever there is Twitter content is a huge accomplishment.

So to wrap up, our product updates introduced improvements to Twitter that make Twitter better for existing users, they make it easier for new users to get started and get immediate value out of Twitter, they provide important tools to developers and make it easy for them to build great apps and they give marketers more channel through which they can take their messages to consumers.

I hope to see the impact of these releases from both a growth and revenue perspective over the coming quarters.

To close out, let me just take a minute to acknowledge that 2014 brought with it a lot of change for the company particularly at the Executive levels. Those changes have brought us to where we are today. We have a great team. Our pace and quality of execution is the best it’s been.

I’m proud of the way the Company has embraced and been fueled by these changes and I couldn’t be more excited about where we’re going and the profound impact Twitter will have along the way.

With that, I’ll turn it over to Anthony to go deeper into the financial.

Anthony Noto

Thank you, Dick and good afternoon, everyone. I’ll discuss our financial and operating performance for Q4 and provide guidance for Q1 in fiscal year 2015.

In terms of revenue, Q4 was another very strong quarter for Twitter. Total revenue reached $479 million, an increase of 97% year-over-year. Ad revenue reached $432 million also up 97% year-over-year.

Once again ad revenue was driven by strong growth in both the number of advertisers and average revenue per advertiser in each channel and geography.

Our direct sales channel remains the largest contributor accounting for nearly half of the year-over-year growth as we saw particular strength in the U.S., Japan and Canada.

Our expansion efforts in the mid-market and small medium business channels continue to pay off. As growth reaching these channels once again significantly outperformed the overall growth rate of our ad business.

In particular year-over-year growth in SMB revenue accelerated for the second quarter in a row, benefiting from new markets, growth in advertisers and increasing the average revenue per advertiser.

Looking across our products, the vast majority of our year-over-year revenue growth was again driven by promoted photo Tweets up 113% year-over-year.

Website cards, mobile app downloads and promoted video were the primary drivers of promoted Tweet growth. I would point out that two of these three products were introduced in the back half of the year and promoted video currently remains in beta.

In terms of geographies, in Q4 U.S. ad revenue grew 78% or international ad revenue a 141% year-over-year and accounted for 36% of total ad revenue.

International growth was driven by strong growth in both APAC and EMEA. Major movers year-over-year in EMEA included the United Kingdom and Ireland.

In APAC, Japan once again performed well and was the primary driver results in the region. We continue to expand our sales force globally entering 13 new markets in Q4 and in fact we now have a sales presence in 73 countries around the world and see significant room for continued international revenue growth as we continue to sign up new advertisers and further expanding grow each channel around the globe.

Data licensing and other revenue contributed $47 million in the quarter, an increase of 105% year-over-year. We signed an important new partnership with IBM in Q4, which allows enterprises to incorporate Twitter data into their decision making. IBM will be a key channel partner for us in that regard.

Our mobile ad exchange business continues to see very strong growth in the exchange with revenue more than doubling versus the prior year.

Moving on to cost and EBITDA, in Q4 total non-GAAP expenses were $390 million, a 73% increase year-over-year. The year-over-year increase was primarily driven by headcount and related overhead costs as well as infrastructure investment.

We continue to invest in our workforce to scale our business and drive continued product innovation. Adjusted EBITDA totaled $141 million a 216% year-over-year increase.

Adjusted EBITDA margin for Q4 was 30% versus 18% in the prior year period. Adjusted EBITDA significantly outperformed our expectations through the outperformance in revenue and the challenge of reinvesting revenue upside on such a real-time basis.

Non-GAAP net income was $79 million in the fourth quarter, up from approximately $10 million in the same period a year ago. Our GAAP net loss in the fourth quarter was $125 million, which includes $177 million of stock-based compensation expense. Non-GAAP EPS was $0.12 while GAAP EPS was a loss of $0.20.

Before turning to metrics, I’ll cover a few items related to cash and CapEx. We ended Q4 with roughly $3.6 billion of cash and marketable securities unchanged from Q3. Cash flow from operations was $43 million CapEx totaled $99 million, $30 million of which was financed through capital leases.

Now I’d like to turn to our operating metrics. First on users average monthly active users reached 288 million for the quarter reflecting year-over-year growth of 20% or four million net additions on a quarter-over-quarter basis.

