Twitter, Inc. (TWTR) Management Presents at Morgan Stanley Technology, Media and Telecom Conference (Transcript)

Twitter, Inc. (TWTR) Morgan Stanley Technology, Media and Telecom Conference March 3, 2020 1:15 PM ET

Company Participants

Conference Call Participants

Ned Segal - CFO

Unidentified Analyst

…we are at day three of the Morgan Stanley 2021 Virtual TMT Conference. We're thrilled for our next fireside chat keynote to have Ned Segal, CFO of Twitter with us. So Ned, thank you so much for joining us.

Ned Segal

Thanks for having me. Glad to be here Brian.

Unidentified Analyst

Good to see you. I see a year ago and now what does the year makes hopefully next year we'll be live again.

Ned Segal

I sure hope so.

Unidentified Analyst

Before we get started, there is a lot to talk about with the Adecco system, with Twitter and everything else, but I do this really the disclosures. Please note that all important disclosures including personal holdings disclosures and Morgan Stanley disclosures appear in the Morgan Stanley public website and www.morganstanley.com/researchdisclosures. Please reach out to our sales representative with any questions on this matter.

Some of the statements that Twitter will make today maybe considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that Twitter makes are based on assumptions as of today and Twitter undertakes no obligation to update them. Please refer to Twitter's Form 10K for a discussion of the risk factors that may impact actual results.

Ned, so a lot to talk through, I feel like every year we get together, there is a lot going on, ecosystem is wobbling out Twitter and really more so than ever now after the Analyst Day. So thank you for taking the time.

Ned Segal

Am glad to be here, glad to spend more time talking to folks about the Analyst Day and all the other good stuff going on at Twitter.

Unidentified Analyst

So let me sort of start with the high level and the objectives, you talked a lot about four key objectives, recently you talked about increasing development velocity and trust, the health of the conversations, increasing your revenue durability and enabling everyone to really use Twitter and increase the overall conversation on Twitter.

Now I guess I wanted to start with the revenue side, talk to us about from where you're sitting now, how would you evaluate the progress you've made on the revenue products so far call it last six to eight months and what are sort of the key priorities as we go throughout 2021 from a revenue durability perspective?

Ned Segal

Sure and remember revenue durability is the number one company objective right now. About a year ago we moved it up to number one recognizing that the work we're doing to better position ourselves around direct response was even more critical amidst the disruption that we're seeing around the global pandemic when people were sent home, when bare advertising saw a real impact from how our behaviors change and how companies needed to pivot how they showed up.

Since then, we made really great progress on our revenue products. We have a lot more work to do. We're able to build on the strong foundation of the completion of our ad server rebuild. We finished that in the middle of last year. Finishing that has allowed us to move faster. We also finished the work we're doing to rollout a revamped version of our mobile app promotion product or app install ads. We rolled that out in early February along with website clicks, which we revamped as well. Those are our two primary direct response ad formats today, but we want to work hard to make sure that we can deliver for advertisers all the way down the funnel, which means you should be able to buy something on Twitter.

So between having more people working on these projects between having finished the ad server rebuild, making revenue product our number one company objective and building on a stronger foundation around direct response, we feel like we did really great progress, but we certainly have more to give you.

Unidentified Analyst

Analyst Day, congrats again, there is a lot of work, it was a very successful day and I think one of the most I think surprising outcomes of the Analyst Day was the revenue outlook where you talked about essentially doubling the revenue to $7.5 billion by 2023. I guess as a CFO of the company, a couple questions, why did you felt -- why did you feel the need to disclose such a big target to the financial community like that? And secondly, what gives you confidence in sort of the multiyear potential platform just given all the evolution going on in the ad industry?

Ned Segal

Sure, we're thrilled to be able to share goals that are out a few years. What I hope people take away from that is we feel really good about our strategy. We are thinking about things in longer timeframes or measuring ourselves against longer timeframes and therefore, we've got the comfort to share those longer timeframes and how people can measure success for us with people in the public as well and so we talked about a few things.

One we said, we want to double our development velocity, that's foundational to the other two. Two is we want to grow our MDAU by 20% going back to last year when we first announced that ambition to continue to grow to $315 million or more by the end of 2023 and then to the one you mentioned Brian want to double or more our revenue from last year's $3.7 billion to $7.5 billion or more in 2023.

