Twitter, Inc. (delisted)
Q1 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Twitter first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. I would now like to turn the call over to your host, Krista Bessinger, Senior Director, Investor Relations. Please go ahead.

[Krista Bessinger:]

Thanks Patrick and good afternoon. Welcome to our Q1 earnings call and thanks for joining us. We have with us today our CEO, Dick Costolo; and CFO, Anthony Noto. We will begin with approximately 20 minutes of prepared remarks followed by Q&A. During the Q&A, we will take questions asked via Twitter in addition to questions from conference call participants. Questions submitted via Twitter should be directed to @TwitterIR using the #TWTRearnings. Before covering the Safe Harbor, as you undoubtedly know by now, this afternoon's planned announcement of the quarterly results was prematurely disclosed. We asked the New York stock exchange to halt trading once we discovered our Q1 numbers were out and we published our results as soon as possible thereafter. Selerity, who provided the initial tweets with our results informed us that earnings release was available on our Investor Relations site before the close of market. NASDAQ hosts our manages our IR website and we explicitly instructed them not to release our results until after the market close and only upon our specific instructions, which is consistent with prior quarters. We are continuing to investigate with them exactly what occurred. Moving on to the Safe Harbor. We would like remind everyone that we will be making forward-looking statements on this call, such as our outlook for Q2 and 2015 and our operational plans and strategies. Actual results could differ materially from those contemplated by our forward-looking statements and reported results should not be considered as an indication of future performance. Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ materially. The forward-looking statements on this call are based on information available to us as of today's date and we disclaim any obligation to update any forward-looking statements except as required by law. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, 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 the call over to our CEO, Dick Costolo.

[Dick Costolo:]

Hello everyone. Thank you for joining us today. We have a lot to cover with you. So we will jump right in. We finished the quarter with mixed financial results and solid operational performance. Total revenue was $436 million, up 74% year-over-year. Adjusted EBITDA was $104 million, which represents a 24% margin, up 182% year-over-year and we surpassed 300 million monthly active users with 302 million monthly active users reported for Q1. After five consecutive quarters of more than 97% year-over-year revenue growth, we underperformed against our expectations. We anticipate the factors that affected our first quarter results will also affect our 2015 guidance. While I am disappointed we didn't continue to exceed expectations on revenue, I am proud of the teams focus, innovation and energy around the way we managed the business in light of the shortfall. In particular, it's reassuring to see we could still exceed our profitability targets and make the strategic investments we had planned in the quarter despite the revenue headwind. Anthony will share a lot more details on our financials and key factors impacting them later on the call. Also relevant to revenue, we just this afternoon announced our agreement to acquire TellApart, a leading marketing technology company providing retailers and e-commerce advertisers with valuable direct response marketing capabilities. TellApart joining Twitter gives us additional tools for cross device identity, targeting and attribution, along with a very talented and deep direct response expertise and team. Anthony will also provide more details on that. As we work toward our mission to give everyone the power to create and share ideas and information instantly without barriers, we continue to focus on our three objectives. One, strengthen Twitter's core. Two, remove barriers to consumption. And three, build new applications and services to increase Twitter as a utility across the world. As I have highlighted repeatedly in the past, product innovation and execution are vital as they will be the drivers of growth long-term and the velocity and quality of work I am seeing continues to improve as we continue to make it a focus. There is incredible unique content on Twitter and our opportunity is to make sure people see something awesome every time they open their phone. We are getting more adept at delivering relevant tweets and content to people in a way that makes their experience with Twitter better and more engaging and I will talk more about that work today. Our first objective, strengthening Twitter's core, represents are focused to increase the number of logged in users and their daily Twitter use by increasing engagement and improving retention. I have talked in the past about some work we are doing to accomplish this, including providing more ways to share and see rich media, improving the new user experience and group messaging. Let me first provide an update on our efforts around the new user experience and how we are moving forward with that work and then I will discuss a new feature we recently launched on Android called highlights. To grow our user base, we need to improve new user retention and our strategy here is to provide immediate value and a compelling timeline the moment a user signs up. I talked last quarter about the experiments we were running to test instant timelines. They reduce the time and work necessary to get a great experience on Twitter by giving new users a rich personalized timeline immediately even if they don't follow any accounts during the sign-up process. We have now launched instant timelines on iOS and Android and soon will be testing them on the web. I expect just iterate frequently on instant timelines over the coming months based on the data we are seeing from its use. The results during our experiment were quite positive in terms of engagement and neutral on