Twitter (TWTR) Q1 2017 Results - Earnings Call Transcript

| About: Twitter, Inc. (TWTR)

Twitter, Inc. (NYSE:TWTR)

Q1 2017 Earnings Call

April 26, 2017 8:00 am ET

Executives

Krista Bessinger - Twitter, Inc.

Jack Dorsey - Twitter, Inc.

Anthony Noto - Twitter, Inc.

Analysts

Colin Alan Sebastian - Robert W. Baird & Co., Inc.

Ross Sandler - Barclays Capital, Inc.

Brian P. Fitzgerald - Jefferies LLC

Brian W. Wieser - Pivotal Research Group LLC

Rich Greenfield - BTIG LLC

Daniel Salmon - BMO Capital Markets (United States)

Ronald V. Josey - JMP Securities LLC

Eric J. Sheridan - UBS Securities LLC

Heath Terry - Goldman Sachs & Co.

Peter C. Stabler - Wells Fargo Securities LLC

Justin Post - Bank of America Merrill Lynch.

Operator

Good day, ladies and gentlemen, and welcome to the Twitter First Quarter 2017 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 over to your host, Krista Bessinger, Senior Director-Investor Relations. Please go ahead.

Krista Bessinger - Twitter, Inc.

Hi, everyone, and thanks for joining our Q1 earnings conference call. We have with us today our CEO, Jack Dorsey; and COO and CFO, Anthony Noto. We hope you've had a chance to read our shareholder letter which was published on our Investor Relations website just a little while ago. Like last quarter, we'll begin with just a few prepared remarks before opening the call directly to your questions. During the Q&A, we'll take questions asked via Twitter in addition to questions from conference call participants. Questions submitted via Twitter should be directed to @TwitterIR using the #TWTR.

We would also like to remind everyone that we'll be making forward-looking statements on this call such as our outlook for Q2 and the full year 2017 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. Also, the forward-looking statements on this call are based on information available to us as of today's date and we disclaim any obligation to update any forward-looking statements except as required by law.

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

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

Jack Dorsey - Twitter, Inc.

Good morning, everyone, and thanks for joining us. Before we take questions, I want to quickly highlight a few things. First, we're really proud to report accelerating growth in daily active usage for the fourth consecutive quarter, up 14% year-over-year. Our goal is to build a service people love to use daily and we're seeing that growth in the numbers. Second, we committed to reducing abuse on Twitter and we've made significant progress. In the past two months alone, we've released a series of product features and machine learning models, and as a result, we are seeing a significant decrease in people experiencing abuse on Twitter as measured by reports and blogs. There's lots more to do, but we're on the right path.

Third, we continue to ship bigger improvements to Twitter and faster. We made it easier to follow conversations, created a new experience named Explore to make it easier to follow topics and interests, launched Twitter Lite to make Twitter accessible to more people around the world, published our developer roadmap with plans to unify all of our APIs, and we introduced new Direct Message APIs.

Fourth, while we continue to face revenue headwinds, we made progress refocusing our revenue products on our strengths and began talking with advertisers about the return on investment gains from our daily active usage growth and better pricing. We believe this continued focus should result in positive revenue growth over the long-term. And finally, we remain focused on making progress towards GAAP profitability. In Q1, we achieved our highest adjusted EBITDA margin to-date as we continue to create greater operating efficiencies. This past quarter has given us a lot of confidence in our focus and execution and excitement for our path ahead.

Thank you for the support along the way. And now back to Krista for questions.

Krista Bessinger - Twitter, Inc.

Great. Operator, we're ready to take questions, if you could go ahead and take a poll.

Question-and-Answer Session

Operator

Certainly.

Krista Bessinger - Twitter, Inc.

Great. Thank you very much. And it looks like our first question comes from Colin Sebastian at R.W. Baird. Colin, please go ahead.

Colin Alan Sebastian - Robert W. Baird & Co., Inc.

Great. Thanks. Good morning and congratulations on the quarter. I guess, first off, curious which product improvements seemed to have contributed the most to the increase in daily usage? And more specifically, is there a way to segment the impact from live sports and other streaming content in bringing new users to the platform?

Anthony Noto - Twitter, Inc.

Hey, Colin. Anthony Noto. Thank you for your question. Let me kick off with an overall perspective on the daily active user growth and then turn it over to Jack to specifically talk about the product. Audience growth in Q1 was driven primarily by organic growth, reflecting some seasonal strength followed by product improvements and marketing. Contributions to growth from product improvements importantly have been growing steadily for the last four quarters, and Jack will talk more about the drivers there in a second. There also is some evidence that we benefited from our new and resurrected users following more news and political accounts in Q1, particularly in the U.S. That's a really positive thing.

As you know, we believe Twitter is the best at showing what's happening in the world and what's being talked about. And having the political leaders of the world as well as news agencies participating in driving that is an important element to reinforcing what we're the best at. That said, our growth is broad based. We saw strong growth worldwide. DAU growth accelerated in seven of our top ten global markets, and the remaining markets in aggregate, they also accelerated. Let me turn it over to Jack to give you a perspective on the specific product impacts on DAU growth.

