Shareholder Letter Q1 2017 – Twitter

Dear Shareholders,

We look forward to discussing our first quarter 2017 financial results with you at 5am PT today. As a reminder, to have your questions considered during Q&A, Tweet to @TwitterIR using #TWTR. Thank you for your interest and we look forward to speaking with you soon.

Highlights

  • Twitter’s audience continued to grow with accelerating momentum in Q1. Daily active usage (DAU)* increased 14% year-over-year, marking the fourth consecutive quarter of accelerating growth. Monthly active usage (MAU) also increased 9 million quarter-over-quarter, reaching 328 million.
  • We’ve made meaningful progress toward identifying and removing accounts that demonstrate abusive behavior and, as a result, we’re seeing less abuse reported across the service.
  • We shipped a series of updates to further simplify our service. We gave people more characters for their replies by removing @names from the Tweet text, we’re building a unified API platform, and we’ve launched new Direct Message APIs, creating a more cohesive product experience for consumers and developers.
  • We made progress toward streamlining and simplifying our revenue product portfolio in Q1, reallocating resources to our highest revenue-generating priorities as well as new revenue product features and new channels of demand.

Overview

Twitter’s audience continued to grow with accelerating momentum in Q1. DAU increased 14% yearover-year, making this our fourth consecutive quarter of accelerating growth. We also saw continued strong growth in MAUs with 328 million reported in Q1, an increase of 9 million quarter-over-quarter. We believe our audience growth has been driven by a combination of: organic growth (reflecting some seasonal strength), product improvements (including better relevance in the timeline and notifications), and marketing.

While we’ve made progress toward building a better, more cohesive user experience that is driving accelerating audience growth, there is still work to be done to translate that into revenue growth. In Q1, we continued to streamline and simplify our revenue products, communicate to advertisers the success we’re seeing with accelerating audience growth, build new revenue product features, and reallocate resources to our highest revenue-generating priorities. We have received positive feedback from advertisers and agencies regarding the significant ROI improvements we’ve achieved as audience growth continued to accelerate and our cost per engagement (CPE) has decreased more than 60% year-over-year. While new deals represent a small portion of total expected revenue, we have signed a number of new advertising agreements with some of our largest advertiser partners

* We define daily active users or daily active usage (DAU) as Twitter users who logged in or were otherwise authenticated and accessed Twitter through our website, mobile website or mobile applications on any given day. Average DAU for a period represents the number of DAUs on each day of such period divided by the number of days for such period. To calculate the year-over-year change in DAUs, we subtract the average DAU for the three months ended in the previous year from the average DAU for the same three months ended in the current year and divide the result by the average DAU in the previous year. Prior to Q3 2016, Twitter has discussed DAUs and the ratio of monthly active users (MAUs) to DAUs. In those instances, for comparability and consistency with MAUs, DAUs also included users who accessed Twitter through our desktop applications and third-party properties.

and agencies in key geographies. We continue to expect revenue growth to meaningfully lag audience growth in 2017. We believe, however, that executing on our plan and growing our audience should result in positive revenue growth overTwitter Shareholder Letter 1 Q1 2017.png the long term.

In addition, we remain focused on streamlining our cost structure, achieving greater operating efficiency, and making progress toward GAAP profitability. In Q1, we reduced our GAAP net loss significantly and achieved our highest adjusted EBITDA margin to date, despite the year-over-year decline in revenue.

