Twitter, Inc. (delisted)
Q1 2016 Earnings Call Transcript

Published: 27 Apr 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the Twitter Q1 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to your host, Krista Bessinger, Senior Director, Investor Relations. Please go ahead.

[Krista Bessinger:]

Hi, everyone and welcome to our Q1 earnings Periscope. We have with us today our CEO, Jack Dorsey; COO, Adam Bain; and CFO, Anthony Noto. We hope you had a chance to look at our shareholder letter, which we posted on our Investor Relations website shortly after the market closed. Like last quarter, we will begin with just a few prepared remarks before we open the call directly to your questions. During the Q&A, we will take questions asked via Periscope and Twitter in addition to questions from conference call participants. To submit a question via Twitter, please direct it to @TwitterIR using the hashtag #TWTR. We would also like to remind everyone that we will be making forward-looking statements on this call such as our outlook for Q2 and 2016 and our operational plans and strategies. Actual results could differ materially from those contemplated by our forward-looking statements and reported results should not be considered as an indication of future performance. Please also take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ materially. The forward-looking statements on this call are based on information available to us as of today’s date and we disclaim any obligation to update any forward-looking statements, except as required by laws. Also, during this call, we will discuss certain on GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in the tables in our shareholder letter and these non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety is being broadcast over Periscope and being webcast from our Investor Relations website. And an audio replay of this call will also be available via Twitter and on our website in a few hours. And with that, I would like to turn it over to Jack.

[Jack Dorsey:]

Thanks, Krista. Hi, everyone and thanks for joining us. A couple of things before we start with your questions. This is our first quarterly update after laying out our long-term strategy and priorities. And as we shared last quarter, our focus is on live. Twitter has always been the best place to see what’s happening now. Whether it’s breaking news, entertainment, sports or everyday topics, only Twitter lets you connect with people anywhere in the world with live conversation. Think of President Obama congratulating Elon Musk on historic SpaceX landing or the world celebrating the legacy of the legendary artist, Prince. Only Twitter lets you follow these historic moments, join in the conversation and share it with others. We made a lot of progress on product innovation this quarter, particularly with live video and our refined timeline and people love it with less than 2% opting out. We remain focused on improving our service to make it fast, simple and easy to use. We also announced a significant deal with the NFL a few weeks ago. As soon as we announced that deal, almost every league in the world contacted us, because they want to provide an even better experience for their fans. And with that, we will move on to your questions.

[Krista Bessinger:]

Great, thank you. Sabrina, we are ready to go ahead and now take the first question, please.

[Operator:]

Thank you. [Operator Instructions]

[Krista Bessinger:]

Great. And it looks like the first question is from Anthony DiClemente at Nomura. Anthony, please go ahead.

[Anthony DiClemente:]

Thanks a lot for taking my questions. One for Anthony and one for Adam. I know you don’t give forward guidance on users or the active user trajectory, Anthony, but can you just give us or speak to trends that you are seeing in terms of new users added, resurrected users and retention? I think last quarter you talked about users from performance-based marketing having higher retention rate. And obviously, if you want to give us guidance on users for next quarter, I think we will take it. And then another one for Adam, just in the shareholder letter, it talked about brand marketers not increasing spend as quickly in the first quarter. I realize that monetization is still growing, but in terms of the deceleration, are dollars shifting back to traditional media platforms, do you think? Are they shifting to other major online platforms? I guess just in your conversations with brand marketers, how are they looking at the strength or weaknesses of the Twitter platform versus other major media platforms that brand marketers might pursue? Thank you.

[Anthony Noto:]

Thanks, Anthony. I will take your first question. In terms of MAU growth, the primary drivers of the MAU growth in the quarter were both seasonality and marketing initiatives. Of course, the continuous improvement in our product underlines the benefit and seasonality that we are seeing, which is not large enough for us to break it out specifically both as we talked about in the shareholder letter through our contributions there. As it relates to the funnel dynamics, we benefited in the quarter from both on improving the top of the funnel as well as retention. And again, the retention improvements reflect the continuous improvement in the product starting to impact the ability to retain a larger top of the funnel this quarter. In terms of our outlook for Q2, we are not providing a Q2 MAU outlook. In the past when we have provided an MAU outlook, it’s because we felt there were some unusual underlying trends that we need to point out and that’s not the case today.

[Adam Bain:]

And Anthony, I will take your question around the advertising side. On the advertising side, overall as we mentioned, brand spend didn’t grow as quickly as we expected. In the quarter, video was strong, but that was partially offset by some softness that we saw in older legacy brand products. So, these are promoted products, for example, without video. In terms of the opportunity ahead, we see a clear opportunity ahead to increase our share of the brand advertising market, especially around video. Some of these new video opportunities will, we believe, grow budgets that we have access to. We also hear from marketers that there is nothing in the world like Twitter in terms of as a marketing platform. Twitter is that live connection to culture for marketers and that’s both unique and special in the brand universe. Live is where – is what’s most valuable in the ad business. So, to make us even more powerful, we are working on some video tools. These are things like reach and frequency planning, demographic targeting and verification, which will rollout this coming fall to coincide with our NFL deal of our live streaming strategy.

[Anthony DiClemente:]

Thank you.

[Krista Bessinger:]

Great, thank you. And the next question comes from Doug Anmuth at JPMorgan.

[Cory Carpenter:]

Hi, thanks for taking the question. This is Cory Carpenter for Doug Anmuth. Maybe a quick question on the NFL deal which I know you guys discussed in the letter. Could you maybe just talk through how you thought about it from a user acquisition or engagement perspective and then maybe also how you are thinking about it in terms of monetization? Thank you.

