Source: Seeking Alpha
Twitter, Inc. (NYSE:TWTR)
Q2 2014 Earnings Conference Call
July 29, 2014 5:00 PM ET
Executives
Krista Bessinger
Dick Costolo – CEO
Mike Gupta – CFO and SVP, Strategic Investments
Anthony Noto
Analysts
Anthony DiClemente – Nomura Securities
Douglas Anmuth – JPMorgan
Heath Terry – Goldman Sachs
Peter Stabler – Wells Fargo Securities
Justin Post – Bank of America Merrill Lynch
Eric Sheridan – UBS
Youssef Squali – Cantor Fitzgerald
Mark Mahaney – RBC Capital Markets
Brian Wieser – Pivotal Research
Dan Salmon – BMO Capital Markets
Ben Schachter – Macquarie Capital
Carlos Kirjner – Sanford C. Bernstein
Arvind Bhatia – Sterne Agee
Brian Nowak – Susquehanna Financial Group
Operator
Good day, ladies and gentlemen and welcome to the Twitter Second 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. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Krista Bessinger, Senior Director of Investor Relations. Ma’am you may begin.
Krista Bessinger
Thanks, Sam and good afternoon. Welcome to our Q2 earnings call and thank you for joining us. We have with us today our CEO, Dick Costolo; Current CFO and SVP of Strategic Investments, Mike Gupta and incoming CFO, Anthony Noto. We’ll begin with approximately 15 minutes of prepared remarks followed by Q&A. During the Q&A, we will take questions submitted via Twitter in addition to questions from conference call participants. Questions submitted via Twitter should be directed to @TwitterIR using the #TWTRearnings.
We’d like remind everyone that we will be making forward-looking statements on this call, such as our outlook for Q3 and 2014 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 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. Also, please see our earnings slide deck posted on our IR site for additional information about metrics we will discuss on this call. An audio replay of this call will also be available via Twitter and on our Web site in a few hours.
And with that, I would like to turn the call over to our CEO, Dick Costolo.
Dick Costolo – CEO
Thanks, everyone for joining us this afternoon. We had a strong quarter. We made progress on multiple fronts across the business and our financial performance was truly exceptional. I would like to run through a few highlights here and then we can dive into the details. We generated $312 million in revenue which represents 124% growth on a year-on-year basis, that’s our fourth consecutive quarter of accelerating revenue growth. Ad revenue growth also continues to be remarkably strong, and accelerating to 129% year-over-year. That growth is primarily driven by higher engagement which translates into improved ROI for our marketers.
Our monthly active users also grew to 271 million in the quarter, an increase of 16 million, the highest number of absolute net new user adds in five quarters. And then finally, we generated $54 million in adjusted EBITDA, more than doubling margins year-over-year to 17%. Later on the call, Mike will provide more details on this past quarter’s results and Anthony will talk more about our going forward outlook. I would like to start by talking a little bit about the progress we are making on our consumer products.
First, during the World Cup, we delivered a kind of events experience that I have wanted to see from us for some time. We served up tailored experiences for each individual match and for the overall World Cup and these experiences felt alive. They felt wonderfully complementary to the matches themselves. That has given me confidence that we can create great user experiences by organizing content around topics and live events. Second, we have a team focused specifically on building a fast and frictionless Twitter experience for users in geographies with sub-optimal connectivity. We are seeing really positive results from the work there and I am excited about our growth opportunity in developing markets around the world.
I want to continue to highlight the reach and impact of Twitter across the mobile landscape beyond our owned and operated properties. As one example, during the Germany-Brazil World Cup game alone, we had approximately 2 billion Tweet impressions off of Twitter in addition to the 4.4 billion impressions on Twitter’s owned and operated properties. So, it’s nearly 6.5 billion impressions in a single match, highlights the continued expansion of our global reach and impact.
And beyond our 271 million monthly active users, there are hundreds of millions of additional unique visitors who come to Twitter every month but don’t log-in. When you consider the combination of monthly active users and unique visitors, the size of our audience on our owned and operated properties is two to three times that of just our monthly active user base, which we believe ranks us among the top-10 largest digitally connected audiences in the world.