There are a couple of specific factors that negatively impacted net additions in Q4. First we lost approximately four million net users due to the rollout of the iOS8 integration, which primarily impacted our third-party pulling MAUs, but also to a lesser extent impacted Twitter owned and operated MAUs.

Additionally as we mentioned before, Q4 is our seasonally weakest period. Importantly, we’re pleased to see that our current Q1 trends in MAUs will likely result in our Q1 MAUs returning to the level of absolute net ads that we saw during the first three quarters of 2014.

Although we don’t expect the product launches and test announced over the last two weeks to have a meaningful impact on Q1 user growth we’re hopeful that these product initiatives will contribute in subsequent quarters.

Timeline views increased to 182 billion up 23% from the year ago quarter and timeline views per MAU totaled 631 billion up 3% year-over-year and better than our outlook for timeline view per MAU to be flat versus Q4 2013. As we announced in November, we do not intend to disclose timeline views for any future periods.

In terms of monetization ad revenue per 1,000 timeline views continues to show strong growth reaching $2.37 in Q4 up 60% year-over-year and 34% sequentially and better than our outlook of up 28% to 30% sequentially.

In Q4 ad revenue growth was primarily driven by an increase in ad engagements importantly CPE also contributed as demand outweigh the supply we made available.

Ad engagements grew 78% year-over-year driven by both an increase in ad load as well as in total ad request. Cost per ad engagement grew 10% year-over-year due to both mix shift to higher price and higher performing ad units as well as an increase in same format CPE.

We’re seeing strong demand for advertising our platform and are encouraged by the continued increases in CPE even with the increase in coverage.

Now I’ll turn to our guidance, before I provide the detail on Q1 guidance I want to quickly provide some color on a relative outperformance with our guidance for Q4.

Last quarter we told you our guidance placed more weight on the opportunities in the quarter coming to fruition versus balancing the opportunities and risks as we had in the past and our advise was to not to deviate meaningfully from our guidance range.

Clearly our reported results exceeded guidance by a significant margin. The significant outperformance was driven by greater than expected acceleration in December, as many brand advertisers ramped spending around the holiday shopping period particularly in the U.S.

In fact when we gave revenue guidance on October 27, the high-end of our revenue guidance range implied 86% year-over-year growth or actual October 2014 revenue had increased 86% year-over-year.

So our guidance at that time was very much in line with the growth rate we’re actually seeing and our expectation for the remainder of the quarter.

That said we’re once again attempting to be more accurate in our revenue guidance relative to results as we continue to place more weight on the opportunities in the quarter coming to fruition.

For that reason and based on current visibility, we do not recommend projections that deviate meaningfully from guidance.

In terms of guidance, for Q1 we expect revenue to be in the range of $440 million to $450 million and EBITDA to be $89 million to $94 million. We expect stock-based compensation expense in the range of $160 million to $170 million.

Finally, we expect the share count for Q1 to be approximately 645 million shares on a GAAP basis and our fully diluted share count to be approximately 690 million shares on a non-GAAP basis.

For the full year 2015, we expect revenue to be in the range of $2.3 billion $2.35 billion and adjusted EBITDA to be $550 million $575 million. We expect stock-based compensation expense of $700 million to $750 million and we expect CapEx to be between $500 million and $650 million.

Finally I would like to note a few things on guidance before taking your questions. First, these guidance ranges are based on currency rates as of January 31, 2015. In fact currency has naively impacted our first quarter and full year 2015 outlook, specifically our Q1 2015 revenue guidance is $6.5 million lower just due to the currency change from Q4 2014 to January 31, 2015.

Second as you think about modeling quarterly estimates in 2015, please consider the following factors. First revenue in Q1 2014 benefited from the Olympics, which is obviously not going to occur again in 2015.

Without the Olympics, our sequential revenue growth in Q1 2014 would have been minus 1%. Additionally, in the second quarter of 2014, we benefited from the World Cup. Without the revenue from the World Cup, our second quarter 2014 sequential revenue growth would have been 15%.

We are sharing these additional considerations with you to provide a proper context as you think about each quarter of 2015. However, even with these considerations, our guidance still calls for a continued robust growth and we look forward to executing with excellence in order to have another year of significant outperformance in 2015.

With that we’re ready to take your questions. Operator, would you please announce the first question.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Mark Mahaney with RBC Capital Markets. Please proceed with your question.