Jack Dorsey - Twitter, Inc.

And as we have been talking about for a while now, we have been really focused on our core use case which, as Anthony said, is making sure that people go to Twitter and they see what's happening immediately. And the biggest change we made last year was changing the timeline to be more relevance-ranked instead of strictly reverse chronological, and focusing on the timeline continues to produce results. So by focusing on the timeline, we are displaying a broader set of tweets now from a person's network, and we're applying more deep learning models to make sure we're showing more relevant tweets first.

The other area we have been focusing a lot of our attention on is notifications and making them a whole lot more relevant. And, again, we've been using machine learning better to make sure that when people are outside of the app, that we're notifying them with something that really matters, bringing them back to the app and increasing engagement so they can get a better experience. So, this quarter actually marks products' largest contribution to growth to-date as well.

Anthony Noto - Twitter, Inc.

And then, Colin, on the second part of your question as it relates to sports and other content, we're really encouraged by the success that we've had in our live premium content both in the product quality, the broadened selection, and the audience aggregation and monetization. In terms of content, we released in the shareholder letter that we had 800 hours of live streaming programming in Q1, up from 600 hours in Q2, and again that's across sports, e-sports, news, and entertainment. Our unique viewers of that content grew meaningfully over 30% sequentially to 45 million. When we measure the impact of different actions that we take on DAU growth or MAU growth, things fall in one of three buckets.

First, causality. We can measure causality in product improvements and the impact they have on DAU and in marketing through holdbacks and other A/B testing. We also use different analysis to understand correlation, and so one of the reasons why we can point to organic growth and seasonality is because the correlation is based on time series and the time of year. And the third bucket would be things that are not specifically correlated or identified. And so we cannot causally measure the impact of lives because it's available for everyone, it's not a holdback. But the evidence by show on an aggregate is really positive and something we will continue to invest in meaningfully to continue to drive more content, continue to drive bigger audiences for our content partners and, of course, deliver for our advertising partners.

Colin Alan Sebastian - Robert W. Baird & Co., Inc.

Okay. Thank you.

Krista Bessinger - Twitter, Inc.

Great. And our next question comes from Ross Sandler at Barclays. Ross, please go ahead.

Ross Sandler - Barclays Capital, Inc.

Great. One for Anthony and one for Jack. Anthony, on the owned and operated ad revenue, the letter mentioned that the trajectory picked up from the February call to today. So, can you just talk about some of the changes that you're making? And are we back to flattish or even positive growth as we enter the second quarter? How should we think about owned and operated? And then, Jack, if you look at the product roadmap and what you just mentioned on some of the changes in the timeline, do you feel like this is something that can just kind of incrementally build upon itself and that the double-digit growth you're seeing today is kind of the new trend, or are some of these changes driving a pretty nice impact today but may not be sustainable long term? How do you think about kind of the overall trajectory of DAUs from here? Thank you.

Anthony Noto - Twitter, Inc.

Thank you, Ross. So, the first thing I think that's really important to understand and something that we'll continue to benefit and talk about over the next several quarters is just the four consecutive quarters of DAU growth with an acceleration again this quarter to 14%. That's on a year-over-year basis. That's very positive and lays the groundwork for us to continue to go to our advertising partners and take them through the improved ROI story of Twitter, both because of the acceleration in audience growth and a significant decline in pricing by over 60% on a year-over-year basis, and that's broad based, not just due to mix shift.

The current revenue trends that we're reporting reflect budget decisions based on trends in audience and pricing of 6 months to 12 months ago when we were not seeing the significant acceleration in user growth or the more than 60% year-over-year decline in cost per engagement. The good news is we've been out aggressively telling the story of that improved ROI. Early feedback has been positive. In fact, we signed 32 additional upfront deals since our last earnings call. While these represent a small portion of our total expected revenue, we're seeing momentum in the number of upfront commitments signed.

That said, advertisers have long allocation processes that take 6 months to 12 months to turn around, so we have a lot of work left to do. As it relates to the trend in the quarter specifically, we did see an improvement in stabilization in the back half of the quarter. I would attribute that directly to the execution of our team going out and communicating the improved ROI story to advertisers, and that's best reflected in the significant improvement we saw in the number of deals that we've signed.

As we think about the outlook and we only give EBITDA and EBITDA guidance, but you can calculate a broad range of revenue, you'll see that range shows a similar trend to what we saw in Q1 with slight deterioration. Based on what we know today, we do not have visibility on revenue growth improving from the current trend in 2017. The factors that would impact that again would be the execution of us delivering a better ROI story. Two, on the negative side is we'll continue to face incremental headwinds in each quarter throughout the year from products that we de-emphasize or discontinued completely, and of course any success we may get from new revenue products or new channels of distribution – new channels of demand that we're working on, those have obviously low visibility until we launch them.

And then in terms of your question on the growth of DAU, let me tag team with Jack on this. We've said in the past that our growth in DAU is based on foundational changes that will continue to compound on top of themselves, and so we expect the changes that we make to continue to have an impact on new users, resurrected users that come back, and then of course our daily active users that will continue to have a higher and higher frequency. Let me flip it over to Jack to talk about some of the product changes we made in the quarter that we'll evaluate as we go into Q2 and beyond.

