Q3' 2021 Earnings Transcript

Twitter Q3 2021 Earnings Report

SAN FRANCISCO, CALIFORNIA

October 26, 2021

PRESENTATION

Operator

Good day, ladies and gentlemen, and welcome to the Twitter Third Quarter 2021 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to your host, Krista Bessinger, VP, Investor Relations. Please go ahead.

Krista Bessinger Twitter, Inc. - VP, Investor Relations

Hi, everyone, and thanks for joining our Q3 earnings conference call. We have Jack and Ned with us today.

We published our shareholder letter on our Investor Relations website and with the SEC a couple of hours ago and hope that you've all had a chance to read it.

As usual, we'll keep our opening remarks brief so that we can get right to your questions. As a reminder, we will also take questions asked on Twitter, so please Tweet us @TwitterIR using the $TWTR.

During this call, we will make forward-looking statements, including statements about our business outlook, strategies and long-term goals. These comments are based on our plans, predictions and expectations as of today, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-K and 10-Q and upcoming 10-Q to be fled with the SEC.

Also during this call, we will discuss certain non-GAAP fnancial measures. We have reconciled those to the most directly comparable GAAP fnancial measures in our shareholder letter. These non-GAAP measures are not intended to be a substitute for our GAAP results. And fnally, this call in its entirety is being webcast from our Investor Relations website, and an audio replay will be available on Twitter and on our website in a few hours.

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

Jack Dorsey Twitter, Inc. - CEO

Hello, everyone. Thank you for joining us today. A few highlights from me and Ned before we get to your questions.

We had a solid Q3 with strong performance across revenue products and continued audience growth. Revenue was $1.28 billion in Q3, and we continue to see signifcant ad revenue growth, which increased 41% year-over-year this quarter. Average monetizable DAU increased to $211 million, up 13% year-over-year, with growth accelerating from an increase of 11% year-over-year in Q2.

1

Before we get deep into the quarter and how we're looking at the rest of the year, as you may have seen, we announced that we agreed to sell MoPub to AppLovin. First, I want to thank the MoPub team for all their hard work and contributions to Twitter and our customers who put trust in us and the MoPub team for many years. The sale demonstrates our confdence in our core revenue product strategy, allowing us to refocus our energy and resources on our direct response, SMB and commerce road maps.

The last time we talked, you heard us talk about our intention to build an ecosystem of connected features and services focused on serving 3 core jobs: news, discussion and helping people get paid. In Q3, we launched products across all these categories, including Ticketed Spaces, Tips, Super Follows and narrowcasting with Communities. We also had the ability to pay your favorite creators using a variety of payment methods, including for the frst time Bitcoin. We continue to upgrade our machine learning systems as well, which are improving personalization throughout the product.

We're just getting started, but already Twitter feels more responsive and intuitive. Lots more to come here. As we approach the end of the year, we feel confdent about where we're headed. Overall, we're on course to leave 2021 a more focused company with clear priorities.

With that, I'll pass it over to Ned.

Ned Segal Twitter, Inc. - CFO

Thanks, Jack.

Q3 was a solid quarter driven by focus and execution. Total revenue grew 37% year-over-year at the high end of our guidance.

mDAU grew 13% year-over-year to $211 million with U.S. mDAU essentially fat quarter-over-quarter and up 4% year-over-year, both in line with our expectations due to the unusual comps from the pandemic surge last year, coupled with typical seasonality.

We expect total mDAU in Q4 to grow at or above the Q3 rate of 13% on a year-over-year basis, and we continue to believe the low point for year-over-year mDAU growth in 2021 was back in Q2 due to those tough comps.

The impact of COVID remains fragmented across the world, and we believe consumer behavior has yet to normalize.

Despite these uncertainties, we remain optimistic given our healthy top of funnel, our conversion rate and our product road map, which allow us to serve more and more people every day.

Let me share some of the highlights from the Olympics and our DR road map from Q3.

The Olympics were a strong event for us. Olympics-related Tweets with video content were viewed more than 1 billion times on Twitter. There were 76 billion Tweet impressions related to the Olympics, and 12 of the 14 offcial Olympic sponsors advertised on Twitter.

Our shift to direct response ads also made great strides.

