推特 (TWTR) 2014 Q2 法說會逐字稿

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.

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 will 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 hashtag twtrearnings.

We would like to remind everyone that we will be making forward-looking statements on this call, such as our outlook for Q3 in 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 website in a few hours. With that, I would like to turn the call over to our CEO, Dick Costolo.

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, 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. 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're making on our consumer product. First, during the World Cup we delivered the 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. These experiences felt alive. They felt wonderfully complimentary 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'm 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. Those nearly 6.5 billion impressions in a single match highlight the continued expansion of our global reach and impact.

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 ten 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're 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. 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 to Mike, who as you saw will be transitioning from the CFO role into a new one heading the Company's strategic investments. I'm excited obviously for Mike and for the Company as he takes on this new challenge.

We've 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're lucky to now get to work day to day with him in house. With that, I will hand over to Mike to jump into the financials.

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 revenue 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 budgets 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 with 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 companies -- 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.

Global 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. Beta 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 website.

In Q2, total expenses were $296 million, up 94% year over year. The increase was driven primarily by head count and related overhead costs, as we continue to invest in our work force, 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. General and administrative costs were $30 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'll 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 of $82 million. CapEx was $75 million, $31 million of which was financed with 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 in Q1. We saw strong growth in both US and international markets. US MAUs reached 60 million, reflecting 3 million net additions in the second quarter, consistent with the 3 million net additions we saw in Q1. 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, and 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 interaction per timeline view, 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. US 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 at the levels of monetization for our monthly active users can't reach or exceed that of our industry peers over time.

In Q2, ad revenue grew 129% on a year over year basis, despite a 35% decline in cost per ad engagement. 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 advertisers.

On a sequential basis, cost per ad engagement increased 18%. This is our first increase in reported CPE that was due in part 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'm looking forward to starting my new role, and importantly, I continue to be optimistic about the future of Twitter. With that, here is Anthony.

Thank you, Mike. I'm incredibly excited to be here, and it's a privilege to be a 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've 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've brought new advertising products to market. Our innovation continues. Just a few weeks ago we announced the general availability of our mobile app promotion sweep. Both emerging apps as well as brands in highly competitive categories are seeing great results.

In August we'll launch the beta version of our new promoted video offering, which provides a way for high-quality content producers and brands to easily upload, share, and measure the distribution and effectiveness of their video content on Twitter. 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 2014, then Dick, Mike, and I will take your questions. For the third quarter 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 $1.31 billion, to $1.33 billion, which is $95 million above our previous range at the mid-point. The increase in revenue guidance for full year of 2014 reflects our Q2 out-performance, and our increased expectations for the remainder of the year.

Moving on to 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, we would like to take your questions. Operator, if would you please announce the first question.

Thank you.

(Operator Instructions)

Our first question comes from Anthony DiClemente of Nomura. Your line is open.

Thanks. Two questions, one for Dick and one for Anthony. Dick, you talked in your prepared remarks about the growth of off-network, so how big Twitter can be over and above just the existing Twitter users. I wondered, you talked about impressions. If you could, talk a little bit about what that contribution could be in terms of revenue, perhaps what off-network revenue was in the quarter? Think about -- how should I -- how should we think about revenue per user in the context of the fact that some or probably an increasing percentage of your revenue is coming from off-network?

Anthony, if I may, you were at the NFL, one of the biggest media enterprises in the world. You have been a media analyst, you've been a media internet banker. I would love to hear you talk about the opportunity that you see for Twitter as a media Company, as opposed to Twitter the social network perhaps. Within that, where do you see the curation of content fitting into that equation? For example, reverse chronological on a timeline. Do you think that changes? Where do you see Amplify fitting into Twitter's media strategy? Thanks.

Thanks, Anthony. This is Dick. As regards your first question, which was in relation to my prepared remarks about our reach and impact off of Twitter, and the World Cup impressions and syndication, then the size of the logged-out audience, I will say this. We see that as a big opportunity, obviously.

Why are we sharing all that information with you now? One is we've made changes we like to the profile pages that make them more engaging and visually appealing, and that has led us to be excited about other experiments that we'll be running for those audiences. As those changes become more visible to you, I want you to have context for why you're seeing them.