Jack Dorsey - Twitter, Inc.

Yeah, in terms of the roadmap ahead, so as I said earlier, the focus on the timeline and notifications is really important and really strong to our use case. So, we've seen for ten years that people go to Twitter first to see what's going on and to see what's happening and what people think about what's going on and what's happening. We want to get to a place where we're the first place they hear of something. Twitter is the first place they hear of something. And that means that we need to get really good at connecting all the dots and all the data that we have to make sure that we're building something that's really relevant so that when we notify someone, it's something that is deeply impactful to them, is relevant, and is important. And they go into an experience where they can dig even deeper and see what's really happening.

In addition to that, we're going to make sure that we're creating new experiences that bring together some new ideas. And the most notable recently is the Explore tab, which we launched on iOS. And this is organizing a new way of following topics and interests on Twitter by bringing together trends, moments, search, and the best of live video. So this is a way to very quickly see what's going on, but instead of organizing by the accounts you follow, by the topics and the interests that are happening right now. And we're seeing strong adoption and repeat usage here with 40% of Twitter daily active visiting the Explore tab and approximately 60% of those people coming back the next day.

Conversation is also really important part of the platform. We made a move recently to simplify the way people converse on the platform, making it easier for them to follow. Much more work to do here, but in our test of this new experience, we found that people engage more with conversations on Twitter as a result. So, we're really happy with that, and we're learning a bunch in terms of how to evolve the product going forward.

Anthony Noto - Twitter, Inc.

And, Ross, the other thing I would just add as it relates to the product changes that Jack just talked about in our outlook is that we're not providing an outlook for MAU or DAU growth in Q2, but I would note that Q1 is typically our seasonally strongest quarter for MAU growth, and historically we have not benefited from seasonality in Q2, making the growth there more dependent on the product and marketing drivers that Jack just discussed.

Ross Sandler - Barclays Capital, Inc.

Great. Thanks, guys. Super helpful.

Krista Bessinger - Twitter, Inc.

Thank you. And our next question comes from Brian Fitzgerald at Jefferies.

Brian P. Fitzgerald - Jefferies LLC

Thanks, guys. Looking at your EBITDA beat, we saw good OpEx control, especially around R&D as a percentage of total to the lowest levels we've seen in a while. Where do you think head count and engineering is going to for the rest of the year? Is this level of R&D sustainable with your product pipeline? Thanks.

Anthony Noto - Twitter, Inc.

Thank you, Brian. We were able to achieve record adjusted EBITDA margin in the quarter despite the headwinds in revenue, and we'll continue to make sure that we drive efficiencies throughout the year in our cost base. We will have some incremental investments in Q2 in marketing and head count. We do have plans to increase our head count steadily throughout the year, and the major focus area is in engineering product and design. We will have selected key hires in other areas, but that is the number one focus for head count investment as it's the engine that fuels our growth.

But we'll remain very efficient and disciplined on our expense base, and balancing that investment versus growth and long-term favorable trends in the things that will be the greatest determinant of our value over the long-term, which is audience growth, audience engagement and then monetization.

Brian P. Fitzgerald - Jefferies LLC

Great. Thank you, Anthony.

Krista Bessinger - Twitter, Inc.

Thank you. And our next question comes from Brian Wieser at Pivotal Research. Brian, please go ahead.

Brian W. Wieser - Pivotal Research Group LLC

Thanks for taking the question. You mentioned 45 million unique viewers of live premium video, up 31% versus 4Q. How much of the user growth could be attributed to the live premium video streams? And maybe relatedly, how are you thinking about content costs as a percentage of revenue or on any other dimension going-forward given what sounds like a much more of an emphasis on aggregate and live video and premium video in particular on the platform?

Anthony Noto - Twitter, Inc.

Thanks. Thank you, Brian. First, we couldn't be happier with the performance of our live streaming content strategy. The product quality gets great rave reviews. The advertising product itself is doing incredibly well with 95% completion rates and sound on in a familiar format for advertising partners, and it's differentiated unlike any of our competitors. It's not just mid-roll advertising but it's with premium content within context, so endemic advertisers can really participate in a unique way. And they're reaching younger audiences. 50% of our audience in live streaming is less than 25 years old and over 50% is international. So, it really is a great product for our audience on the platform as well as advertisers and of course content partners.

In terms of causality of driving MAU or DAU growth, as I mentioned before, we're not doing a holdback on live video and so we can't do an A/B test to measure causally what happened. I can tell you by individual event, we're really pleased and we're seeing great progress. As an example, we had the red carpet show for the Grammys. Music is a very big category, part of entertainment on Twitter. We set a record for any entertainment live streaming or sports live streaming that we have done since September at 5.1 million unique viewers of the red carpet for the Grammys.

And we think that's a testament to a couple things. First, we have 800 hours of live streaming product on the platform that starts to build habit and it starts to build ways to drive natural discovery. Second, we have a passionate audience about music. Some of the accounts that are the largest followed accounts are music accounts and global musicians. And then third, we're just getting better at being able to drive discovery and there's a long roadmap that will make that better and better every day. So by individual show in terms of audience, in terms of the demographics of the audience, in terms of advertising, we've been pleased across the board. And that has allowed us to be very happy with the overall results on audience revenue and costs.

