Twitter reported its second-quarter-2016 financial results Wednesday, 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.
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.
First and foremost, we have a very large global audience. We have obviously over 300 million logged-in users. We just reported 313 million. We have more than 500 million plus logged-out users, and then we have a very large syndicated audience.
And so, when we sit down with media partners and brands and content owners, we’re able to articulate to them the scale of that audience. And the reason why all three audiences matter is because the live premium streaming content product is the same in all three use cases. The video player that sits in the logged-in experience from the app is the same exact experience you’ll get in logged out without having to log-in and under syndicated partners, properties as well as connected TV partners.
And because of that, we can actually sell in an audience that’s quite large relative to other offerings. What’s more important than that is that we know our users’ interests. Those logged-in users explicitly express their interests, what they care about, if they’re a Red Sox fan, if they’re a Jets fan, if they’re Republican or Democrat, based on who they’re following. And therefore, we can tailor the content that we’re delivering to them based on their specific interests. And that delivers a higher-quality audience, not just a scaled audience. And higher-quality audiences reinforce what’s already happening on Twitter, and that’s a great conversation.
There are already people talking about the NFL and looking at tweets without any video, live video, on Thursday nights. We can now deliver to that audience the live video combined with a curated timeline, like we’re doing for the Democratic National Convention right now, in one complete solution. And that’s a connected audience, not just connected digitally but connected to each other. And so, you can experience the live event with the live video and the conversation and benefit from both.
Importantly, there’s a few other characteristics about our platform that we communicate to our partners. 80 percent of our users are outside of the U.S. 80 percent of them are on mobile. And a significant proportion of them are 18- to 34-year-olds, those that are hard to find, those that may not be on pay television. So our value proposition is quite clear. We can help them reach people in different places that aren’t necessarily that they’re reaching today in the younger demo, and extend the reach. And what that ends up doing is delivering a bigger audience for them, better economics for them and benefits for us.
And one of the biggest things about our conversations with them is, we’re looking to be their partner. We’re looking to be additive. We’re not just replicating the experience that’s on television; we’re combining it with this great Timeline and many of the other social features.
Connected audiences drive virality and they drive popularity. And when something happens on Twitter now in live video, that can be pushed out and shared with many others to make the audience even bigger in that moment and experience. And that’s allowed us to win a lot of these deals.
The other thing I’d say is, you really have to understand what the partner’s goals are. These aren’t deals that are sitting on the shelf waiting for somebody to come in to buy. These are deals that we’re creating based on understanding their goals and what we can deliver. And so, that’s how we’ve differentiated ourselves.
Advertising
Twitter addressed some of the challenges it has faced in growing ad revenue and how it plans to attack those challenges in its letter to shareholders:
Our brand business remains strong in absolute terms, but there are some new challenges that we’re now tackling head-on.
First, there is increased competition for social marketing budgets, which requires us to continuously raise the quality bar on the advertising solutions we bring to market.
Second, while we have worked to drive higher return on investment for advertisers (by leveraging our current user base, ad formats and innovations in targeting, creative and measurement), we’re still priced at a premium CPE (cost per engagement) relative to others. This has proven to be a headwind in growing Twitter’s share of overall social budgets and in our ability to grow faster in both video and performance advertising.
To achieve re-acceleration in our ads business, we need to continue to win our share of social marketing budgets and continue to deliver advertising solutions that extend beyond social marketing–into performance and premium mobile video budgets. These are large incremental market opportunities with strong growth that we believe Twitter is well positioned to capture over time.
To do this, we’re focused on three main initiatives: building a rich canvas for marketers; driving increased ROI with improved measurement, bidding and relevance; and increasing scale by leveraging Twitter’s unique total audience. We believe these areas of focus will enable us to deliver value to advertisers of all sizes and capture incremental budgets for both video and direct response ads over time.