Vis-a-vis revenue contribution of those audiences, we're focused 100% on user experience today, and we're not monetizing those audiences. As we eventually think about that, it will probably be over the long term in the context of the way we -- same kinds of ad units we deliver to our on-network, logged-in users, but we're focused right now on leveraging the content that's created by the majority of those 271 million monthly active users that come to the site, to create the appropriate experiences for both the unique visitors and the syndicated audience.

Thanks.

In terms of the opportunity for Twitter, I wouldn't try to characterize it as a media Company or a technology Company. The bulk of our employees are technology people, and so we've always said that we're a technology Company first, and we're using a very simple format with a very complicated technology to be able to become the largest information network in the world.

I came here with one belief, and since being here that belief has only been reinforced -- that's that we can build the largest audience in the world. Dick talked about that in his prepared remarks. That's something I came here believing was the case, and I believe it more now that I have been here for five weeks.

To your point about curation fit, what I would say is Dick made some comments about tailored audiences, and tailored audiences are challenging to do. The Company did an enormously successful job as it relates to the World Cup, in creating a tailored experience for those that were interested in it to really drive engagement.

I think Twitter is unique in that most technology companies disrupt other industries and disrupt other businesses. But Twitter actually makes other companies and other brands better than they would otherwise be. I think that's a unique complementary nature of our information network that really makes us partner with so many types of companies, which increases the amount of information we have in content, which aggregates a larger audience, and it continues that virtual cycle.

As it relates to the third part of your question, Amplify fit, Amplify is a great example of how Twitter makes other companies and brands better. Amplify allows us to partner with TV companies or content creators increase the tune-in to their audience. One example, you mentioned the NFL. Last year Twitter created a partnership with the NFL, helped drive tune-in. This summer their games during the week that were less viewed, or there was a lower awareness of the product being on days other than Sunday.

Amplify is a perfect example of how we can increase that tune-in, create a bigger audience for the content producer and the content licenser, which drives more advertising dollars. Ultimately they'll pay more for that content, and that content producer will want to partner with Twitter.

Thank you. Next question please, operator.

Our next question comes from Douglas Anmuth, of JPMorgan. Your line is now opened.

Great. Thanks for taking the question. First, I was hoping that you could comment on the trajectory of MAUs through the months of 2Q? Then you talked about how it is more products and the experiences, rather than the World Cup itself, but how do you maintain some of the new users that may have come in around that event? Can you also just comment on your thoughts on -- early thoughts on commerce on the platform, and how that's rolling out through Cards at this early stage, how successful that's been? Thanks.

Sure, Doug. Thank you. On the trajectory of MAUs, we don't give a perspective on each monthly MAU number, but on the overall quarter. As we mentioned we're quite pleased with the outcome of 16 million new monthly active users sequentially. The thing I would note, which needs to be clear, is that the World Cup itself didn't really add to the MAU net adds. It helped drive engagement, and it's a product that's really focused on engagement, the way we've positioned it now. In terms of maintaining the users, we don't really see that we benefited from new MAU user growth because of the World Cup.

The last question you asked was about commerce. Nathan Hubbard is leading that charge for us. We're very excited about it. Commerce has been occurring on Twitter for some time, even before the initiatives that Nathan is behind. We recently completed the acquisition of CardSpring, which is an important promotional platform to really complement our commerce strategy. We're very excited about the opportunity that lies ahead of us. We will give you further updates as they occur.

Thank you.

Great, thank you. The next question comes from the Twitter account of Colin Sebastian at R. W. Baird. He asks, how much usage improvement is attributable to the World Cup, and are the buy buttons indicative of an e-commerce push?

Thanks, Colin. This is Dick. As I mentioned, and as Anthony has reinforced, it's really been the case that the World Cup experiences drove engagement -- increased engagement from existing users, and it has been the product changes that we've made over the course of the year that have driven new user growth. That's how I would categorize that. Vis-a-vis the buy button specifically, that's another example of the kinds of explorations we've got Nathan and his team focused on. You will continue to see explorations and other experiments like that.