Now there's so many ways we can get there. One will be to continue to gain share in the digital ads market. We think there is $150 billion spent on digital ads and growing every year that is immediately addressable to us. There aren’t search ads, these aren’t ads in China, these are ads that can be placed on Twitter through growing our audience, through better ad formats both in brand and in direct response, through delivering better relevance, through benefiting from some of the secular shifts that I think are shifting dollars towards places like Twitter that aren’t just tied to COVID but COVID may have driven some of the -- accelerated some of these shifts. We think there is a lot of different ways that we can get to $7.5 billion or more from where we sit today.

Unidentified Analyst

Understood. And part that you mentioned the development velocity, you really want to increase the development velocity. I think you shipped 56 product improvements in the first half of '20 nearly double to 100 products in the second half of ’20. One of the areas we've been trying to really focus on think through is your data capture, your data analytics and how you can take data and integrated that into your ad products.

So where are you from that perspective and how important is that improved data use in the overall equation of doubling the revenue and doubling the return for your advertisers?

Ned Segal

Well, there is a lot of signal that's unique to Twitter that we either historically haven’t leveraged as well as we can or that when combined with better modeling and better formats, we think we can use better than we have in the past. An example of that is our work recently around topics. So today over 100 million accounts follow one of 6,000 topics or more.

Over time we're going to have hundreds of thousands of topics. This is a way for us to do the hard work to find the accounts to help you stay up to speed on the events and topics that you care about most. That helps the consumer experience but it also gives great signal for advertisers that has nothing to do with the device ID on your operating system on your device, but everything to do with what you care about in that moment. It's a great example of signal that we have today that's unique to Twitter that we can leverage better than we have historically. It will help the largest advertisers in the world, but it will also help small and medium businesses who want to find local customers or people who care about their good or service who can use Twitter for the exact same used cases that large advertisers do to launch new products and services and to connect with what's happening. So those are some of the ways that we think about that Brian.

Unidentified Analyst

I want to ask about topics, because that is one area that has really grown quickly. You mentioned there is 6,000 topics now, I think there was really 2,000 a year ago and we sort of 2020. It make sense we're getting more signal about people from topics. Is there anything you can share about the type of ad delivery and the ad performance you're seeing in early days as you integrate that topic information in the person's graph or is it still too soon?

Ned Segal

Well, it's too soon in a couple of ways. One is 6,000 and against scheme of things. When you think about all the topics that have been happening around the world and that people care about, there are so many more in fact an infinite number of ways to think about the different topics that people care about and so we have to scale the number of topics that give us signal.

Two is we need to be really thoughtful about how to use it because we want to show people the most relevant ads possible that feel like they're part of the experience that people have. So it's very early in us leveraging that signal, but when you couple that with all the other things we know about how people use a service between the accounts that you already follow, between the people who have now opted into personalized ads, it's a much bigger number than it was over a year ago. We've gone back and we prompted people as a way to help them understand the benefit of personalization and that you add all of those signals together along with a larger audience and you think about the path in front of us to continue to leverage those better and better over time, we thought there's lots of opportunity to continue to improve the relevance of the ads that we're showing people.

Unidentified Analyst

On the -- coming out of the Analyst Day the revenue guide was very strong but the number actually was even -- it was the bigger beep versus my estimate and those are all my numbers to be clear, but the number that was really surprising a lot better to me was the DAU outlook. The forward DAU what you're plan to get it implies averaging -- it implies adding an average of about 40 million DAUs per year the next few years versus the average of about 15 in the past, that's a really big step up in the pace of DAU growth.

I notice there has been sort of a multiyear focus, but talk to us about what gives you confidence in your ability to sort of add that main DAUs whether it's retention of existing users, bringing more people in the funnel like how should we think about the drivers of this big DAU growth?

Ned Segal

Sure, so remember last year we added 40 million DAUs to service and more of them were driven by product improvements than ever before and so with that foundation and the momentum from last year and the fact that the group of people who joined us around the time that COVID really sent everybody home last March, the fact that we retained that group better than we have previous groups. Those are the kinds of things that give us the confidence when we look ahead at the product improvements that we're delivering the way they compound on top of previous product improvements.

When we look at the events and topics that will drive people to the service and then that very consistent and healthy top of funnel that we see, there still are two million or more people who come to Twitter on the typical day you haven’t been on the service for a month and more who some of whom have never been on Twitter before and so we get a lot of that pass and the work for us is to do a better and better job delivering when we get those ad best to show people immediately the thing that they came to Twitter for and a rich experience around it and anticipating the other things they may be looking for. So it's a combination of those things Brian that help us look ahead and feel really good about our ability to grow DAU from here.

