Twitter, Inc. (TWTR) Management Presents at Barclays Global Technology, Media and Telecommunications Conference 2018 Conference (Transcript)

Twitter, Inc. (TWTR) Barclays Global Technology, Media and Telecommunications Conference 2018 Conference Call December 5, 2018 2:00 PM ET

Executives

Ned Segal - Chief Financial Officer

Analysts

Ross Sandler - Barclays

Ross Sandler

Okay. We are going to get started. If everybody can find a seat. So my name is Ross Sandler, I kind of run the Internet team here at Barclays, among these guys in the front row as well. And we are very happy to have Ned Segal from Twitter here to present. Thanks for coming, Ned.

Ned Segal

Thanks for having me, Ross.

Question-and-Answer Session

Q - Ross Sandler

I figured we would jump in and cover maybe four or five major areas with users, ad revenue, data licensing and other and then at the end, some expense margin stuff. So just to kick things off on the user side, we definitely noticed that the pace of product iteration has picked up a decent amount over the last year. So I guess can you just talk a little bit about when you guys do tweak the product, what goes into that and how that impacts DAU growth? So, is there kind of – so many things are I guess for engagement, some of these things are to reduce friction, but how does the product changes impact DAU growth? Let’s start with that.

Ned Segal

Sure. So when we make product changes, often we will test them. Sometimes we will test them in a market. Sometimes we will test them in more than one place. And the intent is to learn and to test the thesis to understand if what we are doing will create more tweets, if that’s what the intent is whether you are moving the tweet button from the top of the screen to the bottom or you are giving people more characters with which to tweet. And if it works, then you will roll it out. If it doesn’t, then you will try something else. We do other things around notifications or how we use algorithms to deliver the most relevant tweets to people where there is constant iteration around those. And you find that some things work really well and we do more of them and others don’t work as well and so you go back to the drawing board. When we think about the broader topics that we can continue to leverage, to drive audience and to keep them more engaged, we think about things like the topics and events work that we started over the summer where the World Cup was a great example of it, where instead of having to guess what the right hashtags were, whether it’s through notifications or through us telling you about it at the top of your timeline or you going to search around any number of words or hashtags that you might put in the Explore tab. We drop you into an event experience around the game that you might have been looking for with a recap timeline and a latest timeline, which weren’t necessarily the people who you follow, but they are the people who are saying the most relevant things about that topic that you were looking into. It works really well during the World Cup. We have rolled it out around elections around the world, around sporting events and other things all around the world. And we found typically that when people go to one, they go to another one, which is great, because typically what brings people to Twitter whether they are existing users or they are new to the platform or they tried it a long time ago and come back from time-to-time is they come around a topic or event. And so if we can give them a great experience around that topic or event, then they will look at another one. And so the data suggested that work is working, but we know there is a lot more work in front of us to continue to iterate around topics and events to help people find what they are looking for in the platform.

Ross Sandler

If we look at the most recent quarter, DAU growth was 9%. It’s been consistently kind of in the high singles, low doubles for the last 2 years or so. If you look across geographies, how is that 9% – is it evenly distributed in markets where you are seeing well north of 9% growth? Is that a function of some of these product changes you are talking about or is that because of where we are on smartphone penetration? Any color on the geographic breakdown of DAU growth?

Ned Segal

Sure. So one of the things we mentioned on the earnings call was that we saw double-digit growth in 5 of our 10 largest markets and then in a number of other markets as well. And so we looked at that as one indication of the breadth that we have seen in terms of growth. Now, it’s really both of the things that you mentioned. If you look at an individual market or a group of markets to say what’s driving it, sometimes it’s the ongoing interest that we see where people are constantly coming back to Twitter, who may have been on it for some time in the past but haven’t in the last month. They come because they are looking for something. And if we do a good job showing it to them, then they will come back more frequently. They will stay longer when we are there. So we definitely got the benefit of people who keep coming back to the platform. And then there is also places where we are really under-penetrated relative to the opportunity. You might think of emerging markets like India and Brazil when you think about places where we are under-penetrated. But when you look at even the more developed markets like the United States and Japan and we see a whole other segment that look just like the group of people that use Twitter in those markets and we feel like they ought to be using Twitter more regularly too. The work is for us to make it easier to find things that they are looking for in the platform.

