Q3 2019 Earnings Call

October 24, 2019

Good day, ladies and gentlemen, and welcome to be Twitter third quarter 2019 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, Vice President Investor Relations. Please go ahead.

Great. Thank you hi, everyone. Thanks for joining our Q3 earnings conference call, we have Jack and that's with us today.

Before they start I wanted to remind everyone of the format of our call. We published a shareholder letter on our Investor Relations website and with the FCC about an hour ago and hope everyone had a chance to read it.

Because the letter has a lot of detail, we'll keep our opening remarks brief and then dive right into your questions.

We'll also take questions asked on Twitter. So please tweet us at at Twitter IR using the cash tax Tw T R.

Also during this call we will make forward looking statements those are things like our outlook for Q4 and the full year 2019.

At our operational plans and strategies.

Our actual results could differ materially from this contemplated by our forward looking statements and you should not consider a reported results as an indication of future performance.

We're making these forward looking statements based on information available to us as of today and we disclaim any duty to update them later unless required by law.

Please take a look at our filings with the FCC, especially in the risk factor section in our most recent 10-K and in our 10-Q's for a discussion of the factors that could cause results to differ.

Also during this call we will discuss certain non-GAAP financial measures, we reconcile those to the most directly comparable GAAP financial measures and our shareholder letter.

These non-GAAP measures are not intended to be a substitute for GAAP results.

And finally this call in its entirety is being webcast from our Investor Relations website.

An audio replay will be available on Twitter add on our website and a few hours.

And with that I'd like to turn it over to Jack.

Good morning, Thanks for joining our third quarter call.

A few highlights for me in Med before we get your questions.

We've talked for quite some time about how are focused on increasing relevance and ease of use will compound into sustainable growth.

Today, we're proud to show the nearly half of the 19 million daily customers Weve added since the fourth quarter 2018 can be attributed to the study refinements of Twitter.

This also fueled our results this quarter, a 17% year over year increase of daily usage.

Bringing us to 145 million M.D.A. you.

This isn't in incredibly strong foundation to build upon.

The steady refinement is just one part of our development portfolio.

In parallel we are rethinking the fundamentals of how Twitter works in order to better address the problems we're seeing.

One example of this is our work on public conversation health.

At the beginning of this year, we resolved to break from only acting on reports of abuse and harassment.

To proactively identifying tweets and conduct a violates our terms of service.

Today Weve crossed another threshold over half of the enforcement actions, we take in any given week, providing our abuse rolls is now proactively identified and verified by our agents before a victim or bystander has to report the violation.

We will continue to refine this work to steadily increase that percentage.

This is important because it removes the burden of reporting from victims and paired with a much more robust appeals process.

Increases our correctness of enforcement.

Another example of rethinking the fundamentals is where we have taken on some notable experiments this quarter, which might lead to far greater outcomes.

In health, we launched the ability for folks to moderate replies to their tweets by hiding them from the main conversation view, while still allowing moderated tweets to be seen behind a button process.

This is now live in the U.S., Japan in Canada, but.

The global rollout is forthcoming.

More broadly we've evidence to show that people see Twitter as an interest network. It's been a bunch of time focused on finding and following accounts that matched or interest.

From Onboarding to daily use we have opportunities to make this much easier.

To address this we went back to a feature only Twitter experts make use of list.

This quarter, we made less easier to create and most importantly easier to consume.

We've added the ability to pinless directly to your home timeline, enabling a fast switch between your home timeline and list of accounts you want to keep on.

Keep up with but don't directly follow.

We expect glitz creation to get more powerful capabilities over time.

We're also experimenting with following topics right from the timeline.

An option to follow a topic will be appended to relevant tweets a tweet about the Golden State Warriors for instance, we now have a prompt to follow the topic, which allows us to include all relevant tweets matching the topic without having to follow the various accounts that produce them.

Of course, you can on follow anytime and this is an area, we will continue to add more capabilities around.

Finally, and network spend more on this revenue.

Unfortunately, we had some missteps in bugs in our map adds admits greater than expected seasonality in July and August .

Despite that we saw strong September results in good advertiser momentum.