Unidentified Analyst

Got it. And part of it also am sure as you’ve spoken about is efforts to make Twitter more conversational, get people posting more content. You’ve had fleets, now we have spaces so I guess the question is you can take either or both of them, what has sort of been some of the early learnings you're seeing on engagement or retention as you sort of roll out fleets and spaces in these new ways in which people can post contents and platform?

Ned Segal

Well generally if you step back and think about any timely add another way for people to converse on Twitter, it tends to an be incremental to the public conversation. So when we allowed people to use 280 characters instead of 140 when we let them use images or video, when we made it easier to thread tweets, when we -- those would just be some good examples to share where when you do the things, it improves people's ability to share their thoughts and reduces friction and Fleet is a great example of this where when you give people the opportunity to share something that isn't getting to be put into their followers timelines that's going to go away in 24 hours where it's easy for somebody to respond to, it becomes a direct message conversation, you end up with more happening on Twitter and anything we can do to reduce friction and help people have conversations and other things that are most important to them, we're going to work hard to deliver that.

Spaces is a great example that audio chat rooms are a wonderful way for people to either participate in or observe the public conversation while leveraging their interest craft to find that things they're looking for and the people who are participating to follow our graph to help them find the audience for their conversation that they're driving.

Unidentified Analyst

Got it. It should be things you want to watch spaces evolve and watch Fleets involve from a user perspective. I want to go back to the advertising side, a little bit in drilling to some of those drivers. We talked a little bit development velocity as mapped, there is the SMB initiative, there is obviously brands initiatives, maybe just talk to us about how you're sort of prioritizing each of those advertising opportunities to ensure you get the maximum results you can in each of them?

Ned Segal

Sure so first I'll start with direct response because it's we don't just think about map in the context of delivering app install ads. We think about in the context of moving all the way down the funnel and helping advertisers reach their customers even at the moment of purchase. So that's a top priority for us and one that will when we say revenue durability, it will provide more predictability, it will provide access to larger piece of it advertiser's budget when we move all the down the funnel.

So that one is very high in the list for us, but so too are things like small business that you mentioned where we've historically known that there are millions of small businesses on Twitter, but we weren’t doing a great job making the case to them for why they should advertise and making it really easy for them to buy ads. So we've been increasing the team who does the sales to those small businesses that helps them when they need support around using Twitter, but we're also working on the products that they need to make it really easy for them to set up a presence for their business on Twitter to buy ads and promote their tweets in a really simple way. They don’t have sophisticated marketers running their campaigns for them and so we need to treat them like it's a consumer product and make it as easy as possible for them.

So we've begun that work and we're making good progress on it. We'll also overtime move beyond ads and you'll see some things from us over the course of this year where we put dollars into content creator's hands and we're facilitating a transaction where they can create their own price and send premium content to their followers. Similar to that, we will provide premium features on Twitter that we'll charge for but the value will accrue to Twitter for adding extra value to the experience that people have on the service.

Unidentified Analyst

The performance marketing and the direct response opportunity is so large, you guys have talked about how DR is 15% of your business and you eventually want to get it to about 50-50. We've sized where you we think 75% of the online advertising dollars are performance-based and now you're going to be able to hopefully crack into just a lot of money to go after here. Map is one aspect of that, but maybe just help us understand that the types of investments you have to make throughout '21 and '22 to really capitalize on that big pool of performance marketing dollars.

Ned Segal

Sure so the first is continuing to improve our existing DR products, which are primarily app installs, which means getting somebody to download your app or to reengage with your app whether you are a streaming service or right sharing service, a delivery service or something else, again a stock buying app, those are all examples of apps that you can come at Twitter and have the opportunity to download or reengage with them because our senses is those would be experiences that are relevant to how you're using the service at that time.

The second is website clicks that means sending somebody to the website of the advertisers so that they can learn about their product or service, so that they can buy or download whatever that product or service might be. Then we also think about commerce. So helping people buy things on Twitter and we want to be really thoughtful about how we do this so that we're helping advertisers find their customers and continue to own that relationship with the customer. We want to be advertiser friendly and not create a competitive environment for them. We want to create an environment where they can continue to benefit from their relationship with their customer.

So that means being really thoughtful about how you create the experience, so that it's really complementary to the other advertising and commerce opportunities that those advertisers have to market their goods and services. So those would be primary areas that we think about, but we also think about things like the search tab on Twitter where today the ads that you see are tied to your profile, but you're telling us an awful lot of signal at that moment about what it is that you're most interested in.

