EX-99.1 2 twtr-ex991_6.htm EX-99.1 twtr-ex991_6.htm

Exhibit 99.1

 

Twitter Q4 and Fiscal Year 2018 Shareholder Letter

San Francisco, CA

February 7, 2019

 

 

Highlights

 

 

Q4 was a strong finish to 2018 with revenue up 24% year-over-year, reflecting better-than-expected performance across most products and geographies. We delivered GAAP net income of $255 million, net margin of 28%, adjusted EBITDA of $397 million, and adjusted EBITDA margin of 44%.

 

Our focus on improving the health of the public conversation on Twitter delivered promising results in 2018, with a 16% year-over-year decrease in abuse reports from people who had an interaction with their alleged abuser on Twitter, and enforcement on reported content that was 3X more effective.  

 

We made a number of product improvements in the fourth quarter, including making it easier to see the latest Tweets when people want to see what’s happening in the moment. Average monetizable DAU* (mDAU) were 126 million in Q4, up 9% year-over-year, with double-digit growth in five out of our top 10 global markets.

 

Q4 was a strong finish to 2018 with revenue up 24% year-over-year, reflecting better-than-expected performance across most products and geographies. We delivered GAAP net income of $255 million, net margin of 28%, adjusted EBITDA of $397 million, and adjusted EBITDA margin of 44%.

 

Note that all growth rates referenced below are year-over-year unless otherwise indicated. Please also note changes to our quarterly disclosures outlined on page 8.

 

Total revenue was $909 million in Q4, an increase of 24%, or 26% on a constant currency basis. Total US revenue was $506 million, an increase of 24%. Total international revenue was $403 million, an increase of 24%, or 27% on a constant currency basis. We saw broad-based strength across all regions. Japan remains our second largest market, growing 30% and contributing $138 million, or 15% of total revenue in Q4.

 

Total advertising revenue was $791 million, an increase of 23% or 25% on a constant currency basis. Owned and operated (O&O) advertising revenue was $749 million, an increase of 26%. Video ad formats continued to be our fastest-growing ad format in Q4, driven by strength in Video Website Card, in-stream pre-roll, and First View ads. Video was more than half of ad revenue for Q4 and for 2018.

 

Data licensing and other revenue totaled $117 million, an increase of 35%. We saw continued year-over-year growth in data and enterprise solutions (DES), while MoPub had its highest revenue quarter ever. Looking ahead, while DES continues to benefit from customers developing new use cases and smaller customers adopting self-service APIs, we are now largely through our multiyear enterprise renewal cycle. As a result, with many of our largest partners now at market pricing, revenue growth is likely to moderate in 2019.

 

 

 

 

* The definition and calculation of monetizable DAU is the same as that of the DAU data provided back to Q1'16. We have applied the same definition and calculation for both DAU endpoints to calculate the year-over-year growth rates since that time.

Please note, however, that earlier DAU / MAU ratios (prior to Q1'16) referred to DAU that accessed Twitter through desktop applications and other third party properties not capable of displaying ads, and referred to a subset of DAU in certain select markets. As a result, earlier ratios are not like for like and should not be compared to our current ratio or to historical ratios that can be calculated using the new data disclosed today.

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We delivered GAAP net income of $255 million, net margin of 28%, and diluted EPS of $0.33. Adjusted EBITDA for Q4 was $397 million, or 44% of total revenue. We grew our worldwide headcount by almost 550 employees, or 16% in 2018, and ended the year with over 3,900 employees. We’re attracting great people to Twitter who believe in our purpose, and we’re driving investments in our highest priority areas: health, conversation, revenue products and sales, and our platform.

 

 

Our focus on improving the health of the public conversation on Twitter delivered promising results in 2018, with a 16% year-over-year decrease in abuse reports from people who had an interaction with their alleged abuser on Twitter, and enforcement on reported content that was 3X more effective.

 

In 2018, we took important steps to increase the collective health, openness, and civility of the public conversation on Twitter, helping people see high-quality information, strengthening our sign-up and account verification processes, and preventing the abuse of Twitter data.