Great, thank you. Next question, please, operator.

Our next question comes from Heath Terry of Goldman Sachs. Your line is now opened.

Great, thanks. Dick, is it possible to parse some of the impact that you are seeing from the new features and some of the user services that you have been rolling out over the course of the last couple of quarters in terms of what that is having on users and engagement? As Daniel begins to have his fingerprints more on the user experience, what kind of road map or timeline would you have investors thinking about, in terms of really seeing his version of what Twitter is going to look like?

Thanks, Heath. Vis-a-vis your question about parsing the impact from new users on MAU, or -- and/or engagement, I would say that we don't think of it that way, and view it as the collection of changes that we're making in service to delivering value more immediately to users when they come to the platform and create accounts and log in, that are driving that growth. It's the combination of those things that we've described from the beginning of the year that we're moving forward on now, and not -- we don't slice those up by feature.

Vis-a-vis the road map and the timeline to seeing Daniel's vision for Twitter, I would say a couple of things, specifically. One, the product road map that we talked to you about at the beginning of the year and last quarter is the road map that we continue to leverage and continue to move down the path on.

Those include organizing content for new users, and as I mentioned in my remarks, I loved the way we did that during the World Cup with those experiences; making it easier to on-board new users; and as I mentioned last quarter, the continued work on the direct messaging platform that will be a focus the remainder of the year.

Not only has Daniel made a great impact and come into the Company along with Anthony, and quickly, I would say quickly integrated into the fabric of the way we do things here, but we've also added a number of other folks to the product team and the product leadership team that have done a similarly great job. I like the way they've come in, adopted the work that the teams have already been doing in service to that road map and are continuing with that same road map down the future path.

Great. Thanks, Dick.

Thank you. Next question, please, operator.

Our next question comes from Ross Sandler of Deutsche Bank. Your line is now opened.

Thanks, guys. Just another product-related question, I guess for Dick. Following up on the comments on non-logged-in experiences, what kind of additional products could we see for that cohort of users? There's been some chatter out there that Twitter could at some point roll out a timeline based on algorithm versus self-curation, or setting up your own follow list. How complicated is that, and how long until we could potentially see a product like that ship? Thanks.

Thanks, Ross. Vis-a-vis the additional products we could see, I mentioned that I really liked again the kinds of experiences we created around topics and live events during the World Cup. We will run a number of experiments to that broader audience, those unique visitors I talked about. I wouldn't want to be specific about the sequence with which we will roll those out, or when you would see those.

On your second question, algorithmic timelines, for example, versus manually curated follow lists. I think it's fair to say that we're not ruling out any kinds of changes that we might deliver in the product, in service to bridging that gap between signing up for Twitter and receiving immediate value. You will see a number of kinds of experiments that we produce there.

Great. Thanks, guys.

Thank you. Our next question comes from the Twitter account of Rich Greenfield at BTIG. He has a two-part question. The first part of the question is about US user growth. He says, what is the biggest challenge to growing domestic users to 100 million-plus? Does the product need to radically change?

Yes. Thanks, Rich, it's Dick. The short answer is, as I just referred to, it's that delivering immediate value to new users when they come to the platform and sign up for Twitter, and shortening that distance between sign up and receiving immediate value. No, the product does not need to radically change. We have everything we need to deliver that value to users.

Great. The next part of Rich's question is about timeline views per MAU. He says US timeline views per MAU fell sequentially. Why? Are new users increasingly lighter or less-engaged users?

In terms of the first part of the question as it relates to US timeline views per MAU falling sequentially, the US market benefited in the first quarter from some big events that drive engagement, specifically the Super Bowl as well as the Oscars. Those events are not repeated in the second quarter, including the World Cup, which we didn't count timelines for. That's why you see that trend in US timeline views per MAU.

As it relates to the bigger question, are new users increasingly lighter or less engaged users, we would say that the trend that you are seeing currently in timeline views per MAU is really driven by product changes as the predominant driver of that decline.