Mark Mahaney

Thanks. Two questions please on the slew of third-party deals Yahoo Japan, Flipboard, Google congrats on getting those. How could we -- how should we look for the impact of those in the P&L any broad details you can provide would be great.

And then on the engagement metrics going forward Anthony, what should we be able to look at in order to track what’s happening to engagement whether it’s improving or declining if you no longer disclosing timeline views. Thank you.

Dick Costolo

Thanks Mark. This is Dick, let me jump in there with a brief overview of the way we’re thinking about these third-party relationships and I’ll let Anthony chime in on the details and address the engagement question as well.

First of all, on the third party relationships, really think about those in two ways. There are deals where we’re distributing our content to third-parties that we’re now starting to monetize and that’s new and exciting for us and that’s the Yahoo relationship and the Flipboard relationship.

And then the second kind of deal that we’re looking at now and talking about are the Google type deal. So I do want to confirm that we have a relationship that we’ve agreed to with Google I don’t have any more detail to share about it at this time.

But those -- what’s new about those deals is that they will drive traffic and distribute traffic to our logged out experience and that’s the way we’re thinking about those relationship now differently than we were thinking about them previously and Anthony, why don't you jump in and take the rest.

Anthony Noto

Sure. Mark, in terms of the impact of these third party deals, they were all considered in the guidance that we provide you today, so we’re in that consideration.

In terms of engagement metrics, as I mentioned we no longer going to provide the metric of timeline view and the reason for that is, it’s really a measurement that doesn’t reflect the initiatives that we’re doing.

In fact if anything, we’re taking specific initiatives and product changes that will hurt timeline view. As an example, the recently launched product, While you were away, will cause you not to have to go through many timeline views to find something that was really important to you eight hours ago.

And so -- and that’s why we decided to eliminate the timeline view metric given that we have specific product changes that will hurt that metric.

More broadly as we think about engagement, there are number of different way that we measure engagement. There is no one perfect way. When it comes to advertising it's going to be click-through rate and it’s actually different by each format.

A mobile app download click-through rate is very different than a regular promoted tweet that could be either re-tweeted or favorite as a measurement of payment. Additionally on the consumer side many companies use DAU to MAU and while that is a long-term goal of us -- of ours to become a daily product, today we have great variance in DAU to MAU across geographies.

In our more mature markets we have very high DAU to MAU 50 plus. In the emerging markets, we have very low DAU to MAU at 20% range, they all migrate up to a higher rate over time and so as we get to point where we have a metric that’s going to really reflect what we're trying to do we'll share that with you. At this point there is a number of them that we look at and no one metric to share.

Mark Mahaney

Thanks Anthony. Thanks Dick.

Krista Bessinger

Great, thank you. Next question please operator.


Our next question comes from the line of Paul Vogel with Barclays. Your line is now open. Please proceed with your question.

Paul Vogel

Great, thank you. Just two questions one, first on the MAU number as we think about the first quarter if you add back the $4 million you lost, the run rate getting back to where you were in the first three quarter is in acceleration.

So is that just seasonality? You mentioned that's sort of new products really having clicked them yet. So I’m just really curious as the acceleration there, but seasonality or something else.

And then on the advertising side, if you could just talk about the pitch you're making to advertisers on terms of monetizing the non-logged in users, how that’s being received and how you’re selling that advertising relative to what you sell on sort of a core logged in user. Thanks.

Dick Costolo

Sure. Thank Paul this is Dick. In Q1 I would say it’s a combination of seasonality or return to organic growth and the set of product initiatives we’ve created to drive growth, I mean again at a high level, I’d like to say that I’m thinking about growth and our product were as your changes were making now as helping us grow across logged in, logged out and our syndicated audience across the web and third party mobile apps.

And the user numbers we saw in January again indicate that our MAU trend is already turned around and that Q1 trend is likely to be back in the range of absolute net ads that we saw during the first three quarters of 2014, so on a great place there again I would stress that is seasonality or return to organic growth and product initiatives all taken together.

Anthony Noto

Paul one thing I want to clarify as you mentioned the word acceleration so for everyone’s benefit we added 14 million monthly active viewers on a net basis sequentially in Q1 of 2014.

In Q2 of 2014, we added 60 million net monthly active users and then in the third quarter we added 13, when we say that Q1 trends are likely to indicate that we back towards the trend of absolute net ads in Q1, Q3 of 2014 we’re referring to those specific numbers ’14,’16 and ’13 not anything else from a percentage basis.