As it relates to your specific question on the cost side of the equation, obviously we had 800 hours of live streaming content in this quarter and we had record margins and so our P&L captures the benefits of all of that investment including the cost. We're building on the back of a very successful initiative that our team started four years ago, which was highlights and clips in our Amplify program. And that business was built on the back of revenue splits and we've copied that same model in live. And in fact, most of the live deals we do also come with an ability to leverage Amplify type of content and so the two have become very synergistic and then help both in revenue and on the cost side of the equation. But so far we've been able to do the deals that are economically favorable to us and also to our content partners and deliver value for our advertisers, so we'll continue to go down this economic path structure that we have.

Brian W. Wieser - Pivotal Research Group LLC

Okay, great. Thank you very much.

Krista Bessinger - Twitter, Inc.

Thank you. And our next question comes from Twitter from the account of David Clinch. And he asks how do you plan to monetize user-generated content broadcast via Periscope and distributed on Twitter?

Anthony Noto - Twitter, Inc.

So, two important points to make here. First, Periscopes that are captured through the Periscope app do get distributed on Twitter depending on the user settings. Second, the content that's on Periscope is wide ranging. It's from well-known brands and news organizations to individual people that are capturing live video content of things that are close to them or locally oriented. We can monetize that content with pre-roll advertising as we do with our other live video. We put that into the category of instream advertising. It's an important element of incremental content on our platform for live.

We've talked about our live strategy to be a function of leveraging nationally and globally recognized content to build awareness of under-served content. And what fits into that bucket of under-served content is passionate interest areas that may be niche across Twitter, but it's also content that is generated by users either on Twitter, through the Twitter Live compose feature or through Periscope. So, it's a nice complement to our overall live strategy and an important element of filling out the pyramid of high-end premium content all the way down to user generated content and the torso in between.

Krista Bessinger - Twitter, Inc.

Thank you. And our next question comes from Rich Greenfield at BTIG. Rich, please go ahead.

Rich Greenfield - BTIG LLC

Hi. Thanks. You're going into your first ever newfront/upfront presentation on Monday. Obviously, the DAU story bodes well heading into that. Could you comment on engagement? I mean, are you seeing the same type of double digit move in total time spent during engagement, however you kind of measure time spent on the platform? And then when you think about that presentation, like, what is the essential – could you just drill down what's the pitch to advertisers? And have you seen or can you talk to any new brands that have come on to the platform as they've seen the user growth over the past quarter? Anything you could speak to on that would be really helpful.

Jack Dorsey - Twitter, Inc.

Sure. Thank you, Rich. In terms of engagement, we have talked periodically about user active minutes in terms of the measure of time spent as well on tweet impressions. They are both up in the quarter. We're not sharing specifics on the UAM or impressions growth. We have provided that periodically in the past to give additional context when people have been asked or when there have been inflection points. We believe our most important engagement metric based on our product roadmap is driving daily activity and the measure of that is daily active users and obviously that's improved quite meaningfully back to mid-teens growth.

And we'll continue to give you updates from time to time if there are inflection points or controversy, but we're really pleased with the outcome that we've seen in those two measures. As it relates to the newfronts in our pitch to advertisers, we think we have a very unique pitch to advertisers. We think we're the best at driving brand perception and the reason why we think we're the best at driving brand perception is first and foremost Twitter is what's happening, what's being talked about and that's incredibly important.

Second, we have a platform of influencers. Third, our audience is in a discovery mode. And the combination of those three things allows our brand to be part of what's happening. And in our letter, we wrote about that very value proposition to advertisers and the fact that Wendy's was a great example of actually becoming what is happening and that's very unique. Advertisers obviously care more about just those value propositions, they care about audience size and they care about reach and they care about ROI. And the great story there is we have tremendous scale of reach of a demographic that's hard to reach, a younger demographic.

We also have people that are on-the-go on mobile and we have a global opportunity. The second component that's really important to them is can they reach their demographic within a venue that's representative of their brand. We have over 200 premium content relationships. We would challenge others to compete with us on the quality of our premium content video in pre-roll and mid-roll. We hand select these relationships and ensure that we're putting advertisers next to the brands that best represent what they stand for. And so that's another element of that.

When we do our upfronts on Monday, we'll announce a pretty broad slate, a number of new partners that reinforce that focus on premium content and ability for them to reach their audiences within context that best represents their brands. And then on the ROI front, I mean, I think it's math. When prices are down 60% year-over-year in the denominator, if you can hold the numerator constant, you have a significant improvement in ROI. While we think we're also improving the numerator because our audience has accelerated for four consecutive quarters, so we have a richer environment to target consumers for our advertisers. And so that's an important element to the advertising value proposition.