We think about Fleets and ways both our advertisers can use Fleets to reach their customers, but also where ads might fit into that experience when two people are using Fleets, but then the aim is to go back and forth between each other. So it's a great example where there's lots of real estate on Twitter that we can continue to better leverage over time for advertisers.

Unidentified Analyst

The search part is a great example. I go in there and search for Michigan basketball, you should have used that signal certainly drawn our jersey the Map 2.0 [ph] here has a lot about this, it's one piece of the performance marketing in the DR pitch. One of the things that we're still trying to make sure we understand is what are one or two of the largest improvements that came with Map 2.0 versus prior versions and when you talked about that 50% growth in the fourth quarter, was that new advertisers, existing advertisers, what really drove that growth in that product?

Ned Segal

Sure so first, we've shipped over 30 improvements in the last four or five quarters around Map, everything from revamping the actual format. So you can flip through a carousel of images or videos before you click, to download to making the experience of actually purchasing and launching a campaign better, to making sure that the model that predicts where the ads show up spends the first few days of the campaign learning as opposed to locking in. We've improved the reporting so that we can provide industry-standard reporting that we weren’t able to provide looking back a year ago where we had to update our terms of service, we had to update how our relationships work with these measurement partners.

So those would be four really good examples that would demonstrate to you that just by catching up to the industry on some of these things and working to move beyond what parity effectively is and others that we can deliver pretty strong results for advertisers. Now which one of those resonates with a given advertiser really depends on their campaign and their objective, different advertisers come to us with a different view of what success looks like. Some will say we consider success when somebody does their first trade on our app. Others will say it's when they take their first ride on my service. Others will say, I just wanted to go to my app because once they go to my app, I feel like it's good enough that we can deliver whatever it is that might make the most sense for them and so if you step back from those things, it's really the combination of those 30 plus improvements they gives us the confidence they can go to advertisers and market the service more aggressively.

Now you asked about the fourth quarter and what drove that 50% plus growth? It's when you compare one period to another a year earlier, remember so many things changed the games that an advertiser is launching or trying to get people reengage with are different. The countries that are moving into with their good or service have changed. The events against which they're advertising have evolved as well. So it was a good combination of new advertisers and existing advertisers most of the things that people are advertising were different than they were a year ago and I think that's just representative of how our advertising business works is that it's a constantly evolving set of opportunities to deliver for new and existing advertisers. It's great we get new at-backs every year and every quarter because it means that we can show these improvements to people who may not be burdened by an experience with Map that maybe wasn't as good as it should have been over a year ago.

Unidentified Analyst

That's helpful and back to the velocity and improvements is a lot of improvements to the product. The other area is that you talked a little bit about was the SMB opportunity and I guess on the SMB front, I wanted to ask just first of all where are you now from a salesforce perspective on SMBs and if you were to go ahead a couple of years, what are the big areas you need to really invest in on the SMB opportunity to really make it resonate well and scale that dollars?

Ned Segal

Sure so we've grown the team that helps the largest of the small businesses spend more on Twitter. We call that team our customer success team. They are hitting the phones, they're answering when somebody rings, working with many different customers who have a common set of experiences and opportunities and challenges when they use our service and they're able to leverage their knowledge across a broad group of customers, but for us to really scale the small and medium business opportunity from the 15% of revenue that is today to be much more than that and this is a group that they spend more than 70% of their ad dollars on digital. So we know that this is right for us to really penetrate that group better than we have in the past.

We're going to need to lead with great product experience for them and really good relevance and really easy experience not just launching their campaign, but seeing how successful it was. So we've staffed that team and the work that that will require and over the course of this year, we hope that you'll see some improvement in the experience when you go to ads.twitter.com. We want Brian to be able to promote his tweets when he's talking about stocks or Michigan basketball and for it to feel as easy as any experience that you might have on the Internet.

Unidentified Analyst

I have a lot of views of Michigan basketball. So we now turn to the idea of today's [ph] section of the discussion. We can look at your idea of the discussion. It's striking to me that you're willing to talk about doubling the ad revenue just as there are apparently big changes coming our idea and measurement and part of the hope is that performance marketing will improve which IDFA could impact. So what gives you confidence they're going to be able to manage through the idea if they changes, what in your mind are the biggest challenges that IDFA is likely to bring?

Ned Segal

Sure so first it's too early for anyone in the industry I think to approach IDFA and convey any degree of certainty around how this plays out because the ad platforms, the operating system providers, the advertisers and the people who have the choice of how their data is used, all are going to have to act and respond to these changes before we really know how it shakes out. So this is going to take a while.