[Adam Bain:]

Sure and thank you for the question. As Jack mentioned, Twitter has always been known for the place to go to see what’s happening in the world right now. And we have been real time. And the reason we have been real time is because our tweets are publicly available for everyone to see and they are broadly distributed. And live is the best manifestation of real time. We already have live connections, live conversations and live commentary on the platform. And it’s an opportunity for us to add live premium content to those conversations in that commentary. And so yes, the NFL deal is important and I will talk about that in more detail, but we are focused on live premium content in all sports, news and politics as well as entertainment to bring together for our users what they are already talking about, what they already care about. As it relates to the NFL, we know that on Thursday nights during the 3-hour telecast of Thursday Night Football, we have millions of users looking at tweets about that game. And they are creating tens of millions of impressions that we know are very valuable to them and very valuable to our partners, both the NFL and of course our advertisers. And so being able to bring the live streaming game into the product with that live commentary those live conversations is a complete solution. It’s a complete solution for those tens of millions that are already on our platform and care about the NFL and the tens of millions of NFL fans that are not on the platform. And so we see it as the product that will be the same for logged in, logged out and syndicated users. It’s the same video, the same ads, the same analytics and we can deliver in an instant a very transparent way to tell people to come to Twitter and deliver on that instantly. We have talked about the importance of us clearly communicating our value and delivering on it instantly. Live sports, live premium content is a way to communicate them, that’s very familiar to people, something we know they want based on their interest on Twitter and to deliver on an instant, not just with that live video, but all the great conversation and tweets that are attached to it and expose those that having used Twitter to that great content and those that are a complete solution. So, we are really excited about the opportunity to use it as a complete solution.

[Jack Dorsey:]

On the advertising side, we control some of the inventory in the pre-game, in the game and also post-game. This follows along a multiyear, 3-year history that we have had with the NFL of bringing premium content on to the platform and also bringing it out to Madison Avenue. The demand for this program has been incredibly strong for marketers. Only had it in market for about a week, we have already signed up one major sponsorship to the package and it’s important to note that sponsorship actually was funded from video budgets instead of social media budgets. So it’s a good example of how the live streaming strategy that we have overall is aiding our ability to go after these video budgets that we talked about coming this fall.

[Adam Bain:]

I want to point that this watching with Twitter, watching a live event has been something we have seen for 9 years now. It’s pretty phenomenal. And this is really about making sure that make it even easier for people to see these games and to see these events and actually tweet about them. But more importantly, they get to see all the content on Twitter right away. So very easy way to get in, but they could see all the individual produced content, including the premium content as well.

[Cory Carpenter:]

Thank you.

[Krista Bessinger:]

Great. Thank you. And the next question comes from Ross Sandler at Deutsche Bank.

[Ross Sandler:]

Thanks Krista. I just had one for Jack and then one follow-up for Adam. Jack, there was a number of comments in the letter about increasing engagement, so I guess can you just parse that out a little bit for us, what kind of increases or impacts are you seeing from the new algorithmic timeline and given that you have made a bunch of different changes to the core timeline product, what’s the best way for us to measure the increases in engagement, is DAU over MAU still the most important metric and if so, how does that look compared to prior periods. And then the question for Adam, I guess just a follow-up from the previous questions, how does the overall ad market look heading into 2Q, do you expect the work that you guys have been doing around improving measurement and targeting, particularly on the DR side, to start to help the ad revenue growth and if so, when should that happen this year? Thanks.

[Jack Dorsey:]

Thanks Ross. The refined timeline, we are really proud of. We are really proud of what it’s been doing for the service and what it’s been doing for people using Twitter. As you know, a lot of our folks spend the majority of their time in the timeline and the more technology we apply to this, while at the same time giving people control to tailor their experience, the better effects we see. We have seen increases in tweets and replies and re-tweets, and also likes, obviously. So we want to continue to make sure that we are refining that timeline and making it better and better and better. So when people come back to Twitter, they see what is meaningful and a quick pull to refresh and they go back to recent. I will let Anthony take the second part of your question.

[Anthony Noto:]

Sure. Ross, as it relates to engagement, we have a number of factors that we look at as it relates to engagement. The one that is probably the most important is daily active users. It’s one that we continue to focus on as well as a number of other factors, including searches and Direct Messages. So we will continue to look at that metric as well as the others that we have talked about in the past.

[Adam Bain:]

And Ross, to answer your question on the overall ad market, if we look across the board, we grew – we had strong growth internationally, 46% on international growth ex-FX and 39% growth here domestically. We look internationally and we saw across Europe some marketers who held back spend in the first half, holding it back for the Olympics and things like the Champions League. There were some other areas like Brazil and some other major categories. Tech, QSR and retail is good examples of big categories that were little bit softer than we expected. It juries out a bit since the whole category hasn’t reported yet to see how that’s going to shape up across the board. To your point around Q2, we are going to continue to move our marketers from these legacy promoted tweets into promoted video. Promoted video performs incredibly well. It’s – we just recently gotten back a return on ad spend study for video during this past fall season. We saw a $6 return on ad spend for a major beverage manufacturer. So for every dollar that they put in Twitter, it returns $6 back to the register. They told us it was best in category. And so with that type of ROI, we are going to continue to move people through video. In terms of targeting creative and measurement on the direct response side of the house, we have got a lot underway there. One point that I will make is around our dynamic product ads. When we last talked at earnings, DPAs had just bit into an early beta. We have now expanded the beta. At the time we are seeing a 2x lift in click through rates. We are now seeing a sustained rate of 2x lift in click through rate and we are also seeing twice the conversion rate through the funnel. So those strong results mean that it’s ready to open up even more. DPAs take a little bit of time for a marketer to implement. So in Q2, we are going to start opening up through the ads API, so partners can help onboard them as well. So we should be ready for the fall back to school season and the holiday in Q4 season.

