Twitter Q4 and Fiscal Year 2015 Shareholder Letter
SAN FRANCISCO, CALIFORNIA
February 10, 2016
Dear Shareholders,
As we announced last week, we’re taking a new approach to our earnings announcements. Starting with today’s announcement of results for the fourth quarter and fiscal year ended December 31, 2015, we’ll provide you with an earnings letter reviewing our financial and operational performance together with commentary from our senior management team. We’ll then use our conference call and Periscope broadcast to take your questions. As a reminder, to have your questions considered during Q&A, Tweet your question to @TwitterIR using #TWTR or submit your question via Periscope. We hope this new format will give you a clearer view of our performance and outlook in an easier-to-digest manner, while making the most of our time on the call.
OVERVIEW
2015 was another very strong year for Twitter. Total revenue reached $2.2 billion, up 58% year over year with more than $550 million in adjusted EBITDA. We made significant progress in scaling the total number of active advertisers to 130,000 in Q4, up almost 90% year over year. It's remarkable we built this business in just five years from zero revenue. We saw a decline in monthly active usage in Q4, but we've already seen January monthly actives bounce back to Q3 levels. We're confident that, with disciplined execution, this growth trend will continue over time.
Q4 revenue totaled $710 million, an increase of 48% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, revenue would have increased 53%.
Advertising revenue totaled $641 million, an increase of 48% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, advertising revenue would have increased 53%. Mobile advertising revenue was 86% of total advertising revenue.
Data licensing and other revenue totaled $70 million, an increase of 48% year-over-year.
U.S. revenue totaled $463 million, an increase of 47% year-over-year.
International revenue totaled $247 million, an increase of 51% year-over-year.
Q4 GAAP net loss of $90 million and non-GAAP net income of $115 million.
Q4 GAAP diluted EPS of ($0.13) and non-GAAP diluted EPS of $0.16.
Q4 adjusted EBITDA of $191 million, up 35% year-over-year, representing an adjusted EBITDA margin of 27%.
Total average monthly active users (MAUs) were 320 million for Q4, up 9% year-over-year, compared to 320 million in the previous quarter.
Excluding SMS Fast Followers, MAUs were 305 million for Q4, up 6% year-over-year, compared to 307 million in the previous quarter.
Mobile MAUs represented approximately 80% of total MAUs.
Total audience, which consists of MAUs and monthly logged-out visitors, totaled more than 800 million in Q4.
2015 was an important year for our products and partnerships:
We added native video capabilities to Twitter, which led to video views rising 220x from December 2014 to December 2015. As a sign of how far we’ve come: when Disney chose to release its first full trailer for “Star Wars: The Force Awakens”, they did it first on Twitter.
We launched Periscope, which has quickly become an indispensable live video tool for journalists, musicians, athletes, politicians, activists, and everyday people to share the world around them.
We expanded Direct Messages (DMs) for private conversations for up to 20 people, and boosted the character limit for individual messages from 160 to 10,000. DMs rose significantly in 2015 – 61% year-over-year growth in messages sent in Q4.
We unveiled Moments, a new way to get the best of what’s happening on Twitter in an instant, in the U.S., U.K., and Brazil, and supported the launch with our first integrated marketing campaign.
We struck a new agreement with Google for search integration on both mobile and desktop queries, and the integration of Twitter into DoubleClick bidding and measurement systems.
We completed the global roll-out of our self-service advertising platform, which helped contribute to the total number of advertisers rising nearly 90% year-over-year in Q4.
We expanded direct response objectives – website clicks and conversions – onto the Twitter Audience Platform (TAP) in beta, giving direct response advertisers a way to measure results from the TAP audience of 700 million devices.
We added more than 20 new features and updates to our developer tools, including integration of third-party development kits like AWS, Stripe, and Optimizely into Fabric.
This is only a small sample of the work our teams delivered over the course of the year.
We spent the last six months structuring the organization and our leadership team to move with greater agility and focus, reviewing the state of our service and strategy, learning from what we've shipped, and developing a stronger point of view about what we are and what we want to be. In January we gathered our global leadership team to align and commit to a strategy for 2016.
We're focused now on what Twitter does best: live. Twitter is live: live commentary, live connections, live conversations. Whether it’s breaking news, entertainment, sports, or everyday topics, hearing about and watching a live event unfold is the fastest way to understand the power of Twitter. Twitter has always been considered a "second screen" for what's happening in the world and we believe we can become the first screen for everything that's happening now. And by doing so, we believe we can build the planet’s largest daily connected audience. A connected audience is one that watches together, and can talk with one another in real-time. It's what Twitter has provided for close to 10 years, and it’s what we will continue to drive in the future.
