A Complete Guide to Twitter’s Q2 2016 Earnings Call

Twitter reported its second-quarter-2016 financial results Tuesday, and Wall Street was far from overwhelmed.

Twitter reported its second-quarter-2016 financial results Tuesday, and Wall Street was far from overwhelmed.

The social network posted revenue of $602 million, up 20 percent compared with the second quarter of 2015, with ad revenue of $535 million up 18 percent year-over-year. Mobile ad revenue represented 89 percent of total ad revenue.

The company’s generally accepted accounting principles net loss for the second quarter was $107 million, down from $137 million in the year-earlier period.

Twitter reported 313 million monthly active users at the end of the second quarter of 2016, up from 310 million at the end of the first quarter and up 3 percent year-over-year. The company said mobile MAUs represented 82 percent of total MAUs.

TwitterQ22016Revenue TwitterQ22016NetLoss TwitterQ22016MAUs

An earnings call was held after market close Tuesday, and highlights follow, along with content from Twitter’s letter to shareholders, which was also released after market close Tuesday.

Product overview

Twitter highlighted the changes it introduced to its Timeline during the first quarter of the year, moving from chronological to algorithm-based, as well as tweaks to how users can express themselves in tweets, including the introduction of stickers. The company said in the shareholder letter:

We’re seeing continued good results from the enhanced timeline launched in Q1, which helps people catch up on the best tweets from the people they follow. It drove increased retention and engagement (tweets, retweets, replies and likes) in Q2, and we expect the experience will continue to improve meaningfully over time as our machine learning systems get better.

We also launched a significant improvement in May to the Connect tab so that people can get better account recommendations based on existing follows and other engagement. As people follow more accounts that are relevant to their interests, their timelines get better as a result.

And finally, we’re continuing to give people more ways to express themselves in a tweet. In May, we announced upcoming changes to simplify tweets–including what counts toward your 140 characters. For instance, @names in replies and media attachments (like photos, GIFs and videos) will no longer “use up” valuable characters. We’re giving developers time to prepare for these changes and expect to launch in the fall. Simplifying these rules will help people express themselves more easily without compromising the brevity and speed that makes Twitter unique.

Photos within tweets also got more expressive in Q2 with the launch of #Stickers, a fun way to decorate photos on Twitter with hundreds of accessories, emojis and other props. Any public tweet containing a sticker is easily searchable and discoverable, creating a new visual spin on the hashtag; simply tapping on a sticker brings up a new timeline of tweets from people around the world using that same sticker.

And during the question-and-answer portion of Tuesday’s earnings call, in response to a question from Canaccord Genuity analyst Michael Graham, Twitter co-founder and CEO Jack Dorsey replied:

We’ve been focused on four areas in the core product. And we believe there’s a lot more room within these four areas to really build a lot of strength. All of this falls under the line of two of the most important use cases that we want to focus on, which is news. And we think Twitter is better at real-time news and live news than anyone else on the platform–in the world, I should say. And also social commentary–anyone can comment about what’s happening now and share their thoughts, and sometimes those go into conversations.

So, that’s what we want to make stronger and also easier. So, four areas that we’ve been focused on there. No. 1 is around on-boarding. We’ve been applying a lot more machine learning and deep learning to our on-boarding, so we can match people faster to their interests. And we believe that that interest drive is really important to us and unique to us.

Two is the Timeline, where people spend the majority of their time. We’ve made a number of refinements over the past few months to make sure that we’re showing what’s most important and what really matters, and enabling people to quickly get back to everything and to recency.

Notifications is another area where we think we can do a much better job, especially around breaking news. And not that we just push you into a tweet that dead ends, but we can enable you to further explore topics around that tweet and that interest.

And then tweeting itself. We’ve announced some changes, so that we’re giving people the full 140 characters. We’re making it easier for people to mention folks, which we believe helps encourage a lot more commentary and more conversation. So, we believe there’s a lot more room to go in this, and really making sure that we strengthen the news and the social commentary use cases around that.

And on the other side, we believe that we can make these experiences a lot better through live video. So, we’ve been focusing energy on Periscope, in particular, and integrating that deeper into the Twitter experience, so you can go live from Twitter, from the tweet composed, right away, and also that you can see Periscope in a tweet. Anywhere a tweet can live and be embedded, you can actually see a live Periscope.

On the Periscope side, we’re really excited about a recent announcement we made around Highlights. Not everyone can catch a Periscope in the moment when it’s actually live. Highlights allows you to see the most important aspects of that, and all that comes from our investment in machine learning and deep learning.

So, we’re looking at a lot of these technologies to make sure that we can provide the best experiences and the best use cases around delivering news faster than anyone else and providing a good sense of the social commentary that’s happening on the platform.

Live-streaming video

Twitter focused on its live streaming of big events such as the Wimbledon Championships tennis tournament and the Republican and Democratic National Conventions, as well as its pacts with 120 Sports, Bloomberg TV, Campus Insiders, Major League Baseball, the National Basketball Association, the National Hockey League, Pac-12 Networks and, of course, the National Football League.