retention. This is a learning product, as I have mentioned before and we see the opportunity to increase retention alongside the positive results and engagement. We launched another new mechanism to immediately deliver compelling content to users the moment we have it. Today, the main place people consume tweets is through their home timeline and we want to break out of that context to deliver tweets to people in a way that makes Twitter fits effortlessly into their lives. You can see this work through a feature we recently introduced on Android called highlights. It brings you a summary of the best tweets tailored for you via push notification letting you quickly catch up with what's happening in your world. One of my favorite things about highlights is its new user interface where people are just swiping back and forth between these tweets. Through instant timelines and now highlights we offer people compelling content as soon as they sign up while also creating mechanisms that drive people back to Twitter and show them engaging content right away. Next, I want to talk about our second objective, remove barriers to consumption. There is great content on Twitter for everyone and we need to bring that to people immediately and frictionlessly wherever they are and however they come to the platform. I will start with an update on the while you were away function which we call recap internally for short. We are seeing perhaps the most exciting results here. Recap brings to the top of your timeline some of the best tweets you missed from accounts you follow while you were away from Twitter. These tweets are not only seeing high engagement, they are bringing people back to Twitter more frequently. Importantly, the machine learning work we are doing for recap is helping us make these algorithms better and driving continuous improvements and engagement, so we are going to double down on recap because of the success we are having here. Second, just a couple weeks ago we launched the first version of our logged out home page. Every month, as we have described for you, there are more than half billion people who visit Twitter but don't login. By organizing our content in a way that's easily discovered and consumed, we extend the reach of Twitter far beyond the 302 million people who log in every month. We first introduced the logged out home page on desktop in the U.S. and we intend to bring it more places over time, while also iterating on it and making improvements that keep it informative, entertaining and relevant. On our last earnings call, I talked about the work we are doing to better organize content to deliver a great experience to our total audience. The logged out home page and recap along with the ongoing work we have been doing to make profiles more compelling for people who aren't logged in are just three examples of how we can translate that work into a visible delightful experience. Our third and final objective is to build new applications and services in order to increase Twitter's utility around the world. I am going to focus today on Periscope specifically and our mobile video efforts more broadly. About one month ago, we introduced Periscope providing people with a way to share, watch and be an active participant in immersive live video experiences directly from their phones. Like Twitter, Periscope enables people to connect to what's happening in their world and it actually takes that connection to an entirely new level. By transporting you into people's lives, you can now jump into the life of a Paris ballet director, you can see what he sees, hear him speak to his dancers and you can communicate with him as a moment in his day unfolds. Then second later, you can be walking the streets of Seoul with a woman who is showing her friends the city. We have seen tremendous early growth on Periscope. In just the first 10 days alone, more than 1 million people signed into the app and even more have tuned in to live broadcast through the web. This is possible because broadcasters on Periscope can share their Periscopes to Twitter to reach a larger audience. As we have explained in the past, we know that rich media like photos and videos are some of the most engaging content on the platform and that's why we have also brought native mobile video to both iOS and Android in Q1 and now along with Periscope and Vine, there are even more ways for Twitter users to watch mobile videos within the Twitter ecosystem. When we first saw Periscope in late 2014, we were excited about it for a number of reasons, but mostly because it so nicely fits into our mission to give people the power to create and share ideas and information instantly without barriers. The same was true for Vine and with both of these products, we now have a suite of mobile apps, including two of the most powerful native mobile video apps and are well positioned as more and more people turn to video as a way to express themselves, share what's happening around them, connect with others and view content they enjoy. From casual users to content creators who are building a career through mobile video, we will deliver products and services that fit their needs and a public platform that can help them build an audience and reach more people. With the addition of Niche, there is an opportunity for new and emerging professional creators to connect with brands and build their careers. When we combine our native mobile video apps and related services like Niche with the awesome distribution power of Twitter across our total global audience, we offer creators the best way to make incredible videos reach the largest possible audience and build and grow at a career in the Twitter ecosystem. To close out, I continue to be happy with both the improved velocity and quality of the product releases as we continue to provide tools to create and share media, make it easier for people to get immediate value out of the product, no matter where or how they access Twitter and provide new applications that broaden the reach an appeal of Twitter's products, we make Twitter richer, easier, better and bigger. And with that, I will turn it over to Anthony to go deeper into the financials.