In the first quarter, we achieved the following results:

  • Q1 revenue totaled $548 million, a decrease of 8% year-over-year.
    • Advertising revenue totaled $474 million, a decrease of 11% year-over-year. •
    • Data licensing and other revenue totaled $74 million, an increase of 17% year-over-year.
    • US revenue totaled $341 million, a decrease of 13% year-over-year.
    • International revenue totaled $208 million, an increase of 2% year-over-year.
    • Total ad engagements increased 139% year-over-year.
    • Cost per engagement (CPE) decreased 63% year-over-year.
  • Q1 GAAP expenses totaled $589 million, a decrease of 10% year-over-year.
  • Q1 non-GAAP expenses totaled $465 million, a decrease of 5% year-overyear.
  • Q1 GAAP net loss of $62 million, a decrease of 23% year-over-year, representing a GAAP net margin of -11%.
  • Q1 non-GAAP net income of $82 million, a decrease of 20% year-over-year.
  • Q1 GAAP diluted EPS of ($0.09) and non-GAAP diluted EPS of $0.11.
  • Q1 adjusted EBITDA of $170 million, a decrease of 6% year-over-year, representing an adjusted EBITDA margin of 31%.
* For a reconciliation of non-GAAP financial measures to their corresponding GAAP measures, please refer to the reconciliation table at the end of this letter.q1 2017 twitter shareholder letter 2.png
  • Average monthly active users were 328 million in Q1, an increase of 6% year-over-year and compared to 319 million in the previous quarter.Average US MAUs were 70 million in Q1, an increase of 7% year over-year and compared to 67 million in the previous quarter.
    • Average international MAUs were 259 million in Q1, an increase of 6% year-over-year and compared to 252 million in the previous quarter.
  • DAU grew 14% year-over-year, an acceleration from 11% in Q4’16, 7% in Q3’16, 5% in Q2’16, and 3% in Q1’16.

We’re focused on driving value across three key areas of our service: audience, content, and revenue. We believe these areas will have the biggest impact on our ability to create shareholder value. Let’s go through each in more detail.

Audience

Strengthening our core use case as the best and fastest place to see what’s happening in the world and making Twitter safer are critical to growing our audience. We’re pleased with our Q1 results across both audience and engagement. We saw continued acceleration in DAU for the fourth consecutive quarter, an increase of 14% year-over-year, and our second consecutive quarter of accelerating year-over-year growth in MAU, an increase of 6% year-over-year, with 328 million reported in Q1. Growth continued to be broad based — DAU growth accelerated in seven of our top 10 global markets, with particular strength in the US, where we also added 3 million MAUs sequentially. Increases in audience and engagement were driven by organic growth (reflecting some seasonal strength), product improvements (including better relevance in the timeline and notifications), and marketing.
In Q1, we further refined the timeline to display a broader set of Tweets from a person’s network and applied deep learning models to show the most relevant Tweets first. We also continued to use other machine learning techniques to improve the relevance of notifications, which increased engagement and brought people back to Twitter. These changes improved retention across both MAU and DAU. In addition, in late March we introduced an update that makes it easier for people to follow conversations and replies on Twitter.

* We define daily active users or daily active usage (DAU) as Twitter users who logged in or were otherwise authenticated and accessed Twitter through our website, mobile website or mobile applications on any given day. Average DAU for a period represents the number of DAUs on each day of such period divided by the number of days for such period. To calculate the year-over-year change in DAUs, we subtract the average DAU for the three months ended in the previous year from the average DAU for the same three months ended in the current year and divide the result by the average DAU in the previous year. Prior to Q3 2016, Twitter has discussed DAUs and the ratio of monthly active users (MAUs) to DAUs. In those instances, for comparability and consistency with MAUs, DAUs also included users who accessed Twitter through our desktop applications and third-party properties.

Twitter Shareholder Letter q1 2017 3.pngWe also further simplified the user experience with the launch of Explore on iOS, which brings together trends, Moments, and search, making it easier for people to discover what’s happening on Twitter. We’re seeing strong adoption and repeat usage — approximately 40% of our DAUs visit the Explore tab on average per day, and approximately 60% of those return the next day.

Making Twitter safer also remains a primary focus and we executed against a number of initiatives in Q1, several of which were the result of direct user feedback. We’ve been focused on three key areas: communicating more clearly about actions we take, giving people more tools to control their experience, and further leveraging our technology to reduce abusive content. In February, we announced new updates to stop the creation of new abusive accounts by users that have been permanently suspended, and to bring forward safer search results. We also helped people reduce notifications from conversations started by accounts they had blocked or muted, and began ranking content to bring the most relevant conversations forward. Over time, we expect to do even more in this area, with a specific focus on identifying and collapsing potentially abusive and low-quality replies. All of these initiatives reflect our greater sense of urgency in regard to safety, and we look forward to sharing more product updates in the coming weeks and months.

