Twitter, Inc. (delisted)
Q4 2018 Earnings Call Transcript

Published: 7 Feb 2019

[Operator:]

Good day ladies and gentlemen and welcome to the Twitter Q4 and fiscal 2018 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, Vice President, Investor Relations. Please go ahead.

[Krista Bessinger:]

Thank you. Good morning everyone and thanks for joining our Q4 earnings conference call. We have Jack and Ned with us today. Before they start, I wanted to remind everyone of the format for our call. We published a shareholder letter on our Investor Relations website about an hour ago and we hope everyone had a chance to read it. Because the letter has a lot of detail, we are going to keep our opening remarks brief and then dive right into your questions. We will also take questions asked on Twitter. So please tweet us at @TwitterIR using the #TWTR. Also, during this call we will make forward-looking statements. Those are things like our outlook for Q1 and the full year 2019 and our operational plans and strategies. Our actual results could differ materially from those contemplated by our forward-looking statements and you should not consider our reported results as an indication of future performance. We are making these forward-looking statements based on information available to us as of today and we disclaim any duty to update them later unless required by law. Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ. Also during this call, we will discuss certain non-GAAP financial measures. We have reconciled those to the most directly comparable GAAP financial measures 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 and an audio replay will be available on Twitter and on our website in a few hours. And with that, I would like to turn it over to Jack. Good morning, everyone. Thank you for joining our call. As we did last summer, we are going to start with a few comments and a few thoughts in terms of what's important for us as we look forward and how we are thinking building up Twitter. First, we are really proud. This is our best financial performance ever for the full year and the quarter. We are guided by our purpose of serving the public conversation. The reason we think this is so important is because we believe it's the best way to see what the world is thinking about what's happening. And we think that's critical because it helps the whole world solve problems together. There are four key areas that we believe we have to focus on going forward. And that is promoting healthy conversation, making Twitter a lot more conversational, making Twitter a great place for our advertisers and focusing on our technology platform. I am going to speak a little bit about each. In terms of promoting healthy conversation, we think this is really important as we have said in the past because we think it is a growth vector over the long-term and it's the right thing to do for the people on Twitter and also for the world. We have made a lot of progress. We continue to make product changes that have resulted in people reporting less abuse and our enforcement has been three times more effective. A big focus for us going forward is to remove the burden from the victims of abuse and harassment in terms of reporting, muting and blocking by being a lot more proactive around our enforcement and our promotion of healthy conversation. We want to make sure that we are also measuring our progress and we want to make sure that that measurement is open and visible to all. We can do a much better job in terms of making clear why we take enforcement actions, both to the victims and also to those who are inflicting abuse and harassment on the service. And we also want to invest in a much more rigorous appeals process for when we get things wrong. We believe we have to make Twitter more conversational, because this is our key differentiator. People come to Twitter not only to see what's happening, which feels what is happening, but also the conversation around it. You can't find the conversation on Twitter anywhere else. We have focused a lot of our effort on both topics and events to start and we believe that by biasing more of the service towards topics and events and being able to follow interest we will inspire a lot more conversation and we will have a lot more fuel to show what's happening in a very, very unique way. We have been making a lot of progress on making Twitter a clear choice and a strong choice for advertisers. And that has to do with any time an advertiser or brand needs to launch something new, whether it be a product or service or connect with what's happening into a current conversation that might resonate with their current customers or would be customers. We have been focusing and observing a lot on what advertisers need and matching them with the topics and the interests that their customers have so we can place them in a consideration bucket that allows them to easily be seen and be talked about which generates a conversation that they can learn from and continue to hone their message as they build and launch their products. And finally, we are focused on our technology platform. We believe this gives us a technology advantage so that we can continue to serve our purpose in a way that's unique to us, unique to the world, unique to our advertisers and unique to all the people that we serve. A lot of our focus here has been on improving our machine learning and our deep learning across the service. In the past, Twitter has been pretty mechanical in terms of our approach. More and more, every surface area of the service and of the product, we are applying more machine learning and deep learning, which allows for a much more relevant experience, but also enables us to move a lot faster at scale and serve more people. We have been focusing a lot of our attention on building developer agility and this is showing in some of our results. Recently, we launched a switch at the top of everyone's timeline that allow them to easily switch between a ranked timeline that is relevant when you are away from the service for some time and you want to get a recap of everything that you might have missed to easily switch back to reverse chronological timeline. This is a huge and risky move for us because this is where people spend the majority of their time on Twitter and we believe that this would be a great thing depending on the context that people were in and in fact, every metric that we care about went up with the switch including generating a lot more conversation. So we proved to ourselves that not only could we take on a big move, but we could do it much fast. We were able to build a prototype within a week and ship something to all of our customers within three months. This is a lot of confidence for us in terms of how far we have come in terms of our own platform and building a lot of agility so we can move much faster and we can ship much bigger things now that we have a very stable platform to work upon. With that, I am going to turn it over to Ned for some comments as well.