[Anthony Noto:]

Thank you, Dick and good afternoon, everyone. I will discuss our financial and operating performance for Q1 and provide guidance for Q2 and update our outlook for fiscal year 2015. Q1 was another quarter of significant growth for Twitter. Total revenue reached $436 million, an increase of 74% year-over-year on a reported basis. Using constant currency, year-over-year total revenue growth in Q1 was 80%. Ad revenue reached $380 million, up 72% year-over-year on a reported basis, or up 78% year-over-year using constant currency. Ad revenue growth was driven by strong year-over-year growth in the number of advertisers on Twitter across all channels. From a product perspective, year-over-year growth was primarily driven by newer products specifically Promoted Video ads and Website Cards. However, while growth was strong, some of our direct response products fell short of our expectations for Q1. Two factors impacted the results. First, some advertisers limited spending at higher levels of scale because the bids required to win incremental auctions were higher than they were willing to pay, which limited additional spending. Second, we have improved the quality of leads for direct response advertisers using our Website Cards by raising the bar on what constitutes an engagement or click. The higher bar provides significantly increased value to advertisers because we are delivering users further down the marketing funnel. Today, this results in a lower click through rate and less revenue for Twitter. However longer term, we expect the higher ROI that advertisers are getting from these higher-quality leads to result in CPE's that more than offset the lower click through rate we are seeing today. As a result of these two factors, revenue in the first quarter came in 2% below the midpoint of our previously forecasted range. We expect these factors to carry over into Q2, with improvement in the second half of the year. To deliver increased value at scale, we remain focused on providing improved targeting, measurement and creative for direct response advertisers, which we expect will help improve quality scores by improving click through probability and thus less dependence on bid buys to clear auctions at higher levels of scale. Taking a step back, it's important to emphasize that we are still in the very early stages of development for direct response products, as most of them have been available for less than one year. We are very encouraged by the growth we have experienced thus far, but as often is the case with new products, we have a great deal of iterating and fine-tuning to do as we scale in order to maximize the effectiveness of these products in our complex marketplaces. To be clear, there has been no change for a multi-year view of a growth opportunity for advertising on Twitter. We will continue to innovate and are confident we will improve the product to better meet the needs of direct response advertisers over time. An important step in improving these areas is our acquisition of TellApart announced today. The acquisition of TellApart provides immediate meaningful benefits across targeting, measurement and creative for direct response advertisers in the retail vertical category and we will extend these capabilities internationally into other verticals over time. Now moving on to additional highlights from the quarter. By channel, direct sales was once again the largest contributor to year-over-year dollar growth on an absolute basis in Q1. Our SMB channel was again the fastest-growing channel year-over-year with a meaningful uptick in the number of advertisers added sequentially. Looking across products, we continue to see meaningful contributions from products launched less than 12 months ago. Promoted Video was a significant driver of year-over-year ad revenue growth and was up nicely on a quarter-over-quarter basis as well. Our direct response products including mobile application download or maps and Website Cards were the largest contributors in absolute dollars to year-over-year growth in Q1, although these products did see their first decline in revenue on a quarter-over-quarter basis due to the reasons I covered earlier. In terms of geographies, in Q1 U.S. ad revenue grew 59% year-over-year while international ad revenue grew 103% year-over-year and accounted for 35% of total ad revenue. Data licensing and other revenue contributed $48 million in the quarter, an increase of 95% year-over-year. Moving on to cost and EBITDA. In Q1, total non-GAAP expenses were $389 million, up 57% year-over-year. The increase was primarily driven by headcount and related overhead costs as well as an investment in infrastructure and sales and marketing. We continue to invest in our workforce across all functions to scale our business and total headcount reached approximately 3,900 employees at the end of the quarter. Adjusted EBITDA totaled $104 million, an increase of 182% year-over-year. Adjusted EBITDA margin for Q1 was 24% versus 15% in the prior year period. Adjusted EBITDA outperformed our expectations due to lower G&A expenses and reduced commissions. It's important to know, we are still able to make the investments we have planned for Q1 and exceed our EBITDA expectations despite the revenue underperformance. Moving on. Non-GAAP net income was $47 million in the first quarter, up from approximately breakeven the same period a year ago. Our GAAP net loss in Q1 was $162 million. Non-GAAP diluted EPS was $0.07 per share, while GAAP EPS was a loss of $0.25 per share. Before turning to metrics, I will cover a few items related to cash and CapEx. We ended Q1 with roughly $3.6 billion of cash and marketable securities. Cash from operations was positive $92 million and CapEx was $73 million. Now I would like to turn to our operating metrics. On users, average monthly active users reached 302 million for the quarter reflecting year-over-year growth of 18%. U.S. MAUs increased to over 65 million for the period and international MAUs grew to 236 million. Please note given our prioritization of emerging markets as a growth vehicle, we are now delivering a more complete experience to users we define as SMS fast followers. These are users who sign up and access Twitter solely via SMS. As we now have specific initiatives in place to grow and monetize this user base, we will begin counting SMS fast followers and our total MAU count going forward. The number of SMS fast followers in the quarter was approximately six million. For clarity, this was not included in the reported MAU number of 302 million. Including SMS fast followers in each period, total MAUs in Q1 reached 308 million versus 258 million in the same period of 2014, reflecting an MAU increase with SMS fast followers of 19% year-over-year. Please see our supplemental slides on our investor relations website, where we provide the historical breakout for this group of users over the last five quarters for comparison purposes. In future periods, we will focus on MAUs including SMS fast followers when we report. Turning now to monetization metrics. In Q1 year-over-year ad revenue growth of 72% was driven by both an increase in ad engagements and CPE. Ad engagements grew 32% year-over-year driven by both an increase in our load as well as audience. Cost per ad engagement or CPE grew 30% year-over-year due to both a continued mix shift to higher priced ad units as well as increases in same format CPE for the majority of ad types. Now I will turn to our guidance. As previously mentioned, we expect the factors which led to our marginally solid growth in Q1 to continue for the full year of 2015. For Q2, we expect revenue to be in the range of $470 million to $485 million and adjusted EBITDA to be $97 million to $102 million. I say again, adjusted EBITDA to be $97 million to $102 million. We expect stock-based compensation expense in the range of $190 million to $200 million. Finally, we expect the share count for Q2 to be approximately 660 million shares on a GAAP basis and the fully diluted share count to be a proxy 700 million shares on a non-GAAP basis. Please note that our guidance includes TellApart and it assumes a close of June 1, 2015. For the full year 2015, we now expect revenue to be in the range of $2.17 billion to $2.27 billion and adjusted EBITDA to be $510 million to $535 million. We expect stock-based compensation expense in the range of $750 million to $790 million. With that, we are ready to take questions. Operator, will you please announce the first question.

[Operator:]

[Operator Instructions]. Our first question comes from Eric Sheridan with UBS. Your line is open.

[Eric Sheridan:]

Thanks for taking the question. Maybe just two. I want to understand, digging a little bit on the direct response side, understand a little bit better when you saw advertisers responding to price or what they are seeing in terms of ROIs in the marketplace? What sort of feedback you have got from investors since then? And how do you think some of the changes you are making with TellApart might change that discussion with advertisers? And then, Anthony, maybe on TellApart, just any sense you can give us of what it would contribute to the guidance that you have given with the June 1 close?

[Dick Costolo:]