 

Specific actions we took in 2018 included: strengthening account security, updating our rules to more clearly address specific types of hateful conduct, taking new behavior-based signals into account when presenting and organizing Tweets, making it easier to see when a Tweet was removed for breaking our rules, and expanding our team through increased hiring and the acquisition of Smyte. In Q4, our machine learning efforts continued to improve, making it harder for malicious accounts to game our service through multiple accounts and evading suspension, resulting in the suspension of millions of spammy and suspicious accounts.

 

In 2019 we will take a more proactive approach to reducing abuse and its effects on Twitter, with the goal of reducing the burden on victims of abuse and, where possible, taking action before abuse is reported. Our initial focus will be on those types of abuse most likely to result in severe and immediate harm. We will also continue to strengthen our login and sign-up processes to make it more challenging for bad actors to take advantage of accounts for abusive or malicious purposes. We will continue to prioritize the health of the public conversation on Twitter so people feel safe being a part of the conversation and are able to find credible information on our service.

 

 

We made a number of product improvements in the fourth quarter, including making it easier to see the latest Tweets when people want to see what’s happening in the moment. Average monetizable DAU (mDAU) were 126 million in Q4, up 9% year-over-year, with double-digit growth in five out of our top 10 global markets.

 

We made a number of product improvements in the fourth quarter, including making it easier to switch from the Home timeline to latest Tweets allowing people to see what’s happening in the moment, driving an increase in daily active usage, conversations, and overall satisfaction with the timeline.

 

We also continued our work to make it easier to follow and discuss events as they’re unfolding with expanded coverage of sports, entertainment, news, elections, and other topics and events, creating a cohesive experience for people following and participating in the conversation around the US midterm elections in Q4 and offering event experiences for 12 sports leagues in seven different countries.  Similarly, we expanded our support for TV fans in Q4, now delivering our event experience for episodes of over 200 top shows across the US, Japan, Brazil, and the UK. We also added the ability to browse a carousel of videos about an event to highlight varied perspectives.

 

We recently shared our plans to make the experience of conversing on Twitter faster, more fluid, and more fun. Conversation is the fuel that powers our ability to show people what’s happening in a unique and differentiated way. We are experimenting with changes that would make Twitter feel more like chat, and recently announced a testing program that will allow people to try out some of our early product iterations. This will be a testing ground for new concepts, the best of which will be introduced into the main Twitter experience.


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Video continues to be a powerful, essential medium on Twitter, enabling people and content owners to better share experiences, engage in events, and converse with broader audiences. In 2018, we again increased reach and engagement for content owners and contributed to the conversation on Twitter with 100 live-streaming, highlight, Amplify, and video-on-demand agreements signed to complement the extensive user-generated and licensed live and on-demand video content already available on Twitter across a number of verticals including sports, news and politics, and entertainment.

 

We want to provide something valuable to people on Twitter every day, and we believe that monetizable DAU (mDAU), and its related growth, are the best ways to measure our success. Monetizable DAU are Twitter users who log in and access Twitter on any given day through twitter.com or our Twitter applications that are able to show ads. Our mDAU are not comparable to current disclosures from other companies, many of whom share a more expansive metric that includes people who are not seeing ads. We considered changing our disclosure to be comparable to other companies, but our goal was not to disclose the largest daily active user number we could.  We want to align our external stakeholders around one metric that reflects our goal of delivering value to people on Twitter every day and monetizing that usage. So, starting this quarter, in addition to sharing the growth in mDAU as we have since 2016, we are disclosing the absolute number of average mDAU (previously referred to as DAU), for both the US and international markets. As mDAU will be the metric we use to show the size of our audience and engagement going forward, we will discontinue disclosing MAU after Q1’19.

 

This change in disclosure does not impact the objectives that bring advertisers to Twitter or the information to which they have access today. Advertisers come to Twitter because we have one of the most valuable audiences when they are most receptive, and we generate a high return on investment against their campaign objectives whether they are launching a new product or connecting with what's happening on Twitter. Please note other changes to our quarterly disclosure package outlined on page 8.