Dick Costolo

Paul, just Dick again to address your second question specifically it's going to be the very ad unit that we brought to our Twitter own in properties and now are syndicating into this third party experiences that we will be brining to the logged out experience on Twitter.

It’s important for me to highlight that we are first going to be very, very focused on delivering a delightful user experience I talked in my prepared remarks little bit about the fact that it will be a combination of algorithmic, algorithm generated timelines and duration.

We want to really nail that down but once that’s nail down we’re already step to go on delivering that promoted Twit ad unit into the logged out experience.

Krista Bessinger

Great, next question please operator?


Our next question comes from the line of Ross Sandler with Deutsche Bank. Your line is now open. Please proceed with your question.

Ross Sandler

Thanks. Just two quick questions, Dick we know its early but the recent product releases can you just talk about which are showing the most traction and how they are impacting engagement?

And then Anthony on the full year guidance about 70% high end including FX and lack of Olympics and World Cup, so that suggest not a lot of deceleration, can you just talk about where you expect ad load to be in 2015 and what that the growth look likes for me same advertiser basis versus new advertisers? Thanks.

Dick Costolo

Hi, Ross its Dick. In answer to your first question, it's just -- it's simply too early to have any data to share as to the impact of those features we’ve released in January, I would say that when I think about them in the context of how their growth drivers.

The features we’ve released in January is like made a video and group them, make Twitter richer and more enjoyable experience both for a new users and as an increasingly daily use case for existing users.

I'm also finally particularly excited about instant timeline, when we talked about at Analyst Day, one of the reasons all of us here are so enthusiastic about it is because we know that the follow action is the high friction action for new users and removing that action completely and dropping users into a really high quality timeline right away we’re hopeful, we’ll drive immediate engagement and create long term users out of that large group of people have coming into the top of the funnel.

Anthony Noto

And then Ross, as it relates to your advertising question at the Analyst Day, I talked about an opportunity over the long term to get the 5% at load and we didn’t see that was a limit that was opportunity overtime and how we would get there.

We’re so far from that 5% today and that’s not how we actually model the business, the way we model the business is really on a demand basis which you alluded to, which is the amount of spending of existing advertisers plus advertising spending from new advertisers.

And I can tell you the bottom of forecast and top down forecast that we put together for 2015 that we share with you on revenue, we still won’t be near that 5% to get there, obviously the amount of inventory in that 5% will grow with our user base but we’re far from getting to that 5% opportunity long term and our forecast reflects, the demand side equation related to supply, given such access supply compared to demand.

Ross Sandler

Great, thanks guys.

Krista Bessinger

Thank you. And the next question we’re going take from Twitter, it comes from the Twitter account of Dan Ernst at Hudson Square. And he asks why wouldn’t a logged off visitor to Twitter be agreed by a curated best of breed and set of trending tweets and also a brand out?

Dick Costolo

Hi Daniel, it’s Dick. That’s exactly correct, that’s exactly what we will be doing. I would say once again that it’s important to me that we really deliver a delightful user experience, first and foremost.

One of the reasons we launched that logged out experience on web first and so that so we update quickly as we learn, how users are engaging with and what’s already we will be delivery promoted tweets from all sorts of our advertisers into that experience.

Krista Bessinger

Great, thank you. Operator next question please?


Our next question comes from the line of Doug Anmuth with JPMorgan. Your line is now open. Please proceed with your question.

Douglas Anmuth

Thanks for taking the questions. Two things I wanted to ask, first can you use the algorithms from instant timelines and then also while you were away to like people develop more customized timelines within their own experience kind of take that beyond just logged out or just the initial experience through instant timelines.

And then secondly as you enhance the experience of logged out users, particularly with the launch of the home pages, is there a concern that you could go too far in delivering a good user experience for logged out that would not let people or drive the incentive for them to log in as much. Thanks.

Dick Costolo

Hey Doug this is Dick Costolo. I think that, that algorithm that really powers both that recommendation engine for while you were away and Instant Timeline and others is an algorithm that we've been working on for some time.

It’s gotten solid enough that we really like the instant timeline it delivers, but I think it will be a while as we continue to learn and roll out instant timeline before we use it in some new and additional way that we -- that’s beyond what we're using it for now.

So do think it will be on a period of learning around instant timeline and iterating on that and improving it because we have such a great opportunity there with new users they come to the platform.