OUR SERVICE
We have five priorities in 2016 to serve this focus: refinement of our core service; live streaming video; our creators and influencers; safety; and developers. Each is critical to us strengthening our platform and audience around live.
First, Twitter is an iconic service and a globally recognized brand. We are going to fix the broken windows and confusing parts, like the .@name syntax and @reply rules, that we know inhibit usage and drive people away. We're going to improve the timeline to make sure you see the best Tweets, while preserving the timelines we are known for. The timeline improvement we announced just this morning has grown usage across the board (including Tweeting and Retweeting). We're going to improve onboarding flows to make sure you easily find both your contacts and your interests. We're going to make Tweeting faster while making Tweets more expressive with both text and visual media. We're going to help people come together around a particular topic, such as our @NBA timelines experiences. Relentlessly refining Twitter will enable more people to get more out of Twitter faster.
Second, we have amazing technology for live streaming video. Periscope lets anyone on the planet broadcast and watch video live with others. We recently added the ability to broadcast from a GoPro camera, and to watch any broadcast live from a Tweet. Pairing Periscope with Twitter gives broadcasters greater distribution (anywhere a Tweet can be displayed, a Periscope can too) and the ability to hook into our revenue products. We believe live streaming video is a strong complement to the live nature of Twitter, and it helps instantly explain the value of our service. We're going to invest heavily in these first-screen, connected audience experiences. Being able to instantly broadcast and watch a live stream with others is extremely powerful and entertaining.
Third, Twitter is by far the fastest way to talk with the world. And because of that, we have the most creative and influential people and organizations in the world actively Tweeting. Whether it’s musicians releasing albums or polling people to help name their albums, journalists Tweeting their stories and getting feedback, artists, activists, athletes, and politicians, established or emerging – these are the people who shape and influence culture, and they bring the audience that follows through Twitter. And we love them! Vine and Niche have proven their ability to create new talent and match them with marketers to make a living from their passion. We will focus on helping these creators build and connect with their fans and audience through Twitter by giving them better tools. And we're going to enable more people and media partners to create and share Moments, which is proving to be a great medium for storytelling through Tweets.
Fourth, we will continue to invest more resources in making our platform safer. We stand for freedom of expression, and people must feel safe in order to speak freely. Online harassment and abuse is a difficult challenge. This year we will implement technology to help us detect the use of repeat abusive accounts, make it much simpler to report multiple abusive Tweets or accounts, and give people simpler tools to curate and control their experience on Twitter. But it’s not just about creating better tools and technology; we will also be smart and adaptive about our policies in this area and invest in faster response times. Finally, we’re going to emphasize educating people about our safety tools and features as we roll them out.
Fifth, we're going to continue to invest in developers. We want developers to be able to build their businesses with Twitter. We are investing in mobile with Fabric, our platform that helps developers build, grow, and make money with their apps. Fabric has grown from 0 to 1.6 billion active mobile devices in just 18 months. We believe there's huge strategic value in building a platform for developers that helps us grow our reach. We are investing in making it easy for developers to discover, curate, and seamlessly publish great, live stories with Twitter content using TweetDeck, Curator, and embedded Tweets. More than one billion visitors to our developers’ sites and apps already see these embedded Tweets every month. We believe that these sites and apps are incredibly important amplifiers that show the huge reach and importance of Tweets. Finally, we will continue to invest in helping developers make their businesses more productive by understanding their customers and markets with Twitter data.
After months of consideration, we've made significant changes to our organization to ensure more disciplined execution. We moved all of Engineering, Design, and Consumer Product under our CTO Adam Messinger. This is a new structure for our company, and we will take an engineering and design-led approach to making Twitter faster and more intuitive. We moved Revenue product, our Media team, and Human Resources to our COO Adam Bain. We promoted Kayvon Beykpour, the lead for Periscope, to our executive team. Kayvon brings a very strong product sense to the table to make everything we do at Twitter better. And we added Leslie Berland to our executive team as CMO to help us better show the power of Twitter. Our top priority is to recruit phenomenal leadership who bring a fresh and creative perspective and help us recruit more great talent.
Our focus on live is a unique reason to use Twitter to quickly see what's happening in the world and talk about it. That creates a connected audience unlike any other, which continues to grow our business in a complementary way.