Content

Live streaming video continued to drive conversation, connection, and engagement on Twitter. We saw strong momentum in Q1 with partnerships across our key areas of strength: news and politics, sports and esports, and entertainment. We signed a number of new deals in the quarter including partnerships with ESL and DreamHack, Mainichi Shimbun, France Télévisions, Sky Sports, Time Inc., Billboard, IMDb, Condé Nast, and GLAAD. The breadth and diversity of our content continues to meet the passionate interests of our audience and also offers a competitive advantage in our conversations with advertisers.

Notably, in Q1 we streamed more than 800 hours of live premium video from content partners across more than 450 events reaching 45 million unique viewers,* an increase of 31% from Q4’16 (our first full quarter of live streaming premium content). Of these hours, 51% were sports, 35% were news and politics, and 14% were entertainment. We continue to provide significant value to our live premium content partners, helping them extend their reach globally with approximately 60% of unique viewers outside the US, and reach a younger audience with approximately 55% of unique viewers under the age of 25.

* All unique viewership counts referenced herein are based on unique user ID and the MRC video view standard as defined by the IAB (50% in view for 2 seconds).
** The 60% of unique viewers outside the US and 55% of unique viewers under the age of 25 represent percentages for our logged in audience only.

In sports, we launched weekly games with the National Hockey League and the National Lacrosse League, as well as early morning streaming of PGA TOUR LIVE, with great success. Our distribution of PGA TOUR LIVE has averaged almost half a million unique viewers each day. We also launched our spring college sports, featuring college baseball, softball, and lacrosse, which enabled us to meet the specific interests expressed by our audience via their interest graph. We’ve also begun our international expansion, with the Sky Sports Transfer DTwitter Shareholer letter Q1 2017 4.pngeadline Day in the UK, and the National High School Baseball Tournament (Senbatsu) in Japan, among others. In esports, we partnered with ESL and DreamHack to live stream the Halo World Championship, reaching a record 10 million viewers.*

In news and politics, we partnered with the PBS NewsHour to offer special coverage of President Trump’s address to a joint session of Congress, which reached 2.8 million unique viewers. Our relationship with Bloomberg also continued to draw large audiences, with nearly 11 million total unique viewers in Q1.

In entertainment, we partnered with Billboard to broadcast their Grammys red carpet pre-show, reaching 5.1 million unique viewers. This reflects both the strength of the music community on Twitter, as well as increased awareness of our live programming. In addition, Twitter’s streaming of the SAG Awards red carpet show, in partnership with Time Inc. and People, reached 2.6 million unique viewers. We also live streamed two shows associated with the Oscars — IMDb’s live companion show and Vanity Fair’s live afterparty — with the IMDb show reaching 2.7 million unique viewers and the Vanity Fair show reaching 3.7 million unique viewers. We also garnered 2.1 million unique viewers in our first live music event — a Depeche Mode concert in Berlin, Germany.

In Q1, we also began working to improve live content discovery on Twitter with a series of experiments that integrate some live video content into our Explore tab. We plan to expand this in the future as we make it even easier for people to discover what’s happening on Twitter.

Looking ahead to Q2, we’ve entered into partnerships with Billboard to live stream performances from the #REVOLVE festival during the first weekend of Coachella, with Major League Baseball (MLB) to broadcast weekly MLB games, with Banner Promotions to live stream the WBO Lightweight world championship, and with IGN to provide an exclusive live stream of E3 in June. Next week, in our first NewFronts presentation, we will share our entire slate of compelling live premium content across sports, esports, news, and entertainment. Live content 14% 51% 35% News + politics Sports Entertainment 800+ Hours of live video 450 Events 2.6M SAG Awards 3.7M Vanity Fair’s Live Oscars Afterparty 5.1M Grammys Viewership across key entertainment events in Q1 60% International viewers Global reach 55% Viewers under 25 Young audience Unique viewers 45M Unique Viewers #Live

* The 10 million viewers are not de-duplicated.