Last two elements I'll hit on is transparency. We are committed to transparency, media transparency, providing third party measurement and verification and you'll see very aggressive moves by us making investments in this area, and our goal is to be the gold standard and industry leader. We take that very, very importantly. The last element that I would hit on as we go into upfronts with advertisers is, of course, the ability for them to get a broad selection of content and so when we provide a point of view in the newfront, it will span the categories that I mentioned where there's the most activity on Twitter and that is sports, e-sports, news and entertainment.

And then we already have had great testimonials from advertisers like Anheuser-Busch and our ability to drive better ROI for them. They are a company that is in a very competitive category. They're in a business that doesn't have tremendous growth and so they use great scrutiny when they analyze our ROI, and we've seen improvements in CPM buying with them as well as pricing, and that's resulted in double- and triple-digit increases in ROI across six of the major brands that we recently tested with them. And we're going down that path advertiser-by-advertiser to improve the ROI either based on market and mix analysis or (25:44) studies, and this is a good example of some of the success we had more recently, quantitatively, in a very competitive category with a broad range of brands.

Rich Greenfield - BTIG LLC

To the extent that you're actually very successful in making this pitch on Monday night, when do you actually start to see those revenues? Like I know for the TV upfront, it comes in starting in October, but for the newfronts and kind of what you're doing, how quickly could any of that actually convert into actual revenue and therefore profit for Twitter?

Jack Dorsey - Twitter, Inc.

I would say right now we're competing for the equivalent of the spot or scatter market budget allocation. As you know, that's a minority of the ad dollars that get allocated. Right now, sitting here today, we don't see an improvement in our growth rate in revenue, primarily for two factors. One, we will continue to face increasingly negative impacts from products that we have discontinued or lowered the investment in. One example is TellApart. We expect that to go to zero and that's a sizable business, and the negative impact increases each quarter throughout the year, in addition to some other product features that we've discontinued investment in and those will increasingly be negative throughout the year. So that is a headwind.

In terms of driving the ROI story and the incremental spending immediately, we'll continue to communicate to you in real-time how that's going. As I mentioned in the quarter, we saw stabilization after the earnings call in February, and we were able to get those 32 deals signed. And so we're moving in the right direction, but it just takes a while to move the mass of dollars that we have in revenue at over $2 billion.

Rich Greenfield - BTIG LLC

Thanks.

Krista Bessinger - Twitter, Inc.

Thank you. And our next question comes from Dan Salmon at BMO Capital Markets. Dan, please go ahead.

Daniel Salmon - BMO Capital Markets (United States)

Hey. Good morning, everyone. Maybe just step back from the business for a moment. Jack, could you talk a little bit about your experience in the dual CEO role? It's been a little bit of time now. I'd be interested to hear first, has it largely played out as expected? Are there opportunities, advantages that have emerged that you didn't expect? Challenges that have emerged that you didn't expect? But would love to hear that high-level view on how you're spending your time these days?

Jack Dorsey - Twitter, Inc.

Yeah, I mean, I think the biggest focus for me is making sure that we have a really strong prioritization and that we understand what matters most. And I feel really confident about that at both companies. A lot of my time at Twitter is spent focused on making sure that we are really serving our core use case, and that core use case being showing what's happening in the world and what people think about it and what people are talking about. And we have teams who feel connected to the work and that we are operating in a great efficiency so that we can ship faster. And all of that we're showing. I'm really proud of our progress around abuse and safety, for instance, how quickly we met the challenge this year, and how we're seeing that meet in the results and the numbers as well.

The same is true for what we're doing around the timeline and notifications and getting better and better at delivering more relevant tweets to people faster. So, I feel confident that we have a good understanding of what we need to do, that we're focused only on what matters, that we're removing anything that may have been distracting, and the other focus for me is making sure that we have the right leadership team. And I get more and more confident every single day, not only in the folks that we have, but also the candidates that we're seeing for some of the roles that we're trying to fill. So, I feel really good about our progress and also the state of the company.

Daniel Salmon - BMO Capital Markets (United States)

Great. Thanks.

Jack Dorsey - Twitter, Inc.

Thank you.

Krista Bessinger - Twitter, Inc.

Thank you. And our next question comes from Ron Josey at JMP Securities. Ron, please go ahead.

Ronald V. Josey - JMP Securities LLC

Great. Thanks for taking the question. Anthony and Jack, you mentioned in the letter simplifying the revenue product portfolio and that video remains the largest ad product. The Promoted Tweets and DR continue to decline. I think we're a quarter into the re-organization of the sales force. And so when you think about focusing on the highest revenue generating priorities, is that around video and the newfront/upfront, Anthony, per what you were talking about, or is it perhaps building back up your direct response promoted tweet ad formats? Thanks.

Anthony Noto - Twitter, Inc.

Thank you. We made meaningful progress in Q1 in what we define as our simplifying differentiator of revenue products. We discontinued investment in some products which I mentioned. We reallocated engineers across new revenue product areas as well as our ads platform team, and a number of new strategic areas that we hope to talk to you about over the coming quarters, and we hope they contribute to revenue growth in 2018 and beyond.

We did have some quick wins with the ad platform team reallocation driving higher ROI for advertisers and is delivering an incremental 12% increase in user engagement rates due to enhancements to ad relevancy for the new machine learning technology integrations that we have done. And then we've made some significant investments in brand safety, and we're committed to providing, as I mentioned, the best third party measurements.