[Krista Bessinger:]

We will take the next question from Twitter comes from the Twitter account of Arvind Bhatia. And he asks, is there a way to quantify how much Twitter’s advertising revenue will benefit from the election this year?

[Jack Dorsey:]

Hi Arvind. So while we are not going to get into the quantification of the election, I think as we think about whether it’s the Olympics or the elections or things like the Euro League championship, there is a huge opportunity for consumers on Twitter to see really relevant content now and certainly marketers and content partners to have access to new products and features they didn’t have the last time each one of these events happened. During these events, it’s really when Twitter shines for marketers. These live audiences and the connection that marketers can have to them are rare in the online ad space. And so we stand out from the rest of the market around these events. When we think about the elections, direct response part of election cycle, which is around fund raising, marketers can now bring tailored audiences to bear. In the Olympics, we are going to see a lot more video and video advertising being used. So we think there is going to be great opportunities to showcase how far we have come last time around.

[Krista Bessinger:]

Great. Thank you. And the next question comes from Heath Terry at Goldman Sachs.

[Heath Terry:]

Great. You mentioned the increase in ad load during the quarter, I was wondering if you could give us a sense how much of the slowdown in growth that you are projecting for Q2 is from a more limited ability to increase ad load and as we start to think more and more about the network opportunity off of Twitter, how do you think about the opportunity there from an ad load perspective?

[Jack Dorsey:]

Thanks Heath. And in terms of ad load, ad load Q1 was down sequentially from the fourth quarter, so no inventory issue in Q1. As we look through the rest of 2016 and beyond, the areas that have the most incremental growth in monetization would include international home timeline and international non-home timeline, U.S. non-home timeline, logged out and syndication. We also have a significant opportunity to increase the yield of the current inventory that we are selling, improve its monetization. And that’s from a number of factors, continuing to scale our advertisers, our goal long-term is to have millions of advertisers like our competitive peers. And that’s a big driver of continued improvement of the yield of our current inventory that we are selling, in addition to the fact that we are focused on targeting creative and measurement that will also drive yield. So those are the biggest opportunities that we look forward. Then on the top side, what we are seeing saying from a strategy standpoint is that direct response advertisers are really responding well to the new inventory that exists across Twitter Audience Platform, we are seeing actually advertisers that are testing and DR advertisers that are testing into those new areas of inventory actually grow budget with us. So that’s we are off to a good start, the good signup.

[Heath Terry:]

Great. Thank you.

[Krista Bessinger:]

Thanks. And our next question comes from Eric Sheridan at UBS.

[Eric Sheridan:]

On the EBITDA margin, obviously you showed a tremendous amount of leverage in the model in Q1 on the EBITDA line, I want to understand a little bit what drove that leverage in Q1. And then also on the flip side on stock based compensation, that continues to run a little bit higher than what we have thought in some of the future periods, maybe you can give investors some sense of how stock based compensation might traject longer term? Thanks.

[Anthony Noto:]

Sure. We had a very strong Q1 on the profitability front, EBITDA margins on a gross GAAP revenue of 30%, even higher on a net revenue basis excluding TAC. The quarter really reinforces our belief of the opportunity to drive long-term margins of 40% to 45% on EBITDA basis relative to net revenue. In fact our R&D expense and our G&A expense as a percent of our revenue are already where we would like them to be in the long-term to support that EBITDA margin as a percent of net revenue of 40% to 45%. The efficiencies we have in the quarter are directly related to employee expenses, infrastructure expenses and software development. As we think about the longer term, we are going to balance improvements in profitability with the growth opportunity we see in front of us. We want to make sure we are capturing those growth opportunities and investing in them appropriately to maximize shareholder value of the long-term. But we want to do that in a disciplined way, so continued improvement in profitability, but not sacrificing those growth opportunities. Q1 happened to be a quarter which we did less investment compared to Q2. And ultimately, our margins for the full year reflect the level of investment that we plan on making, with some lumpiness by quarter depending on the magnitude of the investment. As it relates to stock-based compensation, I would make a couple of points. It’s our goal to get our stock-based compensation as a percent of revenue down to the high single-digits as a percentage of revenue comparable to our competitive peers in the technology sector and consumer Internet in particular. We have continued to manage our net and gross dilution on an annual basis to be equivalent to where they are. And ultimately, the scale in revenue against the largely fixed costs or declining costs will allow us to get there over the next couple of years.

[Krista Bessinger:]

Great, thanks. And we will take the next question from Periscope. The question is, why not monetize Periscope and Vine?

[Adam Bain:]

I will take that one. We actually are monetizing Periscope and Vine by bringing that creative canvas into Twitter and allowing marketers to bring that canvas into Twitter and do targeting campaigns and measurement through the tools that we have available on the platform. We plan to expand the promoted video with Periscope option for marketers this quarter by bringing in the Android platform as well as up until now it’s just been available on iPhone. We have seen incredible creativity as well recently with marketers taking advantage of the Periscope option in Twitter. Two great examples of this were Doritos that went live during the Super Bowl and promoted the Periscope on Twitter and also Kohl’s, the department store who went live during the Oscars and brought a behind the scenes red carpet live on Twitter through the promoted tweets in Periscope.

[Krista Bessinger:]

Great, thanks. And the next question comes from the line of Brian Wieser at Pivotal Research.

[Brian Wieser:]

Thanks for taking the question. First, I just wanted to dive a little bit deeper into the brand spend in the quarter. I was wondering to what degree do you think that negativity out there in terms of sentiment depressed or otherwise might had impacted how brands are thinking about it? And part of that is to the extent that potentially this rebounds that might contribute to some upswing. A separate question rather dynamic product ads is what you are indicating that you are suggesting there could be acceleration in the second half from direct response advertisers? And do you think that would generally benefit owned and operated or would it impact network inventory more so?