Ross Sandler

Got it. And on the MAU, DAU dynamics, so you talked about health and you talked about how you have taken a number of measures to kind of tweak things, change things in the past year as it relates to health. So, I guess, can we just address the issues you are talking about around health? How are those different than maybe some of your other social media peers? And do you think that we have had the SMS issue and some other issues more recently. As we get into ‘19, are most of these health issues do you think kind of behind us or how do we think about the trajectory around health?

Ned Segal

We don’t think about health as something that will ever be behind us. We think about health as the number one priority of the company and something that should ultimately be a growth factor. Because if we do a good job giving people an experience on Twitter where they feel safe to share their point of view, where they don’t feel attacked, where the wrong tweets are amplified by spamming and suspicious behavior that will drive the behavior that we are trying to creep on the platform, which is people contributing to the public conversation, then consuming things that are happening or on topics and events all around the world. So sometimes, the work will affect the user metrics, because we will close the front door that was being abused to create spamming and suspicious accounts that were inappropriately amplifying tweets. And there might be accounts that otherwise would have been new accounts. Other times, much like the second quarter where we killed tens of millions of accounts that were effectively inactive, because they may have been created a long time ago, they may have started to follow and therefore amplify other accounts, but they haven’t been used for some time and so they won’t affect the user metrics. One of the critical principles for us that we think about when we are doing the work is we don’t want to be constrained by disclosed metrics. We want to always be doing the right things to drive the health of the platform, because we think that’s ultimately what will help us drive audience and engagement all around the world.

Ross Sandler

There was an interesting article that came out I think a week ago from one of your early investors, Union Square Ventures, one of the partners there was talking about how you guys right now are kind of policing and controlling a lot of the health issues, why not develop an ecosystem of third-party developers who can then come in and help you with like account verification or lists or muting or blocking? Is that something that potentially you will look at or do you think this is something that Twitter needs to do on its own given that it’s critical to the overall vibrancy of the platform?

Ned Segal

Well, it’s interesting question and we definitely seek outside help when we think about our policies. We put an RFP out recently to get help around the health topic more broadly, how to define success around it. So we are always looking to leverage both perspectives externally. Technology externally, sometimes we will end up licensing the technology. Other times like a company called Smyte that we acquired earlier this year, we will find a great technology and we will decide that both the team and the technology will best help us realize our goals if we own the technology and the team is a part of our ongoing work at the company. And there is also – there are other things where maybe it makes more sense for us to do them, Smyte is a good example of it where if we want to control the work and so we will do it internally. One of the neat things about Twitter relative to other platforms is because it’s open, it’s real-time, it’s public, we do get a lot of signal from the platform that we otherwise might not. So, a lot of the things that come into us through our Twitter services team will be bystander reports or somebody notifies us of something that they saw happening, that wasn’t happening to them, but because Twitter is open, they were able to see it and then it’s up to us to both have the right policy to communicate it clearly and then to implement it appropriately when we get those bystander reports. So that’s something that we benefit from external perspectives all the time, because there are people who are active on the platform.

Ross Sandler

Last question on the health issues, a week or two ago there was news about FOX potentially not tweeting in a while or boycotting the platform. There was this Laura Loomer incident. So I guess are those things that you worry about? Do you see any impact from that? Are these concerns kind of warranted or not and how do you kind of tiptoe around the seemingly kind of very heated debate on both sides of the political aisle on Twitter?