Essentially what we're trying to do is reduce every ounce of friction that exists when a user comes online to find the information they want quickly and easily. We've made small product changes over time such as media forward and other initiatives that make it lot easier for someone to find what they want, and consume more during the time that they're on Twitter. We're very encouraged by the trends we're seeing behind these initiatives, and will continue them, as Mike mentioned in his prepared remarks.

Thank you. Next question, please, operator.

Our next question comes from Peter Stabler of Wells Fargo Securities. Your line is now opened.

Good afternoon. Thanks for taking the questions. Dick, question for you. Third-party data suggests that tweeting activity among users who signed up in 2012 and 2013 is declining on a sequential basis. First of all, is that the case? We're not sure, of course. Secondly, how should we think about that, given that marketers tell us that tweeters are more valuable than passive non-tweeting users from an engagement perspective, particularly when it comes to re-tweeting and earned media from an advertising perspective? Thanks very much.

Thanks, Peter. I'm not going to comment on any third-party data or rumors. It remains the case that the majority of our monthly active users are content creators on the platform. That includes tweeting, replying to tweets, et cetera.

To your second question, our marketers receive value from everyone who engages with their tweets. Neither we nor our marketers make a distinction between whether an active user on the platform as a customer of theirs is a tweeter or a non-tweeter. I think that it's reasonable to assume that all of our monthly active users that engage with our marketers on the platform are just as valuable to them as any other cohort of active user.

Great, thank you. Next question, please, operator?

Our next question comes from Justin Post of Bank of America Merrill Lynch. Your line is now opened.

Great. My questions are really on high level on ad loads and engagement. I was just wondering if you could tell us where you feel you are on advertising loads, if you still see a lot of room there? On engagement, obviously tremendous growth there. Maybe you could call out a few of the ads that are driving higher engagement? Are they ad formats, Twitter cards, or is it just better targeting overall by your algorithms? Maybe give us a little help on that? Thank you.

In terms of ad loads, what I would say is they increased marginally on a quarter-over-quarter basis, but they are still very low relative to our industry peers, and even the best-in-class industry peers. We still feel like we have significant up side as it relates to ad load or for coverage.

As it relates to engagement, I think it's important to understand that over time as we add new ad formats, such as we did this quarter with mobile app downloads, it will have an impact on engagement rates or click-through rates. Specifically, if you think about the app download card, it's a card that we don't get paid for -- the pay-for-performance mechanism isn't when the individual clicks on the tweet. It's actually when they click on the install button.

This is a much higher hurdle than just clicking on the tweet, or re-tweeting or some other mechanism to drive engagement. Because that action is further down the funnel, the click-through rate is slightly lower, but the price that the advertiser is willing to pay is higher, and that's a great trade-off. We will continue to add different types of ad format that could have that type of impact on the mix overall.

Great. Let me follow up. You mentioned benchmarking versus competitors. When you look at some of the big competitors, do you think your activity, as far as time or page views or timeline views is comparable, as you think about some of the other big social networks out there? Thanks.

We can make an apples-to-apples comparison it is a relates to the commonly used term ad load. That's what I'm making a reference point.

Great, thanks. Appreciate it.

Great, thank you. We will take the next question from the Twitter account of Tim W. Tim asks, do you have any plans to add a special mobile app portal for the NFL games, like you did for the World Cup?

We love to partner. As I mentioned earlier, Twitter makes other brands and other content better. We benefit from a ton of world-class partners. The NFL already is a partner. Last year, as I mentioned, we entered into a relationship as it relates to Amplify. Dick mentioned we'll continue to look at opportunities to created tailored experiences. That's one area, is sports. Sports leagues is something we could look at, as we do with the World Cup. I know someone at the NFL, so maybe I will reach out.

Great, thank you. Operator, we will take the next question, please.

Our next question comes from Eric Sheridan, of UBS. Your line is now opened.

Thanks for taking the question. Two on costs, one on the gross margin. It was up very big year on year. I wanted to understand what's driving that improvement in gross margins, and how sustainable it is on a going-forward basis? Anthony, on the guide for Q3, it implies EBITDA margins actually go back the other way. I wondered what sort of investments might be driving a retreat in the EBITDA margin in Q3, based on the guidance you gave, since it wasn't called out on the call? Thanks.

