Twitter's (TWTR) CEO Jack Dorsey on Q2 2015 Results - Earnings Call Transcript

| About: Twitter, Inc. (TWTR)

Twitter, Inc. (NYSE:TWTR)

Q2 2015 Results Earnings Conference Call

July 28, 2015 5 PM ET

Executives

Krista Bessinger - Senior Director, Investor Relations

Jack Dorsey - Interim Chief Executive Officer

Anthony Noto - Chief Financial Officer

Analysts

Ross Sandler - Deutsche Bank

Paul Vogel - Barclays Capital Inc.

Eric Sheridan - UBS

Mark Mahaney - RBC Capital Markets

Heath Terry - Goldman Sachs

Douglas Anmuth - JP Morgan

Brian Wieser - Pivotal Research Group

Anthony DiClemente - Nomura

Brian Nowak - Morgan Stanley

Justin Post - BofA Merrill Lynch

Peter Stabler - Wells Fargo

Dan Salmon - BMO Capital Markets

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.

I would now like to turn the call to your host, Krista Bessinger, Senior Director, Investor Relations. Please go ahead.

Krista Bessinger

Thanks, Avogale, and good afternoon. Welcome to our Q2 earnings call and thanks for joining us. We have with us today our Interim CEO, Jack Dorsey; and CFO, Anthony Noto.

Today, in addition to connecting with you on Twitter, we’re using Periscope to show you behind the scenes view of the call. We’ve always used Twitter to bringing closer to the discussion, but now through Periscope, we can bring you inside the room and show you around.

Periscope is the best way to watch, to share and watch live video from a mobile phone. It’s about seeing the world through someone else’s eyes and sharing and experiencing a live moment. It’s not about a overly produced and additive video. So bear with us as we read our prepared remarks and occasionally check our note. But we hope you enjoy what it’s like to be transported into the room with us today and experience how powerful we think this platform can be.

Moving on to the Safe Harbor, we’ll begin with approximately 15 minutes of prepared remarks followed by Q&A. During the Q&A, we will take questions asked via Twitter in addition to questions from conference call participants. Questions submitted via Twitter should be directed to @TwitterIR using the #TWTRearnings.

We’d also like remind everyone that we will be making forward-looking statements on this call, such as our outlook for Q3 and 2015 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.

Also 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. This call in its entirety is being webcast from our Investor Relations website and being broadcast over Periscope. An audio replay of the 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 Dorsey

Thank you, Krista, and hello from San Francisco everyone. Thanks for joining us today. I also want to welcome all of those tuning in to watch our prepared remarks and Q&A live via Periscope.

To start, I want to thank our shareholders and most importantly I want to thank everyone for who uses Twitter. And I want to note that it’s pretty amazing we’re able to follow the commentary about this call and our earnings report live directly through our service. So let’s get into it.

We’ve been very successful at monetization, with a strong Q2, delivering over $500 million in revenue and more than $120 million in EBITDA. However, product initiatives we’ve mentioned in previous earnings calls like instant timelines and logged out experiences have not yet had meaningful impact on growing our audience or participation. This is unacceptable and we’re not happy about it.

Over the past few weeks, I’ve had a chance to get a deeper understanding of where I need to focus our team. We need to do three things. One, we need to ensure a more disciplined execution. Two, we need to simplify our service to deliver Twitter’s value faster. And three, we need to better communicate our value.

Now, let me know go through each. First of all, we haven’t done a great job at aligning the entire company around our total audience strategy. We’re in the process of implementing a stronger discipline of direct ownership and accountability that clearly serves a single strategy in order to increase our reach, value to people and participation. The people, the organizations and the companies that use Twitter must come first and be at the center of everything we do.

Second, you will see us continue to question our reverse chronological timeline and all of the work it takes to build one by finding and following accounts through experiences like why you are away and Project Lightning which launches this fall. Our goal is to show more meaningful tweets and conversations faster, whether that’s logged in or out of Twitter. It’s been awesome to use these new experiences daily and I believe we should strike the right balance of recency and relevance in a way that feels really great that truly show the power of Twitter immediately. And I can’t wait for all of you to experience it yourself.

Third and finally, we have unbelievably high brand awareness globally. People all over the world know of the power of Twitter, but it’s not clear why they should harness it themselves. An answer to why Twitter must be articulated clearly and felt everywhere throughout the service. We are advancing this marketing communications work as fast as possible and ensuring it’s coordinated with the simplification of our service. Anthony will speak to this more in his remarks.

We will take the necessary time to build the service people love to use every single day. And we realize it will take some time to show results we all want to see. A greater clarity of our purpose, our objectives and putting the people that use Twitter first drives the urgency we now feel. So what should you expect from Twitter?

You should expect Twitter to be as easy as looking out your window to see what’s happening. You should expect Twitter to show you what’s most meaningful in the world to live it first before anyone else and straight from the source. And you should expect Twitter to keep you informed and updated throughout your day.

But Twitter can’t just be the best window to the world; Twitter also has to be the most powerful microphone in the world. You should expect Twitter to increase your reach and you should expect Twitter to encourage live and direct conversation and participation around whatever you share.

If we meet these expectations, and we will, Twitter will become the first thing everyone in the world checks to start their day and the first thing people turn to when they want to share ideas, commentary, or simply what’s happening.

And now over to Anthony to provide a perspective on our financial results and outlook before we open up to questions.