BUSINESS
On the business side, we had a strong Q4. Total revenue reached $710 million in the quarter, an increase of 48% year over year (53% on a constant currency basis), with continued strength in our advertising business, particularly in video ads and across major verticals, channels, and geographies.
We have three main initiatives for our ads business:
1. Building a rich canvas for marketers;
2. Driving marketer ROI with improved measurement, bidding, and relevance; and,
3. Increasing scale by leveraging Twitter’s unique total audience.
Here is an update on each of these key priorities and how we are executing against them.
Building a rich canvas for marketers
Our Promoted Video ad format is now a meaningful contributor to our owned-and-operated advertising business, which is exciting considering that auto-play video ad units only launched in July. Video adoption now represents 33% of our managed accounts and includes all 100 brands in the Ad Age 100.
A few weeks ago, we launched a pilot for our conversational video ad unit. Conversational video ads make it simple for consumers to engage with and then easily share a brand’s campaign message with customizable call-to-action buttons that encourage consumer response. One of the first marketers to use this new video ad unit in the pilot was EA Sports, who drove over 19 million paid impressions and 15 million organic impressions – delivering an earned media rate of greater than 78% – for their #MyMaddenPrediction contest.
The other exciting area for marketers is around live video with Periscope. We have already seen some amazing examples of brands using Periscope. For example, Target launched its Lilly Pulitzer line on Periscope, an effort that helped fuel huge consumer demand (90% of the collection sold out in a few days). And at the Super Bowl this past Sunday, Doritos used Periscope live from inside Levi’s Stadium to promote its new Doritos ad campaign.
This week we began a pilot with a handful of marketers on Twitter to allow them to promote Tweets with Periscope broadcasts within our Promoted Video campaign objective. Targeting and reporting are the same as the advanced Twitter capabilities currently available when running any Promoted Video campaign. Periscopes on Twitter point to a new live direction for the ad industry that redefines the creative landscape.
ROI and measurement
We executed a number of our planned improvements in Q4 for driving marketer ROI with improved measurement, bidding, and relevance.
First, we launched a feature called brand hub, a way to help marketers quickly understand all of the conversation about their brand on Twitter. We also launched our new conversion lift reports to help marketers better understand the incremental contribution of the clicks and views on their ad campaigns – particularly when running mobile or cross-device campaigns.
Advertisers participating in the beta tests of conversion lift reports were large performance advertisers in the retail, financial services, media, education, and telecom industries. During several months of testing, advertisers saw positive results, including:
People who are exposed to an advertiser’s Promoted Tweets are 1.4x more likely to convert on the advertiser’s website compared to the control group. This demonstrates that simply seeing an ad on Twitter can yield powerful results.
The outcome proves even better for people who clicked on an advertiser’s Promoted Tweets: they are 3.2x more likely to convert on the advertiser’s website as compared with the control group.
In Q4 we also successfully piloted our Dynamic Ads test, which was built on TellApart technology and allows direct response marketers to reach users with personalized ads based on their browsing behavior. Early results have been promising: marketers in this test have seen on average a 2x increase in clickthrough rates for Dynamic Ads versus traditional Promoted Tweets. Based on this strong performance and demand from marketers, we will open this test to a larger group of marketers in Q1 as we continue to improve the functionality.
Another key initiative we have been working on is our integration with DoubleClick Campaign Manager (DCM). We expect that this integration will allow clients to see Twitter’s performance alongside other media channels, to better demonstrate the value of Twitter’s ads. Campaign tests with advertisers began at the end of Q4 and will continue in a pilot through the remainder of Q1. For the second phase of DoubleClick measurement, we’re also working with Google to provide an industry first: a social attribution model that properly measures Twitter-specific actions (like Follow or Retweet) and the corresponding impact on conversion.
In addition to measurement, we also have begun our technical integration work with DoubleClick Bid Manager (DBM), which will allow DoubleClick advertising customers to buy Twitter ads through our Ads API alongside their programmatic ad spend. We are excited about this opportunity because it will be easier for DoubleClick advertising customers to buy ads on Twitter and should expose us to new budgets.
Leveraging Twitter’s total audience
We made meaningful progress in Q4 to expand our advertising efforts to Twitter’s total audience and expose marketers to our large reach. We started by testing ads to logged-out visitors on Twitter. For this test, marketers were able to expand their reach to an additional 500+ million visitors who come to Twitter but are not logged in.