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Q4’18 AND FISCAL YEAR 2018 FINANCIAL AND OPERATIONAL DETAIL

 

Fiscal Year 2018

Through our consistent strategy and solid execution, we made significant progress in 2018, leading to steady sequential growth in total mDAU and revenue as 2018 progressed, along with GAAP profitability throughout the year.

 

Total revenue for 2018 exceeded $3 billion, an increase of 25%, or 24% on a constant currency basis.  Excluding TellApart (which contributed $45 million of revenue in the first three quarters of 2017 and was fully deprecated in Q4’17), total revenue grew 27%.

 

2018 also marked our first full year of GAAP profitability, with GAAP net income of $1.2 billion, net margin of 40%, and GAAP diluted EPS of $1.56, compared to a GAAP net loss of $108 million, (4%) net margin, and GAAP diluted EPS of $(0.15) in 2017.  Excluding the release of deferred tax asset valuation allowances of $845 million, we generated net income of $360 million, net margin of 12%, and diluted EPS of $0.47.

 

Adjusted EBITDA for the full year reached $1.2 billion, with a 39% adjusted EBITDA margin compared to $863 million and a 35% adjusted EBITDA margin in the previous year.

 

SBC expense for the year decreased 25% to $326 million, or 11% of revenue, down from $434 million, or 18% of revenue in 2017.  We grew our worldwide headcount by almost 550 employees, or 16% in 2018, and ended the year with over 3,900 employees.

 

Net cash from operating activities was $1.3 billion, up 61% from $831 million last year. Capital expenditures in 2018 totaled $487 million, up 73% from 2017, as we upgraded much of our infrastructure to support our product priorities and deliver our service. We generated $853 million of adjusted free cash flow in 2018 compared to $550 million in 2017.

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Q4'18 Performance

 

Revenue

Total revenue was approximately $909 million in Q4, an increase of 24%, or 26% on a constant currency basis. Total US revenue was $506 million, an increase of 24%. Total international revenue was $403 million, an increase of 24%. We saw broad-based strength across all regions. Japan remains our second largest market, growing 30% and contributing $138 million or 15% of total revenue in Q4. On a constant currency basis, Q4 total revenue would have been $11 million higher.

 

Total advertising revenue was $791 million, an increase of 23%, or 25% on a constant currency basis. Key results to note:

 

 

Owned and operated (O&O) advertising revenue was $749 million, an increase of 26%. We continue to see sales momentum with advertisers built around our differentiated ad formats, better relevance, and improved ROI. We are delivering increased value to advertisers around the world, whether they’re launching something new or connecting with what’s happening. Twitter is where they find the most valuable audience when they are most receptive.

 

Non-O&O advertising revenue was $42 million, a decrease of 18%. TAP, which represents the vast majority of our off-network business, tends to have more variable quarterly revenue.

 

By product, video ad formats continued to be our fastest-growing ad format in Q4, driven by strength in Video Website Card, in-stream pre-roll, and First View ads.

 

By region, US advertising revenue totaled $425 million, an increase of 24%. We believe the better-than-expected growth in the US reflects continued strong execution across product and sales coupled with fundamentally stronger and more broad-based advertiser demand. International ad revenue grew 21% to $366 million, marked by broad-based revenue growth across all regions.

 

By sales channel, large to mid-tier customers continue to represent a sizable majority of our advertising revenue. Our self-serve channel, while considerably smaller, continues to grow. We see a large opportunity in self-serve, which is generally used by smaller and local businesses, with additional product investment needed to fully capitalize on the opportunity to help these businesses reach their customers on Twitter.

 

Data licensing and other revenue totaled $117 million, an increase of 35%. We saw continued year-over-year growth from data and enterprise solutions (DES), while MoPub had its highest revenue quarter ever. Looking ahead, while DES continues to benefit from customers developing new use cases and smaller customers adopting self-service APIs, we are now largely through our multiyear enterprise renewal cycle. As a result, with many of our largest partners now at market pricing, revenue growth is likely to moderate in 2019.