Sure. In terms of the revenue shortfall, it was directly attributed to direct response and it was directly attributed to demand as opposed to supply. As I said in the script, as advertisers scale their spending, as they retire levels of spending, they weren't willing to increase their quality score on an adjusted bid basis to get to the next level of supply to clear the auction. Additionally, we have moved web-based direct response products, Website Cards, from a CPE pricing mechanism and engaging mechanism to a CPX pricing mechanism. And what that means, under CPE there is four different ways to drive engagement to drive a click and to get paid. Under CPX there is only one way to drive a click through rate that we get paid for. And what we are doing is adding significant value to these advertisers by delivering them leads that are further down the marketing funnel and that lowers click through rate because it's a much higher bar to drive an engagement, ultimately drives up higher ROI and that is resulting in great value for advertisers, lower revenue for us. But we are already seeing some improvement in the CPE the advertisers are willing to pay and we do believe, over time, that CPE will continue to increase until it actually offsets the decline in CTR. So those are the two factors. What are we focused on? As it relates to direct response, we are focused on three things that we talked about before and I will give you some specifics, targeting, measurement and creative. As it relates to targeting, we are improving our cross device ID capabilities, which is an important element to driving optimization and our ability to target and drive better ROI. Application graph targeting is another feature that we have recently rolled out and we become more pervasive. That's the ability to look at a user's smartphone, understand what applications they have and target based on complementary applications or if someone is not active on an application using an re-engagement approach as opposed to an install approach. Then better prediction models. Today, we have prediction capabilities as it relates to click through rates and we will increasingly move to prediction ability as it relates to actual conversion. From a measuring standpoint, we announced today a third-party attribution deal with DoubleClick and this is an important development that allows advertisers to not only understand the return that they are driving through attribution from Twitter but also from attribution information from a third party like DoubleClick. It's an important step forward for us as it relates to measurement and an important functionality that our advertisers have asked for and we will continue to get on the path to partner with other third-party attribution models as well. The second thing under measurement that will incrementally add throughout the year is conversion lift studies and the ability to A/B test driving a lift through different measurements and different formats. And then lastly on the creative side, we rolled out through in March carousel formats. Today, that carousel format is only being used for map, mobile application downloads. It's an ability in one slot to give multiple choices to the user from a mobile application standpoint and we think it has great prospects to driving better performance for the advertiser overall. And then lastly, TellApart really accelerates our capabilities in all of these different areas, targeting, measurement and creative. We couldn't be more excited to have Josh and the TellApart team to be part of the Twitter team and we are excited to get started. The last thing I would leave you with is that the issues we would characterize as growing pains, they are adjustable over time. We couldn't be more confident about the growth opportunity that we have in front of us, at least for advertising. So we are quite excited. In terms of your second question, TellApart in our guidance, we are not breaking out TellApart in our guidance from the standpoint it's not material. What I will tell you is we are excited about having the team. We are working to close the deal by June 1. The TellApart business is dependent on third-party publisher inventory. There will be a migration of that over time and that will impact the ultimate revenue that we drive from TellApart. So those of you that may have had a relationship with Josh and his team as a public company, you have to factor that into how you think about the contribution of its revenue to our overall revenue as this third party inventory migration.

[Eric Sheridan:]

Thanks for the color.

[Krista Bessinger:]

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

[Operator:]

The next question comes from Ross Sandler with Deutsche Bank. Your line is open.

[Ross Sandler:]

Thanks. I guess, a question for Anthony and then one for Dick. Just a little more clarity on the revenue guidance. So if we cannot back out the impact from the World Cup that you called out from last year, that implies about 60%, plus or minus, ad revenue growth for the second quarter and around the same for the back half. So I guess the question is, given how low the ad load is, why are you guys not seeing higher growth rates? And what's the constraint? Are you onboarding new advertisers at a similar rate or higher? And then, for TellApart, is there a high overlap between Twitter's advertisers and those that are running on TellApart? And then Dick, just a quick one on Periscope. Any update on total number of users or any metrics you guys are willing to provide? I know it's early. Thanks.

[Anthony Noto:]

Sure. Thank you. So in terms of guidance, we obviously missed first quarter revenue by 2% relative to the midpoint of our guidance range and so if you keep the quarter-over-quarter sequential growth rates constant to where they would have been implied by our original guidance, the full-year should be down by 2%. Obviously, it's down by, I think, 4.5% relative to the midpoint of our guidance. The delta between the 2% and the 4.5% is due to two factors. One, we have lowered the sequential growth rates to factor in a degree of risk that we now recognize from Q1 related to DR. We do think the initiatives that I mentioned will drive strong performance. We are expecting that to come more in the back half of the year than in the second quarter, but the quarter-over-quarter growth rates were lowered to add in some risk there. Second factor is currency. It's not a big factor, but it also factored into lower quarter-over-quarter growth rates. As it relates to TellApart, there is very little overlap in the advertiser base.

[Dick Costolo:]

Hi, Ross, it's Dick. On Periscope, I don't have any additional data to give you other than what I mentioned in my opening remarks. In the first 10 days, more than million people logging into the app. I will just add this additional color. I keep talking about native mobile video and what I mean by that is video produced primarily for mobile consumption. We saw last night with the events in Baltimore, if you happen to be on Periscope, it's absolutely riveting and when we are able to organize these experiences that people are distributing to our ecosystem, whether it by Vine or Periscope or Twitter itself and deliver those experiences to logged out users and in syndication, I am just super excited and confident about the ability to grow that Periscope user base.

[Krista Bessinger:]

Great. Thanks. Ready for the next question, operator.

[Operator:]

Our next question comes from Anthony DiClemente with Nomura. Your line is open.

[Anthony DiClemente:]

Hi, thanks. A couple questions for Anthony. Just if you can give us a little bit more around your expectation for the MAU trajectory over the next few quarters? Should we continue to expect something in that mid-teens MAU add range and what are the drivers? And then secondly, wondering on the direct response piece, what percentage of your ad spend is direct response to begin with, Anthony? And how has that changed in the last few quarters? And just on a percentage of revenue basis, can you help us with how you expect that to change? And then finally monetization of the logged out users, that seems to remain a major opportunity. Any color on when we could start to see the fruits of your partnerships with Google and so forth, Flipboard, Yahoo! Japan work themselves into the revenue numbers? Thanks.

[Anthony Noto:]

MAUs, the 302 million monthly active users that we reported without SMS follows in Q1 was driven by growth initiatives and a return to organic and seasonal growth and we had the benefit of all those factors working for us as we delivered that number. In Q2, we are not seeing the benefit from those three factors as much and there is also some headwinds. So at this point our visibility is actually limited as it relates to Q2 MAU adds. We are off to a slow start in April and so the visibility is not as strong as it was in Q1 and the trend is not similar to Q1. Your second question is what percent of revenue came from DR. DR revenue, as a percent of total revenue, is increasing. That said, our direct sales organization which is generally characterized as branded advertisers is still more than 50% of our overall revenue. It's not growing as fast as DR. So DR is increasing as a percent of revenue, but the branded advertising trend is very strong. It was strong in the quarter and continues to be strong. Additionally Ross had asked the question about our advertiser growth. Our advertiser growth, year-over-year, in the first quarter is very similar to our advertiser growth year-over-year in Q4, which is another indicator of the broad-based growth that we have in both areas from advertisers. And then as it relates logged out, I am going to pass it over to Dick.