Although the test was small, the early results are encouraging. Initial performance from the pilot has shown that video view and click through rates for logged-out ads are similar to logged-in performance. Further, 65% of people who saw ads from a marketer when they were not logged in correctly recalled the ad, roughly 50 percentage points higher than the control group.
These results are positive, but we know we have a lot more work to do in order to increase logged-out impressions and to bring these results to marketers globally.
Looking ahead to Q1, we will continue to work to scale our total audience offering, including:
Logged-out ads pilot test expansion. We will be expanding the geographies where marketers can test running campaigns to Twitter’s logged-in and logged-out audience.
First View product pilot. First View is our newest ad product, which gives a marketer the opportunity to own the first Promoted Video shown to users the first time they visit Twitter within a 24-hour period. This premium placement gives marketers a unique way to drive mass reach and awareness around significant brand moments and launches with video.
We also continue to make progress in extending our ads in syndication, through revenue growth from the Twitter Audience Platform (TAP). With TAP, advertisers extended more of their campaigns from Twitter to a wider audience of over 700 million devices. We are seeing expansion of budgets by advertisers as they continue to get performance with TAP. We’re seeing a similar trend in our MoPub exchange as well. In fact, in Q4 more than half of all spend through MoPub came from Fortune 1000 brands. MoPub now sees more than 400 billion 30-day ad requests, and is enabling over 45,000 active apps to manage their inventory.
Growing our advertiser base
In addition to the three priorities, we want to highlight the growth in the number of marketers using Twitter ads.
In Q4, we reached 130,000 active advertisers, up almost 90% year over year, driven by our small and medium-sized businesses (SMB) initiatives. We expect that SMB growth will continue as we improve our product, making it faster and easier to run campaigns and improve our direct response tools.
We are also very pleased by the growth in active users of our Tweet Analytics dashboard, where people can measure the performance of their organic Tweets and can choose to amplify that performance with our SMB ads product. In Q4, our Tweet Analytics dashboard had over 25 million active users, up 3x compared to Q3, creating a large and fast-growing pool of potential marketers to convert into SMB advertisers.
We also are seeing other ways that businesses are increasing their engagement on Twitter, including using Twitter as a valuable customer service channel. According to a recent McKinsey & Company study we commissioned, the volume of customer service conducted on Twitter has grown 2.5x over the last two years. Additionally, a study by Aberdeen Group has shown that businesses that conduct customer service on Twitter see better outcomes: a +19% lift in customer satisfaction ratings, a +7% increase in sales per customer, and a decrease in churn by as much as 12%. Given the results so far, we are beginning efforts to streamline our customer service features and create tools so that businesses can scale more of their customer service activity on Twitter versus traditional service channels.
Our confidence in the product roadmap we are building for marketers is backed up by the marketing community’s excitement and feedback about the new tools we are delivering in 2016. As we continue to deliver on building a rich canvas for marketers, driving ROI with improved measurement, bidding, and relevance, and increasing scale leveraging Twitter’s unique total audience, we believe we will see steady increases in both the total budgets from marketers and the total number of marketers on Twitter.
Q4’15 FINANCIAL AND OPERATIONAL DETAIL
Revenue
As stated, we exceeded $2.2 billion in revenue in 2015 – an important milestone for the company as we approach our 10th anniversary in March, and just five years after we started to monetize our business.
Total revenue reached $710 million in Q4 2015, an increase of 48% year over year, meeting the high end of our guidance range of $695 to $710 million. On a constant currency basis, total revenue growth would have been 53% year over year, or $731 million. Using currency exchange rates from October 15, 2015, which were used to determine our Q4 guidance, total revenue would have been $716 million.
Total advertising revenue reached $641 million in Q4, an increase of 48% year over year, as reported, and 53% on a constant currency basis. Twitter owned-and-operated advertising revenue was $556 million, an increase of 31% year over year. Non-owned-and-operated advertising revenue reached $85 million, or 13% of advertising revenue, consistent with that of Q3. Growth in total advertising revenue continues to be driven by strong growth in demand for our advertising products, particularly video and website card formats. However, year-over-year growth in the app install advertising format slowed meaningfully in Q4 relative to that of Q3. Sequential video revenue growth in Q4 more than doubled that of total advertising revenue growth.
By channel, SMB revenue was again the fastest growing on a year-over-year basis, driven by growth in new customers, though it remains the smallest segment of total advertising revenue by a considerable margin. Our direct sales channel showed the strongest growth in revenue on a sequential basis in the period, reflecting seasonal spending typically seen from brand advertisers in Q4. We grew our base of total active advertisers by nearly 90% in the period versus Q4 2014 – approximately 16% on a sequential basis as we continued to sign up new advertisers and grow overall demand on the platform.