Our user-generated content ecosystem also remains strong. In Q1, we streamed 77 million hours of live user-generated video through Periscope. We also made a number of product improvements. We launched the Producer API, which provides developers new ways to share live video via external hardware, software, cameras, and web services, allowing partners to more easily get their live content into the Twitter ecosystem. We also provided publishers and creators with new tools that allow them to see comprehensive analytics around their Periscope live broadcasts, and also to monetize their broadcasts with pre-roll ads in Periscope videos on Twitter.

Revenue

We believe Twitter is the best place for advertisers to drive brand perception. We saw this vividly in recent weeks when Wendy’s, a brand that regulartwitter shareholder letter q1 2017 5pdf.pngly engages with people on Twitter, responded to a loyal customer on a mission for free chicken nuggets. Wendy’s leveraged the unique conversation that happens only on Twitter into national prominence for their brand, creating a call for Retweets that inspired unprecedented engagement. Other brands, celebrities, and consumers alike quickly took notice, and it soon became one of the most Retweeted Tweets ever. This one simple conversation is a powerful example of Twitter’s unique value proposition for advertisers.

We’re continuing to showcase this value with our largest ad partners, highlighting the improved ROI from both our audience growth and better pricing — with a more than 60% year-over-year improvement in cost per ad engagement. Early feedback has been positive and we’ve signed 32 additional upfront deals since our last earnings call. While these represent a small portion of our total expected revenue, we’re seeing positive momentum in the number of upfront commitments signed.

We’re also continuing to simplify our revenue product portfolio, reallocating our resources to the highest revenue-generating priorities, and to areas where we have the greatest odds of scaled success. We made meaningful progress in Q1, discontinuing investment in some products and features and reassigning engineers across new revenue product areas, our ads platform team, and a number of new strategic areas that we expect to open new avenues for growth in 2018 and beyond. We improved ad relevance from new machine learning techniques, and as a result, our ads platform team drove higher ROI for advertisers and delivered an incremental 12% increase in ad engagement rates. Finally, we’ve committed to providing better third-party measurement analytics for viewability and audience delivery, and we’re making the necessary investments to do so. While we continue to expect revenue growth to meaningfully lag audience growth in 2017, we believe that executing on our plan and growing our audience should result in positive revenue growth over the long term.

Video remained our best-performing ad format in Q1, reflecting strength in our First View ad format and in pre-roll and live-streaming video ads. In the first quarter, we partnered with more than 200 premium content partners across live and Amplify with key events in sports, entertainment, news, and politics. Our live events and in-stream video ads garnered significant viewership, delivering great reach and a large variety of premium content categories to advertisers.

In addition, we continued growing our dataTwitter Shareholder letter q1 2017 6.png licensing revenue — which we expect to become an increasingly important contributor to revenue growth and profitability over time — as we’ve taken a more brand-centric approach to our go-to-market strategy. Specifically, the channel partner approach we discussed last quarter is already driving results and we’ve entered into two new agreements in Q2 with Brandwatch and Crimson Hexagon. In addition to directly supporting brand needs, we are unifying our API platform to provide a more consistent and scalable experience for developers. This will offer new tiers of data access, including a paid tier that provides additional functionality, and will allow developers to create better solutions for businesses.