[Dick Costolo:]

Yes. So I will speak broadly about the two fundamental questions we want to address with our product changes which are, why should I use Twitter and how do I use Twitter. We have launched version one of two products here that we think answer those questions. The logged out experience delivers that immediate value to people who come to Twitter and when people see compelling content there, they quickly understand the value they can get from Twitter and why they should use it. And then secondly, instant timelines removes that friction and shows people how to use Twitter, making it much more immediately delightful and compelling. These are both V1 products. As I have mentioned before, we are going to iterate on them rapidly and frequently before we worry about introducing monetization into things like the logged out experience. And I highlight that a V1 products and iteration because for example, when we first launched ad targeting, we iterated on that regularly in order to get it to the place it was even six months after we launched it and it's certainly much, much different now and I am confident we will do the same with the logged out experience and instant timeline and other initiatives. Additionally as it relates to the Google deal, I would highlight several things. One, that will be rolling out in May. I don't have a specific date for you, but now I can at least give you a specific month. And that Google deal is all about, that relationship is about driving our total audience strategy. The goal is that people consume content and engage with that content whether they log in or not. And finally, we are also working with Apple to surface great Twitter content and accounts directly in Spotlight Search on iOS and OS X, that also makes it easier and quicker to find great things on Twitter. So I would sum up by saying, there is absolutely an opportunity to go and monetize that attention and traffic. We want to make sure we iterate on the experiences to get them right first. Got it. Thank you very much.

[Krista Bessinger:]

Great. Thanks and we are going to take the next question from Twitter. From the Twitter account of Rich Greenfield at BTIG and he asks, should Twitter curate content for logged in users the way you are doing for logged out? Is this a priority?

[Dick Costolo:]

Yes. So just following up, thanks Rich, first of all, I am just following up on my last answer. As we iterate on the logged out experience and curate topics, events, moments that unfold on the platform, you should absolutely expect us to deliver those experiences across the total audience and that includes logged in users and users in syndication.

[Krista Bessinger:]

And next question from the phone please, operator.

[Operator:]

The next question comes from Paul Vogel with Barclays. Your line is open.

[Paul Vogel:]

Great. Thanks. Just a couple of questions. One, first, just on the logged out users, Anthony, just was there anything expected in the guidance that you are now adjusting based on monetizing the logged out users? Second questions is on the direct response, I know app installs have been a big driver across the web. Any commentary on app installs in particular and how they have worked on Twitter? And then just last, I think you guys mentioned in terms of churn that the instant timeline and other new features have sort of been neutral on retention. Is there any commentary on churn overall not just on new users but older users and whether or not users who come on based on events, whether it's World Cup or Super Bowl, churn at a different rate than users who come on for other reasons? Thanks.

[Anthony Noto:]

Thank you, Paul. In terms of logged out users driving revenue guidance, there is not revenue in the guidance that we gave from logged out users. In terms of mobile application downloads, the business started in late July, August of last year. It's been a very good growth contributor. It is one of the DR businesses that are underperforming in the quarter, having a very strong year-over-year growth rate, but being down sequentially relative to our expectations to power through seasonality. And so that was one of the DR products that underperformed. All the things that I mentioned before targeting, measurement and creative, apply to map as it does to DR more broadly and we are really encouraged by the signs we are seeing from carousel which is a direct format change for mobile application download. In terms of your question on retention, overall our retention was largely the same in Q1 relative to Q4. And in terms of, do event MAU drive different levels of retention or churn, et cetera? The answer to that question is, no. We do get obviously increased activity on the platform engagement around specific events, but to tie it to a churn rate or an acquisition rate, we haven't seen that historically in a real significant way consistently across events and across newsworthy breaking real-time information.

[Paul Vogel:]

Great. Thank you.

[Krista Bessinger:]

Thanks. Next question please, operator.

[Operator:]

The next question comes from Brian Pitz with Jefferies. Your line is open.

[Brian Pitz:]

Thanks. Any specifics you can share of the DoubleClick deal? How much inventory will be made available? And what does the rev share look like? And also any early insights into the Flipboard and Yahoo! Japan syndication deals? And when we should see any P&L impact? Thanks.

[Anthony Noto:]

Thank you, Brian. In terms of DoubleClick deal, we are not sharing any additional information. We are really excited about third-party attribution. We think it will really help with the measurement element of DR but also optimization. In terms of the ads API that you are referring to, we are not sharing information as it relates to inventory or revenue splits. In terms of timing of revenue from Flipboard and Yahoo! Japan, Flipboard launched in the quarter. We did see a small amount of revenue from Flipboard in the quarter and that relationship we are really excited about because we have the opportunity in Flipboard to monetize Twitter timelines of Flipboard users using Flipboard to access Twitter. And that's exciting, but it's also exciting that we have an opportunity monetize non-Twitter timeline inventory on the Flipboard. As it relates to Yahoo! Japan, we don't have a specific launch date as it relates to monetization element of that syndication deal. But the syndication deal has been implemented and is live. The monetization element of it, because it's on web, is more complicated from a product integration standpoint.

[Brian Pitz:]

Thanks, Anthony.

[Krista Bessinger:]

And we will take the next question from Twitter. It comes from Bennett Sultan and here she asks, How has hiring and recruiting performed this quarter? Can you speak towards employee retention and job demand?

[Dick Costolo:]

Thanks, Bennett. This is Dick. I would highlight that first of all, we were named to Fortune's best places to work in the first year. I believe the first year we applied to that, which was fantastic and an extraordinary achievement. So I am proud of that. And then I would say, generally look great people want to work with other great people and as I have sort of highlighted in the last couple quarters, I couldn't be happier with both the team we built out here that not only directly reports to me but that next level of leaders from across the industry who are also operating in the organization now in the engineering organization, finance, media, product, et cetera. So I think that's all having a very positive impact on the kinds of talent we are able to bring into the company.

[Krista Bessinger:]

Great and next question from the phone line please, operator.