Ned Segal

Sure. Stepping back from any one particular account or any one situation, I just say our goal is to serve the public conversation. It’s not to serve the public conversation for Yankees fans exclusively or for people from one political party in one part of the world or for people who see a particular issue one way as opposed to the people who see the issue and want to talk about it, share their perspective on it, hear other people’s perspectives on it, be involved in a conversation around it. So, we won’t realize our purpose. We won’t be able to attract and retain the people who believe in our purpose who work on the team. We won’t be able to attract and retain the advertisers who connect with their customers on the platform if we are not serving the whole public conversation. So we are always thinking about our policies. We are thinking about how we communicate them. We are thinking about Twitter services team and the machine learning technology that we use to implement the policies and doing so in a way that’s consistent and well understood and not meant to favor any one perspective over another. When you look at the health work that we do, it’s not about choosing a perspective over another. It’s about making sure that things aren’t amplified inappropriately. It’s about making sure that people are safe – feel safe to share their perspective both on Twitter and off of Twitter and that’s just ongoing work for us that we will always be focused on, whether it’s around the two sides of a sporting event or of a political conversation.

Ross Sandler

Got it. We shift gears to revenue. So the third quarter, the U.S. ad revenue was unbelievably good. So can you just talk about I guess some of the drivers of that outperformance? And as you look out into 2019 thoughts on sustainability of that U.S. region in particular and do you think that you are benefiting from some of the disconnects happening in other companies in mobile display advertising currently?

Ned Segal

Well, we are really pleased with our performance in the third quarter in the United States. And if we look at the things that drove it, we would point to this clarity of strategy and the execution that we have delivered over the last couple of years. We did not expect it to manifest itself in 32% ad revenue growth in the United States. The way that it did in the third quarter, it came back both in a bigger way and faster than we expected it to, but we think when we look at the attributes of it, it’s the same things that caused international turnaround faster and earlier and what is our largest market, where we have been the longest in the United States. And so we point back to a larger more engaged audience, we point to better ad formats, our execution with advertisers where we are clear on why they should advertise on the platform where we are delivering better relevance to them. We are helping them measure their success on Twitter better than we were before. And the clarity of those things combined with the results when you could show them the ROI has empowered them, emboldened them to spend more on the platform faster than we expect them to. So we are thrilled with it and we are working hard to keep that momentum going. And you asked about other platforms, we feel like there is so much that’s in our control at Twitter right now and it’s because of the execution and the strategy that I just described. And we are laser focused on continuing to do the things that have put us in this position over the last couple of years and staying focused on those as we look ahead because in a growing online or mobile ad market, in a growing ad market, there is so much that we could benefit from by just doing the things that are in our control that, that’s where we remain focused.

Ross Sandler

Got it. If we look at Japan and some of the international countries, you guys have been very successful early on even before the U.S. and Japan stemming from some of the agency relationships, big brand relationships. So I guess, what are the learnings from Japan that you can now replicate to some of these other international markets and how long does it take if you go back to before you are breaking out Japan revenue, to get Japan to that point?

Ned Segal

Some things that happened in a market are broadly applicable and other things end up being specific to a given geography. And so we are always looking at both the successes and the failures in any given geography to see what we can learn from them. Japan is an interesting one, because it’s become a large and important market for us and there are a couple of things that I would point out both on the audience side and on the advertiser side. On the audience side, we realized that people were tweeting more because you could say more in 140 characters in Japanese than you could in English. So we gave people more characters in the languages where people seemed to be constrained and we found that, that positively impacted tweets, while not really impacting the length, the average length of a tweet. We realized that people were DMing themselves tweets in Japan. That was – we weren’t providing them the feature that they were looking for. So we rolled out bookmarks for tweets all around the world not just in Japan, because we don’t believe it makes sense to fork the product. We want to find the things that are broadly applicable from all around the world and apply them all around the world. So those are audience examples.