Our goal in rebuilding our core AD and map technology sex was to address exactly these sorts of issues and increase engineering agility.

Because of this work, we're much better equipped to identify and fix issues, we come across today than we were just one to two years ago.

So painful but no longer existential as it was in our past.

I believe our company is in its strongest position ever we're learning faster prioritizing better shipping more and hiring people who are out of reach before.

All this has increased our confidence we can meet the larger challenges facing us in our industry, including misleading information and then in ever evolving regulatory environment.

We are approaching all these problems and deeply principal Blake and commit to addressing them openly in a way the benefits all not just Twitter.

Thank you and without a pass it over the.

Thanks, Jack before you get into Q1 day I want to highlight a few things which are in the letter, but merritt mentioning it the outside of the call in aggregate issues relating to our revenue products reduced year over year growth by three or more points. In Q3, we discovered and took steps to remediate bugs that largely affected our legacy map product. These bugs affected our ability to target.

Ads and share data with measurement and add partners.

We also discovered that certain personalization and data settings were not operating as expected.

These issues, where in our control and we will work to do better.

Also experienced greater than expected add seasonality that began in July and continued into August .

We believe our core value propositions of watching something do and connecting with what's happening on Twitter continue to resonate with advertisers and that's lower business over the summer was in part due to a relatively lighter slate of big events and launches in July and August compared to 2018. One example of this is comparing the men's World Cup in 2018.

The women's World Cup in 2019.

We were pleased AD revenue growth rebounded to double digits globally in September with the most pronounced recovery in the United States advertisers sentiment remains strong.

Looking ahead, while we're taking steps to remediate the product issues. We've described we expect them to continue to weigh on the overall performance of our ads business in the near term.

Specifically, we expect the moderated performance and map and the issues discussed in our personalization and data settings will likely result in four or more points of reduced year over year growth for total revenue in Q4 from three or more points of impact in Q3, reflecting a full quarter impact in Q4 versus only a partial quarter impact in Q3.

This is incorporated into our guidance.

As in prior quarters, our guidance reflects the most likely range of outcomes based on our current visibility we've considered the rebound in our ads business in September the strength of our bookings and the organic events and product and service launches that have already happened or that are expected in Q4, along with the lingering headwinds we expect from the previously discussed product issues.

We remain confident in the fundamental strength of Twitter and believe we're focused on the right priorities across the company in fact, the issues. We saw this quarter reinforce our confidence in our strategy both in consumer and ads.

We're especially excited to see such strong product driven M.D.A. you growth year to date and continue to see a tremendous opportunity in front of us to deliver increasing value for advertisers and to get the whole world to use Twitter with that we're ready to take your questions operator.

As a reminder to ask a question. If you want me to press Star one on your telephone to withdraw your question press the pound or hash key please standby when we compared to Q and a roster.

Your first question comes from the line of Duck listen myth of JP. Morgan. Please go ahead. Your line is open.

Thanks for taking my questions. My two first just med on map can you just help us understand a little bit more about kind of when you learn to the issues around map around targeting and then sharing data and then the degree to which they've been fixed at this point and how that kind of informs the the four points of impact.

So you're talking about for for Fourq, you and then secondly, it looks like you're on track to do nearly the 20% Opex outlook that you've discussed for this year and I know, it's early but do you expect the same big for investment priorities next year and.

How do you think about opex growth for 2020. Thanks.

Okay. Thanks, Doug I'll take both wasn't jacket and anything afterwards if.

That makes sense first on the question on the product related issues. So these came up over the course of the quarter and.

It wasn't one particular day there were more than one of these things. Let me give you a couple of examples which can help them come to life. The first is we ask people a series of questions. When we put them before we put you into a timeline when you're new to Twitter among the questions. We ask our we couldn't use your device settings to figure out the best adds to show you.

Oh, it turns out that that setting wasn't working as expected and we were using device settings.

Even if people at asked us not to do so.

So when we discovered that one week tweeted about it which we often due to try to be transparent with people when things aren't working as expected and two we turned off the setting.

So that it would work as expected that has a negative impact to revenue because it's one less input that you've got when you are figuring out which adds to show people. So instead of getting a partial quarter impact you get a full quarter impact in Q4.