And as it regards, does the, is the logged out experience going to cannibalize logged in experience in anyway, actually view it kind of a flip the around. And it’s the case today that we have got this, really incredible opportunity and around the people that hear about Twitter or aware of Twitter and are driven to the platform because they see it on TV or they hear about it on press somewhere.

And we've drawn this well in front of them today and force them to go through all of these hoops in order to get started. So I'm actually of the mind that, that logged out experience will be a way to show them what Twitter is and how valuable it is and all the amazing content that’s on the platform and then as they want to engage with it they can become logged in users.

Douglas Anmuth

Okay, thanks guys.

Krista Bessinger

Next question please.


Our next question comes from the line of Heath Terry from Goldman Sachs. Your line is now open. Please proceed with your question.

Heath Terry

Great, thanks. Dick, I was wondering if you could give us a sense of the engineering priorities for this year, how important were product introductions like while your way be versus improving the algorithms around personalization for existing products like the discovered timeline.

Dick Costolo

Yeah, sure thanks Heath. That’s -- it can be very straightforward answer about it. The algorithms -- the backend if you will around the capabilities that are driving these algorithmic while your way, instant time etcetera, it is the number one priority.

It drives so much of the high quality engagement on the platform that, that’s probably first and foremost where we'll devote a lot of resources.

Having said that, lots of kinds of product experiences will emerge from network, the Magic Racks product experience emerged from network. As I mentioned once we get through instant timeline, there are lots of other things we want to do with that capability.

As another example we’ve got an experience out to users who come back to the platform who registered while ago haven’t been with us and come back, they previously would come back into whatever, however many or few accounts they followed before.

Now we can drop them into sort of resurrection instant timeline if you will, I will focus on that more as we like the results of instant timeline. So that backend is going to power a lot of experiences and we’re spending a lot of time and energy there.

Heath Terry

Great, thanks. Dick.

Krista Bessinger

Great, and we will take our next question from Twitter from the account of [Matt Sullen]. And he asks do you see impact to revenue in 2015 as a result of strength in the U.S. dollar versus other currencies?

Anthony Noto

Thank you, Matt, its Anthony. Our 2015 revenue guidance of $2.3 billion to $2.35 billion is in fact impacted by currency. On a constant currency basis to January 31, 2015, it would have been $55 million to $56 million higher than what we actually gave as guidance.

Krista Bessinger

Thank you. Next question please operator.


Our next question comes from the line of Eric Sheridan with UBS. Your line is now open. Please proceed with your question.

Eric Sheridan

Thanks for taking the questions. Anthony two for you may be on the guidance going forward. Over the last couple of quarters you really demonstrated a tremendous amount of leverage in the business in terms of the margins and the beats on the EBITDA line.

Any update you can give us some sort of what other than just incremental revenue is driving that leverage and whether its informed any new way you're thinking about the long-term profitability of the company.

Second on CapEx, that was maybe a bigger increase than we thought year-on-year in the way you're forecasting ’15? Anyway you can carve out sort of the priorities for those dollars in the capital budget 2015. Thanks so much.

Anthony Noto

In terms of leverage at Analyst Day, we took the time to give a new perspective on our long term margins. During the IPO, the company had articulated our long term margin profile of 35% to 40%.

And on Analyst Day given the leverage of performance that we achieved as a public company during the first year and having more information about the business more broadly, we’d raised our long term adjusted EBITDA margin to 40% to 45%.

The leverage that we are getting today is primarily due to the our performance in revenue and not being able to reinvest fast enough and while we have contingencies in the quarter on the positive side, the investment certain areas of things do I perform it’s just a really hard thing to do in a real time basis.

There are productivity initiatives, as you would imagine in addition to just operating leverage but that contributes a very small component to the overall operating leverage that you are seeing today at this point but this is a long term opportunity for us and that’s why we give the long term margin of 40% to 45%.

As relates to your CapEx question, there's two big investments in CapEx. In 2015 one is a third data center. We have two data centers now and a third data center importantly will allow us to have greater redundancy. Today we have to completely replicate what's in one data center and the other data center. Having a third data center will allow us to get some productivity leverage as well.

The second thing that's impacting CapEx in 2015 is real estate capital expenditures. We're building out additional space in San Francisco and in New York and those are two big expenditures as it relates to building out CapEx, but we're also in the process of continuing to upgrade our locations from a capacity standpoint internationally and so we're seeing CapEx go up quite meaningfully over 100% from real estate.