[Operator:]

The next question comes from Douglas Anmuth with JPMorgan. Your line is open.

[Douglas Anmuth:]

Thanks for taking the question. Two things, one for Anthony and one for Dick. Just first Anthony, on the changes in engagement growth in CPE growth, some pretty big changes in trend there. I am trying to understand the detail in ad engagements, how much that is tied to exactly what you are talking about in terms of direct response? I understand the cost side is probably there in terms of the bigger growth. And then secondly, Dick, can you give us more color on video. I think the launch of native video is in January. If you can help us just understand anything, any metrics that you can share there? And what you think the awareness of native video is on the platform and levels of engagement that you have seen? Thanks.

[Anthony Noto:]

Thanks, Doug. In terms of your first question, load factor from Q4 to Q1 is relatively flat. The difference there would be lower click through rate and that's a function of a couple of factors, most importantly the mix shift towards lower click through rate formats.

[Dick Costolo:]

Yes. And I will quantify video consumption and engagement this way. Since the launch of native mobile video on the platform on iOS and android, we have seen orders of magnitude increases in the volume of native mobile video shared to Twitter across all kinds of the video shared to Twitter, orders of magnitude increases. And again, as I have mentioned, that content is some of the most engaging on the platform in terms of favorites, retweets, clicks, et cetera. So I am delighted with that and that's how I would quantify it.

[Douglas Anmuth:]

Thank you.

[Krista Bessinger:]

Thanks. Next question please, operator.

[Operator:]

We have Heath Terry with Goldman Sachs. Your line is open.

[Heath Terry:]

Great. Thanks. Anthony, when you referenced the rising cost of ad units as being a reason behind the slower growth and budgets, what does that say to you about the ROI that advertisers are seeing in general and maybe more specifically to the app download side of the business? And then also if you can give us an update even just qualitatively on ad load in the quarter specifically in the U.S.? Was there any contribution to the slowdown in growth related to limitations in ad load that you are starting to see?

[Anthony Noto:]

Sure. On your first question, I specifically pointed out that advertisers didn't have high enough quality score adjusted bids, because there is two parts to that. It's both what they bid as well as the predictive click through rate and the combination of those two things. So the value that they wanted at higher levels of scale wasn't equal to what we would be able to deliver based on that quality score adjusted bids. So it could be a factor of CPE, but it also could be a low predictive click through rate which would decrease the quality score on an adjusted bid basis, even if a person had a very high CP that they bid. In terms of your broader question about, are we running into a supply issue? What I would say is this, the shortfall we had in revenue in the quarter was related to demand. We don't have a supply issue today. Taking a step back from a big picture perspective, the ultimate size of our business will depend on the size of the audience that we build and that audience is broadly defined as logged in, logged out, syndicated users, Vine users and Periscope users, our ability to driving engagement with those users and then our ability to monetize products against those users. Today, we are not inventory constrained, but we are continuously evaluating our ability to optimize the yield over inventory to make sure we are driving value for both the user as well as the advertiser, So today, it is really demand issue. We will continue to evaluate over time .But that's what the issue is today. Our load factor relative to what we talked about in November from an opportunity of 5%, we are not close to 5% today. We are meaningfully below that.

[Heath Terry:]

And that's in both, U.S. and international?

[Anthony Noto:]

Yes, the 5% that I am referencing and where we are in load factor is an aggregate worldwide reference. We haven't broken out load factor by U.S. or by international, nor by heavy, medium or light users. They all obviously vary by market and by type of user.

[Heath Terry:]

Great. Thank you.

[Krista Bessinger:]

I will take the next question from Twitter. It comes from the Twitter account of Victor Anthony and he asks, how does this new risk impact how you think about your annualized revenue potential as you laid it out at Analyst day.

[Anthony Noto:]

Thank you, Victor. We couldn't be more confident in the opportunity ahead of us and the team that we have going after it. So no change relative to the opportunity that we talked about at Analyst Day. I would say this is typical growing pains where product that's less than 12 months old. We have a seasoned group of executives that have built DR at other companies that you are familiar with that have been very successful and growing their businesses to over two million advertisers. We still believe we have that same opportunity. We are still in the tens of thousands of advertisers realm and we still think threw is an opportunity to be able to build our DR business to be as effective and capture the opportunity that we had laid out at Analyst Day and the drivers that we talked about previously.

[Krista Bessinger:]

Great. Operator, we will take our next question from the phone line, please.

[Operator:]

Our next question comes from Brian Wieser with Pivotal Research. Your line is open.

[Brian Wieser:]

Thanks for taking the question. Just wanted to take another attack at the DoubleClick question. Without getting into the financial specifics, I was just curious if you can say when that integration might begin? And if it will be possible to track impressions or just clicks? And separately, just curious about what this might mean in terms of plans to integrate with other ad servers and other DSPs?

[Dick Costolo:]

Sure. I appreciate why you are asking the questions on DoubleClick, but we really value the relationship with Google. This is the second major deal we have announced with them. Our search deal will be rolling out in May and we are really excited about that. This DoubleClick deal was just signed recently and the specific plans, we will share with you later as they become more visible and we are comfortable sharing with you. In terms of what we get from a data standpoint and from a revenue standpoint, we are not sharing that information. It's obviously competitive and information we are not going to share publicly.

[Brian Wieser:]

And in terms of working with other, can be management tools or other DSPs? Is that something you can comment on?

[Dick Costolo:]

We are talking to other third-party attribution partners and we are excited about the opportunity to move beyond just DoubleClick to give our advertisers exactly what they want from a measurement capability and third-party attribution is a key to that. So we want to give them a full 360 degree view, Twitter, DoubleClick and other major third-party attribution platforms.

[Brian Wieser:]

Great. Thank you very much.

[Krista Bessinger:]

Thanks. And next question please, operator.

[Operator:]

We have Ron Josey with JMP Securities. Your line is open.