Anthony Noto

Thank you, Jack, and good afternoon everyone. I will discuss our financial and operating performance for Q2 and provide guidance for Q3 and the full year.

Total revenue reached $502 million, an increase of 61% year over year and $17 million above the high end of our guidance range. On a constant currency basis, total revenue grew 68% year over year.

Ad revenue reached $452 million, up 63% year over year on a reported basis and up 71% year over year on a constant currency basis. Ad revenue was driven by strong demand as well as growth in our advertiser base which accelerated year over year.

From an advertising products perspective, year over year growth was driven by promoted tweets and specifically promoted tweet features such as video, mobile app downloads and website cards.

Importantly, these features were also the primary driver of quarter over quarter revenue growth as we continue to execute on initiatives to improve targeting, measurement and creative capabilities for our advertisers with direct response objectives. Finally, the promoted video ads feature moved to autoplay late in the quarter, with some of the strictest quality standards for a monetizable event in the industry.

By channel, SMB was again the fastest-growing channel on a year over year basis, driven by growth in new customers. Our DSO channel remains our largest overall contributor. By region, international ad revenue grew 75% year over year and US advertising revenue grew 57% on a year over year basis.

Turning to monetization metrics, year over year ad revenue growth was driven by an increase in both ad engagements and cost per ad engagement. Ad engagements grew 53% year over year, driven by an increase ad load, growth in audience, and the move to autoplay video. CPE grew 6% year over year, driven by both higher pricing of our direct response ad formats and mix shift. Lastly, on ad revenue, we closed the acquisition of TellApart on May 22 and we are very happy to have Josh McFarland and his team on board.

For the five weeks it was part of Twitter in Q2, TellApart contributed $12 million of reported results. As you think about Q3, please note that we do not expect the full quarter contribution from TellApart revenue to increase sequentially relative to the Q2 run rate and it’s possible it may even decline. And to round out total revenue, data licensing and other revenue contributed $50 million in the quarter, an increase of 44% year over year.

Before moving down the income statement, I’d like to highlight a few points related to the progress we’ve made in our direct response capabilities and feature set for advertisers. Overall, we’re starting to see a positive response to improvements we are making across targeting, measurement and creative for advertisers.

First, we are seeing solid improvement in growth of spend through these advertisers driven by improved auction dynamics and higher returns. Second, objective-based campaigns were made generally available in May and the demand continues to be strong with related increase in CPE on a like-for-like basis. We will continue to iterate in these three areas and hope to see continued improvement in the coming quarters.

Moving on to cost and EBITDA, in Q2, total non-GAAP expenses were $443 million, up 50% year over year. The increase was primarily driven by headcount and related overhead costs as well as investments in infrastructure and sales and marketing. We continue to invest in our workforce across all functions [to scale] our business and our total headcount reached approximately 4,100 employees at the end of the quarter.

Adjusted EBITDA totaled $120 million, an increase of 122% year over year and also above the high end of our guidance range. Adjusted EBITDA margin for Q2 was 24% versus 17% in the prior year period and in line with that of Q1.

Non-GAAP net income was $49 million in the quarter, up from $15 million in the same period a year ago. Our GAAP net loss in Q2 was $137 million. Non-GAAP diluted EPS was $0.07 per share, while GAAP EPS was a loss of $0.21 per share.

Now, turning to our audience. As I noted throughout the quarter, MAUs in Q2 did not benefit from the same factors that benefited Q1. Specifically, we did not see organic growth, positive seasonality or growth initiatives seen in Q1. We reached 304 million MAUs in Q2, excluding SMS Fast Followers, compared to 302 million MAUs in Q1 for a growth rate of 12% on a year over year basis. Total average monthly active users, which as a reminder includes SMS Fast Followers, reached 316 million for the quarter, reflecting year over year growth of 15%.

It’s important to note that while sequential growth of SMS Fast Followers was strong in Q2, user activations are not necessarily linear for these types of users. As a result, net additions in future periods could vary. As Jack mentioned, we’re obviously not satisfied with these results. In the couple of months since assuming responsibility to lead marketing, we’ve done a deep dive into the issues driving MAUs and usage and are developing a marketing strategy and plan to address this. I want to share with you a few observations from that process.

First, we are incredibly fortunate to have over 95% brand awareness across the most important global markets. This is outstanding and puts Twitter [indiscernible]. Despite this enormous awareness, we’ve achieved less than 30% penetration of users in these markets.

This low level of penetration implies that we have only reached early adopters and technology enthusiasts and we have not yet reached the next cohort of users known as the mass market. We believe the reason is that we have failed to do two critical things. First, we have not clearly communicated Twitter’s unique value and so that’s reflected in everything we do across product, content and marketing, and as a result, non-users can ask why should I use Twitter?

Additionally, we have not delivered on meeting the new potential user’s expectations of Twitter when they try the product. Simply said, the product remains too difficult to use. As Jack mentioned, we need to simplify the product so everyone get value from Twitter faster. In short, we have not communicated why people should use Twitter, nor made it easy for them to understand how to use Twitter. This is both a product issue and a marketing issue.

We’ve seen other products overcome these same issues and successfully make their transition to reach the mass market adoption phase and we are confident we can do the same. To solve this problem is critical we define our unique value and ensure that uniqueness is reflected in our product or content or marketing.