So those will be the areas of investment that are important to make. In addition to that, we're leaving no stone unturned as it relates to possible areas for growth. So as an example, if we can better monetize our inventory through third party relationships, we will do that. We're currently testing MoPub buying on Twitter owned and operated at a small scale. We'll do tests with other third parties to see if we can improve the monetization of specific ad formats.

As it relates to your comments on performance advertising, it's really important to understand that there's some DR products that we have that are incredibly successful and sizable and we will continue to invest in those and innovate. There are some that we don't think are competitive and therefore don't have longevity to them. We'd rather reallocate those resources and double down on things that are uniquely Twitter and leverage our competitive advantages, like our social advertising products.

These are products that reflect organic actions on Twitter and we're simply providing an ability for an advertiser to amplify or promote that activity to a broader audience to drive more reach, and it's very unique to Twitter because it's only on Twitter. As you mentioned as it relates to video, instream advertising which is both pre-roll and mid-roll has proven to be our fastest growing vehicle and also something that is very effective for advertisers. One of the key reasons we drove such a meaningful increase in the ROI of Anheuser-Busch of double digits to triple digits across the six measured brands is because of the impact of instream advertising and how strong that product is. So we'll continue to invest in that.

And then there are some new products that we have put investments into that we'll evaluate. We would call these seed investments and as they grow, we'll able to share more with you. But to talk about the impact now would be premature.

Ronald V. Josey - JMP Securities LLC

Thank you. That's great.

Krista Bessinger - Twitter, Inc.

Thank you. And our next question comes from Eric Sheridan at UBS. Eric, please go ahead.

Eric J. Sheridan - UBS Securities LLC

Thanks for taking the question. Maybe I'll ask two that are sort of clarification on the shareholder letter. One for you Anthony. You called out on the revenue TellApart heading to zero as we move through the year, but you're obviously seeing improved results in the core O&O business. Can you give us any more sense of sort of the puts and takes as we move through this year? How people should frame some of those headwinds and tailwinds playing out as you sort of move through 2017 and maybe even think about it beyond as the audience kicks in?

And then on users. I don't know if this is for Jack or for Anthony, but you called out in the note that you've been identifying and removing accounts. I wanted to understand a little bit about those removal of accounts and what that might have impacted on the user growth, because we saw better user growth this quarter but were there impacts in there that would have made it better? Thank you.

Anthony Noto - Twitter, Inc.

Sure. In terms of puts and takes question, Eric, the number one factor in 2017 that we think could impact our outlook is our ability to execute and make sure our advertising partners understand the significant improvement that we have in ROI because of the acceleration of audience and the more than 60% year-over-year decline in advertisers. We have over 100,000 advertisers and the thing that will impact our demand more than anything else is their confidence that when they advertise on Twitter, they achieve their objectives in both reach and return on investment. We think we have that formula, and then we're going advertiser and agency one at a time to improve the trend based on those proof points.

In a headwind standpoint, we will face increasingly negative impacts in Q2, Q3, and Q4 from discontinuing the TellApart as well as discontinuing investment in certain features and functions. It's also important to note that there are products that we invested in 2016 that we thought would meaningfully contribute in 2017 that we have pulled the investment from because we don't think they're going to be as successful as we had hoped and we'd rather put those resources against higher probability bets. There are new areas of demand that we're looking at outside of just targeting the digital and social budgets. Those two areas are premium display advertising and online video advertising.

Obviously we can attack online video advertising via our successful instream and mid-roll advertising. There are features and functionalities we need to provide for advertising buyers to do that at scale. We're investing in those. As it relates to premium display inventory, we think there's an opportunity to go after those budgets through different sources of demand on Twitter, and so we'll invest in those pipes and those technologies to see if that's a viable option for Twitter. And then beyond that, we're making investments in areas like data and ad technology.

Our data business was one of our fastest growing businesses this quarter. It's really high margin, the dollar revenue in data is worth $2 to $3 in other revenue and so is it has an impact on profitability as well. And we're focused on a specific channel strategy to drive revenue there. And then we're testing new sources of revenue from areas that have significant activity on Twitter already. There was news about a test that we're doing for TweetDeck. It has a very loyal audience. It's an audience of size. Is there an opportunity to deliver incremental value to all the TweetDeck users through different forms of monetization.

And then there are areas where we're not monetizing like syndication, like logged out, like Moments, and we're looking at different ways to monetize that as well. But I would emphasize more than anything the impact of all these things is not known today and the timing of them are not known today and they require great execution and iteration and that's what we're focused on and those are sort of the puts and takes in the quarter and beyond 2017.

Jack Dorsey - Twitter, Inc.

And, Eric, I think you're referencing our progress on abuse. And our analysis has shown that only a small percent of the content on accounts on Twitter are abusive and we've seen no discernible impact on our metrics from these changes to make Twitter safer.

Eric J. Sheridan - UBS Securities LLC

Thanks so much.

Jack Dorsey - Twitter, Inc.

Thank you.

Krista Bessinger - Twitter, Inc.