For MAP advertisers, we launched an updated learning period model that delivers more consistent campaign performance.

And for website clicks, we introduced a multi-destination carousel to enable advertisers to market and drive traffc to multiple products inside the same ad on Twitter.

2

These are just a few examples of our accelerated pace of testing and rolling out new features, yet we won't stop there when it comes to increasing focus on our most critical work.

As Jack mentioned earlier, and although it happened in October, it's worth spending a moment on the announced sale of MoPub.

The sale of MoPub positions us to reallocate resources and accelerate product development by investing more in the team's focus on better monetizing our website and apps.

The sale is expected to close in Q1. And while the associated product engineering and go-to-market teams are largely expected to shift to DR, SMB and commerce upon closing, it will take time for their work to deliver results.

We do not expect to recoup the full revenue loss associated with the sale of MoPub in 2022, which is estimated to be between $200 million and $250 million.

Despite some expected 2022 revenue loss, there are no changes to our goal of generating $7.5 billion or more of annual revenue in 2023 with our increased focus and additional resources working on increasing our market share in the $150 billion and growing addressable market for ads on Twitter.

I've also noticed there's been a lot of focus more broadly on the impact of the supply chain on the economy in general and advertising in particular. I'm pleased to share that our launch and connect value proposition continues to resonate with advertisers across the economy, with well more than half of our total ad revenue year-to-date associated with services and digital goods.

Let me also spend a moment on ATT. We continue to see opportunities around personalization on Twitter as we better leverage our unique signal to improve people's experience and show their more effective ads across both brand and direct response. The revenue impact we experienced from ATT in Q3 increased on a sequential basis but remains modest. The impact of ATT is likely to vary across ad platforms given the unique mix of ad formats, signal and remediations on each as well as other factors, the mitigations we put in place and the speed with which we've adopted new standards like the SKAdNetwork and resulting changes across our technical stack have contributed to minimizing the impact to us. Since the launch of ATT in April, we've invested in supporting SKAdNetwork, opening up 30%-plus more inventory and scale on iOS and launch support for view-through attribution and SK Campaign ID management features in the Twitter ads manager. It's still too early for Twitter to assess the long-term impact of Apple's privacy-related IOS changes, but the Q3 revenue impact was lower than expected, and we've incorporated an ongoing modest impact into our Q4 guidance. We've seen our revenue product development, both related to and distinct from ATT, improved the performance of our products, and we expect that to continue.

Let me quickly turn to a couple of points regarding our outlook. We continue to expect total revenue to grow faster than expenses in 2021, excluding the litigation settlement announced in Q3, and we expect to continue our investment posture as we enter next year. We'll talk more about 2022 in February, but let me provide a little more context here.

Our 30%-plus headcount growth in 2021 with annual merit increases and other investments we've made in 2021, including our new data center, will fow into annual expenses for 2022, likely resulting in a mid-20% increase in total expenses next year prior to hiring any more people or additional investments during 2022. We're pleased with our Q3 results, and we're excited about the momentum we bring with us into Q4.

Let's go to questions.

3

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) Your frst question is from Doug Anmuth from JPMorgan.

Douglas Anmuth - JPMorgan Chase & Co

I have 2. First for Jack, how do you think about the path to returning to 20% growth in 2022 and '23? And which of the new products do you think will be most impactful here?

And then secondly, Ned, just on the -- your comment you just made just about the increase in expenses. So I just want to make sure we're understanding it right. You're kind of saying the expenses ending '21 will take you to a mid-20s percent increase following that through before you even hire anybody or add additional expenses. So that's a number that you'll update in 3 months?

Jack Dorsey Twitter, Inc. - CEO

Yes. Just to take the frst question, our greatest opportunity and potential for growth is around personalization and relevance. That is where we've consistently gotten the greatest gains in everything that we do, and we intend to put a lot more emphasis here. This mainly speaks to our application of machine learning and general AI across every product surface that we have, but it also lends itself into some of the newer product surfaces and capabilities that we've been talking about, some for longer, some more recently.