We’re working as rapidly as we can to put us in a position to launch an integrated marketing strategy and marketing campaign before the end of 2015. We have also begun the process of hiring a CMO and are encouraged by the quality candidates that we are in dialog with today.

To be clear, however, we do not expect to see sustained meaningful growth in MAUs until we start to reach the mass market. We expect that will take a considerable period of time. What I can tell you today, though, is we will be bolder, move faster, and raise the bar in everything we do to unlock value for shareholders by ensuring disciplined execution.

Now, before moving on to the outlook, I wanted to provide an update into some key data points as it relates to the long-term opportunities we discussed at our Analyst Day. First, the ratio of DAU to MAU for our top 20 markets in Q2 2015 was approximately 44% versus the 48% we shared with you at our Analyst Day which is for the first three quarters of 2014.

Second, ad load, as measured by total ad impressions divided by total tweet impressions is approximately one-third of what we see as the long-term potential. Third, since going public, our revenue growth has primarily been driven by increased users, increased monetization via the load factor and other factors. During this period, supply has been greater than demand. However, over time, we recognized that if we do not grow audience, drive increased engagement or begin to monetize other areas such as logged out, it is possible that [indiscernible] our revenue could be impacted by limited availability for specific ad types.

Now, I’ll turn to our guidance. For Q3, we expect revenue to be in the range of $545 million to $560 million and adjusted EBITDA to be $110 million to $115 million. We expect stock based compensation expense in the range of $190 million to $200 million. Finally, we expect share count for Q3 to be approximately 675 million shares on a GAAP basis and the fully diluted share count to be approximately 708 million shares on a non-GAAP basis.

For the full year 2015, we now expect revenue to be in the range of $2.2 billion to $2.27 billion and adjusted EBITDA to be $520 million to $540 million. We expect stock based compensation expense in the range of $750 million to $790 million and we expect capital expenditures to be the in the range of $450 million and $550 million.

To wrap up, I’ve been at Twitter for just over a year. I joined the company because of the significant opportunity I believe we have to build one of the most successful companies in the world. Over the course of the last 13 months, my view in that opportunity has not changed. The unique value that Twitter provides partners, companies and individuals gives us the best aggregated real-time content in the world. Twitter is incredibly unique in that it makes other companies and partners better. That said, we have a significant amount of work ahead of us to turn that opportunity into a reality and we’re committed to doing just that for our company, our shareholders and our partners.

With that, we’d like to take your questions. Operator, can you please poll for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ross Sandler with Deutsche Bank.

Ross Sandler

Thanks for doing the Periscope. That looks great. Just two questions, one for Anthony and then one for Jack. Anthony, on the topic of supply outstripping demand in the ad business, where do you think you’ll be on the DR advertising side by the time we get to the fourth quarter? Do you think that targeting attribution and measurement will be in place? And how much do you expect TellApart to contribute in the fourth quarter based on your full year guidance?

And then Jack, on the product side, I guess, Project Lightening and the Google partnership were the two biggest things you guys have done off late. But can you give us an update on traffic and retention from these? And then do you broadly think that these are the types of initiatives that will break us into the mainstream or the mass market as you guys talked about or do we need full overhaul in the future?

Anthony Noto

First in terms of your question, DR is approximately 25% of our overall revenue, it’s the fastest growing channel that we have. DSO or direct sales, branded advertisers, still is the largest contributor. We don’t have a specific forecast for where DR will be by Q4.

And as it relates to TellApart, we have no plans to monetize the business. We continue to believe – sorry, on TellApart, contribution to the second half of the year, the only comment I’d make is I would tell you that that business is dependent on third party inventory. And we bought the business knowing that some of that third party inventory which are our competitors could go away and there would be a transition time period ultimately to put that inventory to other channels. And so that’s factored into our outlook.

I made a specific comment not to expect the Q2 revenue run rate to be up sequentially and it could potentially be down sequentially in Q3 and that was specifically because of that transition and knowing we’d have to have to make that investment.

Jack Dorsey

As it relates to your question on overall supply, I’m simply stating because our growth rate in users is slowing quite dramatically. We’re giving you a sense in our load factor that there are scenarios where we can have a significant increase in daily revenue demand and specific mix shift towards one particular type of ad category. And if that happens, we could be more constrained than we have been in the past from a supply standpoint.

As it relates to the Google deal, we are very happy with the broad relationship we have with Google. It’s not just about the distribution and search deal, it’s also about the ads deal, ads EPI as well as third-party attribution. And so we enjoy working with them.

As it relates specifically to the Google search daily integration, the deal is only partially implemented; it’s implemented in the US. There are other languages we will expand into specifically within English-speaking countries. Also it’s only on mobile, we haven’t expanded it to desktop.

Additionally, it’s focused primarily on events, celebrities, politicians and the news breaking things, and so it’s a small segment of the overall opportunity that we have with them and they have with us. So far, we’re happy with what we’re seeing, but it’s really too early to have a meaningful impact on our business or to quantify the contribution that it’s making.

Anthony Noto

And on the product side, specifically your question was around Project Lightning, this is not being launched yet. We expect to launch it in the fall. The ideas behind around really pushing up the best content found within Twitter immediately with some human editorial curation to find more context and also to help us find the best tweets. It’s something we’ve been able to play with internally and so far it feels really great. We’re discovering a lot of amazing content on the service. And it does have that immediacy that we love about Twitter, but it also has this great contextual addition as well, which tells a better story. So we’re really, really excited about the direction, but it is early and we’re going to learn from it internally and then can’t wait for you all to see it externally as well.