Hi, Eric. It's Mike. On the gross margin year over year, what we're seeing again, as we've talked about as we make these investments into the infrastructure to make sure we can scale with users and usage, we are seeing leverage come into that model as we improve the structure of our infrastructure and those investments. Really, it's just the scale kicking in over time that you are seeing on the year-over-year basis. We continue to optimize that infrastructure spend, to make sure we're doing it in the most efficient way possible.

Eric, on the second part of your question as it relates to guidance, I would first start by saying philosophically as we think about guidance, we really want to balance the opportunities versus the risks in a quarter when we give you guidance. That's what the outlook represents.

As it relates to sort of the specific margin question, I will tell you, we want a balanced growth versus investments. The multitude of growth opportunities we have in front of us is enormous, and we don't want to in any way short-change the long-term size of the business or opportunity to become the largest audience in the world. We also want to be prudent, though, that we're not investing without any constraint.

If you look at our fiscal year 2014 guidance as a whole, we're guiding to almost 100% year-over-year revenue growth, with margin expansion up about 500 to 600 basis points, which is a significant amount of profit improvement relative to that fast growth rate. As we think about the third quarter specifically, we want to make sure that we are still investing in the growth opportunities.

The second quarter, 75% of the up side in revenue dropped to the bottom line. We would have liked to have spent some of that back, given the multitude of growth opportunities we have. Just didn't have the ability to do it quick enough, so we're going do it in the third quarter; but still for the full year, really deliver that balance of growth and profitability.

Great, thank you.

Thank you. Next question, please, operator.

Our next question comes from Youssef Squali of Cantor Fitzgerald. Your line is now opened.

Thank you very much. Two quick questions. First, Dick, you talked about the hundreds of millions of uniques that come to Twitter but don't log in. Just trying to understand why they don't log in. What's the -- is it a friction in the process, or is it a lack of a value a proposition that these guys are seeing? Clearly, what is it that you are doing short term to remediate there? On the -- my other question is around the MoPub. Can you just refresh us on the opportunity around that acquisition and its performance and contribution to the quarter? Thank you.

Sure. Thanks, Youssef. In answer to your first question, Twitter is everywhere. It's all over TV. When the NBA commissioner gets on TV and talks about his sanctions against Donald Sterling, there are tweets all along the bottom of the screen during the course of that discussion. When events happen in the world, whether it's the joy of the World Cup or the tragedy of MH-17, all over television, all over the news, all over the newspapers, people talk about everyone on Twitter is talking about this. This is all happening on Twitter right now.

Along with this great work we do in serving our syndicated audience across the entirety of the web, and our TV and news partners, they bring all this attention to the site. These users come to Twitter looking for the content they've been told is happening and unfolding on Twitter right now. Many of them browse around. Some of them search, some of them look at profiles, and obviously from the numbers we're seeing, lots of them decide not to log in.

We're serving this huge syndicated audience we have that's growing. We're serving that 271 million monthly active users who do log in well, and that's growing. We feel like we provide limited content to those hundreds of millions of other users who are unique visitors to our properties, and we see an opportunity, a big opportunity, to serve them just as well as these other two audiences. That's how I would frame what you are seeing in that first group of users there.

To your second question, MoPub, we continue to see just that our big bets on programmatic buying, mobile buying, and the accelerated investment in mobile advertising, all map so directly to precisely the kind of work we're doing in MoPub, and continue to believe that's just a significant opportunity for us. I will kick it over to Anthony, if you've got any other comments on the future opportunity there.

Sure, on MoPub I would characterize that we're seeing very strong growth, 170 billion ad impressions in the last 30 days, requests that were fulfilled, up from 130 billion in April, so very strong growth there.

From a bigger-picture perspective, I mentioned the closing of the acquisition of TapCommerce. That's a DSP that will tie in to MoPub, which is a mobile exchange, and essentially allow us to take the demand that we're seeing both into Twitter and across the web, and aggregate it across not only Twitter inventory, but network inventory through the exchange that MoPub can help facilitate on the supply side. TapCommerce is a nice addition, adding additional demand on top of the exchange.