The social network also elaborated on plans for advertising within its live-streaming content:
Early conversations with advertisers around our NFL live streaming content indicate that they’re prepared to start shifting online video budgets to Twitter. The first package we’ve brought to market is with the NFL, and we’ve already sold through a meaningful percentage of the available ad inventory for the upcoming season. Brands like Anheuser-Busch InBev, Nestlé, Sony Pictures and Verizon Communications are just a few of the marketers who are excited about advertising within our new live streaming content this fall. This is just the start of what we believe will be a long-term shift away from desktop video to premium mobile environments, and we believe Twitter is well positioned to benefit from that shift.
And Twitter discussed how advertisers can take advantage of pre-roll ads:
In addition to our work on reach and frequency buying, we also introduced an easier way to serve skippable, pre-roll ads of any length in front of the most premium mobile videos. Twitter pre-roll will support Video Ad Serving Templates (VAST) through select Ads API partners. VAST is a universal protocol that standardizes communication between ad servers and video players. With this feature, advertisers can programmatically have their pre-roll ads served in front of premium content with hundreds of publishers. The ability to use VAST (exclusively available via the Ads API and currently in beta in the U.S.) is available through four of our Ads API partners: AdParlor, Amobee Brand Intelligence, TubeMogul and Visible Measures.
Finally, the social network went into detail on Twitter Audience Platform and Twitter Dashboard:
In Q2 we announced that the Twitter Audience Platform was available to all performance advertisers around the world. Now, advertisers that want to drive website clicks, conversions or mobile app installs can seamlessly extend their campaigns to Twitter’s audience of more than 800 million visitors–whether they’re on Twitter, or engaging with thousands of mobile apps and websites.
We’re also introducing new creative formats to help direct-response advertisers better connect with this audience across both mobile and desktop. In fact, our research shows that people who were exposed to ads driving website conversions on both mobile and desktop devices were 52 percent more likely to make purchases compared to people who were only exposed on one device.
Finally, we know it’s incredibly important to make Twitter as simple and powerful as possible for the marketers using the product. This is why we launched the Twitter Dashboard in Q2, which is a stand-alone app and web interface designed to help businesses connect with their customers and community. The Twitter Dashboard gives businesses an advantage in the way they use Twitter. With an iOS app and desktop web experience, Dashboard gives business owners a clear picture of what’s being said about their businesses, lets them schedule tweets and offers insights about their tweet performance.
Safety
Twitter offered an overview of its efforts to protect its users in its letter to shareholders:
We’re committed to providing tools to help people control their experience on Twitter, Periscope and Vine, so they can consume content freely and express themselves with confidence. For example, we’ve improved blocking on Twitter, which can be an effective way to handle unwanted interaction. We’ve also launched a comment moderation system on Periscope that allows the community of viewers on a broadcast to report and vote in real-time on comments that they consider to be spam or abuse.
We, along with the broader industry, have a lot more work to do in this area, but we’re committed to continuing to develop tools that will help keep Twitter, Periscope and Vine safe and open for people to connect in real time. We do this work together with the strong communities and partners that exist across all of our products.
Dorsey went into more detail in his response to a tweeted question:
This is really, really important to me and to everyone at the company. So, I want to address both freedom of expression and safety together here, since the two intertwine.
We are not and never will be a platform that shows people only part of what’s happening or part of what’s being said. We are the place for news and social commentary. And at its best, the nature of our platform empowers people to reach across divides, and to build connections, to share ideas and to challenge accepted norms.
As part of that, we hope–and we also recognize that it’s a high hope–to elevate civil discourse. And I emphasize civil discourse there. Abuse is not part of civil discourse. It shuts down conversation. It prevents us from understanding each other. Freedom of expression means little if we allow voices to be silenced because of fear of harassment if they speak up. No one deserves to be the target of abuse online, and it has no place on Twitter.
We haven’t been good enough at ensuring that’s the case, and we must do better. That means building new technology solutions, making sure our policies and enforcement are consistent and educating people about both. We’ve made improvements in the first half of the year, and we’re going to make more. We named safety as one of our top five priorities for this year, and recent events have only confirmed that this is truly one of the most important things for us to improve, and has motivated us to improve even faster.
Readers: What are your thoughts on Twitter’s second-quarter-2016 financial results and earnings call?
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