Data licensing and other revenue totaled $70 million in the quarter, up 48% year over year, driven by more than 60% growth in mobile ad exchange revenue.
Advertising Metrics
Advertising revenue growth on a year-over-year basis was driven by an increase in ad engagements, which grew 153% year over year. This was once again primarily the result of our move to auto-play video in late Q3, as well as growth in our non-owned-and-operated business and an increase in ad load. Average cost-per-engagement (CPE) fell 41% year over year, due primarily to the shift to auto-play video, which delivers more engagement at a much lower average CPE than click-to-play video ads. Overall ad load was higher in the quarter, on both a year-over-year and quarter-over-quarter basis, driven by the increase in advertiser demand. We continue to have ample opportunity to grow both ad impressions and ad engagements on the platform.
Costs & Adjusted EBITDA
In Q4, total non-GAAP expenses were $591 million, an increase of 52% year over year. The increase was mainly driven by traffic acquisition costs, employee-related expenses, sales and marketing, and infrastructure costs. Traffic acquisition costs were $52 million from non-owned-and-operated advertising. Stock-based compensation expense once again came in below our expectations at $158 million and is down approximately $19 million versus the prior year.
Adjusted EBITDA for Q4 totaled $191 million, an increase of 35% year over year and above the high end of our guidance range of $155 to $175 million. Adjusted EBITDA excludes restructuring costs of $13 million. A portion of the outperformance versus our guidance can be attributed to lower than forecast expenses. The adjusted EBITDA margin for Q4 was 27%. We ended the quarter with approximately 3,900 employees.
For full year 2015, we generated $558 million in adjusted EBITDA, resulting in an adjusted EBITDA margin of 25%, up from 21% in 2014. In addition, we made significant direct investments in developing Fabric, Periscope, and Vine – none of which is yet generating revenue – totaling approximately $75 million.
Balance Sheet
We ended the year with $3.5 billion in cash and cash equivalents, and 2015 marked the first full year of positive free cash flow. We expect to generate significantly more free cash flow in 2016.
Audience
Total MAUs were 320 million for the quarter, flat versus Q3 and an increase of 9% on a year-over-year basis. MAUs, excluding SMS Fast Followers, grew 6% year over year to 305 million, but were down on a sequential basis from 307 million in Q3. Importantly, as of the end of January, we have already seen total MAUs, excluding SMS Fast Followers, return to Q3 levels. In Q4, we saw positive impacts from our marketing initiatives which contributed meaningfully to MAU growth; however, these were more than offset by organic declines, partially due to fourth quarter seasonal trends. It is encouraging to note that new MAUs acquired through marketing have been retained on average at a higher rate than organic MAUs for the same period.
Also, please note that beginning in Q1 2016, in order to simplify our disclosures, reported total MAUs will no longer include SMS Fast Followers. We will continue to employ strategies to grow and monetize SMS Fast Followers and will include them in our total audience count, as we make those disclosures.
OUTLOOK
At the end of each year we revisit our approach to guidance and evaluate the practice of companies across our industry as well as what’s appropriate for Twitter. We expect that 2016 will be a year of many changes for Twitter – a new product roadmap which includes significant changes, the changing mix of our business, and the investments we plan to make in significant growth opportunities. Accordingly, we think providing a detailed outlook for the current quarter, but limited guidance for the full year in the form of capital expenditures and adjusted EBITDA margin, is the right approach for us. This is a practice that is consistent with (and in some cases more detailed than) many of our industry peers.
For Q1, we expect:
Revenue to be in the range of $595 to $610 million;
Adjusted EBITDA to be in the range of $150 to $160 million;
Stock-based compensation expense to be in the range of $160 million to $170 million;
GAAP share count to be in the range of 690 to 695 million shares;
Non-GAAP share count to be in the range of 705 to 710 million shares.
For FY 2016, we expect:
Capital expenditures to be $300 million to $425 million;
Adjusted EBITDA margin in the range of 25-27%.
Note that our outlook for Q1 and full year of 2016 reflects foreign exchange rates as of February 8, 2016.
CONCLUSION
Twitter will be 10 years old in March. A decade! Over that time we have had an incredible impact on culture and society, in a way that none of us ever dreamed of when we started, and have built a thriving business. Our work now is to set ourselves up to have even greater impact over the next 10 years. We are confident we will.
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