[Ron Josey:]

Great. Thanks for taking the question. I wanted to ask a little more about product and specifically we noticed a big cadence in terms of product launches and so, one in particular was interesting around group direct messaging. Just wondering if since the launch you have seen an engagement grow on that product and if you are finding users prefer to talk to via groups or via the traditional open web or open Twitter? Is that another way for those user that use group, do they tend post as much outside as they did inside of the group? Thanks. Appreciate it.

[Dick Costolo:]

Sure. Hi, Ron, this is Dick. Thanks for that question. I would say that we have definitely seen an increase in use of direct messaging with the combined launches of group DM and the share tweet functionality, being able to take the public conversation to a private channel. I don't know that I would characterize the growth or increase in engagement as specifically attributable to one or the other. There is kind of a mix and match, if you will. In other words, what I mean by that is, there is an increase in engagement of the people who are using DM to take a public conversation to a private channel with just one other person, but that's also part of what's compelling group private conversations. In other words, people taking a public tweet into a private room with a group of users and having a private back and forth about the public conversation. So sort of a long way of saying, I think it's the combination of those two together that's really responsible for the growth, not one or the other. And specific to your question about, do they post more publicly or chat more privately in groups, I don't have any data for you on that. What I will say about DMs is that we will continue to iterate there and you will continue to see a cadence of launches around direct messaging that are all about letting people move fluidly between the public and private conversation.

[Ron Josey:]

Great. Thank you.

[Krista Bessinger:]

And next question please, operator.

[Operator:]

We have Mark Mahaney with RBC Capital Markets. Your line is open.

[Mark Mahaney:]

Thanks. A question for Anthony and then a question for Dick. Anthony, can you say anything about the retention amongst advertisers? I know you mentioned that there is continued robust growth in advertisers, but are the advertisers you already have had on-site on the service on the network, is there spend retention, their ability to renew campaigns with you, has that changed? And then Dick, given the MAU trends and maybe I won't overdo is, but maybe the slowness that you are seeing going into this quarter, is there any rethink on your part in terms of being able to grow MAUs beyond just the product enhancements, but maybe considering a brand advertising campaign? Thank you.

[Anthony Noto:]

Thank you, Mark. On a year-over-year basis, I alluded to the fact that our growth rate in total advertisers was similar in Q1 to Q4. We haven't previously talked about retention rate of advertisers or as you refer to as churn and so I would hesitate to give you that information now. We have to think through it more, so you have a clear picture. But year-over-year growth rate in the quarter was very similar to what it was in the fourth quarter.

[Dick Costolo:]

Hi, Mark, it's Dick. As regard to your specific question about brand advertising, well I have said in the past year, is something I still strongly believe in and I think we are probably closer to it now, which is that as we get these learning products like the logged out experience and instant timeline working and iterating on them into a place where we really feel good about the kind of experiences we are dropping people into the moment they come to Twitter. Yes, you should absolutely expect us to be thinking about things like precisely that, reaching out into the market and then bringing people actively, proactively I guess is a better way to put it, into those experiences. But it will be on the heels of getting to a point where we are really happy about the way those experiences feel and the data we see from them. And I think we are a lot closer to that now.

[Mark Mahaney:]

Thank you.

[Krista Bessinger:]

Thanks. And we will take the next question from Twitter. It comes from the Twitter account of Manish Sheth who asks, can you give insights into in-tweet purchase and what's the strategy for in-tweet purchase beyond just tickets?

[Dick Costolo:]

Sure, I would say that it's actually the case that tickets are one of the more recent examples of in-tweet purchase we have started exploring and we will continue to run those explorations. I have highlighted in the past that it's in the moment commerce that we are particularly excited about when we think about in-tweet purchases and we continue to explore different kinds of ways of thinking about in the moment commerce. I don't have any additional plans to announce there yet.

[Krista Bessinger:]

Thanks. Operator, next question from the phone line, please.

[Operator:]

The next question comes from Peter Stabler with Wells Fargo Securities. Your line is open.

[Peter Stabler:]

Thanks for taking the question. I guess, one for Dick and one for Anthony. Fully appreciate, I think all of us do that the timeline view metric had fully outlived its usefulness and that's great. Just wondering if you have any thoughts on how we should be thinking about monitoring engagement going forward? That's first one. And then secondly, with regard to your own analytics and measurement products, wondering if you could step back and give yourself a self-evaluation, where you think you are in the development curve of analytics on your own platform and what could we expect from a product development cycle going forward this year? Thank you.

[Anthony Noto:]

Sure. In terms of engagement metrics, there is a lot of different metrics that we look at internally. There is not one metric for engagement. And so I can give you a sense of some of them and quite frankly, we would like to be able to give you more visibility in this, but there is just a number of different measurement. So DAU is one measurement of engagement. We talked about that at Analyst Day. It's a measurement that is dependent by market and you can have mix shift. So it could be a little bit misleading, but DAU to MAU ratios in the quarter were similar to what they were by market relative to Analyst Day. Other engagement metrics that we look at are tweets per day, favorites and retweets, direct messages, searches. Our number of searches actually accelerated on year-over-year growth basis in the quarter. Direct messages also accelerated on a year-over-year basis in the quarter. Favorite and retweets had strong growth and we had growth in tweets per day as well. So those metrics all were generally positive. The timeline view metric, we don't look at internally. It is a metric that we are doing things that actually hurt it and that was one of the reasons why we eliminated it. So we continue to look for metrics that could be helpful to you and we will try to give you color from time to time across these different metrics. But there is not one, the all-in metric.

[Dick Costolo:]

Yes and Peter, this is Dick. I would say, to the analytics question, what we are really doing now, we are really focused on internally is bringing together the various analytics systems we had around measuring logged in audience, logged out audience and syndicated audience into a single system, for really understanding things like total views of a tweet across the entirety of the audience, as one example. And once we have those integrated capabilities, we will be able to highlight those to publishers and Twitter users. I think that will give people a better sense of their own total distribution across the entire ecosystem. And I am excited for us to get those wrapped up and launched.