Eric Sheridan

Great. Thanks for the color Anthony.

Krista Bessinger

Thank you. Next question please operator.


Our next question comes from the line of Justin Post with Bank of America Merrill Lynch. Your line is now open. Please proceed with your question.

Justin Post

Thank you. Just looking and I know you don't want to disclose the churn. Can you just give us your high level thoughts on user churn maybe some kind of numbers around what percent of people have churned off of Twitter? Any thoughts you can provide there?

And then what initiatives you're doing to get those people back that might be working so far and are you optimistic you can bring a lot of these people back this year? Thank you.

Anthony Noto

So as it relates to churn broadly we don't release the specific number, but I will tell you churn has improved in November and December compared to the prior months and we're encouraged by that.

Our growth team has a number of initiatives that are specifically addressed at converting unhealthy users to healthy users very early in their life time on Twitter and more where Dick talked to in timeline.

The whole goal of the timeline is to make end user healthy user day one, second one for that matter and so there is a lot of initiatives against the whole concept of having healthy users from day one and if they're not, addressing that very quickly after they've come on to the platform before we missed the opportunity to improve there.

So I am encouraged by the churn and ensuring there is a lot of initiatives there.

Justin Post

Thank you.

Krista Bessinger

Great. And we will take our next question from Twitter. It comes from the account of [Kevin McGoldrick]. He asks how do you see Vine's relationship with the new native video option and how do you see that interaction playing out?

Dick Costolo

Yes, thanks Kevin, this is Dick. Maybe let me pan back and talk about video across the Twitter ecosystem between Vine, consumer video and Twitter professional video on Twitter etcetera.

Our mission is to give people the power to capture and share ideas and information instantly without barriers and that work instantly capturing life or a moment or an event as it happens and communicating it as it happens is how we think about Twitter video being vital to consumers.

And it's one of the reasons we created that simple capture and share capability in the Tweet composer. You can think about all those benchmark moments on Twitter New Year's Eve, Ferguson etcetera, imaging being able to capture those on video and sharing them instantly with the world, that's where we think we're really going to stand out.

I think Vine as really a creative medium in its own right, an artistic medium in its own right. You see the emergence of all these Vine stars and what they've been able to do on the platform as distinct from, but complementary to native mobile video across the Twitter ecosystem.

Krista Bessinger

Thank you. Operator, next question please.


Our next question comes from the line of Anthony DiClemente with Nomura. Your line is now open. Please proceed with your question.

Anthony DiClemente

Thank you very much. Just one for Dick and one for Anthony. Dick just a follow-up on your commentary just now about video, can you just elaborate on where professional video fits into that? Maybe give us an update on Amplify and your professional video efforts.

And then Anthony just on monetization, you mentioned that CPE grew 10%, that's a strong number, you did mention that part of that was attributed to mix shift and a part of it was growth in same format CPE. I am just trying to get a little bit more dig into those two in terms of what was a bigger driver?

And then moving forward what are the higher price ad products? Is there is a mix shift to a higher priced ad product be it video or another as we head into future quarters that will potentially continue to drive CPE growth as driven by mix shift, thanks?

Dick Costolo

Sure, this is Dick. On to your first question regarding professional video, I think of that as being a continuum from -- at one end of the -- our content partner like the NFL and the NBA and the broadcast networks at maybe one end of the spectrum to you and me and our friends at the other end of the spectrum.

And then all these sorts of folks like the Vine stars if you will in the middle there who are increasingly becoming professional and migrating from consumer uses of video to professional, we want to provide tools across that spectrum.

So what you’re seeing from us now is one, broadening the role out of our amplified program globally to more than 130 partners now and layering on to that capabilities like SnappyTV and for other kinds of content creators who may not be a broadcast network or the NFL or the NBA, but seek to monetize their content and distribute longer than 30 second video on our platform.

What I mentioned briefly earlier in my prepared remarks that we will also be providing more and more capabilities there, that’s what I was referring to, that sort of middle tier of content creators who were looking to do more will see more and more capabilities and tools from us on the platform.

Anthony Noto

And then Anthony as it relates to your question on CPE versus engagements, engagements was the broader driver of our overall growth up 78% year-over-year. From a CPE perspective, it’s somewhat of a complicated answer.