Second example is specific to map, where we typically well shared data with measurement partners, who will then share it with advertisers. So that they can see the effectiveness of their campaigns not just on Twitter, but across platforms and another one of the questions that we ask people before we put them into a timeline is.

If we can share their data with measurement partners.

Setting also was not working as expected and we were passing on data, which we have not intended to.

So we stopped doing that and although we are working on remediation there isn't remediation yet in place and so the effects of that will continue into Q4 of the as you can imagine the remediation would be sharing aggregated data as opposed to personalize data when people have asked us not to share their data. So those are two good exam.

<unk> hopefully help the issues come to life, a little bit that this wasn't one thing there were things that we found out over the course of the quarter and that when you've got a full quarter is impact of them, even if you're working to remediate there can be a negative impact to revenue.

Secondly, you asked about expenses and.

Although it's too early to talk about 2020 on I'd just point.

Quite back to some of the comments in the letter and then our opening remarks for we look at the things that we saw this quarter. Both the D.A. you growth and the issues on the revenue product side and they really reinforce our strategy. We're really pleased with our hiring this quarter retention was better than it has been and our ability to attract people to Twitter took him work here was that.

With that it has been so we continue to believe in grow head count, 20% or more and that expenses will grow about 20% as we've talked about in the past so no real changes there and as we think about next year, we think about a similar set of priorities from a big picture perspective, but it's too early to layout.

At our specific plans or think about how that'll all play out but do keep in mind that we hope that all the people. We've hired this year will stay with US next year. We hope that we will get married increases to people, who get promoted and cost of living increases and so on and so there's a natural increase to expenses just based on decisions that have already been made.

Yeah.

Thank you.

Thank you next question please.

Your next question comes from the line.

Well, obviously of Deutsche Bank. Please go ahead your line is open.

Thanks, two if I can first just when we when we looked at the I think that said nearly half of.

Jack Saar, you said nearly half of the users.

User growth came from.

Rick refinements can you just give us a sense for where the other half if I understood that correctly came from and then when you look at the acceleration India you growth do you have any sense for.

How much of that is coming from the better Onboarding specifically.

No you started to talk about that something you're investing in but I think it was more of a 2020 focused so do you still feel like it's early innings and your ability to drive product improvement.

The faster faster Onboarding, India, you grip.

Thanks, Lloyd let me start and turn it to Jack on the Onboarding question. So we typically talk about three levers when we think about ways that we can bring people to Twitter gives him a great experience and I will become part of their daily lives on the first one is product improvements you mentioned Jack's comments, where that was almost half.

The improvement over a longer period of time, when we make product improvements they compound overtime. The people who are new to Twitter. This quarter benefited from all the product work that we've done over the last many years.

And watching that compound watching the pace of our innovation improve and watching how we continue to drive better relevance, whether it's around notifications or the home timeline or onboarding, it's great to see the real impact that that's having the second one are the events that are happening all around the world that drive people to the service now if we don't give them a good.

Experienced when they get there they're going to leave and may not come back or may not come back for some time. So these are opportunities are at bass for us but events are they continue to be a driver when we think about ways that we're adding people to the service. The third one which is smaller but is still at a part lever as marketing.

Marketing is a great way to bring people to service, but again it all comes back to the product because if we don't get people good experience when they get there they may not a they may not come back as frequently as we'd like let me turn it to Jack on Onboarding.

So Lloyd on a on Onboarding as you know we've been talking about Onboarding for quite some time and I would say that we've had a lot of fits and starts and the approach there.

One other things that gives us a lot of confidence is again going back to my opening remarks, we do believe Twitter works best when people see it more as an interest not we're able to quickly finance and follow their interest and right now they have to do a lot of work to find and follow related accounts.

So we have been both testing and also deploying.

Tools around topics and interest to make it much easier to get into your interest faster without having to do all the work to find and follow those related accounts.

Right now they're in App or are those experiments. Both the intention is that we bring up right to onboarding. So if you do show up into the upper into the web site expressing in particular interest like basketball or.

And then as we get confidence around that.