[Jack Dorsey:]

Great. Let me take the first one. I don’t believe that sentiment affected the brand spend. And we see a couple different proof points on that. Probably the biggest proof point is that in Q1, we go through and do strategic upfront deals. These are our relationships, similar to TV, upfront relationships with our largest advertisers and also agency holding companies. So in Q1, we resigned three of our global agency holding company deals. These are centered around video and these are all up collectively 40% year-on-year. On the individual upfronts that we do with large customers, we also have – are up over 40% year-on-year with them as well, which indicates some back half opportunity to the year especially around video. To your point around DPA, the DPA technology is using the TellApart technology. So this is the first real example that we have of bringing TellApart technology on to Twitter’s owned and operated platform. It’s exposing us to new budgets, these remarketing budgets that we have never had before. The signs are good in terms of the lift, both the click-through rates and the conversions, which show that it’s performing for marketers all the way through the funnel. What we need to do next now is bring those remarketing budgets on to the platform at scale. In order to do that, we are lighting up these API partners and other third-parties to help bring that quicker to the platform. Will it work? It should work for the Twitter Audience Platform in a big way, but it also will work for Twitter owned and operated both logged in and also logged out since remarketing budgets can take advantage of the targeting that’s available for logged out users.

[Brian Wieser:]

Great, thank you very much.

[Krista Bessinger:]

Thank you. And the next question comes from Brian Nowak at Morgan Stanley.

[Brian Nowak:]

Questions, I have two. There is a lot of focus on live events and kind of live audiences. I know in the first quarter, we had the Super Bowl. Could you just talk about the Twitter live audience around the Super Bowl kind of what you saw in 2016 versus 2015, how has it changed year-on-year, bigger, smaller etcetera? And then the second thing, in the investor note, it sounds like you are pretty focused on specific plans to go after new online video ad budgets. Can you just talk to some of the changes you see that are being made to the video ad product to go after more dollars? Thanks.

[Jack Dorsey:]

Sure. In terms of the Super Bowl in particular, we haven’t called out the specific performance of that. Overall, the NFL for the full season performed very strongly at a Tweet impression basis in addition to the live audience that was watching tweets while also the telecast window was open. And so those are two things that we analyzed and two of the reasons why we are so aggressive in trying to create relationships with the National Football League in our fourth year that’s really extending what we have already had for 3 years in Amplify. And so, the NFL season was a real success on Tweet impressions and that live audience measurement. Now, let me turn over to Adam on the online budgets.

[Adam Bain:]

Yes. So, on the online budgets, these are a set of budgets that we don’t have exposure to today, because they require a certain set of features that we are working on right now. These are features like demographic targeting and validation, GRP and TRP, targeting and reporting. So, it’s a function of putting these features in place. We believe that we can tap into incremental video budgets when we put those features in place. The features are actually in production – are in development right now and are going to be timed to launch with our NFL deal and our live streaming strategy for this fall. And as I mentioned, we are already seeing good response from the market by the fact that advertisers are funding, for example, the NFL deal with the video side of the house instead of where we typically pull money from on the online ad budget.

[Krista Bessinger:]

Okay, thanks. And the next question we take will be from Periscope. The question is will you incorporate Periscope during the NFL games?

[Jack Dorsey:]

Thank you for the question. The great thing about Twitter and the three brands we have is they all can work together as it relates to video. And part of our relationship with the National Football League does include Periscope content, shoulder programming pre-game and behind the scenes and that was part of the deal that we struck with them. And its part of the other deals that we are working on with other live, sports live entertainment and live news and politics opportunities. So, we are really excited about leveraging all three elements of it. And it’s one of the unique things about Twitter that we think can position us to capture our fair share of these opportunities.

[Krista Bessinger:]

Okay, thank you. And the next question we will take is from Mark Mahaney at RBC Capital Markets.

[Andrew Bruckner:]

Hello, this is Andrew on for Mark. Just a quick question with the addition of the board seats and Leslie Berland coming on, I am wondering what other holes you are looking to fill in your team? And then with regard to Leslie Berland, if you can talk about your changed marketing strategy if at all or any updates on the marketing strategy? Thank you.

[Jack Dorsey:]

Yes, I will take the first part. Thank you, Andrew. We are continuing to look for new board members and you will see more additions this year. We are really proud of the additions of Hugh and Martha to our board, because there is a lot of guidance and accountability to what we need to do as a service. My focus is a lot on recruiting this year and specifically into engineering and to products. So, we are looking for a whole lot more leadership there.

[Adam Bain:]

And then as it relates to marketing strategy, about a year ago, we talked about the need and opportunity for Twitter to clearly communicate our value and deliver in an instant and we talked about that for the first time. We talked about the importance of products, content and marketing all working together synchronously to maximize the impact to be able to do that. Leslie has come in and joined the team and has already had an impact. She has integrated both our advertising cross-functional groups, marketing cross-functional groups. So, those focused on advertisers and those focused on consumers into one cohesive cross-function and they are developing first principles. They are developing integrated marketing plans. But ultimately, it ties back to that overall strategy of combining product, content and marketing to deliver integrated experience for our users, both logged in, logged out and syndicated so that we can clearly communicate that value and deliver in an instant. So, we are really excited about having her on the team, which has already had an impact.

[Andrew Bruckner:]

Thank you.

[Krista Bessinger:]

Okay. And our next question comes from James Cakmak at Monness, Crespi, Hardt.