Operator

Our next question comes from the line of Paul Vogel with Barclays.

Paul Vogel

You guys talked about attracting the mass market, but I guess it looks like over the years, it’s been over a billion unique users created and you have about 302 million, or 304 million monthly actives right now. So A, if we think about that number accurately, how should we think about the mass market you need to attract, do you think you’ve attracted a lot of them and they haven’t stayed or do you think there’s still this huge opportunity of people who never sampled it and you need to expose them to what Twitter is? I guess, how should we think about reengagement versus new customers?

Anthony Noto

I think it’s about addressing both of those. Those that have tried to use to Twitter and found it be too hard to use and those that have not tried. The number one reason from our market research that users don’t use Twitter because they don’t understand why to use Twitter. They don’t understand the value that Jack and I both talked about and we need to clearly communicate what that value is.

The number two reason why users do not use Twitter because they don’t know how to use Twitter. And so our efforts to simplify the product, our efforts to communicate that value clearly are necessary to go to that next cohort of potential users and have them be retained the mass market. So it’s a combination of those that have tried and haven’t stayed with the service and those that have never used it.

Jack Dorsey

And just to add to that as well, we intend to not only answer that with marketing and better communication around that value, but also to meet those expectations that we set forth in the product itself. And we need to make sure that we’re telling a consistent and a cohesive story and I think that’s the biggest opportunity internally as to ensure more of that disciplined execution to think cohesively, to think from the marketing message all the way into when someone gets into our app and utilizes it and is encouraged to use it on a daily basis.

Operator

Our next question comes from the line of Heath Terry with Goldman Sachs.

Krista Bessinger

Operator, we can go to the next person in the queue please.

Operator

Our next question comes from the line of Eric Sheridan with UBS.

Eric Sheridan

Anthony, maybe just to, you talked a little bit about ad base reaccelerating in the quarter. [indiscernible] confirm that it was in terms of the number of advertising user Twitter and what might drive that? And then the second question, when you announced the CEO announcement later in the quarter, about a couple of weeks back, you reiterated the quarter being [NOI] I wanted to see if the strength in beating the numbers actually results from June being better than expected, in which case you exited with a better run rate for advertising revenue growth exiting the quarter?

Anthony Noto

So your first question in terms of number of advertisers, yes, the absolute number of advertisers on a year over year basis grew faster in Q2 than it grew in Q1. We’ve talked about the opportunity to move from tens of thousands of advertisers to millions of advertisers. We’re fortunate in that, we’re just about to pass the 100,000 advertiser mark.

And there is a couple of things that we will continue to do to grow the overall advertiser base. Clearly, continuing to provide new formats, something like autoplay video, it’s an entirely new format relative to just promote a video that will attract new types of advertisers. Additionally, mobile application download is something we launched in July, August of last year in addition to some other direct response products.

So we’ll continue to innovate as it relates to the actual formats advertisers want and that will allow them to better target their particular potential customers and get better ROI. We’ll also continue to focus on improving creative design to give them again a better way to deliver their message to the end user and therefore better ROI and then measurement. And so we’re iterating on all three of those dimensions and that’s what’s allowing us to grow the advertiser base. Our goal is to hit the 1 million to 2 million range that some of our competitor peers are at and we’re still at our first 100,000. So there is a big opportunity in front of us still.

As it relates to the quarter, what I’d say is the performance in the quarter, there was no significant changes as we entered the last month of the quarter. We continued on a trend line that we had throughout the quarter and that ultimately ended up with our total revenue of $502 million.

Krista Bessinger

And we will take the next question from Twitter, it comes from the Twitter account of [Jordon Roberts]. And the question is how does the monetization of SMS users differ from the full desktop or mobile users? And how do you plan to close the gap overtime?

Jack Dorsey

So I think it’s important to put into context what the strategy is behind SMS Fast Followers users, again these are users that are defined as individuals that have signed up for Twitter through SMS as opposed to one of our specific clients. Our MAUs excluding SMS Fast Followers have used a specific client to sign up for the product. They may access the product overtime via any client or any product like SMS.

So these specific users that we’ve coined the phrase SMS Fast Followers are users in growth markets that are largely on feature phones and they’re signing up for the product via SMS. And we’re delivering them information based on specific followers they may choose or program list that we decide to transmit to them. They are monetizable, we did monetize a few of them in the first quarter.

We’re continuing to look for ways to not just drive monetization, but more importantly drive increased engagement. We’re planning to seize in these markets today with a very complicated product. And so as those markets evolve and the adoption of the smartphone reaches these featured phone users, they will be more than familiar with the brand, they already have used it in its most complex state and will build a really tight relationship with them. And overtime, we will trade them up to a more engaged experience and on a smartphone which will monetize at much, much higher rates than what will be monetized in SMS Fast Followers format.

Operator

Our next question comes from the line of Mark Mahaney with RBC Capital Markets.

Mark Mahaney

Two questions. Jack, could you just give us an update on the CEO search and your personal plans? And then could you talk broadly about the – you talked about the MAU trends, but what about the engagement trends? And I know you’re not necessarily providing metrics, but as you look at what’s happened across Twitter, the Twitter-sphere, the engagement of the current MAUs, any notable trends there and any possibly adverse impact from the rollout of video or is that leading to greater engagement?