Thank you.

Thank you next question please.

Thank you.

Specific guidance for 2020 here, but would it be fair to assume that some of these.

You mentioned the letter that USAID recalled in September so we got from sorting out some of the issue you would get you stood better or more.

That's my first question and then the second question is.

We're seeing very strong international you grows so can you talk really.

And along those lines.

International AD revenue.

He is traveling you asked a little bit so it just because the bugs golden deceleration in places like Japan or or is it. Good. The users are coming in countries that made Oh offers is higher will monetization potential any color there on the problem international would be helpful. Thanks, Thanks, Ross I kinda.

For questions, but we can call it two and all I'll take a crack out so on the four points.

Impact to Q4 of the for a more points that we talked about there will be some bleed over from those into future periods. It's too early to quantify at both because we're working hard on remediation also because we're not giving guidance for 2020, yet, but there will be some continued impact from these things. The second is the recovery.

We saw in September really wasn't from remediation. This was that there was.

If you think about our.

Two things that we're talking about advertisers launching new products and services and connecting with what's happening.

Those along with the always on advertising that you'll often see when you come to Twitter. They just rebounded nicely to double digits led by the United States, but not just in the United States in September that's what gives us the comfort that the issues that we saw in July and August we're more pronounced seasonality than we had anticipated.

Even when we incorporate the ongoing product issues that continued into September . The fact that we saw that double digit growth that.

And we were thrilled that the improvements that we're bringing to the service are being felt by people all over the world people, who are new to Twitter people have who have used Twitter in the past, but abuse. It less frequently both continue to be real opportunities and areas, where we've had success.

Last part of your second question was around Japan.

And international more broadly from revenue perspective, just to give you a few numbers there. So international revenue grew 7% year over year, but inside of that is our second largest market, Japan, where I think some context would help so we were down 1% year over year in Japan remember last year, we grew 44% year over year in the third quarter, we built.

A really big business that we're very proud of in Japan, both with lots of people, who use the service great relationships with the largest agencies and having really connected with the advertisers with Matt and with video ads now map is a bigger part of our business. There that it is in other geographies. So it was more impacted by these.

<unk> issues, then other geographies, where so that down 1% is both I get up against a tough comps and also more pronounced and its impact from that we continue to be really excited about the opportunity in Japan, I'm actually headed there to see some of our partners. This weekend, we add the Olympics coming out in 2020.

And we continue to work hard to bring out and improved version of that although the impact will be felt gradually we do expect that impact to begin in 2020 in Japan ought to be one of the primary beneficiaries.

Great. Thank you next question please.

Our next question comes from the line of Justin Post of Merrill Lynch. Please go ahead. Your line is open.

To any one particular.

Underlying metric when we think of what's driving the growth because we're seeing benefit from from many of them.

After service when they want to connect with the big event, whether it's the women's World Cup or the end of the baseball season that we are a terrific place for them to do that and we've been a big beneficiary that as those messages. It really resonated when you add up all of those product launches when you add up all of those.

As events across different types of topics across geographies, you end up with lot of happening on Twitter everyday that our opportunities for advertisers to connect with their customers on the service.

Okay. Thank you.

Great. Thank you and we'll take the next question from Twitter. The question comes from the account.

Clean manager and the question is when will you enable topic. Following it would not only improved the user experience, but also improved onboarding and retaining a new users.

As I as I mentioned in my opening remarks, we have been experimenting with.

Both interest and topics more broadly.

One example of this is making better use of list I'm a lot of people construct list around.

Topical area. So it includes a number of accounts that mindset.

Particular topic, so for instance, I follow.

Quicker list the has all the folks within within crypto and I can pin that right to the top of my home timeline. So it can quickly is why to it to see it.

The other thing that we're doing and experimenting with right now.

Yes, it's a small rollout so far but we intend to expand it soon is whenever we see a tweet that might match a particular.

Topic.

We'll put a prompt and that.

Thanks, Jack Operator, we'll take the next question please.

Our next question comes my line of Eric Sheridan W.P.S. Please go ahead. Your line is open.