On the advertiser side, there are a couple of things I would point to. One, it’s a more concentrated agency market and we had more recent success over the last 1.5 year in Japan than we had before where we had a breakthrough with those larger agencies, which has really helped us drive ad dollars and strong ROI for the advertisers in Japan. The second one is our video formats have really resonated with the advertisers in Japan and that’s been a big unlock for us. Advertising with video is different on Twitter than it might be on another platform. And getting people to instead of taking a 30 second video that might have worked somewhere else and just using the first 6 of the last 6 seconds to make something that specific is specifically designed to be a 6 second video from the start has the brand upfront that leaves people with the right message. Once you get people to do that, they really see much better impact from their ads on Twitter and then they invest more and keep trying again. So that’s worked really well in Japan and we have taken the success from those learnings and definitely applied those to other geographies as well.

Ross Sandler

If we look at Europe, you mentioned breaking through in Japan, so for some of your peers, Europe is a third or so ballpark of their revenue including the UK, which markets in Europe are you most excited about and do you think like that breakthrough point is closer or is it going to take a little bit longer in Europe?

Ned Segal

We see signs of strength in Europe just like we do all around the world. When we look back at the third quarter, we saw strength across products and across geographies that we are really pleased with. The UK has been a strong market for us and there is a lot of the similar strategy and execution points that I was pointing to around the U.S. and around Japan that have delivered that strength in the UK, but there is still work for us to do in the UK and across Europe to continue to do a better job of delivering the message to advertisers and how they ought to be using the platform to connect with their customers. And so I would say there is still work to do there, but we still feel good about Europe too.

Ross Sandler

Okay. On high level, you said in the past that you feel like you are demand-constrained versus supply-constrained platform and I think the last time you guys gave out the ad load was at the Analyst Day 2014 if I recall correctly. But if we look at that 9% DAU growth, could ad load double multiple times from here? Like is that the right barometer to think about ad revenue over the long-term? Is it going to be anchored to DAU growth or not?

Ned Segal

So I think the reason you are asking the question is because we have grown revenue in excess of audience for three quarters in a row. And so let’s just start by talking about that for a minute and then we can get into some of the underlying drivers of revenue. When we look ahead, we feel like – we know that ultimately we need to continue to grow audience and engagement in order to realize our purpose and in order to deliver great outcomes for all of our stakeholders, but we still see lots of room in front of us to continue to grow revenue in excess of audience. So, why is that? We definitely continue to feel demand constrained more than supply constrained when we look across geographies, when we look across times of the year, when we look across different surface areas. On the surface where you might see more ads in the home timeline than you do in Explore or in that events experience that I was describing just as an example of where there is definitely work for us to do. But there are other things beyond ad load that one can do to really drive revenue in excess of audience. Relevance is a great example. We sift through more ads today to find the ad that will show you than we did a year ago. That’s trading off server capacity and latency and having enough demand and knowing enough about the ads and the individual who is going to see them. And as we traded those off, we found real benefit from having done so, where we are able to show you an ad that’s more compelling to you or that’s likely a higher CPE than the ad that we might have shown you without giving you a latency experience such that you are going to flip by before we are able to actually serve the app. That’s an example on relevance, but there are lots of others that I can point to as well where we still see lots of room in front of us to continue to drive improvement around those to deliver better ROI for advertisers. And so we don’t just think about ad load when we think about things that could drive revenue in excess of audience.

Ross Sandler

Got it. I want to make sure we have time if anybody has a question or I can keep going. But if you have a question, just raise your hand. Okay. So if we shift gears to data licensing and other, Gnip was a great acquisition for you guys. Can you just talk about how that business is doing? And if you look out between price and volume and kind of new customers that you have had into the platform, what are the biggest drivers for Gnip?