From a pure mix perspective, our faster growing newer units are higher priced units but click through rate unit. As an example a mobile app download or a video they have different mechanisms that are the pay for phones mechanisms that drives the click through rate.

And we’re charging differently for them based on a click through rate that’s lower in the overall funnel from a marketing perspective and so CPE should improve as that mix shift continues in that direction and click through rate could in fact decrease as we do that, which is what we saw this quarter.

But there’s one underlying economic trend that also matters and that’s the balance between supply and demand, which is driven by our load factor. And so there could be circumstances, where our supply is significantly greater than our demand and you wouldn’t see that increase in CPE, because of the excess supply relative to demand.

In this quarter that was not the case. In this quarter, we did increase load factor, but demand was still greater than supply and that’s why we saw CPE increase both due to mix and same format CPE.

Anthony DiClemente

Got it. Really helpful. Thank you.

Anthony Noto

Thank you.

Krista Bessinger

Operator, next question please.


Our next question comes from the line of Ben Swinburne with Morgan Stanley. Your line is now open. Please proceed with your question.

Ben Swinburne

Thank you. Anthony, in the guidance do you assume much contribution from the new syndicated advertising partnerships you have and will add and if you do, could you just help us think about gross versus net if there is any kind of rev share associated with that?

And then Dick, can you just give us some color on why Twitter ended its Google integration years ago and why it made sense then, it doesn’t make sense now and now it makes sense to get together. Some color there would be great.

Anthony Noto

Sure, on the first part of your question, Ben, what I would say is these deals were considered in our guidance. I didn't provide a perspective on whether there is revenue or not -- revenue or how much as if they were considered.

In terms of how revenue will be recognized as it relates to these syndicated monetization deals, it really comes down to what channel it goes through. We have two channels. One is in exchange and that revenue is recognized on a net basis. If it goes through a ad network, that revenue is recognized on a gross basis and it depends on whether demand is coming from and who the winner of a specific ad is.

Dick Costolo

Hey Ben, it's Dick, let me try to answer the Google question this way if I may. We've obviously had a relationship with Google over the course of the years with all the bunch of the executives here and a bunch of the executives there obviously know each other quite well.

I would say that the way we think about the Google deal now without again -- without going into any of the details distinct from the kind of relationship we had in the past is that we've got the opportunity now to drive a lot of attention to an aggregate eye balls if you will to these logged out experiences, topics and events that we plan on delivering on the front page of Twitter. And that's one of the reasons this makes a lot more sense for us now.

Ben Swinburne

Thank you.

Krista Bessinger

Thank you. Operator, next question.


The next question comes from the line of Ron Josey with JMP Securities. Your line is now open. Please proceed with your question.

Ron Josey

Great. Thanks for taking the question. Just I wanted to come back a little bit on product improvements. I know we talked a lot about it, but specifically on the on-boarding process I am wondering if the revised process has helped to really convert the logged out users to logged in users.

And if that is the case, that's just given you all confidence in seeing in new trends return to where they were a year ago. Thank you.

Dick Costolo

So I would say that none of the work we've done to date around a logged out users or experiences for users who aren’t logged into Twitter has had any impact at all yet on the kind of outlook we provided to you for Q1.

And then again over time, we think about our ability to get people excited about Twitter content and experience Twitter content by coming to the front page of the site or other ways they might get to a logged out Twitter experience as sort of an on ramp or an on-boarding vehicle into eventually becoming a more engaged logged in user.

Ron Josey

Great, thank you.

Krista Bessinger

Thank you. We’ll take our next question from Twitter from the account Wayne Fowler. The question is do you have forecast as they have beneficial the new Google deal will be with regard to user growth.

Anthony Noto

So we’ll excited about the new Google’s deal, everyone is asked questions about, thank you. Dick mentioned very clearly that we’re doing this because we have a great opportunity to leverage the tremendous audience they have and their interest in relevant real time information and bringing that to their logged out home page.

The logged out home page doesn’t necessarily mean those users will translate into monthly active users. If we do our job and given the right type of content and causing them to be engaged and given the right experience over time that will happen but today that’s not what we are focused on nor what we expect over the course of time there is an opportunity though.

Dick Costolo

Let may be may be just chime in one more piece of information this is not something that you’re going to see launch or rolled out for several months. I would just make that very clear.

Krista Bessinger

Great, thank you. Operator next question please.


Our next question comes from the line of Mark May with Citi. Your line is now open. Please proceed with your question.