Jack Dorsey

I know this is a trending topic on Twitter around the CEO search, but unfortunately we do not have an update to provide today. The search committee does feel the urgency of the search, but it is doing its work to make sure that we arrive at the best answer. And we’ll have updates when there is something meaningful to share.

My focus is entirely on raising the bar of our execution and making sure that we’re focused on the right things. And as I said in my prepared remarks, it’s really around simplifying our service and making sure that people can get in and get to the value of Twitter faster and in a more immediate way, in a more relevant way and also making sure that we have a good communication of what that value is even before they get into the app. And that’s all the work we’re doing with the marketing. So I’m focused on what I believe to be the most meaningful thing and I’m spending a lot of time on it.

In terms of engagement, do you want to talk about other trends?

Anthony Noto

So as we’ve said in the past, we measure engagement in a lot of different ways. Obviously, daily active users is one measure of engagement relative to monthly active users and I just provided an update on where that was in Q2 for our top 20 markets. In addition to that, we look at other things like number of searches conducted, which is actually growing very well, the number of direct messages sent which actually accelerated. There’s not one level of engagement metric that we look at and so it depends on whether or not we’re talking about advertising usability and these other measurements that I mentioned in terms of other activities on the property and service.

The last thing I’d say about video, you referenced that, autoplay video is a win for everybody. It’s a win for the advertiser, we don’t charge them until there is a three-second viewing time with 100% viewability at that point in time. It’s easier for the consumer, they don’t have to click on the ad, they can simply fly through Twitter and see videos as they are playing and decide to stop and view or continue moving on. The engagement rates for them are actually higher than the engagement rates for our other products. And that’s also in that process.

Operator

Our next question comes from the line of Heath Terry with Goldman Sachs.

Heath Terry

I was hoping you could give us a sense of as you look at managing through this transition, how are you approaching employee retention? What kind of increase or changes at all are you seeing in turnover among the type of employees that you’re trying to hold on to? And how in the current environment for talent within the valley is Twitter dealing with attracting the kind of people that you need?

Jack Dorsey

It’s a great question. I am entirely focused on building the best team. And a lot of that focus has to be around not just particular individuals, but the best team dynamic. And great teams love shipping products to people who will use them on a daily basis. And our focus is entirely around making sure that we unblock our team from shipping products faster, in a better way, and we also have the benefit of having a brand and having a tool, having a service that truly empowers people and that aligns a lot of folks who want to come in and have an impact on that tool.

So we definitely need to do a better job in ensuring an execution discipline to allow for people, enable people to ship faster. And I think our shipping cadence has improved over the past six months and we will continue to show improvements there. But there is a lot we could do around aligning folks around our purpose and around the objectives and making sure that we have direct ownership and accountability. That is a work and the discipline we are putting into the organization right now.

Krista Bessinger

And we will take the next question from Twitter; it comes from the account of [Nick Sorello]. And the question is does Twitter plan on integrating Vine, Periscope and Twitter into one app?

Anthony Noto

It’s a great question, Nick. We are always looking for opportunities to provide integration between all of our apps. We have the benefit of having some pretty amazing and engaging brands in Twitter, in Vine, and in Periscope. And we certainly want to make it easy to broadcast live, or to broadcast a six-second video from whichever app you are in. And we’re always looking for those opportunities. But nothing specific to update around today, but our goal is to make that easier and to provide more connection between all three.

Operator

Our next question comes from the line of Douglas Anmuth with JP Morgan.

Douglas Anmuth

Jack, you mentioned Project Lightning coming in the fall, do you have a similar timeframe for moving beyond reverse chron order and can you talk about just some of the key considerations and challenges there as you think about doing that? And perhaps Anthony can give us an update on the early impact of DoubleClick Bid Manager.

Jack Dorsey

We actually have an initiative in the app today which is why you are away, which starts to break down the reverse chronological timeline and orders things by relevance, orders by relevance and it’s showing some good early results. This is an early product and we need to learn from it, but it is – it does point to the direction that we want to see more of – and again, we need to balance recency with relevance. I think Project Lightning does a fantastic job at that [indiscernible] is doing a great job at that as well. But there is a whole lot more work to do there.

In my own experience of using Twitter and my timeline now, we’re definitely seeing a lot more value at the top of my stream and definitely favouriting and retweeting and replying for those tweets right at the top, so that relevance is having an impact and right now we are finding the balance of how much push-outs versus the recency of the reverse chronological timeline. But we continue to show a questioning of our fundamentals in order to make the product easier and more accessible to more people.

Anthony Noto

And then, Doug, your second question is related to DoubleClick, there is two components to that deal. Obviously, third-party attribution and then what we call the ads API. Third-party attribution we haven’t introduced yet, we hope to do that in the fourth quarter, by the end of the year. We are ready to go on that as quick as a partner is in. It’s really an important element of our DR business and that there is some really large direct response advertisers especially in the financial services space where these partners [indiscernible] third-party attribution from DoubleClick where they have been with us. So we are excited about bringing that by the fourth quarter.

I would say the same thing about DoubleClick Bid Manager being a fourth quarter event. And since I’m talking about the fourth quarter, I’d also just indicate everyone that the TellApart business is something that will have this year for the first time in the fourth quarter and that is retail focused business on the retail vertical, which are really a big fourth quarter bid. So it’s something we have to consider.