[Ned Segal:]

Great. Thanks Jack. Before we get into Q&A, I just wanted to say a few words on our new disclosures. We want to provide something valuable to people on Twitter every day and we believe that monetizable DAU and DAU and its related growth are the best ways to measure our success. Monetizable DAU, which is formally then referred to by us a DAU and for which we have disclosed year-over-year growth since 2016, are people who login and access Twitter on any given day through Twitter.com or our Twitter apps that are able to show ads. Our mDAU you may not be comparable to current disclosures from other companies, many of you might share a more expansive metric that includes people who are seeing ads or from a broader set of apps. We considered changing our disclosure to be comparable to other companies but our goal wasn't to disclose the largest DAU we could. We want to align our external stakeholders around one metric that reflects our goal of delivering value to people on Twitter every day and monetizing that usage. So starting this quarter, in addition to sharing the growth in mDAU as we have since 2016, we will be disclosing the absolute number of average mDAU for both the U.S. and international markets. As mDAU will be our audience and engagement metric going forward, we will discontinue disclosing MAU after Q1 of 2019. We will also provide guidance ranges for total revenue and move to giving our profitability guidance on GAAP basis, guiding to GAAP operating income instead of adjusted EBITDA on margins. One of the things you might be wondering about is how our new mDAU could impact advertiser conversations. This change in disclosure does not impact an advertiser's objectives on Twitter, the decisions they make or the information to which they have access today. Advertisers come to Twitter because we have the most valuable audience when they are most receptive and because we generate a high return on investment against their campaign objectives. As we look ahead, we see huge opportunity to deliver increasing value for advertisers on Twitter through improving ad relevance and measurement and innovating with more compelling ad formats and better tools. All of this can lead to a better ROI and increase demand. With that, operator, we are ready for your questions.

[Operator:]

[Operator Instructions]. Your first question comes from Douglas Anmuth from JPMorgan. Your line is open.

[Douglas Anmuth:]

Thanks for taking the questions. I have two, I think both for Ned. First, can you help us just understand the operating income guidance for 1Q, the $5 million to $35 million, which I think looks like it will be down year-over-year? Is there something more specific in there? Something that we may not be thinking about? And then second, you talked about 20% GAAP expense growth in 2019. How are you thinking about whether you can potentially expand margins in 2019? Thank you.

[Ned Segal:]

Hi. Thanks Doug. Both questions are related. Let me talk a little bit about the expense growth and how that plays out in the guidance. So remember, if you look back for context at 2018, we grew cash expenses about 17% because of the way stock-based comp came down from higher levels over the last couple of years. GAAP expenses through 8%. But if you look at the fourth quarter, cash expenses were up 21%. So we are bringing a larger expense base into 2019 than we began the year with as we added headcount gradually over the course of the year. We grew headcount about 16% in 2018. So we take that larger expense base into 2019 and we will continue to invest against the same priorities with the same prioritization as we had in 2018 with how it continues to be our number one priority from both a resourcing and a mindset perspective. So the results of that higher expense base and continuing to invest is the operating income guidance that you see there today. As you can imagine, operating income guidance is both a result of the expenses and revenues. The revenue guidance that we gave is just based on the best information that we have got five weeks into the quarter with a lot of the quarter left to play. We will work hard to deliver the best outcomes we can. If you look at the full-year and the expense growth, I think I just point back to those comments that I shared with you in the prioritization that I went through. Does that help, Doug?