[James Cakmak:]

Alright, thanks. Adam just wanted to talk about the Google relationship I understand DCM is going into alpha test here in the coming weeks. Can you just talk about what we should expect and how accretive this relationship can actually be as we look into the second half of this year? And then I guess, Jack or Anthony, on the users, this is obviously something that gets a lot of scrutiny, but you had the DAUs, the MAUs, but at the same time, you talked about the 800 million on and off platform is users even the right way to think about it, just how do you guys think about it internally and is there some method that we should continue to want to see? Thanks.

[Adam Bain:]

Hey James, I will take your first one. So on the DoubleClick side, as you recall, there is two parts of the DoubleClick deal. DCM as you mentioned, which is around measurement. And DBM, which is around ad buying. So let me start with the DCM piece measurement. In the quarter, we expanded the beta over a dozen advertisers and we have run hundreds of campaigns now through DCM. We have seen two things. One, when measuring desktop impressions to desktop conversions, the data looks accurate through DCM and the results for Twitter for these campaigns looks strong. So that’s good news. When on the other edge – on the other side of the house, when you look at mobile impressions that are measured through DCM that are measuring desktop conversions, so this cross-device measurement, what we saw through the measurement period is that something that the industry overall needs to address which is that this type of cross-device measurement overall need to work from an industry standpoint. This is something that we are working with Google together on. It’s part of the reasons why we did the DoubleClick deal in the first place is to help solve some of this cross-device measurement for the overall industry. This hits us particularly in an acute way because 90% of our impressions, our ad impressions are on mobile. So cross-device for us is really important part. On the DBM side, Google engineers and Twitter engineers are working on the buying piece for integration. We believe it will be in beta in Q3.

[Jack Dorsey:]

As it relates to your question on users, we like to refer to it as the world’s best connected audience. We are focused on driving repeat usage of that connected audience. And I don’t want to confuse. When we say connected, we mean connected to each other, not just connected to a digital platform. And the value of having that connected audience allows us to be the place to found out what’s happening in world right now because conversations are live, commentary is live and it travels around instantly because of our syndicated partners in both our logged out and logged in experiences. So we are still absolutely focused in total audience, but we want to emphasize the point that we wanted to be the best connected audience, which really reflects our point of difference to all of those audiences.

[Krista Bessinger:]

Great. Thank you. And the next question we will take from Twitter comes from the Twitter account of echo to all and he or she asks, can you talk about the progress that you are making on developer relations?

[Jack Dorsey:]

Sure. So we recently announced with Fabric that we have crossed over an important milestone, which is Fabric is now touching over 2 billion devices, which is really important milestone and it shows that Fabric is indispensable for developers across the board. The other piece of our developer relations is moving Fabric customers also through monetization to the degree that they are looking for help for monetization. We saw strong growth in the quarter for MoPub. The amount that we paid to publishers grew 80% year-on-year for MoPub, so more ahead I think there.

[Krista Bessinger:]

Okay. And the next question comes from the line of Dan Salmon at BMO.

[Dan Salmon:]

Hi guys. Good afternoon. A couple of initiatives you mentioned were especially I think Adam, to help the video business we are expanding demographic and verification, might that be something that piggybacks on your relationships with Nielsen and Moat or are there new things to be added there. And then maybe just one follow-up on the renewal of the holding company upfront relationships, just interested to hear how much of the up-tick in spend from them and other large brand advertisers through that process was centered around football and maybe if there is a way to help us gauge maybe what a same-store sales type of number might be for that?

[Adam Bain:]

Sure. So on the first one Dan, on the demographic we are targeting and also verification of audiences, it is going to be an expansion of our Nielsen and Moat relationships, so that we can bring some of the things that video advertisers are looking to measure on the Twitter that hasn’t been available before in mass. And that’s one of the things we are teed up on for Q3 as we open up our video platform in a major way, it also coincide with our NFL deal. In terms of the renewal of the holding company upfronts, we did those before we announced the NFL deal. And as I have mentioned, they are up 40% year-on-year, which indicates the back half opportunity. Those upfronts are centered however, around video. And so the work that we have done with marketers over the last couple of quarters has shown great response. And so I think the agencies are looking at that and having enough confidence to invest in Twitter going forward, especially around video.

[Dan Salmon:]

Great. Thanks, Adam.

[Krista Bessinger:]

Thank you. And the next question comes from the line of Peter Stabler at Wells Fargo.

[Peter Stabler:]

Thanks for taking the question. Wanted to go to the guidance, could you help me reconcile a couple of things here, so we are hearing pretty strong commentary regarding ROI, new advertising products measurement, etcetera, yet sequential guide is a bit perplexing to us, as even mature media companies growing 3% to 5% a year can put up sequential gain in Q2, so I guess is there a suggestion here that current advertisers are pulling back spending as you add new advertisers or if you can just provide a little bit more color here, that would be helpful? Thanks so much.

[Anthony Noto:]

Sure. In terms of the guidance, it reflects a couple of factors. First, the results in Q1, we are at the low end of our expected range. That underperformance relative to the high end of expected range or even the midpoint reflected a weak March and that’s the month of the quarter that underperformed. Obviously, we have gotten through April and have a sense for where April is. And the next two months are really critical to achieving the full quarter outlook that we provided or exceeding it. And so we are providing you the near-term update that we have. I think as it relates to advertiser health and the state of demand for the platform, Adam can talk in this in more detail. But I would just tell you the same thing we talked about last quarter. We have a number of different channels in a number of different geographies. And our largest channel and our largest geography is now about driving share of wallet and that’s our direct sales organization in the U.S. And so the penetration growth of those advertisers has largely run its course and we are focused on driving greater share of wallet. And so some of the slowdown that you see is a reflection of the fact that we are moving from two dimensions of growth for that largest group of advertisers, largest dollar spend of advertisers, to one dimension of growth.