Q1’17 Financial and Operational Detail

In the first quarter, we made further progress with disciplined execution across our strategic priorities, which resulted in improved audience and engagement growth. We also reduced our GAAP net loss significantly and achieved our highest adjusted EBITDA margin to date, despite the year-over-year decline in revenue, as we continued to streamline our cost structure and remain focused on greater operating efficiency. Revenue Total revenue reached $548 million in the first quarter, a decrease of 8%

Revenue Total revenue reached $548 million in the first quarter, a decrease of 8%

Total revenue reached $548 million in the first quarter, a decrease of 8% year-over year. Total advertising revenue was $474 million, a decrease of 11% year-over year. Twitter-owned-and-operated (O&O) advertising revenue was $415 million, also a decrease of 11% year-over-year. After a challenging start to the quarter, the growth trajectory for O&O improved and we saw more stable revenue trends beginning in mid-February. Non-O&O advertising revenue reached $58 million, or 12% of advertising revenue, a decrease of approximately $5 million or 8% year-over-year. The decrease was driven by continued declines in TellApart, offset by healthy year-over-year growth in the Twitter Audience Platform.

By product, video continued to be our single largest revenue-generating ad format. Strong growth in our First View, pre-roll, and live-streaming video ad formats was offset by year-over-year declines in traditional Promoted Tweet and direct response ad formats.

Data licensing and other revenue totaled $74 million in the first quarter, an increase of 17% year-over-year and representing 14% of total revenue compared to 11% in Q1’16. Growth was primarily driven by strength in data licensing.

Advertising Metrics

Q117_Shareholder_Letter.pdf.pngTotal ad engagements increased 139% year-over-year, driven by a continuing mix shift toward video ad impressions and higher video view rates from product improvements such as video quality optimization and latency improvement. Average cost per engagement (CPE) fell 63% year-over-year, reflecting a higher mix of video engagements and, to a lesser extent, improved engagement rates for the majority of ad formats on a like-for-like basis, as well as lower CPEs across most ad formats compared to the prior year. Cost Per Engagement Y/Y Growth Rate Q4’16 Q1’17 -60% -63% Total Ad Engagements Y/Y Growth Rate Q4’16 Q1’17 151% 139% 11 Costs Total GAAP expenses declined 10% year-over-year to $589 million, due to decreased sales and marketing expenses and R&D expenses, each reflecting lower headcount as a result of our 2016 restructuring plan. These decreases were offset by increases in

Non-O&O advertising revenue reached $58 million, or 12% of advertising revenue, a decrease of approximately $5 million or 8% year-over-year. The decrease was driven by continued declines in TellApart, offset by healthy year-over-year growth in the Twitter Audience Platform. By product, video continued to be our single largest revenue-generating ad format. Strong growth in our First View, pre-roll, and live-streaming video ad formats was offset by year-over-year declines in traditional Promoted Tweet and direct response ad formats. Data licensing and other revenue totaled $74 million in the first quarter, an increase of 17% year-over-year and representing 14% of total revenue compared to 11% in Q1’16. Growth was primarily driven by strength in data licensing. Advertising Metrics Total ad engagements increased 139% year-over-year, driven by a continuing mix shift toward video ad impressions and higher video view rates from product improvements such as video quality optimization and latency improvement. Average cost per engagement (CPE) fell 63% year-over-year, reflecting a higher mix of video engagements and, to a lesser extent, improved engagement rates for the majority of ad formats on a like-for-like basis, as well as lower CPEs across most ad formats compared to the prior year.

Costs

Total GAAP expenses declined 10% year-over-year to $589 million, due to decreased
sales and marketing expenses and R&D expenses, each reflecting lower headcount as a result of our 2016 restructuring plan. These decreases were offset by increases in cost of revenue reflecting higher content revenue share and depreciation, and increases in G&A expenses. Traffic acquisition costs were $30 million, or 51% of non-owned-and-operated advertising revenue. This compares favorably to 57% in Q1’16 and 52% in Q4’16. On a non-GAAP basis, total expenses in Q1 declined 5% year-over-year to $465 miQ117_Shareholder_Letter.pdf (1).pngllion.