[Douglas Anmuth:]

It helps. Any more comments just on margin potential to expand in 2019?

[Ned Segal:]

Yes. So when you think about margins, there is a couple of ways to look at it. One is that we make our expense decisions, our investment decisions with a long-term time horizon. We think about believe the way that we can deliver health on the service over long periods of time. We think about growing the number of people who use Twitter over long periods of time. And so we make the investment decisions over the long-term time horizon. The margins will be an output of those decisions in revenue that we deliver in any given period. And we are going to work hard to deliver great outcomes and we will guide to revenue one quarter at a time and the margins will just be an output of that.

[Douglas Anmuth:]

Okay. Thank you. It's helpful.

[Krista Bessinger:]

Thank you. Next question, please.

[Operator:]

Your next question comes from Lloyd Walmsley from Deutsche Bank. Your line is open.

[Lloyd Walmsley:]

Thanks. Following up on Doug's question, last quarter you guys talked about a bit of a diversion and focus on the development side to engage on health side. So wondering if some of the OpEx growth guidance is an effort to reengage in the core product? And I guess related to that, can you give us a sense for how much conservatism might be in that OpEx guidance? What might cause you guys to grow spending less than the 20% or more than the 20%? Or is the budget kind of the budget? And then second one would just be on the event landscape. Can you talk about the outlook for 1Q in 2019 and what to keep in mind for modeling aside from maybe the World Cup strength you called out? And can you give us a sense for how meaningful the election cycle was in the fall in terms of engagement and monetization?

[Jack Dorsey:]

Great. Thanks, Lloyd. So we will continue to invest across all of our priorities of which health is the first but making it easier for people to be a part of and see the conversation on Twitter is the second. We think about revenue products and sales and we also think about platform. There is no change to those priorities. No change to their prioritization. And we think we have to invest the dollars in where the people are going that we are hiring. So no changes to the thinking there. In terms of variability on the OpEx, we can always evolve our thinking on where the dollars may go but we have been pretty consistent over the last year or so in thinking about those priorities and we expect to continue that. The headcount is obviously more fixed. And so there some other dollars in the OpEx budget that are less fixed. But we try to think about those decisions with long-term horizons and not things that we jerk around from one period to another based on near-term outcomes. You asked about events. It's interesting, if we look at any given year, all around the world, you would find an election, a presidential election in Brazil or Mexico, the World Cup, the Olympics. We look at all these as opportunities to bring people to Twitter to help them see all the amazing things on the service so that they will come back more frequently and stay longer when they are there so we can help them find what is most interesting to them and get them involved in or help them see the conversation. The same thing is true for advertisers where we look to deliver them a strong ROI during those events so that they will come back more frequently when they want to launch a product or service and when they want to connect with what's happening. And it's our job to comp those events by earning people's trust so that they will come back over and over again. There are events in 2019 that may not have occurred in 2018 and there were events in 2018 that won't happen again in 2019 and it is our job to just grow over them.

[Lloyd Walmsley:]

Thank you.

[Krista Bessinger:]

Great. Thank you. Next question, please.

[Operator:]

Your next question comes from Ross Sandler from Barclays. Your line is open.

[Ross Sandler:]

Hi guys. Just two questions. Thanks for the new mDAU disclosure. It looks like, our rough math and bear with us on this, that the U.S. owned and operated ad revenue per DAU is around 410 to $15, call it, per quarter in 2018. And that compares to Facebook's somewhere in the mid $30. So that, I guess, suggests you have got plenty of runway to increase ad load from here. So I guess given the 5% DAU growth in U.S., how do you think about ad load even looking out over the next few years? And then the second question is just around the first quarter in particular. Given the 26% owned and operated ad revenue growth in 4Q, what kind of owned and operated do you see in the first quarter, based on your guidance? Thanks.