Thank you. And our next question comes from Twitter from the account of Dr. AJ Kooda (36:40) and he asks what about live-streaming cricket or soccer to reach international audiences that are passionate about those topics.

Jack Dorsey - Twitter, Inc.

We would love to have both sports on Twitter. What we do is look at what the interests are of people on Twitter based on who they follow. There is a very passionate audience for cricket. Their rights are really expensive and they're locked up for multi-years. That doesn't mean we can't partner with different media companies that have those rights. Most of the deals that we do, do not exist. We go in and meet with media owners or content owners and understand what rights they have and then find a way to partner with them, not to just intermediate them, but to partner with them to increase their reach and the economics they can drive against the rights they have and it's a very differentiated value proposition.

So two areas that we're definitely focused on are international and international interests that are not similar to the United States. We showed that in Europe in the most recent quarter. We had Transfer Day which is a partnership with a major broadcaster that had rights to Premier League's Transfer Day. We also partnered with Deutsche Telekom in Germany to bring #StreetGigs onto our platform with a Depeche Mode concert that achieved great results as did Transfer Day both over millions of unique viewers. And then we did Six Nations Rugby in France and so we will continue to make investments in Europe in these different areas of interest.

In Japan, we did a high school baseball championship live-stream which is again a very passionate audience in Japan. And so the great thing about Twitter is we know your interests. We can serve those that are niche, we can serve those that are broad and we can do it in an economic way that creates value for our partners both on the content side and on the advertising side. So if someone wants to partner with us on cricket, we're all ears and we know the rights are up in India and we know they're multi-years and they're going to be hundreds of millions of dollars. We can add value to whatever partner wins.

Krista Bessinger - Twitter, Inc.

Okay. Thank you. And our next question comes from Heath Terry at Goldman Sachs. Heath, please go ahead.

Heath Terry - Goldman Sachs & Co.

Great. Anthony, you touched on bringing third party measurement into the platform. And obviously there's been a lot of discussion around that and across every platform that's out there. Wondering if you could give us a sense of sort of where your ad technology is right now, your first party ad technology is, both in terms of measurement, as well as targeting versus what you would consider best-in-class?

Anthony Noto - Twitter, Inc.

Yes, what I'd say is we do implement the standards that advertisers and agencies want. So, for example, for viewability standards we have implemented MRC. We do think that's the standard for viewability and measurement within video. We will become MRC accredited. It's an important process that we're embracing. It's a long process and we've kicked that off already with the right resources. We have relationships with Moat. We have relationships with Nielsen. We have relationships with TAG [Trustworthy Accountability Group].

So we will be a gold standard in making sure that we integrate those measurement standards that our partners deem most appropriate so they know what they pay for. We want to make sure that the advertising that they deliver is seen by the audience, the audience reflects the demographics that they wanted, and they're getting a price that they think is what they're paying for. And we will make investments in those three areas and, hopefully, we'll be able to share with you over time more specifics on the things we're already providing.

I would say we're at parity with everyone else to a slight advantage because we do have some higher standard options as it relates to viewability versus others, but we're going to move very fast to get out in front and be the gold standard because it's something we can completely control, and something that we know our advertisers value, and there's no reason for us not to be out in front. It's not a function of scale. It's not a function of size of MAU or DAU. It's a commitment to our partners and we will develop products that deliver great ROI and measurement standards they can count on.

Heath Terry - Goldman Sachs & Co.

Great. Thank you.

Krista Bessinger - Twitter, Inc.

Thank you. And our next question comes from Peter Stabler at Wells Fargo Security. Peter, please go ahead.

Peter C. Stabler - Wells Fargo Securities LLC

Good morning. Thanks for the questions. A couple if I could. First of all, Anthony could you tell us a little bit about small business. In the past you've mentioned it as a focus for development and I'm wondering if the focus on video products suggests that small business isn't as important to you going forward. And then secondly, on the account issue, I'm wondering if you could give us a little update on your efforts to eliminate fake accounts from the platform? Thanks very much.

Anthony Noto - Twitter, Inc.

Sure. SMB business is actually very important to us. I would say we have three buckets of products that we're focused on, and they're equally important. So our social products are our bread and butter. Our social products are those things that are leveraging organic actions on Twitter and amplifying them in some way or promoting them in some way. Those are the products that appeal to SMBs. We need to develop a product market with small, medium businesses that take those products in a turnkey solution and in a pricing mechanism that allows them to be always on. And so our team is focused on that, and it's one of our potential growth drivers on the puts and takes list.

Will they use instream pre-roll advertising? I do think they will, but we think the foundational products for the SMB advertiser are those social products that are proven on Twitter. And then the third bucket is performance-related ads. And as I mentioned, we have some direct response advertising, specifically website clicks that is very large and very successful, as well as certain features and formats over mobile application download products that are also large and also successful, and we will continue to invest in that. So three buckets, social products around advertising, video products and then performance-based products.

For SMBs in particular, we want to build a foundation with the social products, continue to build success in the performance products, and over time trade them up to higher visual and broader formats such as video. And so we think we have a lot of runway on just the first two and the third one would be incremental as we build consistency and confidence in their ROI over time.