Great, thanks. Congrats, Anthony.

Thank you. Next question, please, operator.

Our next question comes from Mark Mahaney of RBC Capital Markets.

Thanks, two questions please. In the note about the metrics, there's that reference to the 14% of users that maybe result from automated activity. Can you give us any context around that? Was that a smaller number in the past or a higher number?

Broader, Dick, over the last three quarters you've talked about it seems like an intense -- greater focus on the user experience. At a high level, where do you think you are in terms of getting Twitter to the optimal user experience? I'm sure there's no optimal, but as you -- how much of this is serendipitous, how much of this is a product plan, product pipeline that you have laid out over the last three quarters or the last year? How much better can user experience -- should it get, and can it get? That's the basic question. Thank you.

Sure. I'll take the second question first, and then we can go from there. Thanks, Mark. Vis-a-vis the greater focus on user experience, how much better can it get, to be perfectly frank, we think it can be a lot better. We have, I think, a lot of great thinking on the teams about how we can make it better, surfacing the kind of great conversations that pop up in people's timelines from time to time, making sure that for those users who follow hundreds of accounts they don't miss the very best pieces of those streams as they flow by.

Then once again, for those users who are new to the platform and are coming to the platform for the first time, getting them value immediately. I think it's the case that we believe that across the spectrum of our users, even our core users who are on the product every day, we can deliver much better experiences to them. I think the answer to how much better is significantly.

Mark, this is Mike. To your first question, I believe the number we disclosed in the Q was slightly below the 14%, I think closer to 11%. But this refers to -- I think it was 12%, actually. It refers to automated pulling requests we get from third-party apps. That switches, frankly, back and forth depending on the application. Think of that as the high end. We think we're within that. But again, these are users who are getting pulled Twitter content, and in many cases they're viewing that content. It's just coming in, in an automated way.

Great, thank you. Next question, please, operator.

Thank you. Our next question comes from Brian Weiser, of Pivotal Research. Your line is now opened.

Hi, thanks for taking the question. We know the US and the UK are important. I was wondering if you might be able to rank order the next several markets, perhaps for revenue, or perhaps differently identify which countries contributed disproportionately to growth. One separate question, just following up on an earlier comment you made, 40% of users live in countries where self-service advertising is available. I was wondering how much of your actual ad revenue is self-service? Thank you.

In terms of the other countries, in terms of the year-over-year growth rate in absolute dollars, the US, the UK, and Japan contributed the most in year-over-year absolute dollars, to give you perspective on that, from a geographic standpoint. In terms of the percentage of our revenue that's coming through self-serve, that's not a metric that we've shared, and we're not prepared to share at this time.

We're really encouraged by the impact that self-serve has on the SMB advertiser base, and think it's a big opportunity for us. Obviously if it's only covering 40% of our user base, or less than 40% of our user base at this point, there's a lot of opportunity ahead of us. But at this point the percentage of revenue is not disclosed.

Great, thank you very much. Actually, I should clarify. Is the self-service advertising primarily being used by small businesses, or do you see opportunity still for the self-service advertising on the core Twitter platform from the bigger brands?

Today it's primarily SMBs. Over time, as the sophistication of the advertising the agencies using our product increases they could also use it, but it's primarily SMBs today.

Great, thank you.

Thank you. Next question, please.

Our next question comes from Dan Salmon of BMO Capital Markets.

Good afternoon, guys. Another sort of commerce-related one. I would love to just hear a little bit about the Amazon cart test that started in the quarter, where that might go, what early results you saw from it?

Hi, this is Dick. Thanks, Dan. I would categorize the Amazon cart test as just that, another test. We don't have any specific comments or numbers to share from that test. It is one of a number of explorations we're doing around that notion of in-the-moment commerce that we're all very excited about, and we will continue to do more of that.

Great, thank you. Next question, please, operator?

Our next question comes from Ben Schachter of Macquarie. Your line is now opened.