Ned Segal

So we are really excited about our data enterprise licensing business, which shows up in the P&L under data and other. Gnip is one of the acquisitions that we are really proud of. We have had a strategy for a couple of years now where we have gone back to the many customers that we had and recognized that perhaps having fewer of them but having deeper relationships with them where they had a differentiated service that they could provide around Twitter data and where they were paying the right price for it, which often meant more. That was a lot of work for us to do to implement that strategy. The strategy is now well underway where it’s well understood by our customers, where some of them – the construct might not work for them, but many of them, it has and we are really pleased with how that’s worked out. One of the neat things about that business for us is we don’t have to decide how the data is going to be used. So, there are things that are well understood about how people use Twitter data for social media monitoring, for sentiment analysis, for other things like that. But then I am certain there are other used cases that will come up where people actually could use our premium version of the APIs and test it and learn. If it becomes successful, we can develop a deeper relationship with them where we figure out what the right price is for them to pay and structure a longer term relationship.

Ross Sandler

The other business in that line is MoPub and you guys had mentioned some SDK issues around GDPR, but it didn’t seem to show up in the third quarter much at all unless Gnip was even stronger. That line was pretty good. So, just any thoughts on the trajectory of MoPub, are we over those issues?

Ned Segal

So, there is a GDPR-related issue where we needed to update the SDKs and then mobile publishers needed to accept the SDKs in Europe and there is just a lag sometimes. And when they accept them relative to when they are available, it’s up to us to make sure that we and the people who use the platform are GDPR compliant. So, there was some impact from that in the third quarter as we had expected there to be. There was some impact a little bit in the second quarter as well, but just a month’s worth. So you could see some lingering impact from that, but if the size of the business, the nature of where it shows up in the P&L is such that, it’s probably not worth the trouble to try to model it too much. We are pleased with the performance of the MoPub business. The data and other lines over the last couple of years, has typically been driven by the data business more than MoPub, but we are pleased with the trajectory of both businesses for sure.

Ross Sandler

You guys don’t specifically breakout segment margins, but Gnip was kind of a software licensing business. MoPub is a net revenue business. Is it fair to assume that as long as that kind of keeps growing as it is in the 20s or more mid to high 20s and in some quarters it exceeds that revenue that there is going to be an upward pull from the mix shift on your operating margin?

Ned Segal

From a margin perspective?

Ross Sandler

Yes.

Ned Segal

There could be, but the data and enterprise licensing business is definitely a high margin business. The MoPub business is a pretty predictable one although the revenues coming in everyday is one that you are able to develop patterns around it and have us take a pretty good stab at how things are going to play out. So, they end up being nice margin accretive businesses for us and you will notice in a quarter like last quarter, they grew less than the overall business. When things were slower in the overall business, they may end up growing faster.

Ross Sandler

Got it. And then on expenses and margins, so you have called out 10% to 15% headcount for this year. I think you said on the last call, this is kind of the right level to think about medium term without formally talking about what that’s going to be in ‘19. But if you look out – the headcount of Facebook is growing 50% odd, most companies are growing well north of that. Did you feel like that’s the right band to think about? What would be factors that would cause that band to change?

Ned Segal

I am not sure about the comment you are referring to from the call, but what we did say was that we have come in at the high end of that range for the year that the way and just to take a step back and think about it for a moment, we tried to approach our investment for 2018 from a position of strength where we felt like we had a clear strategy. We knew exactly what we wanted to do, which was to invest more against our largest priorities, health, audience, the revenue products, the sales team. And implicit in all of those given the CapEx growth that you saw this year was the platform as well and we should probably just be talking more about platform, because it clearly has been an area of investment for us. We don’t expect any change to those from a prioritization perspective and we feel good about the work that we have done to resource those this past year. We will talk more about ‘19 as we get to our call in February, but we are at the – we are putting the finishing touches on our planning work for next year. But we do feel like again we are able to approach things from a position of strength where we have delivered solid execution, where we are really clear on what our priorities are and to the extent we do continue to invest, it will be against those same priorities and in that same work.

Ross Sandler

Got it. Alright. Thanks a lot, Ned.

Ned Segal

Thank you, Ross.