Secondly, what gives us confidence and enthusiasm as we look ahead is we look at the unique signal that Twitter has where they're growing audience with better formats and more relevance and the ability to better leverage that signal much of which is tied to a device ID and we feel really good about our ability to leverage that combination. We also feel like we've built up a lot of trust with the people who use our service, whether it's around GDPR or CCPA, when we prompt people and ask them questions which have to be really thoughtful and transparent and demonstrate the choices that they have.

We ask if we can show them personalized ads, we do the same thing and we hope that that trust that we built up with people helps us as we look ahead and helping them understand the benefit of giving us the things that we need in order to give them a good experience whether it's ads or tweets that they're seeing on Twitter. And finally, I think the IDFA in a way is going to level the playing field.

We're in an industry where many -- we're much better than Twitter historically at leveraging all of the data that was available to them from the device ID to what people were doing on other websites and so on. When we all have the same set of new challenges that we have to face leveling the playing field will be a really interesting impact on the broader industry and we think when you combine that with the unique signal that we have and all the work we're doing right now to get back to parity on a lot of these things, we felt like it positions us to hopefully do just fine through this., but we're going to have to see how it plays out is definitely too early to say.

Unidentified Analyst

A lot to monitor, I think in the coming days and weeks essentially we'll see when this thing actually rolled out.

Ned Segal

Even when it does roll out Brian, remember you're not going to see prompts from everybody right away. So companies will have to make their own decisions about how and when they want to prompt. We've shared that we don't want to be in a rush around IDFA. We want to be really thoughtful but if you only have one chance to ask somebody if you can have access to their device ID to show them more relevant ads, you want to ask in a really thoughtful way and you want to take time to learn from the industry and the broader ecosystem before you ask a question like that.

Unidentified Analyst

Got it. That's helpful it's very helpful context. I wanted to end with which one the long-term financial model. It's interesting you guys have taken a really unique hybrid cloud strategy. Some of the content implies on your own data set that you’ve been building and then you have the GCP entering WS partnership. So talk to us about areas in which you're seeing benefits of using your own data center footprint, areas you're seeing benefits of using Google or Amazon and then how do you think this all comes together in the long term gross margin profile?

Ned Segal

So first we'll talk about the cloud and then we can take -- get to gross margins. We want to be agnostic as to where data sits from a architectural or even from a cost perspective so that we can make the best architectural decisions in order to deliver speed internally and externally around decisions, around how tweets show up on your timeline around how an ad gets chosen and put into your timeline. And so far we've found that having the data that we sift through in order to make good decisions sitting in GCP has helped us make better decisions and we're delighted over the course of this year to notice that people were using it more than we expected and that meant that we're making more better, faster decisions and so we ask them to keep going. We didn’t ask them to the slow down.

Now most other Twitter data sits on Twitter servers in our data centers, but over time we want to have timeline served from the public cloud as well that can allow us to make sure that we can scale up quickly, they can allow us to ensure that we're close to where our customers are in terms of where our datacenter sit. They can ensure that we can provide appropriate redundancy. And so having the architecture set up so that we're agnostic as to where data sits, we think will help us for many years in just making the right decisions.

Cost is only one of them, speed is way high up on there and so too is access to the best technology. Lastly, you asked about gross margins, remember there are few different levers that go into cost of revenue. The first one is infrastructure and most of our infrastructure cost whether they are public or private cloud end up in cost of revenue. So if it's in period expense or if it's depreciation of previously acquired service.

Also in there is our traffic acquisition costs, which has trended lower and we haven't broken that out as much recently because it has trended lower and the third is the revenue share with content partners and when people buy a lot of ads that go in front of highlights that you see on Twitter around great events, those end up showing up in the cost of revenue line. We're going to continue to be gross profit dollars sensitive, not gross margin percentage sensitive as we grow the company. We think that's going to help us make the best decisions for all of our stakeholders and so we'll have to see how that plays out overtime. When we talk about long-term margins, we haven't talked so much about gross margins because of that. We've really focused on the GAAP operating margins.

Unidentified Analyst

Okay. All right. Well that is always great to sit down, there is a lot of excitement to you to monitor the next year and couple of years. So thank you so much for your time.

Ned Segal

Thanks for having me Brian. Next year in San Francisco.

Unidentified Analyst

Make sure San Francisco is done. Thank you, everyone.

Question-and-Answer Session

Q -