Thank you, guys. Facebook highlighted that it's going to be focusing more on key public entities (inaudible - technical difficulty) to get more exclusive content from such entities, or do you simply expect that they will post on multiple networks? Then Anthony, do you expect to have any meaningful changes to how you will present guidance and other financial or operational metrics going forward, or are you fairly comfortable with how it's presented today? Thanks.

Ben, could you repeat the first part of you question? You broke up as you were saying it.

It's just that Facebook is focusing on getting more content from public entities such as celebrities. Is Twitter going to work to get exclusive content from such entities, or do you think that (inaudible, technical difficulty) --

Ben, you broke up again, but fortunately you broke up on a different part this time, so I think we got the gist of it. I would say we love the relationships we have with those kinds of public figures in all walks of life, and the content producers and broadcasters who work with them, and the kinds of content that they deliver into Twitter. We're confident and love the way that we're growing both of those kinds of relationships. I think that will continue to be a strength for us. I think your second question was vis-a-vis future guidance, and Anthony.

Thanks, Ben. I was fortunate as a banker to start working with Twitter under the cover, so to speak, over a year ago, and really getting a good understanding of the metrics in the business. I can tell you in that more than one year the business has changed meaningfully in a number of different regards, given all the initiatives the Company has rolled out and been successful in achieving. That's a long way of me saying we will continuously evaluate what are the best metrics to disclose that best represent the drivers of our business as it relates to building shareholder value.

As we go into the 2015 planning process, we will do a deep dive on all the key metrics and the entire way we present the Company to the public investor, and make the appropriate changes if we find any at that time. We're at the very beginning of that. There's nothing I would talk about today, but it's a process we should go through every year, given how fast the Company is innovating, and how quickly the business is changing.

Great, thank you. The next question comes from the Twitter account of [John Furrier]. He asks, can you talk about the developer strategy at Twitter? Are there any new changes?

I would just add that we continue to invest in helping developers build into Twitter, and providing developer tools to the entire mobile app landscape. Just this past quarter, Crashlytics, a mobile developer SDK, added real-time analytics capability to their suite of services that now has crash reporting, beta testing, and analytics. I'm very excited about the suite of services that they're building and service to helping developers build better apps. We will continue to make big investments there.

Great, thank you. Next question, please, operator?

Our next question comes from Carlos Kirjner of Bernstein. Your line is now opened.

Thank you. Two quick questions, if I may. Do you guys believe you can build an accurate, reliable interest graph for visitors? If yes, how,? If not, is it reasonable to assume that the monetization potential for visitors will be significantly lower than the potential for your logged-on users? Secondly, what are the root causes for the difference in timeline views between -- per MAU -- between domestic and international users, and how do you think they will evolve? Thank you.

Hi, Carlos, it's Dick. I'll take the first question there. I think the interesting thing about the different audiences -- again, when you think of them in three groups: those 271 million monthly active users for whom we have a great interest graph; that audience that we see in syndication; and then thirdly, those hundreds of millions of visitors who come to Twitter -- there is frequently tremendous signal from those visitors who come to Twitter. They may have come directly from a search -- specific search intent.

Today already, when we look at the kinds of profiles that many of them view and navigate between, you get some great signal for the kinds of content they've come to Twitter to consume. We think that long term, those kinds of signals will provide us with the data that we need to deliver the right kinds of monetization experiences to that audience. Again, I would make very clear that we will focus initially and for some time on the user experience, and make sure we get that right before we go down that path.

Talk about the difference between timeline views per MAU for US MAU versus the international MAU, and the difference in magnitude. What I'd point to there is the US market is obviously more mature as it relates to total MAUs in one concentrated geography, while the international number represents many dispersed geographies.

In each one of those geographies, the amount of content that has been tweeted or can be engaged with is going to be different than the level of quality and breadth and depth that we have in the United States. As that breadth, depth, and quality improves of content, then the consumption measure and timeline views per MAU will also change.

The other thing I would say about the international markets is they're all very different than the US. The devices they use to access Twitter are very different. Dick talked earlier about some of the issues we have in developing markets. Because of that different device the experience is different, and doesn't lend itself to as much consumption. But as the devices become more technologically advanced with greater penetration, we will see those two start to converge more.