[Jack Dorsey:]

Hi. Thanks Ross. On the question of monetization, ad load is a lever. We see a lot of levers when we think about the opportunity. We have grown revenue in excess of audience for four quarters in a row. That's not a path to grow forever. It wouldn't be a path to realize our purpose of serving the public conversation to everybody. But we definitely see room to continue that trend when we look in front of us. We think about continue to improve ad relevance. We think about continuing to improve the ad formats that we provide to advertisers and we still have work to do with the many advertisers out there who use Twitter to help them invest more and with those that don't use Twitter as much as they should whether they are the largest advertisers in the world or the millions of small businesses that probably don't advertise on Twitter yet, but have accounts on Twitter already. So we feel like there are lots to leverage there. The ARPU is just outcome of the hard work that we do with the advertisers against the growing user base. We do, when we look across the platform, when we look across geographies and different surface areas and times of year, we still feel more demand constrained than supply constrained across the platform. So there is definitely still work for us to do there as well. Your second question was about O&O and how that plays out. We are just giving guidance on overall revenue. We still feel really good about the conversations we are having with advertisers. The message is of Twitter having the most valuable audience when they are most receptive and us being the place to launch something new, whether it's a movie or a new product and of being the place to connect with your customers and connect with what's happening. Those are really resonating with advertisers and we see lots of room to continue that success.

[Krista Bessinger:]

Great. Thank you. And the next question, we will take from Twitter. It comes from the Twitter account of Rich Greenfield. He has two questions. The first one is, could you discuss your progress in direct response/performance advertising? He has seen more app install ads in his feed lately? And then the second question is around Japan. Japan had a great Q4 2018 with revenues up 30%. Can you talk to the health of the Japanese market in 2019?

[Jack Dorsey:]

All right. Thank you, Twitter and Rich, for the question. First on direct response. We have a really a great business helping people when they launch a new app in new parts of the world or they have a new game that they come out with that they want people to know about. And Twitter has been a great place to launch those apps. Mobile application downloads is an important part of our advertising business. It's also a place where we see more opportunity and it will be one of the areas of investment for 2019 as a path to a broader direct response opportunity over the next couple of years. So MAP and a great year, but we still feel like there is a work for us to do to realize our potential and helping those advertisers connect with their customers on Twitter all around the world. Japan had a terrific year, finished up 30% 30% in the fourth quarter. It's our second largest market. We found real success there over the last year or so with the largest agencies. It's a more concentrated ad agency market. The video ads as a format have really resonated with people in Japan and with the advertisers in Japan. So we are really pleased with our performance in Japan and also feel like there is opportunity that remains in front of us there as well.

[Krista Bessinger:]

Great. Thank you. Next question please, operator.

[Operator:]

Your next question comes from Jason Helfstein from Oppenheimer. Your line is open.

[Jason Helfstein:]

Thanks. I will ask two questions. Just first to Jack. What pending product changes are you most excited about? There was a lot of buzz just around different things relating to at that CES. Maybe if you can expand upon that? And then I guess more specifically on the first revenue guidance. Is there any specific reason why first quarter will come out at the low end of the range? Is there anything you are seeing that is making kind of that net number be the low end relative to the middle or the high? Thank you.

[Jack Dorsey:]

Thanks Jason. So there is three areas on the consumer side that we are really excited about. One is around health. There is a lot we can do within the product that can create a much better experience for the individuals on the service and we have spent a lot of time focusing in the past on our reporting infrastructure and less time on the actual first party product experience. So we are now looking at the experience itself and how we can give people more controls over the Twitter experience to help some of the health issues. We do believe this is a long-term growth vector for us and something we are really excited about, experimenting with and providing some solutions that I think make the overall conversation much better. That leads into the second big tier which is conversations. We believe this is our core differentiator. People come to Twitter not only to see what's happening, but what people think about what's happening, what people are talking about. And right now the experience of having a conversation on Twitter is pretty difficult. There is a lot of friction within it. It's very hard to follow conversations. It's very hard to participate in them. We think there is a ton of opportunity to make that much, much faster and we believe that this will generate even more conversations. A good example of this is the timeline switch that we released not too long ago. We weren't expecting to see an increase in replies and conversations but in fact it did that exactly. So just giving people simple controls but also looking more deeply at where people have conversations, putting the conversations on the same surface so they have all the context of what's going on we believe will inspire them to participate more fully. And then finally, we do believe that Twitter is much more of an interest network than anything else. People come to Twitter because are interested in something. They want to follow those interest completely. So a really profound change for us going forward will continue to be biasing the majority of service towards interest. And what this means is being able to much easier follow an interest, express an interest from onboarding when you first download the app. And you might be in San Francisco and interested in the Warriors, we should connect with that conversation with those events immediately, so you don't have to do all the work of finding and following the related accounts, all the way to local news events or emergency situations or anything that's breaking within your particular market or around the world or long-term interest that you might have that you have to dig a lot through Twitter to find the relevant accounts. We think we can make this much, much easier. And we think it's what Twitter wants to be. So there is a ton of work here that we have been experimenting with and launching around. And it really allows a much more pure experience on Twitter but it also enables a much better and richer canvas for our advertisers to participate in this as well.