Operator

Our next question comes from the line of Brian Wieser with Pivotal.

Brian Wieser

First, I know growth was stable in the US for the quarter, but I was wondering if you can provide any color around churn. And separately, I was wondering if you could talk about traction or just ongoing progress with MoPub and whether you have any sense where your market share is our ad serving, mediation or marketplace capabilities.

Jack Dorsey

In terms of retention, our retention rate for the quarter was the same as it was last quarter. So there is no change there. And then as it relates and to the MoPub business, we don’t break it out separately, what I would tell you is that the growth rate of the MoPub ad exchange business had a similar growth rate to our overall advertising business. We don’t break out the market share.

Krista Bessinger

We will take the next question from Twitter. It comes from the Twitter account of [Joe Elk], who asks how do you simplify the UX without degrading the feature set of power users?

Jack Dorsey

This is a great question and something we are very mindful of and one to find the right balance. First and foremost, we all inside the company use the product on hourly, it’s not minimally basis and there is a lot we love about it. But even for us as power users of the service, there is a lot we can do to increase the relevance of what we’re seeing.

And if we’re increasing the relevance of what we’re seeing, we are also increasing the potential of the relevance for people who are not familiar with the traditional Twitter models. We need to make sure that we provide a really graceful and unfolding path to get to more value faster for anyone that comes into the service. And that means they don’t have to consider what Twitter is, they just have to consider what they are there for.

And we think Project Lightning is a good example of showing this. While You Were Away is a good example of showing this. And there’s opportunities where we can place this in our traditional model such as at the top of the reverse chronological timeline; in the Project Lightning case on a separate tab so that you can go to that tab and you can actually discover new content and discover new events and discover what’s happening in the world easily. But also as you follow and as you work to build that following for your reverse chronological timeline, you can go back there as well.

And this is something we want to make sure that we continue to optimize and make sure that we’re speaking to the needs of our more sophisticated folks because it is meaningful, but it is a fine balance. We think search is a big part of this as well. We do see a lot of folks who are familiar with the service use search in really compelling ways and we want to make sure that we’re making that easier and easier as well. So more relevance benefits everyone, but at the same time we need to make sure that we’re balancing that with what we’re known for in terms of recency and live and that roar of the crowd feeling.

Operator

Our next question comes from Anthony DiClemente with Nomura.

Anthony DiClemente

I have one for Jack and a couple quick ones for Anthony. Jack, philosophically, as you look to grow the audience at Twitter, just wondering are all users treated equal, such that you just do whatever you can to grow the audience as quickly as possible or in your mind are there types of users either by geography or by demographic, by cohort that you would focus on organizationally given their monetization capability over the long-term and then just wondering if that will inform where and how you guys roll out your marketing campaign that you mentioned?

And then Anthony, I just wonder to what degree was an increase in the load factor a driver of the reacceleration in ad engagements in the quarter? I know that in your prepared remarks, you talked about ad load of Twitter being a third of its long-term potential, but just wondering if there’s any interplay or any dots to be connected between load factor and engagement in terms of the DAU over MAU numbers that you cited. And then finally, can you just talk to us specifically about MAU trends into the third quarter?

Jack Dorsey

I’ll kick it off. I would say that Twitter is unique in the sense that it has a potential to really reach a global audience and every individual in the world and provide value to every individual in the world. And we certainly have content and tweets that will be relevant to every particular person in the world for different reasons.

I think one of the goals we should always be mindful of is how do we not just increase that reach, but also increase participation. How do we show a path towards participating more with the tweets than participating more with the service and enabling more and more conversation on the platform.

One of the things that’s really unique about what we have is we have some of the best live content in the world, but at the same time we provide a venue for conversation around it. And that venue is both in public conversation and also in private conversation through direct messages. So we certainly want to amplify that and we think there’s value all along the path from just purely consuming tweets and reading tweets all the way to engaging and then ideally tweeting yourself and participating in those conversations more deeply. So that’s what we’re focused on doing and we believe there’s a whole lot of value there.

Anthony Noto

One additional thing I’d say, Anthony. You asked a question how that focus impacts our marketing plans. We do LTVs, lifetime value analysis, on users by market. We’ve identified eight growth markets, we’re focused on those growth markets based on their relative value and we will invest in marketing in each one of those eight growth markets based on lifetime value. And we’ve been doing that since last year when we started performance-based marketing.

Your second question, you asked about load factor and ad engagements. Load factor increased sequentially and year-over-year. I gave you an update on where load factor is versus our long-term opportunity to give you a sense for that. Ad engagements increased both due to load factor, but also the mix shift towards autoplay video which is a net positive.

As it relates to the MAU to DAU ratio and other factors, what I’d say is the DAU to MAU ratio has gone down over the time period that I articulated, because we’ve grown MAUs faster than DAUs and we have not historically focused on driving daily active user growth. And that’s something in 2016 that we will consider more.

As it relates to MAU trends in the third quarter, listen, we wanted to give you a very clear articulation of the opportunity we have in front of us. It’s an opportunity to close the gap between penetration at less than 30% and awareness at 95%. And we couldn’t be more excited about the opportunity to really leverage what we think is the best real-time content in the world to simplify the product so that value could be achieved and then to stream from the building tops on that value proposition and bring people to the product.