Thank you.

Great, thank you. The next question comes from the Twitter account of Victor Anthony at Topeka Capital Markets. He says, you insinuated that you could potentially close the monetization gap with the industry over time. How do you see your business model changing in order to narrow that gap, and what level of investment would that require, both organically and through acquisition?

The way I would answer the question is taking a step back, and thinking about the big, broad drivers of monetization. The first obviously level of monetization is what's our ad load? We're at a very low level of advertising load or coverage, and we have a significant opportunity to increase that, especially relative to our public peers, but also just generally.

The second driver of our monetization is click-through rate. That's a function of improving the prediction of the individual user's attractiveness to that advertising, or targetability. Also, formats. The more formats that we can provide advertisers for the specific objective they want to accomplish from a marketing perspective, the better the click-through rates can be, and the more appropriate that pay-for-performance engagement metric can be to their objective.

The last point I would mention is price. As we continue to drive scale, which advertisers are looking for in a specific target, and we continue to add new products that are more targetable and more appropriate for the specific marketing objective, ROI will go up. As ROI goes up, advertiser demand will increase, and that will continue to drive price. It's a very wide-open opportunity for us given where we are in the ad load side of the equation, and relative to the number of advertisers and the formats that we have.

We think there's a big opportunity to not just reach where our industry peers are, but potentially to exceed it. In terms of the investment, we don't see a step-wise change in our investment in order to get there. It's just doing more of what we're doing -- building a big audience, giving them the right ad product that they want, the right data, and measurability and targeting, and ultimately will continue to drive the growth that we expect.

Great, thank you. Next question, please, operator.

Our next question comes from Arvind Bhatia of Sterne Agee. Your line is now opened.

Thank you for taking my question. A couple of, actually. First one is, I wonder if you could speak to some of the user trends post the World Cup. Also, in light of how much you have been exceeding your guidance or EBITDA margins, et cetera, wondering if that has changed your thinking on the long-term margin potential that you have laid out at 35% to 40% in the past. I'm wondering if that's starting to change in your mind at all? Thank you.

On the user trends, we don't update the specific monthly user trends. There is an implication in our guidance that you could tie back to users. We gave you revenue guidance, obviously, for the third quarter. We also provided a perspective on the expected trend in revenue per timeline view, as well as in timeline view per MAU.

The combination of those three things, as well as considerations for seasonality over time, can help you triangulate into an MAU number. But we remain very optimistic about the product changes that we have, and we're just balancing the opportunities versus risks in our guidance, to give you a perspective on that specific question.

Your second question is long-term margins. The answer to that is no. During the IPO Road Show, the Company talked about 35% to 40% long-term adjusted EBITDA margins, and that still remains the case today.

Thank you.

Thank you. Operator, I think we have time for one last question, please?

Thank you. Our final question comes from Brian Nowak of Susquehanna. Your line is now opened.

Great, thanks for taking my questions. I have two. If you go back to Mark's question earlier on the disclosure on the 14% of users that are being impacted by the application, what would the MAUs have looked like year on year or sequentially if we excluded any users that didn't have any active -- any action involved with them, and you excluded those guys from the user base? Secondly, any help on kind of rough-sizing for duplicative accounts? If I have three accounts -- one for Michigan football, one for politics, and one for finance -- any idea for duplicative accounts in an MAU number? Thanks.

Hi Brian, it's Mike. Just on the 14%, and as I mentioned it's up slightly from the 12% we saw in Q1, this I would say is a maximum number. We have many applications that are pulling into Twitter for Twitter content. This is pre-determined timelines and tweets that users are looking for.

We don't have a very reliable way to know exactly how many of -- how much of that pulled activity is actually a user seeing that content. We wanted to be conservative here, and share kind of the outer bound. Historically, we've seen that content is in fact being consumed, and those are actually active users. But we don't have an actual number that we can share.

On duplicative accounts, there is some usage of multiple accounts by single users, but again, that's not a number that we discuss.

Great. Thank you all for your time. We appreciate you joining us. We look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.