Stock-based compensation (SBC) expense was $117 million, below our $125 to $135 million forecasted range. SBC expense has decreased meaningfully in each of the last three consecutive quarters and decreased 22% year over year. We ended the quarter with more than 3,300 employees. Income and margin GAAP net loss in the quarter was $62 million or -11% of total revenue, compared to a net loss of $80 million, or -13% of total revenue in Q1’16. The narrower loss reflects lower total GAAP expenses year-over-year. We reported GAAP diluted EPS of ($0.09) and non-GAAP diluted EPS of $0.11. Adjusted EBITDA for Q1 was $170 million, or 31% of total revenue, compared to $180 million or 30% of total revenue in the previous year. We outperformed our forecasted ranges of $75 to $95 million of adjusted EBITDA and 17% to 17.5% adjusted EBITDA margins due to better than expected revenue, lower headcount and overhead costs, and expense timing benefits. Balance sheet and statement of cash

Income and margin GAAP net loss in the quarter was $62 million or -11% of total revenue, compared to a net loss of $80 million, or -13% of total revenue in Q1’16. The narrower loss reflects lower total GAAP expenses year-over-year. We reported GAAP diluted EPS of ($0.09) and non-GAAP diluted EPS of $0.11. Adjusted EBITDA for Q1 was $170 million, or 31% of total revenue, compared to $180 million or 30% of total revenue in the previous year. We outperformed our forecasted ranges of $75 to $95 million of adjusted EBITDA and 17% to 17.5% adjusted EBITDA margins due to better than expected revenue, lower headcount and overhead costs, and expense timing benefits. Balance sheet and statement of cash

GAAP net loss in the quarter was $62 million or -11% of total revenue, compared to a net loss of $80 million, or -13% of total revenue in Q1’16. The narrower loss reflects lower total GAAP expenses year-over-year. We reported GAAP diluted EPS of ($0.09) and non-GAAP diluted EPS of $0.11.

Adjusted EBITDA for Q1 was $170 million, or 31% of total revenue, compared to $180 million or 30% of total revenue in the previous year. We outperformed our forecasted ranges of $75 to $95 million of adjusted EBITDA and 17% to 17.5% adjusted EBITDA margins due to better than expected revenue, lower headcount and overhead costs, and expense timing benefits.

Balance sheet and statement of cash flows

We ended the quarter with $3.9 billion in cash, cash equivalents, and marketable securities. GAAP net cash provided by operating activities in the period was $203 million, an increase from $163 million in the previous year. Adjusted free cash flow for Q1 was $126 million, compared to $99 million in Q1’16.

Audience

For the fourth consecutive quarter, we saw an acceleration in year-over-year growth rates for DAUs. In Q1, total DAUs grew 14% year-over-year, compared to 11% in Q4’16, 7% in Q3’16, 5% in Q2’16, and 3% in Q1’16. This trend continues to be broad-based, with accelerated DAU growth in seven of our top 10 countries including the United States, as well as in aggregate across all other markets outside of the top 10 countries.

Total MAUs for Q1 grew to 328 million from 319 million in the prior quarter. The significant sequential increase in MAUs was primarily driven by organic growth (reflecting some seasonal strength), with significant contribution from product improvements and to a lesser degree, marketing initiatives. On a year-over-year basis, MAUs grew 6% year-over-year in Q1, an improvement compared to 4% in Q4 and 3% year-over-year growth rates seen in each of the first three quarters in 2016.

Outlook

Similar to the last two quarters, we are providing adjusted EBITDA, adjusted EBITDA margin, and stock-based compensation expense guidance. We continue to expect advertising revenue growth to continue to meaningfully lag that of audience growth in 2017, including in Q2.

For Q2, we expect:

  • Adjusted EBITDA to be between $95 million and $115 million
  • Adjusted EBITDA margin to be between 21% and 21.5%
  • SBC to be between $115 million and $125 million

For FY 2017, we expect:

  • Total non-GAAP expenses to be flat to down 5%, compared to full year 2016
  • SBC to be down 20% to 25%, compared to
  • Capital expenditures to be between $300 million and $400 million

Note that our outlook for Q2 and the full year 2017 reflects foreign exchange rates as of April 14, 2017.