[Ned Segal:]

Hi Jason. Your second question was around the guidance. First, it is just worth talking about the change in the guidance to total revenue. So instead of backing to a range, we are trying to be more explicit now. The explicit range is a little tighter than the range that you might have backed into before. Hopefully, we are reflecting the health of our business and the confidence that we have got as we head into 2019. As you can imagine, our outlook is based on the visibility that we have as of today when we notice there is still a lot of the quarter left to play out. remember for a more brand focused business like ours, the budget sometimes gets set early in the year and starts to play out from that point forward. And so we are just working with the best information we have when we get at the time the call when we give our guidance range and we work hard to deliver as great an outcome as we can this quarter and throughout the year.

[Jason Helfstein:]

Thank you.

[Krista Bessinger:]

Great. Thank you. Next question please.

[Operator:]

Your next question comes from Mark May from Citi. Your line is open.

[Mark May:]

Thank you. I appreciate it. Just first can you characterize the recent drivers of ad ARPU growth? What have been the contributions from the high-level drivers like engagement or inventory growth, pricing growth and yield or conversion improvements? Just kind of curious what's been sort of the key contributors there? And then secondly, can you discuss key areas of investment for this year? Are there any particular product areas or teams within Twitter that will be getting more of the focus of the incremental hiring and investment? Thanks.

[Ned Segal:]

Thanks Mark. So first on the question on what's driving the ads business. We think about a few things. And these are the same areas where we have seen success throughout 2018 and where we still see opportunity in front of us. The first is just doing a better job in the ads platform driving relevance. You show people more relevant ads, they are more likely to watch or interact with them or help the advertiser realize their objectives. The second is those newer ad formats, the video website card and the video app card, continue to bring incremental dollars to Twitter as well as replacing where dollars might have been going before with a more compelling format and hopefully deliver it in a more relevant way to a growing and more engaged audience. A result of those is that we get better clickthrough rates. Clickthrough rates were up 27% this quarter. Ad engagements were up 33% which suggest that both the mix shift to video continues but also that better ad relevance is driving more interaction with the ads that people are seeing. Lastly, as a result of all those things the conversations with advertisers are just going better and we still feel like there is more work for us to do on that demand supply balance as we still feel more demand constrained than supply constrained across the platform but we are doing a good job of continuing to address that. When we look at the investment priorities, I talked about that the big buckets that we think about with health coming first. But if we looked at the places where the dollars may go and the product both on the consumer side and the revenue side, I would highlight a couple things. Jack talked about conversations and working hard to make Twitter more conversational. The events and topics infrastructure to make sure that whether it's a sporting event, an election, a television show or something else that people are talking about or interacting around on Twitter that they don't have to guess for the hashtag and that we can take them right into an experience where they see the latest tweets, where they see a recap of everything that happened whatever might be the most compelling or helpful way to bring them up to speed around that event or topic. We also think about the MAP business, I mentioned that earlier as an important area of investment for us in the broader ads platform where we feel like there is real work for us to do to enable us to move faster, to test things better, to help advertisers measure it easier. So those will be some of the areas that I would highlight.

[Mark May:]

Thanks Ned.

[Ned Segal:]

Thanks Mark.

[Krista Bessinger:]

Thank you. Next question, please.

[Operator:]

Your next question comes from Brent Thill from Jefferies. Your line is open.

[John Streppa:]

Hi. Yes. This is John Streppa, on for Brian. Thanks for the question. In the past, you have highlighted the opportunity for not only new users on Twitter but also re-engaging lapsed users. Just curious if you have noticed any change in the behavior of lapsed users coming back to the platform, especially as you are servicing more relevant content, especially with focus on video? Thanks.