We have started to experiment with improving the experience for this group of unique visitors. Profile pages are an example of the limited content we offer to unique visitors who come to Twitter and don’t log-in today. In the last quarter, we improved profile pages to make them more engaging, more visually appealing to everybody who comes to Twitter, whether they are logged-in or logged-out. And we will run experiments and continue to run experiments to improve the overall experience for logged-out unique visitors. To be very clear, our central focus remains on improving product experiences for our monthly active user base.
But make no mistake, our total audience and reach represent a significant opportunity and we will continue to invest in maximizing the size of our audience.
We are already the world’s real-time information network and by giving everyone the best of Twitter, no matter where or how they consume our content, logged-in as unique visitors or in syndication we will position ourselves to reach the largest audience in the world and every person on the planet. I want to conclude my introductory remarks by expressing my personal thanks for Mike, who as you saw will be transitioning from the CFO role into a new one, heading the Company’s strategic investments. I am excited obviously for Mike and for the Company as he takes on this new challenge. And we have also brought on a stellar individual in our new CFO Anthony Noto, who will join us for Q&A and looking forward guidance. Mike and I had the good fortune to work closely with Anthony during our IPO process and we are lucky to now get to work day-to-day with him in-house.
With that I will hand it over to Mike to jump into the financials.
Mike Gupta – CFO and SVP, Strategic Investments
Thanks, Dick and good afternoon everyone. I will discuss our financial and operating performance for Q2 and then hand it over to Anthony to cover guidance before we open the call for your questions. Q2 was another very strong quarter for Twitter with continued acceleration across both total revenue and ad revenue on a year-over-year basis. Total revenue reached $312 million, up 124% from the year ago period, faster than the year-over-year growth we saw in the prior three quarters. Ad revenue reached $277 million, up 129% from last year. This is the highest rate of year-over-year growth that we have seen in advertising revenues in the last six quarters.
Strength in our advertising business is broad-based across all channels and geographies with particular strength in international markets due to strong advertiser demand around the World Cup. Our promoted products continue to deliver high levels of engagement and marketers are increasing budget and spending in response to the ROI that they are seeing on our platform.
In Q2, international revenue accounted for 33% of total revenue, up 168% year-over-year. We now have a sales presence in more than 40 countries around the world. And we see a significant room for international revenue growth as we continue to expand the direct sales, sales support staff, reseller efforts and the continued roll-out of our self-service advertising platform. In Q2, we introduced self serve ads in three new countries Spain, Israel and South Africa. While self-serve advertising touches less than 40% of our global user base today, we intend to roll-out our self-serve platform to many more countries over the course of the year.
Mobile also continued to be a strong driver in the quarter with 81% of total ad revenue generated from mobile devices. This is up from 67% in the prior year. Data licensing and other revenue contributed $35 million in the quarter, an increase of 90% year-over-year. This line item includes significant contributions from both our mobile ad exchange and the Gnip data licensing business.
Turning to expenses, unless otherwise noted, my comments will focus on our non-GAAP financial measures which excludes stock-based compensation, amortization of acquired intangible assets and income tax effects related to acquisitions. For the GAAP financial measures as well as the reconciliation between the non-GAAP and GAAP financial measures, please refer to our earnings release posted on our IR Web site. In Q2, total expenses were $296 million, up 94% year-over-year. The increase was driven primarily by headcount and related overhead cost as we continue to invest in our workforce, scale our business and drive continued product innovation. We ended the quarter with approximately 3,300 employees.
Operating expense by line item was as follows; cost of sales for the second quarter was $80 million, R&D costs were $85 million, sales and marketing costs were $101 million, and general and administrative costs were $35 million. This resulted in adjusted EBITDA for the second quarter of $54 million compared to $10 million in the prior year period, representing an EBITDA margin of 17% in Q2, more than double year-over-year. Non-GAAP net income was $15 million in the second quarter, up from a non-GAAP net loss of approximately $16 million in the same period a year ago. Our GAAP net loss in the second quarter was $145 million which includes $158 million of stock-based compensation expense.
Before turning to metrics, I will cover a few items related to cash and CapEx. We ended the quarter with roughly $2.1 billion of cash and marketable securities. Cash flow from operations is $82 million and CapEx was $75 million, $31 million of which was financed through capital leases, the remaining 44 million was purchased outright.