But in the near term, our organic growth is going to be very low as it was this quarter and as I think about Q3 it’s marginally better, but I wouldn’t want you to or anyone else to expect a change in our growth rate relative to what you are seeing in this quarter. I think you’ll see that for a while and that was my point.

Operator

Our next question comes from the line of Brian Nowak with Morgan Stanley.

Brian Nowak

I have two. Anthony, is there any way you can quantify or help us better understand how the CPX transition impacted the growth and pricing versus ad engagements in the load factor in the quarter and how do see that flowing through in the second half of the year in the guidance?

And then the second one, Jack, just going back to the MAU deep dive that you talked about, what has surprised you most since you’ve been getting under the hood on the MAU base and the MAU growth so far and which demos or age groups do you see as the biggest opportunity or the lowest hanging fruit to go after to really grow the MAUs from here?

Anthony Noto

In terms of your first question, objective-based pricing you referred to as CPX, that became generally available to everyone in May. The beta on it was pretty broad. So it’s now generally available to everyone. We saw nice improvements in CPE. We had articulated to you last quarter that we were driving the engagement metric lower in the funnel, the acquisition funnel by giving advertisers a specific vehicle that they were optimizing for, i.e., an objective.

And so we saw nice improvements in CPE this quarter to get us back to our overall CPM where we would have wanted to be after making that investment. So we are encouraged by the trend in CPE as well as the improvement in ROI for the advertiser. In the second half of the year, I would say our outlook reflects the combination of that factor as well as other initiatives we have as it relates to targeting creative and measurement.

Jack Dorsey

No real surprises. They’ve been fairly close to the business. Again, as I’ve spent the last few weeks really considering what’s in front of us and what the present state is and the future, it’s really around lining our execution and simplifying the service and making sure we’re communicating the why of the service more. But we are communicating that to a very, very broad base.

We do think Twitter and everything found within Twitter has mainstream appeal and not targeting particular demographics. One of the benefits is that we do carry every type of event in the world. So you will definitely see us amplify more of those events as they happen and they will certainly target into particular demographics around those events, but we’re going to make that call as those events happen and as we can really understand how we can share that value and then immediately get people into the service and realize it too.

Operator

Our next question comes from the line of Justin Post with Merrill Lynch.

Justin Post

Two questions. My first is either for Jack or Anthony. Just your strategy to get Twitter to the mass market, I guess what data or what gives you confidence that Twitter is right for the mass market? Obviously a lot of us on this call use Twitter, but just thinking about the mass market use case, what gives you confidence there?

And then in the second half of the year, if usage and user growth is going to be somewhat slow relative to prior years, what is really going to drive the quarter over quarter revenue growth besides just normal seasonality? What are some of the things you’re excited about for the second half revenue drivers?

Jack Dorsey

In terms of your first question, Justin, the reason why we’re so confident that we can reach the mass market is there’s two things that are required to get there. One, articulating a clear value, what Twitter provides, why should people pick Twitter versus all their other choices. And two, delivering that value and their expectations of the value when they get to the product.

What we start with is great brand awareness. Second, we just have to clearly communicate that value. Third, what we have that people want is this best real-time content in the world and ability to participate with our real-time content. So there’s not an asset that we need to go get. There’s not a component or value that we have to need to go get. We know we have the value that they want. It’s one, communication, which Jack and I mentioned, and two, it’s about making the product simple and easy to use. And I think you’ll see from Project Lightning that we’ve made it very simple.

Users will show up. The content will be curated. It will be curated by editors that are picking the best of the tweets that we have on a daily basis which is a massive number of pieces of content of what’s most relevant in the world and we will give individual consumers an opportunity to see the world now on Twitter. And so we have to do two things. One, clearly state the value, and two, organize and deliver in a way that is an experience that they’ve experienced at other places.

We’ve seen other products that have had the issue crossing the chasm make that transition quite easily. E-commerce and Amazon is one example. Cell phone is another example. But there are many other companies that haven’t been able to do it because they had a structural problem. In the e-commerce space, there has been some brands that really only a third of the people that buy online buy from these really well-known brands. Why? They don’t own the product. They don’t own customer service. They don’t own pricing. Those are the value drivers for e-commerce. Best selection. Best price. Best service.

We have the values that will cause someone to want to come to Twitter versus everyone else. Best content, ability to participate, ability to see the world. We just have to simplify that message and give it to them in a foolproof way where they just have to show up. So we don’t have any concerns if there’s a structural issue. We just have to execute with discipline and we will unlock that value for you as shareholders.

Justin Post

And then on the second half drivers of revenue, what are you kind of most optimistic about?

Jack Dorsey

We’re very excited about having the TellApart business which will really focus on DR and the retail category which we have been underpenetrated in. I’m also excited about the marketing that we will do in the second half of the year that is implied in our guidance. For the first time, we will have an integrated marketing plan in the US behind the launch of Project Lightning which will communicate that clear value I just talked about. And we’ll see how well the product delivers against that.

Additionally, we talked about continuing to expand the relationship with Google from a distribution standpoint to other countries with English language and to other platforms like the desktop. And then third-party attribution is another contributor to that. We also have some product roadmap plans as it relates to monetization and specific things focused on targeting creative and measurement. And really lifting, raising the bar in that area to better meet the needs of advertisers. So a lot of stuff in the second half as it relates to both users, partners and advertisers.