[Ned Segal:]

Hi John. Glad you asked the question. We definitely think about two ways to help people deliver and get value from Twitter every day. So the ratio of DAU to MAU is about 39%. That suggests that there is a lot of room for us to continue to help people who come to Twitter from time to time, find value on Twitter every day. But there is also a whole other part of the world, the people who haven't come to Twitter before or having come in the recent past. And we have the opportunity when they get a link from somebody, when they search and end up on Twitter, when they come to Twitter because something happened in the world and they want to learn more about it for them to have a great experience to find what they are looking for, for us to anticipate other things that might be helpful for them to learn about or interact around. So both continue to be important areas for us. When we look at the top of funnel, it continues to be really healthy and we still have lots of opportunity to earn people's trust. They are coming to Twitter. We just need to help them find what they are looking for when they get there.

[John Streppa:]

Great. Thanks.

[Krista Bessinger:]

Thank you. Next question, please.

[Operator:]

Your next question will come from Justin Post from Merrill Lynch. Your line is open.

[Justin Post:]

Great. Thank you. A couple. First, Jack, you mentioned a positive response to the timeline changes. Is that showing up in the users or just usage per user? Second, just how is the strategy to reach out to direct response advertisers? A lot of ad channel techs we talked to aren't yet on Twitter. Is it pricing that's the issue? Or is it just making it easier for them to use and just tell them the story? I will just leave it there. Thanks.

[Jack Dorsey:]

Yes. Thanks Justin. So we do see it affecting both. The timeline shift for us was again something that we made about three years ago as we look to apply more machine learning and deep learning to the service to add more relevance. And that was a pretty significant change for us and did result in some great engagement. But we also saw an opportunity to give people more control depending on the context we are in. So we find that the ranked timeline is great when you are away from the service and you want to get a recap of everything you missed and it helps usually. You don't have to dig through all the tweets that you may have missed from the folks that you follow. But in some cases, like if you are in the middle of watching a Warriors game or there is a breaking news event, switching it to reverse chron enables you to see everything in real time and see how fast and how fluid Twitter ultimately is. And we saw all of our metrics go up from, all the metrics that we care about go up from this, what seems like a very, very simple change. And that's inclusive of people tweeting and engaging in conversations as well. So we think there is a lot more that we can do within the timeline, both in terms of relevance and also some the controls we give people that will result not only in growth for the engagement on the service but also to help new folks into the service get the most out of Twitter.

[Ned Segal:]

Hi Justin. Your second question was about pricing around ads and how we think about that as a lever. Pricing is an output to us. If we work hard to help advertisers realize their objectives on Twitter, if we come out with better formats, if we deliver better relevance, if we put those up against a larger and more engaged audience, then the auction will sort out the pricing. And advertisers, if they get a good ROI on their campaign, they will come back and do another one or do a bigger campaign. So we don't really forecast pricing. But when you look at what it's done over the last year where CPEs have continued to come down, they were down 7% this past quarter and you balance those with the higher clickthrough rates and the higher ad engagements, we feel like those signs of success that we are delivering a strong ROI for advertisers which will help them keep coming back for more.

[Justin Post:]

Great. Thank you.

[Krista Bessinger:]

Thank you. And we will take the next question from Twitter. It comes from the account of roniethologic. And his question is, can you give us some color on the efforts to improve the onboarding?

[Jack Dorsey:]

Yes. Thanks for the question. So onboarding continues to be an area that we think is going to unlock a lot of growth for us. As Ned mentioned, we still have a very healthy top of funnel. A lot of people coming to Twitter with the desire to use it and to see what's happening in the world. One of the things that we don't do well when people first come on to the service is match them with an interest. We are not using a lot of the signals that would indicate where they are or what they might be interested in. And some of things that we are looking at are making sure that we use those signals so that we can immediately get them into an event experience or recognize that they might be into basketball for instance and enable them to get into the conversation right away without having do any work whatsoever. So our principle here is to remove as much work as possible from finding and following various accounts around an interest and getting you into a timeline or an event experience or into a conversation that would be meaningful immediately and then letting you take on the actions to find those related accounts and follow those accounts. So we think there is a lot of opportunity here and a lot of growth. And it has been a focus for our consumer team and we should we should continue to see a lot more improvements as the months go on.