[Adam Bain:]

Yes. And Peter, I would just add that on top of what Anthony just mentioned, in our largest most mature brand channels, we actually actual saw growth in Q1 on a year-on-year basis. And we expect that to continue. Essentially what we expect in Q2, however is that more of these advertisers will trade up from these legacy brand promoted tweets into promoted video products. Again, we think this is a great thing for the platform since video consumes less inventory. It’s a great thing for those marketers. They see great ROI when they use video versus traditional promoted tweet products. And it’s also better for consumers, consumers report enjoying the video ad experience even to a greater degree than what we see in traditional promoted tweets.

[Peter Stabler:]

Thanks so much.

[Krista Bessinger:]

Thanks. And the next question we will take is from Twitter. It comes from the Twitter account of Neil Cameron and he asks, does artificial intelligence have a major part to play in your vision for customer service on Twitter?

[Jack Dorsey:]

That’s a great question. We are really excited about machine learning and deep learning and all the advances in technology to make the experience better. And it’s best when they are applied in a very, very thoughtful way. Twitter has always been phenomenal for the past 9 years around customer support. We have had people come on to the platform to talk about their service, to talk about a brand, to talk about a product they just bought. And the brands actually have a conversation with them. And just a few months ago, we released an update to that experience where any brand, any company can take a customer service tweets private and actually handle the situation with a customer privately and direct messaging. And also give them feedback on the experience, so company can know how well it’s doing. We think that’s a great way to start, but we are always looking for new technologies to apply to make that easier for companies to address all of the tweets and to address all of the customers that they see on the platform on a daily basis.

[Krista Bessinger:]

And the next question comes from the line of Youssef Squali at Cantor Fitzgerald.

[Youssef Squali:]

Thank you very much. Two questions, please. First, starting with Adam, given the focus on video and promoted video, can you just help us one, understand how you actually price video on the platform and maybe the differential if there is one and pricing between promoted video and the promoted tweets, considering the migration you just spoke about. And then Anthony, I think on the MAU issue, you talked about the major drivers being seasonality and marketing initiatives. Can you help us just parse out little bit what these marketing initiatives that had an impact on the quarter were? And then when you say no unusual trends you have seen in Q2, which is the reason you are not necessarily guiding to MAU, are we to understand by that, that we are back to kind of normal seasonality for that metric? Thank you.

[Adam Bain:]

Yes, great. I will take the first one. So, in terms of how we price our video products, they are priced on a cost per video view basis versus these older legacy brand promoted tweets are priced on a cost per engagement. We have seen video be a more effective ad unit for marketers, especially when measuring either the mind or the wallet. We have seen video now is a doubling of ad recall versus traditional promoted tweets. Marketers that moved into video also saw almost a 30% lift in message association or ad association versus traditional promoted tweets and then lastly an 18% lift in awareness. So, ultimately, it’s helping drive all aspects of a marketer’s campaign and objectives and video is just performing much better.

[Anthony Noto:]

Youssef, on your question as it relates to marketing initiatives, a couple of factors. The marketing initiatives that impacted the MAU growth are really about digital marketing, and it falls into three buckets

[Youssef Squali:]

Alright, thank you very much.

[Krista Bessinger:]

Thanks. And the next question comes from the line of Brian Pitz at Jefferies.

[Brian Pitz:]

Thanks for the question. Earlier this month, two new board members were appointed. I think Jack also hinted that there are more additions to come soon. Any color on what other skill sets you are looking forward to complete the team or any insights on what you are looking for? Thanks.

[Jack Dorsey:]

Thanks for the question, Brian. We are continuing to look for public company experience for our global international policy experience, media experience, more of the voice of the person on the platform that we find so that we can continue to build the right products and get the right guidance and perspective from the board. And we are continuing to look for more diversity on our board as well.

[Brian Pitz:]

Great, thanks.

[Krista Bessinger:]

Thanks. And the next question we will take is from Twitter, it comes from the Twitter account of Neil Doshi. And he asks can you discuss the SMB opportunity? How is traction? And what are some of the challenges?

[Adam Bain:]

Sure. On the SMB side, we were up on a year-on-year basis overall in active advertisers and it was driven by our SMB initiatives. SMB for us is an exciting opportunity because we have identified close to 9 million businesses who have setup shop on Twitter and are using it organically. Our goal is to move those 9 million businesses through the funnel to become active advertisers on the platform. As we think about sort of the road ahead in SMB, we see the SMB efforts mirroring our efforts in direct response. As we have seen so far, a lot of the spend from our SMB customers are into things like our website card objectives or DR objectives. So, as we make improvements through targeting measurement and also exposing those DR advertisers to Twitter’s total audience we think the SMB business will grow right along with it.

[Krista Bessinger:]

Great, thank you. And the next question comes from the line of Ken Sena at Evercore.

[Ken Sena:]

Thank you. You showed a nice EBITDA leverage in the quarter, but I noticed that overall R&D spend is down about 8% year-on-year. So, just given the size of the opportunities that you cite in the letter and the investments that are being made by your competitors, do you feel you are investing enough? And then we may have missed it, but we didn’t see an off network revenue or TAC disclosure. And so maybe you could provide that as well? That would be great. Thanks.

[Anthony Noto:]

Sure. I will take the second question first. Our TAC was up 57% and that will be provided in the detailed disclosures that are available on our IR website. As it relates to R&D expense, we went through a restructuring last year to right-size the organization so we could focus on delivering the product roadmap that the team has built. We feel like we have the right organization behind that. We are always looking for great talent and retaining great talent and we will continue to focus on that. Interestingly enough, despite the change in R&D expense, on the number of software projects that are being worked on in the first quarter of this year that were started, doubled relative to what they were in the fourth quarter. And in the third quarter, we had very few because we are in the transition time period. So, we have a very sizable engineering product and design team. The work is focused on our product roadmap. It’s a great alignment. And that’s best reflecting the fact we had such an increase in software development projects in Q1.