The social network also outlined its efforts to aid live-video creators and influencers in its shareholders letter:

We’re heavily committed to creators and influencers–artists, activists, athletes and writers, established or emerging. As we’ve outlined before, there are three things they need from us: reach, tools and economics.

In Q2, we increased reach for creators and influencers’ videos by making it easier for people to explore more videos within Twitter. Now, tapping on a video tweet or Vine in the Timeline takes people to a full-screen viewing experience, where more Twitter video and Vines are suggested underneath. We are in the process of fully rolling out this new feature, and as the rollout continues, we see that people using the new experience watch roughly four times more videos than those who don’t yet have it.

We also launched some great new tools for creators and influencers in Q2. Twitter Engage, a new companion application for iOS, helps creators better understand, engage and grow their audiences on the go with real-time data and insights. The app surfaces the most important follows and @mentions from other influencers and loyal fans, providing an easy way to stay plugged into Twitter.

Finally, Twitter discussed Magic Pony, the machine learning company it agreed to acquire in late June:

Magic Pony’s machine learning and visual processing technology will help us deliver high-quality streaming video at lower bandwidth, improving the watch experience on mobile devices. Magic Pony’s interdisciplinary team includes alumni from some of the top labs in the world and complements our existing team of engineers, data scientists and machine learning researchers who are dedicated to improving the core Twitter experience. This skill set will be important to virtually everything we do in the future across our services, not just video.

During the Q&A portion of the call, Deutsche Bank Securities analyst Ross Sandler asked:

Jack, on the improving engagement, can you parse for us how much of that’s being driven by the mix shift to video content and live video content that you’re embarking on, and then how much is being driven by some of the product tweaks that you and your team are making? A little bit of color there would be helpful.

And then, Adam and Anthony, can you talk about the economics of all these deals that you’ve been signing with the sports leagues of late? Should we assume these deals are rev share deals like the old TV Amplify, or are there minimum guarantees involved? And should we expect these to be profitable right out of the gate, or will they potentially initially weigh on margins and then pay off in the long term? How do we think about that?

Chief financial officer Anthony Noto replied:

The improvement in engagement that we’re seeing is driven by product changes not associated with the live premium content that we’ve launched. As you may know, we’ve only done two events, and we’re in the middle of our third event, since we announced the live-streaming premium content initiative. We did a test with Wimbledon. Last week, we did the Republican National Convention, and we’re in the middle of the Democratic National Convention today. And that’s as it relates to the live premium content experience, which is what I think you’re asking specifically about.

As it relates to the economic deals, we’re focused on live sports, live news and politics and live entertainment. And those deals economically build on the success of the program that (chief operating officer Adam Bain) and our team built over the last four years in Amplify with 250 media partners. Those deals aligned economics to revenue splits, and the deals we’re currently doing reflect that type of arrangement and building on the success we’ve had with our partners, shared economic interest on both sides of the equation. So, it fits very nicely into our overall economic model and is a great way for us to bring our audience more of what they want.

Noto elaborated further in response to a tweeted question from Evercore Partners analyst Ken Sena:

So, on the live deals that we’re doing, I think it’s important to sort of solidify the philosophy of our approach. As I mentioned, we’re going after three specific vertical categories. And initially our focus is on acquiring rights to nationally and globally recognized content to build awareness of this great experience of Twitter, of bringing live video together with the conversation that’s already happening on Twitter in the connected audience, connected to each other.

As we build that awareness, we will also build awareness of underserved content that we’ll acquire, as well as news and analysis. In order for us deliver on our brand promise of being the place to come to see what’s happening, we need that complete portfolio of content–live games, live commentary, as well as live news analysis. And ultimately, we want to also serve underserved content, under-distributed content.

Each of these deals is different. Some of the content is exclusive–as an example, The Rally, which is a two-hour show Monday through Friday from 9 p.m. to 11 p.m. ET. That is an all-sports highlights, news and analysis show that is exclusive to Twitter. Some of the other content is not exclusive generally, but it could be exclusive that it’s only free to Twitter, i.e., you don’t have to authenticate, and you don’t need a paywall.

So, it’s deal-by-deal. But ultimately, trying to create a portfolio approach of free content–no authentication, no paywall–to really deliver on the connected audience’s desire, that’s already expressed in what they’re talking about on Twitter.

Bank of America Merrill Lynch analyst Justin Post asked:

Thinking about all the streaming content you’re adding over the year and next year. I’m just wondering about your competitive advantages to win that content. What unique things does Twitter bring and are you getting maybe preferred deals that would be interesting to us?

Dorsey responded:

As it relates to our ability to go out and win deals with partners, I would say a couple of things. We started having conversations with media partners at the beginning of the year, and our value proposition to them is really embedded with a couple of the key differentiators of Twitter.

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