[Krista Bessinger:]

Great. Thank you. And we are ready for the next question, please.

[Operator:]

Next question comes from Heath Terry from Goldman Sachs. Your line is open.

[Heath Terry:]

Great. Thanks. Ned, I am wondering if you could just give us a bit of a sense, the 20% increase in OpEx this year, how much of that would you characterize as a defensive sort of related to the trust and safety and health issues and regulatory issues around the platform versus investment in many of the product areas that Jack has talked about that would be driving growth in either users or monetization? And then as we think about mDAU growth over the course of this year, obviously some conversation earlier about events that you are comping against with last year. Is there even just sort of qualitative directional way that we should be thinking about or that you are thinking about how mDAU growth should look for the year ahead?

[Ned Segal:]

Thanks Heath. On the first question, we don't feel like any of the investments that we are making this year are coming with the defensive lens. We feel really clear about our strategy. We feel really good about the execution we delivered in a record year from a revenue and profitability perspective in 2018. But we still feel like there is lots of work to do against those same priorities. So I just want to make sure you think about the lens that we look at it from which is one of confidence and the same consistency around the strategy. You asked where the dollars are going? And I have been through it on the call and I would just remind you, health is the number one priority, but it's not just from an investment dollars perspective, it's from a mindset perspective and where people spend their time, whether they are working on onboarding or they are working on more proactive enforcement of our policies. mDAU growth and how it might evolve over the course of the year. We are not going to guide to how mDAU is going to grow. But we do think that product changes that Jack has talked about and the events that go on in the world at any given time, they ought to cause DAU to continue to grow and it's our job to when people do come to Twitter to make sure we help them find what they are looking for better and better so that the DAU continues to grow.

[Heath Terry:]

Great. Thank you.

[Krista Bessinger:]

Great. Thank you. Next question, please.

[Operator:]

Your next question comes from Mark Mahaney from RBC Capital Markets. Your line is open.

[Mark Mahaney:]

Thanks. Maybe just two questions. One, this data point about being three times more effective in terms of enforcement on reported content, could you just talk about how you are able to do that? And is that just a raw use of the resources, human resources? Or is there an AI solution here? Just talk about how you are able to do that? And then the second question has to do back with the expense outlook for the year. It seems pretty consistent with the expense growth that you have had recently. It's just the Q1 outlook, the profitability outlook suggest that the spend growth is greater than. Is there any particular reason why expense growth would be stronger in Q1 versus the rest of year? Is that just the normal vagaries of expenses? Thanks a lot.

[Jack Dorsey:]

Thanks Mark. So it's a mix. We are getting better at applying machine learning and artificial intelligence to our internal tools to help our internal agents be a lot more effective. We are also delivering more product changes as well that allow us to better prioritize our queues so that we can move a lot faster and recognize the severity of reports much earlier so that we can act upon them. So a lot of our work is not only on the product side but making sure that the tools that our agents use enable them to be a lot more efficient, a lot more effective. And so looking for opportunities to minimize error rates and also make a much more rigorous appeals process that people can trust and understand how to quickly appeal any decision that we might make in there.

[Ned Segal:]

Your second question, Mark, was about expenses and the ramp. So you end up with expenses growing more in the first quarter than they might in any given period. That can just happen based on when the hiring happened in previous periods. So we accumulated a larger team over the course of last year and you bring that whole expense base into the first quarter, you add merit increases and other things on top of that and you end up with the expense growth potentially being higher on a percentage basis. But that approximately 20%, that's a better number for the full-year.

[Mark Mahaney:]

Okay. Thank you.

[Krista Bessinger:]

Thank you. Next question, please.

[Operator:]

Your next question comes from Anthony DiClemente from Evercore. Your line is open.