Selling better formats that we're selling more relevant ads are putting more relevant ads in front in front of people. So pleased about that and cost per AD engagement was down 12%.

That largely reflects a mix shift from Matt to video.

Really would think more about that than I would about changes around like for like pricing. When you think about AD formats and opportunities around these just generally there's still lots of opportunity for us to continue to improve relevance to continue to come out with better AD formats and improve versions of our existing ad formats.

The last period of time here because of that product related issues that we've talked about it should be no surprise that cpms were actually down this quarter.

There I wouldn't say there were more costs from the bugs the biggest impact from a resourcing perspective, when things like this come up is that we people we end up shifting where people are spending their time, sometimes where we work on remediation. While we may have preferred to work on other things.

So that can have a different kind of impact, but when we think about these product related issues that we really feel were in our control. We look at them as a validation of where we've been investing and that 20% or show head count growth that we've talked about a that the about 20% expense growth for this year those are going against things like we have.

Got it check.

Elections, and the integrity of the conversations around them.

So we are paying a lot of attention to all the dynamics at play.

Specifically looking at misinformation and misleading information and how that affects haven't broken out what we did with 2016.

But we do we have put a lot of focus on our transparency sooner.

Thanks for the people of visibility into how people and who is spending.

For political both Canada and also issue ads on the service, we intend to continue to look for opportunities to increase transparency.

And then look broadly at the of the role of political advertising on on the service and where we can improve it.

We will we will of course update you all with a with any decisions are findings, we make but this does remains our top priority.

Hey, you asked a couple of things to add just to give you some financials to go with Jack's comments.

When we talked already it's out there about the 2018 mid terms and that political ads are less than $3 million out for us we try to be really principles about the decisions that we make around.

Advertising, whether it's a political or otherwise.

Okay think of it.

Thank you next question please.

Thanks, a couple of quick questions could you quantified the impact in the revenue Miss this quarter alone between the product mishaps in seasonality what percentage of the Miss the shortfall was due to one versus the other secondly map products like what percentage of AD revenue would you think that they account for and third the seasonality doesn't really seem.

I could seasonality it seems like it's more there's a new term for it or we need to come up with one like adventure reality or something you just didn't have a large number of I don't know traffic driving or interest driving events and therefore, you had a bit of a shortfall maybe that's just part of Twitter going forwards. When you if you have big events.

Seasonality.

We haven't broken out map as a percentage of the business it varies from quarter to quarter from geography to geography from year to year. It is not a an area where we've seen as much strengthen the recent past.

Thanks, Scott So we didn't generate about $167 million a cash this quarter, but we also repaid a convert.

And often challenge ourselves around.

About efforts to bring on more advertisers NDR advertising just talk us through some of the one or two key steps still to take to bring on more advertisers and really crack into the the de our budgets. Thanks.

Where in a 120 $530 billion digital ads market that grows 20% here that they should launch more new products and services and invest more against those launches on Twitter that they should do more to connect with what's happening on Twitter one way to think about it is if you go back to the Super Bowl, We had 30 of the 38 advertiser.

From the Super Bowl on Twitter at the same time, but there are eight to whom we still need to make the case that they ought to be on Twitter.

That along with continuing to prove it improve relevance better formats and moving down the funnel in terms of the types of advertising. That's available those are all things that off to help us from the auction dynamic perspective, I think about map. If we can l. people realize their objectives with fewer impressions that leaves more impressions for other things without.

Changing how many as we show to somebody or anything like that your next question I've answered a little bit of already but what can we do around direct response and bringing more advertisers to the service. So our math work should lead to more direct response type opportunities overtime and in terms of bringing more advertisers to the service we.

We have a nice business, where we help smaller advertisers.

In reaching their customers on Twitter, but that's not in areas that we have prioritized improvements around in the recent past its a place where we know that there's millions of small businesses around the service, where we could help them more and reaching their customers on Twitter, but we've got to do the engineering work and make the case to them better than we are today.

And right now we've chosen to prioritize other things first.

Okay. Thanks for joining us we appreciate your interest in Twitter and we look forward to speaking with you next quarter. We'll report our Q4 earnings and the full year on February six before the market opens we'll see you on Twitter.

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