Krista Bessinger

We will take the next question from Periscope. And the question is, how do you plan to monetize Periscope, which is the next big thing?

Jack Dorsey

I definitely agree that Periscope is the next big thing. But we have no plans to share around monetizing it just yet. One of the amazing things about what we’ve done with Twitter and what the team has really pushed is the monetization fits perfectly within the service and actually makes the service better. So we’re always looking for opportunities to do more of that and we would hold the same high bar to what we do with Periscope and with related properties like Vine.

Operator

Your next question comes from the line of Peter Stabler with Wells Fargo.

Peter Stabler

Two, if I could. First of all, the 100,000 advertiser count is pretty impressive. I think the last time you gave it to us, it was around 60,000. So at a high level, two ways to increase your ad revenues, one, bring in new customers, two, grow your wallet share of existing customers. Wondering if you could comment on the later? Those who have been on the platform for a while, how are you doing there in terms of growing your wallet share. And then secondly, wondering if you could give us an update on commerce initiatives and what kind of consumer appetite you’re seeing for transactions on the platform?

Anthony Noto

In terms of the number of advertisers, we’re fortunate that we’re benefiting from the growth in both, both the number of advertisers and spend per advertiser. If you think about the pyramid at the top of the pyramid, our branded advertisers, what we refer to as a DSO channel, we’re really fortunate that we cracked the nut on how to deliver value to DSO or branded advertisers very early on. So it’s our most mature channel. But we’re still seeing growth there in both the number of advertisers as well as spend per advertiser.

At the bottom of the pyramid revenues being driven more by penetration of these new SMB advertisers than it is [buying rate]. But over time, we do think we’ll also have the benefit of an increased spending rate, so to speak, not buying rate, by the advertisers as it relates to SMB. So it depends on what type of advertiser you’re talking about that’s predominantly driving it. But we are overall benefitting from both.

Jack Dorsey

On the commerce side, it is still super early for this product, but a lot of our focus has been around making tweets more relevant and delivering more relevant tweets faster to people. And as we do that everything within the action, within the tweet action benefits including something like commerce.

Operator

Our next question comes from the line of Dan Salmon with BMO.

Dan Salmon

Jack, you recently launched a product around event targeting and I know that’s been an area where advertisers take a real long look and use Twitter a great deal. It looks like that helps automate that process around some of the bigger events, World Cup, Olympics and otherwise. Could you maybe tell us a little bit more about the roadmap you see for that product? And in particular, is it the type thing where if an event is more of a breaking event where it might be able to be applied and help advertisers automate that process a little bit more where they’re trying to get engagement around that specific event and subject?

Jack Dorsey

So one of the biggest things that we’ve always seen on Twitter and be really successful on the platform is around events and the engagement around events and certainly we’re going to make sure that we’re building more and more tools to target, to allow people to target these events faster. But these are still super, super early and something we need to learn a lot more from.

Dan Salmon

If I could just have one quick follow up on TellApart for Anthony. The focus on it so far has been around increasing the DR demand on Twitter. Take a step back, do you see that as a tool that advertisers are going to be able to use more broadly as a buy side tool? Obviously, you mentioned some move away from some inventory from competitors, but is that just simply a DR tool to buy on Twitter as you see it or is it a broader one that advertisers are going to be able to use across the web?

Anthony Noto

First what I’d say is TellApart is a great standalone business and that’s the first question we have to answer when we acquire a business. Josh and his team have built a really successful standalone business. It’s been primarily focused on the retail category.

All I’m simply saying is when they source inventory, they source it from a number of different platforms. It has historically not been sourced from Twitter. And so it’s important that as we think about our outlook and as we integrate some of that demand into the Twitter platform that we understand the value that’s created and there’s an investment we’re going to make in the third quarter to start that process and it’s not all completely in our control. So that’s reflected in our guidance and that’s why I made the comment specifically about the 3Q trend versus 2Q trend.

Longer-term, the reason we bought the business was, one, it is a great standalone business, but two, it gives us increased capabilities in the DR category in retail, but we could leverage the broader platform of inventory that we have at Twitter, but we also could leverage the broader platform of demand that we have at Twitter to expand geographically TellApart’s business and also expand in vertical categories. So it’s a holistic strategy. It’s not just about using it as a DSP into Twitter, that’s one small component.

Krista Bessinger

We have time for one last question which we will take from Twitter and then turn it over to Jack for his closing remarks. The last question from Twitter comes from the account of [David Clinch] who asks how much of a role will human curation play in new Twitter products and services?

Jack Dorsey

It’s a great question and something we’re still learning and playing with internally and there’s going to be a balance. The general answer is where it matters and we certainly are going to benefit from that curation and from people looking at the content and looking at our tweets and making sure that we’re constructing the right experience around it, but we’re still finding that balance and we’re going to do our work to make sure it feels great before we launch this.

Krista Bessinger

And then back to you Jack for your closing remarks.

Jack Dorsey

Thank you all for your time. In closing, I’ve never been more sure of the value Twitter brings to people and to our world. People trust us to carry some of the most important conversations, commentary, critique, events, ideas and questions in the world. I’m focused on raising the bar of our execution so we can serve people better and faster and build a company that empowers generation after generation. I want to thank you all for your time, your support and we’ll see you all on Twitter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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