[Ken Sena:]

Great, thank you.

[Krista Bessinger:]

Thanks. And the next question comes from the line of John Blackledge at Cowen.

[John Blackledge:]

Great, thanks. Two questions. For the DoubleClick partnerships, will either the DCM or DBM pieces be out of beta in 2016 or are we looking at kind of a 2017 event at this point? And then the second question will be have you said what percent of ad revenue is traditional promoted tweets? And what was the rate of change for that ad revenue on a year-over-year basis in 1Q? Thank you.

[Adam Bain:]

Yes. So, on the DoubleClick side, DCM is in beta right now. As I mentioned, we have expanded it beyond a dozen clients and 100 campaigns. We are going to continue to expand the beta out, but we are going to watch the cross-device measurement piece very carefully as I mentioned. For us, what we want to make sure when a marketer, especially direct response marketer runs with us through DCM is that they fully understand that their mobile impressions that they are running on Twitter, of which 90% usually of their impressions are on mobile. We will map to the conversions and they are able to do the math correctly to get to the conversion number. On the DBM side, engineering is happening right now to get the DBM pipes in place. So, we anticipate a beta of that in Q3. And then as marketers see good ROI, we will open it up from there.

[Anthony Noto:]

As it relates to the legacy promoted tweet both revenue in terms of year-over-year growth rate, what I would say is it’s still a very valuable format for advertising partners. It’s just becoming – their spending is becoming more diversified and we are seeing a move away from that to these higher performing auto-play video ads, which are equally valuable. And so there is a little bit of a mix shift. But that overall pie is under pressure and it’s still a sizable piece of our revenue. And to Adam’s point, we are excited about the product roadmap we have on the revenue product side. We hope to see that deliver over the course of the year, but that one legacy promoted pie is under pressure.

[John Blackledge:]

Thank you.

[Krista Bessinger:]

Thanks. And the next question we will take is from Twitter. It comes from the account of Rich Greenfield. And he asks, your strategy and focus is really centered on live, how does Facebook’s desire to own live impact Twitter?

[Jack Dorsey:]

Thanks, Rich. We have been doing live for 10 years and we have – we believe we have a leadership potential in it. We have a leadership position in it, but it’s not just about showing a live event, it’s also about hosting a conversation around the live event. Twitter has always been the best place to see what’s happening immediately to see what’s happening instantly and to bring people together around a particular shared experience. And as we talked about last time, we think the easiest way to get what Twitter is, is really to show a live event, show people the great accounts who are providing insights that you can’t find anywhere else, you can’t find in your address, but you actually meet on Twitter through that experience, to connect them through a follow and also to encourage them in a conversation. And that is exactly what we are focused on making sure that we continue to do. Because we are public and because we are distributed and because we are simple, we are the fastest way to see that event, but it also can go everywhere. So, can we say 100 million audience that we continue to grow and continue to focus on and then we are working on making sure that we have the best experience out there and using technology appropriately to increase that experience and the enjoyment of the experience. So, Periscope is a great example of this where we think we do have a significant leadership position in live streaming video and we want to make sure that is the best, not only for broadcasters, but for their fans and the fan base that watch those Periscopes.

[Krista Bessinger:]

And so the next question comes from the line of Mark May at Citigroup.

[Mark May:]

Thanks. I just had one quick question. Regarding your comments in the letter that you saw softness during the quarter from some of the large brand advertisers, would you say that, that is kind of a reflection of what’s happening at the macro level or it’s more company-specific, for instance, related to their promoted tweets transition that you have referenced? Thanks.

[Adam Bain:]

Yes. I think for us it really is around this transition from traditional legacy brand promoted tweets into promoted video. Essentially, what we see the advertisers doing is testing into these higher performing units. They haven’t grown the spend yet. We believe that new budget will be added when some of the other features that we have in place that I talked about like the GRP buying or some of the demographic targeting and verification. In terms of the economy, I talked a little bit about it.

[Anthony Noto:]

What I would add to that is obviously we want to see all of our peers report and see ultimately where the results are. When we look at our top 10 vertical categories, QSR, quick serve restaurants, as well as retail were two categories that performed decidedly lower than the rest of the overall business, which are macro driven categories. So to the extent it impacted everyone, we will have to wait and can see, but that’s the only evidence that we have in our results.

[Mark May:]

Thanks Adam. Thanks Anthony.

[Krista Bessinger:]

Thanks. And the next question comes from the line of Ron Josey at JMP Securities.

[Ron Josey:]

Great. Thanks for taking the question. I think you mentioned Jack, that post-NFL announcement, other leagues and live events reached out, you all, I was just wondering, can you talk about how Twitter’s viewing sponsored content versus promoting the content that users are generating via Moments and other tools? Thank you.

[Adam Bain:]

Sure. Why don’t I hop in there, I am not exactly sure what you mean by sponsored content. We obviously have an ad model that monetizes incredibly well, it works seamlessly with the lives sports, live politics and news as well as a live entertainment product, both in the format that we already have as well as auto-play video. And so the opportunity to create economic value for our partners really falls into a few buckets. First, we can help them reach a younger audience that’s hard to reach. A large percentage of our users are the millennial demographic. We can reach a global audience and we can reach a mobile audience and really extend their reach. We can also help drive tune into those that do have linear television and are away from home who are not aware of the programming being on. And then of course, we can also help them generate more revenue most directly and indirectly and that value proposition, in addition to the things that Jack talked about in terms of interest graph and knowing who is actually interested in that content specifically because they are following those types of accounts and looking at that specific type of tweet is really powerful for us to deliver them a complete solution.