Topics and interest continues to be a highlight. We have close to 12,000 topics now, 11 different languages, 230 million accounts following at least one Topic. We're putting this closer and closer to onboarding, but this helps everything. This helps our experience, consumer experience, it helps our business because it gives us a signal with a ton of intent, and expressing intent to run a particular issue or topic instead of us having to infer it. And it also lays the foundation for the products that we want to create. So Spaces is an example of this, which we just rolled out to 100% of all of our customers.

Communities, which is the narrowcasting use case, allowing people to talk specifcally in what feels like a much smaller room about a topic interest, and that could be a location with my neighborhood. I think we will defnitely see a lot of usage as people fnd new ways of having conversations that don't feel like they're Tweeting to just the entire world and broadcasting it but actually have a much tighter feedback group because they're talking about something that is locally interesting, whether that be a particular interest or that should be a location, a geography.

So those are the ones I would point to, but the biggest impact will continue to be personalization. And this is an area where we feel we are behind, although we've put a lot -- we've gotten a lot of gains from it. That just really speaks to the potential we have so much more work to do in terms of machine learning and just generally applying AI to every surface area we have.

Ned Segal Twitter, Inc. - CFO

Doug, just to add a little bit to that and get your question on expenses. The top of funnel continues to be healthy all around the world for us, that is the folks who haven't been on Twitter for a month or more, whether they've never been on Twitter before or they've tried it in the past but haven't made it a part of their daily ritual. So all the product stuff that Jack took you through, plus that healthy top of funnel and all the events and topics that continue to bring people to Twitter all over the world, those are the components that build us up to that $350 million number for the end of next year. When we put it out there in February, remember, we knew that this was

4

going to be a year where we'd be lapping last year's pretty incredible growth and that acceleration was required, and so we've now started that with 11% from Q2 going to 13% DAU growth in Q3.

The second part of your question on expenses. So we'll give more color around 2022 in February as we typically do. But we just want to remind everybody, one, our investment posture hasn't changed. And as we mentioned back in February, as long as we're on track for our goals, we're going to continue with the mindset to invest to drive growth. And when you just do the math on the hiring and investment decisions that we've already put to work, whether it's the data center or people who've already joined the company, that when you roll those through the P&L for a full year, you add in merit increases and so on, you naturally get to -- and this includes depreciation for the data center, for example, which doesn't start until you actually start to use the data center, you naturally get to the mid-20s. And so we're in the middle of the process where we sort out all the things that we want to do next year, so I don't want to get in front of that. But we do want to continue to invest to drive growth next year, and anything else that we decide to do that is in a resource reallocation decision would be on top of that.

Operator

Your next question is from Justin Post.

Justin Post - BofA Securities

I would love to talk about progress you saw in the quarter with the MAP product. And I guess you're enabling shopping, so maybe talk a little bit about that and how you see the opportunity?

And second, you guided to 25% quarter-over-quarter growth at the high end, which is pretty good comparably. Are you expecting the MAP product to kind of contribute better growth than overall in Q4?

Ned Segal Twitter, Inc. - CFO

Justin, a couple of things on the revenue product side. First, we were pleased with our progress on MAP. A couple of ways to show it. One is MAP grew slightly faster than overall ads, which gives you a sense that we're continuing to make progress there. We saw strength from some areas where we haven't always seen in the past such as travel, where launch campaigns as people begin to travel again from the travel advertisers grew 40%. A lot of that's tied to MAP. Fintech, they grew their spend 200% year-over-year with us. Food delivery, where a lot of that's pointing people to apps, that grew 140%.

It gives you a sense for where some of the strength is coming from. You mentioned shopping, so we now have business profles to differentiate businesses from your account and mine on Twitter where you can put your hours operation, you can put your website. We will also make it so you can buy products straight from those profles. So stay tuned for that, and we've been experimenting with that over the course of this year. Also on the direct response side, the multi-destination carousel is improving click-through rates by 20%, which gives you a good sense for why this is attracting more and more advertisers and more and more dollars to our service. So we'll keep marching down that road map. And with the sale of MoPub, we'll have more resources to put against it.

To your second question around revenue guidance. So if you back out last year, which was by no means a normal year and you look at the 4 prior years, you see sequential growth in Q4 for us that was from the mid-teens to the mid-20s. And so when you compare this to that $1.5 billion to $1.6 billion range, you can see that, that's reasonably consistent with what we've seen

5