Mark May

Thank you. I had two and Anthony I’m actually going to ask another on Google. I believe that you are generating data licensing revenue from that deal and so given Google scale or I would seem that could be material incremental new source of revenue. Can you give us a sense of how that’s impacting Q1 and full year revenue?

And then if you can provide a little more color on what exactly happen with the iOS8 update that you referenced and as your expectation that you will be able to recover most if that all of this 4 million users that you talked about in the New Year.

Anthony Noto

Sure. As it relates to Google and any revenue considerations, we’re not providing any perspective on that at this time. The one perspective relative to your question, I would provide I'll just echo Dick's point that this is a relationship that we will roll out in several months from now which means not in Q1 since we're already in February.

In terms of your second question, let me just give you some specific numbers as it relations iOS. So we said we lost four million monthly active users due to the iOS8 integration. One million of those monthly active users were Twitter owned and operated monthly active users and three million were on Safari, what we call Auto point MAU’s and we lost those.

We don’t expect to get the three million Autopoint MAU’s in Safari back and that’s a non-Twitter owned and operated Autopoint MAU. The one million that number was actually higher at a different point in the quarter when we were able to bring it back down to just one.

Dick Costolo

Hey Mark, this is Dick. Let me, may be I’d leave in a little bit more color there that might be helpful. We obviously have a great relationship with Apple. I've talked about that at length over the course of the last two years.

On the second part of what Anthony talked about there, there was unforeseen bug in the release of iOS8 as it relates to the specific Twitter integration into iOS that’s why it was particular to us.

Once we understood the issue, we move just quickly as we could on multiple fronts to minimize its impact, but it wasn’t -- it wasn’t a one size fits off fix, which is why you've seen some of the complexity that we talked about here in brining those users back. The problem was a complex and affected different users differently.

Mark May


Krista Bessinger

Thank you. Operator, next question please?


Our next question comes from the line of Peter Stabler with Wells Fargo Securities. Your line is now open. Please proceed with your question.

Unidentified Analyst

Hi, this is [Steve] filling in Peter. Thanks for the question. Some very nice developments on the content side here this quarter, hoping you can provide an update on commerce efforts and retail initiatives in the fourth quarter.

We know that brands, left with other stories to the Twitter users, but we also think the ability to prove our ROI through e-comm and direct transactions and increased efforts in the area of attribution could play a larger role, did you comment on successes with direct response advertising, your driven communication or click through buy from Tweet.

Dick Costolo

Sure, Peter this is Dick. I’ll comment on commerce generally and then Anthony, if you have anything you want to add, chime in. We continue to experiment with buy now and offers and commerce on Twitter.

You may have seen some of the -- some of the things we're running during the Super Bowl of some of the people and events and groups participating in the Super Bowl and we don't have anything new to add on top of that or don't have anything additional to announce right now other than those continued experiments that we're running.

Anthony Noto

And as it relates to a direct response, in my prepared remarks, I talked about the fact that the SMB channel saw a second consecutive quarter of faster year-over-year growth rate and acceleration. So we're encouraged by that, but it's still very early days.

We had shared with you the number of advertisers that we had in that channel at Analyst Day. The number is growing very nicely. It's very encouraging, but it's still sub of 100,000 and so there is still big opportunity for us as it relates to DR.

Unidentified Analyst

Great. Thanks for the color.

Krista Bessinger

Thank you. Operator, I think we have time for just one last question please.


Our next question will come from the line of Youssef Squali with Cantor Fitzgerald. Your line is now open. Please proceed with your question.

Youssef Squali

All right. Thank you. Two quick questions. First what was the impact of the self service ad products over this quarter or you guys open the whole bunch in the last quarter and maybe can you comment on the mix between the direct sales and self service ads over season?

And second, the impact of -- I know this is early, but just the impact of promoted video in the quarter and kind of pricing you're seeing there?

Anthony Noto

As it relates to self serve, that exist in both the MMS channel and the SMB channel. We haven't broken out those specific revenue segments and we're not prepared to do now, but as I mentioned, they both performed very well and grew faster than the overall growth rates.

As it relates to self serve international versus domestic, domestic self service, they're bigger on absolute dollar basis than international, but we haven't broken out those segments either.

Youssef Squali

Thank you.

Krista Bessinger

Thank you all for joining us. We appreciate your time and look forward to speaking with you again next quarter.


Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a good day everyone.

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