[Jack Dorsey:]

And Ron one other thing I would mention is in terms of overall sponsored video content, we had another successful quarter of Amplify. We now are over 300 Amplify video partners, so this is premium video content that partners are bringing on the platforms, sometimes exclusively on to Twitter. And it’s available now in 25 countries, so truly a global offering. Overall, we have ran hundred of – hundreds of campaigns in the quarter and we saw great campaigns around March Madness, the Grammys and Super Bowl. As we think about the year ahead, certainly there is a bunch of interesting events coming up, but there is also a bunch of always on opportunity for Amplify partners to speak directly to their audiences and then also to create a win-win with them for monetization.

[Ron Josey:]

Thanks.

[Krista Bessinger:]

Okay. We will take the next two questions together. They are actually one from Periscope, one from Twitter from the account of tmcmill81, but they are very related, so question from Periscope is, are you guys planning any acquisitions all of Periscope. And the question from Twitter is around plans to use the $3.5 billion in cash?

[Jack Dorsey:]

Sure, they are definitely related. The first point I would make is that acquisitions have been critical in creating value for the Internet sector, consumer Internet sector over the last two decades. Many of our competitive peers have bought assets at very early stages that have resulted in billions of dollars of value and Twitter has been the same. The acquisition of Vine, the acquisition of Periscope, of Fabric are foundational acquisitions that are allowing us to create value for shareholders both now and into the future. And so the fact that we have the amount of cash on our balance sheet, over $3.5 billion leaves us with strategic optionality to look for those assets that are game changing the way Periscope is and the way Fabric is as well as some of our other acquisitions. And we are focused not just on consumer capture devices, but we are also focusing on other opportunities that have scaled audience to leverage our great monetization vehicle. And we are also focused on ad technology to continue build out our ad text stock. At end of the day, our goal is to be a one-stop shop for advertising. And having both owned and operated inventory, third party inventory and ad text stock that can serve both of those constituencies is really critical.

[Krista Bessinger:]

Thank you. And the next question comes from the line of Aaron Kessler at Raymond James.

[Aaron Kessler:]

Yes. Thanks guys. A couple of questions, first can you just give us an update on the logged out user monetization I believe that was in beta last quarters, is that still on beta, what’s the performance there and maybe timing taking that out of beta. And just if you can provide an update on the kind of the UI changes that we – in terms of fixing that broken parts you referred to last quarter made specific right to ad names impacts at reply as well? Thank you.

[Jack Dorsey:]

Yes. Aaron I will take the first part, which is around logged out monetization update. We continue to expand the beta across Q1. We are encouraged by the performance. When you look at cost per click rates, for example, one of the DR objectives that we have, CPCs are nearly identical for logged in and logged out from the sustained basis across the quarter, which is a good indication from advertisers that they are seeing good value from logged out experiences. In order to make that opportunity or realize that opportunity, we realize that we need to invest more to increase the amount of logged out impressions and overall scale of the offering.

[Adam Bain:]

And on the broken windows and user expense in particular, we are looking a lot at conversations. Conversations is a huge part of the platform and that’s where a lot of the confusing aspects of Twitter are that we know is inhibiting more usage. And you should expect a see a lot more updates the conversation modules over this year. And we are really excited to push them up because clarify a whole lot. And we are making conversation on the platform a lot easier, a lot more expressive as well. We focused a lot of our energy recently on the onboarding experience and we have seen some pretty meaningful gains here. We saw over 48% increase in follows and 56% increase in mutual follows. Mutual follows are really, really important to retention because you are getting that constant feedback and you can have conversation on platform around it. So what we are doing around onboarding into the flow is working and we are going to continue to strengthen that.

[Aaron Kessler:]

Okay. Thank you.

[Krista Bessinger:]

Great. Thank you. And we have time for just one question. The question comes from the line of James Lee at CLSA.

[James Lee:]

Great. Thanks for taking my question. This question is for Adam specifically, with video ads ramping, I assume age and gender targeting will become more important, I was wondering how do you address that challenge when you login data is a little bit more implicit. And just give us how accurate you are in terms of predicting both factors. And also on video advertising Adam, how much of your TV video campaign right now is companion to TV versus standalone on your platform? Thanks.

[Adam Bain:]

So on the first one, in terms of video, to do age and gender, we do ask Twitter users now to input their birthday. There is a special feature on the platform where they get birthday balloons. That data has been useful in terms of targeting gender. We actually are highly predictive on the user’s gender which is based on the accounts they follow and some other features set. What we are working on in terms of video is making sure that our data asset matches the validation services like Nielsen’s DAR. And on the second one, is that a question more about our consumer marketing or some other thing?

[James Lee:]

No, it’s more on video advertising, when you talked advertisers in general, are they doing parallel campaigns on their TV and also on your platform at the same time, so you have the companion platform or is it just the standalone platform? Thanks.

[Adam Bain:]

Yes, great question James. Yes, we are seeing marketers line up campaigns together. This has historically been an opportunity for us in general. What’s interesting though is, we still see a ton of underperforming display advertising out in the world. And so what we see happening is money is moving out of display advertising, traditional display advertising into categories like this. And so marketers ultimately are lining up their Twitter spend with their TV spend. Essentially what we have done now is, we have proven that we already know there is great Twitter ROI when you do that, but there is also now proven great TV ROI. And we have done a bunch of research across multiple categories, whether it would be auto or consumer packaged goods, to show when advertisers lineup their buys in that way, it actually lead to in some cases over a 10% lift in their TV ROI.

[Jack Dorsey:]

Alright, that’s all for now. Thank you all for joining us and really look forward to talking with you next quarter.

[Operator:]

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