Jack Dorsey - Twitter, Inc.

And, Peter, can you just clarify your question on fake accounts? Do you mean...

Peter C. Stabler - Wells Fargo Securities LLC

Like nonhuman activity, Jack. Bot-driven accounts.

Jack Dorsey - Twitter, Inc.

Yes, so a few things here. First, we have for quite some time seen useful bots, and we recently made a move to help support some of that activity, mainly around customer service and support. We released a DMAPI to allow companies to create more efficiencies for themselves when they want to use Twitter for customer service. In regards to bots that are more targeted to spam, we regularly work to detect and shut these down, and we found that less than 5% of Twitter accounts are spam related. But we're always testing our tools and continuing to invest in machine learning and deep learning tools to make sure that we better address any spam vectors or any fake accounts in that sense.

Peter C. Stabler - Wells Fargo Securities LLC

Do you guys have a means to shut down the folks who sell accounts, like legal means? Because there are companies out there that sell followers right now.

Jack Dorsey - Twitter, Inc.

We do. Yes.

Peter C. Stabler - Wells Fargo Securities LLC

Okay. Thanks.

Krista Bessinger - Twitter, Inc.

Thank you. We have time for just one more question. And for that, we'll go to Justin Post at Merrill Lynch. Justin, please go ahead.

Justin Post - Bank of America Merrill Lynch.

Great. Thank you. I'll just ask a model question to wrap it up. Just on the revenue range, it's quite wide again, Anthony, and you were able to beat last quarter. Just maybe help us understand what gets you kind of to the lower end and the higher end of the implied revenue range? And then on the expense base, as you look at it from where it came in at Q1 just in total dollars both cost of sales and operating expense, how do you see that trending for the rest of the year? Thank you.

Anthony Noto - Twitter, Inc.

Thank you for the question. So three buckets broadly defined will impact the ultimate outcome in revenue relative to the implied revenue range that you can get to based on our EBITDA and EBITDA margins. The first bucket is execution. When we gave an outlook on February 9 at our last earnings call, we similarly gave EBITDA and EBITDA margins, and it resulted in a similar wide range. What caused us to come in at above the middle point of that was execution. The ability to go out there and take the great proof points we have on improved ROI and convince advertisers of that, and get them to lean into their spending. So that's the first bucket, is execution. We think we have the information to deliver on that. It's a matter of time, and it's a matter of convincing them to reallocate budgets.

The second bucket is competition, and that's been relatively stable since February 9, and so our assumption is it stays relatively stable. And the third bucket is the negative impact from products that we've discontinued investment in or have discontinued or decided not to launch. And that is also a variable. And so things that would put us in the lower end of that range is a combination of worse than expected trends in any one of these three buckets or all three, and things that could put us at the higher end of the range.

We'd start with execution number one and then obviously if competitive factors decrease, which is always possible, there could be a trip up here or there, that's an opportunity. And then on the discontinued investment products, I don't expect there's going to be a lot of unexpected upside there given we've been very clear in communicating our desire to move away from those products. And generally advertisers move faster than you would want them as it relates to not spending, the opposite of getting them to spend more.

And then in terms of expense trends, we did give guidance overall that our expenses would be flat to down 5%. As a reminder, when we plan the year, we have planned our expense base for the year. There could be puts and takes in each quarter that make it come in below or above where we thought, and we're managing for the total year. And so while we had out-performance in Q1, it was driven by both upside in revenue and lower than expected cost through efficiencies. We will invest a little more in marketing and head count in Q2. We're not at target cost of revenue. It's something we're focused on, something we're incredibly proud of as a company as it relates to cost.

There's two factors. One, we set long-term ranges for our expenses as a percent of revenue as it relates to gross revenue. We'll actually net revenue excluding TAC for R&D, S&M and G&A. We're actually at the high end of those ranges now and obviously we have a significant opportunity to continue to increase scale and so those expense ratios can continue to improve. But for all three of them, this was the first quarter we hit the high end of that range that we previously communicated.

On cost of revenue, we're evaluating a number of different opportunities to continue to drive that lower. The most significant one will be revenue, because some of those costs are lumpy and are fixed. The second thing I'd say about costs that we're proud of is our stock-based compensation. We raised the improvement that we expect to see. We've previously said that SBC would be down 15% to 20%. We now expect it to be down 20% to 25%. If you average our net dilution 2017, 2016, 2015, and 2014, based on our guidance for 2017, our net dilution averaged over that time is at 2% or less, which is really low, and in the target range of our competitors, and that's an important trend as well.

Jack Dorsey - Twitter, Inc.

Okay. And that is all...

Justin Post - Bank of America Merrill Lynch.

Thank you. I appreciate it.

Jack Dorsey - Twitter, Inc.

Thank you, Justin. That is all the time we have for today. Just to recap, our goal is to build a service people love to use every single day, and we're really proud of the audience growth we saw in the first quarter. While we continue to face revenue headwinds, we believe that executing on our plan and growing our audience should result in positive revenue growth over the long-term. We want to thank you all for your time and your support. Have a great day, and we'll see you on Twitter.

Operator

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect. Have a good day, everyone.

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