[Anthony DiClemente:]

Good morning and thank you. Ned, I don't think anyone has asked on CapEx. Your outlook calls for a step-up in 2019. Maybe just a little bit on how we should think about infrastructure build or drivers of CapEx this year? And then for Jack, I listened to your Bill Simmons interview a couple of weeks ago, which was great. At one point in that interview, you made a really interesting and persuasive argument in favor of the power of text, the speed of text. I think you even suggested that you could convey more emotion and thought with text as opposed to video. But when we look at your business, the video ad formats are the fastest growing ad format. I think they are more than half of your advertising now. So when you think text versus video, what gives you and Ned confidence in the mix shift to video on the business side for Twitter if text and conversations, as you talked about today, are really the sweet spot for the use case of Twitter? Thank you.

[Ned Segal:]

I will take your first one, Anthony, on CapEx. So just for context, CapEx was up 73% in 2018. We have talked all year about $46 million of gear that we received in Q4 of 2017 that we paid for in Q1 on the normal payment terms. So if you normalize, it was really up 35%. On an as reported basis, out CapEx in 2019, the guide is for mid teens to 23% year-over-year growth. But if you normalize that $46 million, it's up a similar amount as last year, 25% to 35% growth. That 25% to 35%, it feels like it's more of the same to us continuing to invest in our data centers, continuing to invest in the product and continuing to invest in the offices where our team works to make sure that they got the best place to do the most important work of their careers. So no changes to the priorities, from a CapEx perspective. This, to us, is an indication that we are investing for the long-term to make sure that we can deliver a great Twitter experience to people wherever they are in the world.

[Jack Dorsey:]

And we don't see and I don't see that text and video are at odds with one another. In fact, I think there is a virtuous loop between the two. We believe that video enriches the conversation. And that any conversation, whether it be through text or another medium, points back to more of the video on the service. So we do think there is a really healthy relationship between the two. And as we see more video on the platform and ingest more live streams, for instance, we do see it enriching a lot of the conversation, which allows people to do things like point out parts of a video or clips of video, which generates even more conversation. So we want to make sure that we are agnostic to any form of media that comes on the service, because all of it tends to generate a lot more conversation. That is a fuel that we use to show people what's happening. So we love to see continued increase in people being able to express themselves within video and all the conversation around it because it generates an increase in usage and increased engagement throughout the service and creates a lot of the network effects that we benefit from.

[Anthony DiClemente:]

Thank you.

[Krista Bessinger:]

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

[Operator:]

Okay. Then last question will come from Eric Sheridan from UBS. Your line is open.

[Eric Sheridan:]

Thanks so much for taking the questions. Maybe for Ned. Maybe parsing out the 20% OpEx growth, is there any areas on specific line items in the P&L that we should be thinking or areas of more pronounced leverage or deleverage as you look out to 2019, just for purposes of sort of getting that all modeled correctly? That's number one. Number two, you talked about mid-forties adjusted EBITDA margins long-term. You have got almost there this past Q4. Is there a way to translate that long-term objective? And how you think about achieving the long-term GAAP EBIT margin target for the company from a profitability standpoint? And how linear versus volatile do you think that will be in the coming years? Thanks so much.

[Ned Segal:]

Okay. Thanks Eric. First on the OpEx question. Not much more to share there. It's just more of the same for us. Investing at the same priorities and the same relative prioritization. So I won't drag you through it again. On the EBITDA margins. A couple of things to point out. The first is, we were at 44% for the quarter and 39% for the year. So that's further evidence that we can achieve those long-term EBITDA margins that we have talked about. We did it in Q4 2017 as well. And we just have to carefully balance our ability to demonstrate those margins in any given period with our ability to invest to drive growth over the long-term and realize our purpose to serve the public conversation. If you were to try to translate those EBITDA margins into GAAP operating margins, you will get to somewhere in the mid teens in terms of just a straight translation. And along with how we invest over time, the other things that can affect those margins in a seasonal advertising business, they are going to move around from one period to another as you have seen in previous years.

[Eric Sheridan:]

Thanks so much.

[Ned Segal:]

Thanks Eric.

[Jack Dorsey:]

Okay. Thank you all for joining us. As we head into 2019, we have never felt better about our strategy and our execution and we look forward to sharing additional updates on our progress next quarter when we hold our Q1 earnings call on April 23 before the market open. Thank you all for your support and we will see you on Twitter.

[Operator:]

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