[Peter Stabler:]

Thank you.

[Krista Bessinger:]

Thanks. Next question please, operator.

[Operator:]

The next question comes from Ben Schachter with Macquarie. Your line is open.

[Ben Schachter:]

Anthony, you mentioned that the number of advertisers is in the tens of thousands, but I am wondering, how many advertisers do you think you will end the year with? And then separately, is it fair for us to expect that the SMS only users will monetize at significantly lower levels? And if so, why include them in the combined MAU count? And then finally, the third was, will the Periscope users will also be included in MAUs? Thanks.

[Anthony Noto:]

Sure. As it relates the number of advertisers at the end of the year, we are not providing a forecast or guidance for advertisers at year-end. As it relates to SMS fast followers, just a couple point of clarification and then to your specific question. So our MAU definition in our filings has included SMS users, but to be very clear those are users that signed up for Twitter on a client other than SMS, desktop, mobile web, the application, many other clients they could have used. And then they have chosen to get notifications or tweets sent to them via SMS. And that's different than a SMS fast follow user. An SMS fast follow user is a user that is an emerging market. It is an important growth area for us. These SMS fast followers have only signed up for Twitter via the feature phone via SMS. And so they are getting tweets sent to them in either a list from individual followers to their feature phone. And the reason why we are investing in this type of user is it could increase the top of our funnel, it allows us to build relationships with future users. It's probably the most technical interface a user can have with Twitter compared to a smartphone, which is much easier with an application or desktop web. And so these users are relatively sophisticated and over time, we expect that they will move from a feature phone to a smartphone or a desktop computer and access Twitter that way. But today they are solely accessing Twitter through SMS and we clarify that by calling them fast followers. In terms of their ability to be monetized, we do have the ability to monetize them. In fact we have just started monetizing them in a very small way through Promoted Accounts and we did that with one partner around IPL. In terms of long-term, we would hope that these SMS fast followers over time would graduate to smartphones and desktop usage. As they do that, their magnitude of usage will increase and our ability to monetize them will increase. But today, the monetization rate of SMS fast followers is going to be meaningfully lower than the monetization rate of any of our other users.

[Krista Bessinger:]

We have time for just two last questions. We will take one from Twitter and then one from the phone line. From Twitter, we will take a question from Jennifer J who asks, can you comment on your M&A strategy? Should we expect to see similar pace of acquisitions in the future quarters?

[Dick Costolo:]

This is Dick. I will start and then Anthony can chime in. Thanks, Jennifer. Listen, I would say that while it's super early days for Periscope, I don't want to get too far out on that. We are really delighted with how acquisitions like that and Vine have worked out for us. So we will continue to be really opportunistic about looking for those kinds of teams and companies in the market, even when they are prelaunch as both Vine and Periscope were when we acquired them. And I don't know if you want to add anything to that.

[Anthony Noto:]

Sure. The only thing that I would add is that, we really want to make sure that investors are grounded in how we think about M&A from a functionality standpoint or strategic standpoint. And Dick has reiterated those three areas we are focused on and it's those areas that we look for acquisitions, those that will strengthen the core, those that will reduce barriers to consumption in new apps and services and these two acquisitions Periscope and TellApart fit squarely in that third bucket. And you should expect we would continue to look for other opportunities in all three buckets.

[Krista Bessinger:]

Great. And operator, one last question from the phone, please.

[Operator:]

We have Mark May with Citi. Your line is open.

[Mark May:]

Appreciate you taking my questions. I have two, please. It seems like your move to CPX or CPA or whatever your calling it, is somewhat differentiated versus peers and it also seems like it puts a bit more of the onus on Twitter to have a lot of ads to choose from and to be able to target those ads really well. And so the question is, do you think you have the scale with those ads and advertisers and the targeting down so that this transition to CPX will be smooth and incremental in the short to midterm? Or do you think that this may take a little while to play out? And then secondly regarding DoubleClick Bid Manager, can advertisers buying Twitter via DBM, are they able to fully leverage all the data available from your own self-service tool through that channel? And are you guys able to protect like data leakage to Google and others when using platforms like DBM? Thanks.

[Anthony Noto:]

Sure. Thank you, Mark. On the move to CPX, we are definitely taking a long-term view and driving towards quality. We think advertisers love our Twitter advertising platform. We started with the hardest to convince advertisers, the branded advertisers Adam and his team built the native product and really pioneered that. So we are very fortunate in that we have formats that our advertisers love and we continue to iterate on making them even better for advertisers. And the move to CPX is 100% about improving quality for them and it's also about improving quality for the actual user, because it's a much higher bar for someone to win that auction when it's on CPX basis, when you think about predictive click through rates and quality adjusted bids. And so in the quarter, we did see a headwind. It was in the $4 million to $5 million range, if we hadn't switched to CPX from CPM/E formats. CPE didn't offset it, unfortunately we are actually starting to see in the last of couple weeks an improvement in the CPE as it relates to the specific CPX engagement mechanism. So we are encouraged by that. But our guidance reflects that we expect it to take place over time not immediately. I wouldn't want to mislead you that we expect it to happen right now. It's going to take place over the next several quarters and more broadly, we will continue to drive towards quality, even if it comes at the expense of some revenue in the near term, like it did this quarter. As relates to buying via DBM, what I would say is, I appreciate everyone's questions. A lot of things you are talking about, we obviously would think about when we were striking this deal and we are ensuring that we protect the Twitter franchise and Twitter value by being a great partner. One of the neat things that I can tell you is that DoubleClick is willing to give us Twitter specific attribution mechanisms that are unique to our tweets from a promoted and favorite standpoint, et cetera.

[Mark May:]

Thanks.

[Krista Bessinger:]

Great. Thanks everyone for joining us. We appreciate your time and look forward to speaking with you again next quarter.

[Operator:]

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