Now I would like to turn to our operating metrics, as Dick mentioned, ongoing product improvements are continuing to drive growth across all key metrics including users, engagement and monetization. First on users, we saw improved growth in monthly active users in the second quarter with average MAUs reaching 271 million, reflecting 16 million net additions, up from 14 million Q1. We saw strong growth in both U.S. and international markets. U.S. MAUs reached 60 million, reflecting 3 million net additions in the second quarter, consistent with the 3 million net additions we saw in Q1. And international MAUs reached 211 million, reflecting 13 million net additions, up from 11 million net additions in Q1.
Timeline views increased to approximately 173 billion, up 22 billion or 15% from the same quarter last year and up 16 billion or 11% from the first quarter. Timeline views per MAU were also up modestly quarter-over-quarter. Note, that these timeline view metrics do not include the curated World Cup experience that Dick spoke about earlier.
Going forward, we will continue to improve the product to make it easier and more efficient for users to find the content they are looking for. As we succeed in doing this, we expect to see the current trend of year-over-year declines in timeline views per MAU to continue along with improving interactions for timeline views consistent with what we have seen in recent periods.
Switching to monetization, ad revenue per 1,000 timeline views continues to accelerate, reaching $1.60 in Q2, up 100% year-over-year and up 11% sequentially. U.S. ad revenue per 1,000 timeline views reached $3.87, up 79% year-over-year. And international ad revenue per 1,000 timeline views reached $0.75, up 152% year-over-year. We continue to see steady improvement in monetization and we expect those trends to continue. We do not see any structural reason that the levels of monetization for our monthly active users can’t reach or exceed that of our industry peers overtime.
In Q2, ad revenue grew 129% on a year-over-year basis, despite a 35% decline in cost per ad engagements. The increase was driven by total ad engagements which grew more than 250% year-over-year, reflecting higher quality ads, improved prediction and targeting and the increased use of rich media by advertiser. On a sequential basis cost per ad engagement increased 18%. This is our first increase in reported CP that was due impart to strong advertiser demand around the World Cup and a mix shift towards higher performing and higher priced ad units. Ad engagements also increased 4% quarter-over-quarter, significantly improving overall yield.
Before turning it over to Anthony for the financial outlook, I want to take a moment to say thank you. As Dick mentioned, I will be transitioning out of the CFO role to head up Twitter’s strategic investment arm. Over the past few weeks, I have been working closely with Anthony to ensure a successful transition. I am looking forward to starting my new role and importantly I continue to be optimistic about the future of Twitter.
With that, here is Anthony.
Anthony Noto
Thank you, Mike. I am incredibly excited to be here and it’s a privilege to be part of the Twitter team especially given the opportunity in front of us. I want to highlight a couple of recent initiatives on the advertising front before turning to guidance. We have had great success in advertising, helping fuel our growth has not only been the success of our existing products, but also the steady pace at which we have brought new advertising products to market. Our innovation continues. Just a few weeks ago we announced the general availability of our mobile app promotion suite both emerging apps as well as brands in highly competitive categories are seeing great results.
In August, we will launch the beta version of our new promoted video offering which provides a way for high quality content producers and brands easily upload, share and measure the distribution and effectiveness of their video content on Twitter. And finally, we have closed the acquisition of TapCommerce, an important asset we have added to our mobile ad technology stack. Now with our existing ad tech stack, we can help advertisers drive conversions and ROI with mobile consumers on and off of Twitter.
With that I want to now switch to outline our guidance for Q3 and the full year of 2014 then Dick, Mike and I will take your questions.
For the third quarter of 2014, we expect total revenue to be in the range of $330 million to $340 million with an adjusted EBITDA in the range of $40 million to $45 million. We also expect stock-based compensation expense in the range of $180 million to $190 million. For full year 2014 for total revenue, we are raising our range to $1.310 billion to $1.330 billion which is $95 million above our previous range at the midpoint. The increase in revenue guidance for full year of 2014 reflects our Q2 outperformance and our increased expectations for the remainder of the year.
Moving onto adjusted EBITDA, stock-based compensation and CapEx, we are raising our range for adjusted EBITDA to $210 million to $230 million. We continue to expect stock-based compensation expense to be in the range of $640 million to $690 million. We continue to expect CapEx to be between $330 million and $390 million.
With that, I would like to take your questions. Operator, if you would please announce the first question.
Question–and–Answer Session
Read the Full Transcript here
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