 

Advertising Metrics

Value for advertisers continued to improve in Q4, driven by ongoing ad engagement growth, improved product features, better ad relevance (as measured by clickthrough rates (CTR) and ad engagements), and better pricing.

 

Total ad engagements increased 33%, resulting primarily from increased demand and improved CTR, which grew on a year-over-year basis across the majority of ad types as our ad prediction models and video ad product performance continues to improve. CPE decreased 7%, primarily driven by higher CTR from improved relevance and an ongoing shift to video ads, which carry higher clickthrough rates and lower CPE. With improved CTR, advertisers are able to get the same amount of engagements (or more) at a lower (or similar) price. Total yield per impression again improved year-over-year, driven both by higher CTR across most ad formats and continued mix shift favoring higher yield ad formats.

 

As we look ahead to 2019, we remain optimistic about our ability to execute on our priorities and deliver increasing value for advertisers on our service.

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Daily and Monthly Active Usage

Average mDAU in Q4 were 126 million, up 9% year-over-year, driven by a combination of organic growth, marketing, and product improvements. We saw double-digit growth in five out of our top 10 global markets, demonstrating another quarter of broad-based growth.

 

Similar to last quarter, year-over-year average mDAU growth was impacted by ongoing health efforts in Q4, both due to how we resourced and prioritized our work and the impact from ongoing success removing spammy and suspicious accounts. As noted in Q3, spammy and suspicious sign-ups tend to be more prevalent on the web (vs. mobile), and in Q4, we saw another year-over-year decline in mDAU that access Twitter only through the desktop web, whereas mDAU that access Twitter through the web and mobile or using only mobile apps continued to grow double digits on a year-over-year basis. We believe that these results are an indication of our success in eliminating spammy and suspicious accounts and making it harder to create them at the outset through our health work. We will continue our efforts to remove spammy and suspicious accounts from our service and to prevent their creation in service of a healthier public conversation.

 

By region:

 

 

Average US mDAU were 27 million for Q4, up 5% in comparison to 25 million in the same period of the previous year and up 1% in comparison to 26 million in the previous quarter.

 

Average international mDAU were 99 million for Q4, up 11% in comparison to 89 million in the same period of the previous year and up 1% in comparison to 98 million in the previous quarter.

 

Average MAU in Q4 were 321 million, a decrease of 9 million year-over-year and a decrease of 5 million quarter-over-quarter, impacted by a number of factors including: product changes that reduced the number of email notifications sent, as well as decisions we have made to prioritize the health of the service and not move to paid SMS carrier relationships in certain markets, and, to a lesser extent, changes we made to comply with the General Data Protection Regulation (GDPR) in Europe.

 

By region:

 

 

Average US MAU were 66 million for Q4, down 3% in comparison to 68 million in the same period of the previous year and down 2% in comparison to 67 million in the previous quarter.

 

Average international MAU were 255 million for Q4, down 3% in comparison to 262 million in the same period of the previous year and down 2% in comparison to 259 million in the previous quarter.

 

 

Expenses

Total GAAP costs and expenses grew 13% in Q4 to $702 million, reflecting headcount growth, additional revenue share expenses related to video content, and increased infrastructure expense, partially offset by decreases in stock-based compensation (SBC) expense. SBC totaled $82 million, or 9% of total revenue, compared to $102 million, or 14% of total revenue for the same period in 2017. GAAP operating income totaled $207 million or 23% of total revenue, compared to $110 million or 15% for the same period in 2017.

 

On a non-GAAP basis, total costs and expenses increased 21% in Q4 to $618 million. Traffic acquisition costs (TAC) were approximately $17 million in Q4, a decrease of 13% due to ongoing variability in our TAP revenue.


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Profitability

Q4 capped our first full year of GAAP profitability, with net income of $255 million, net margin of 28%, and diluted EPS of $0.33. In the same period last year, we reported GAAP net income of $91 million, net margin of 12%, and diluted EPS of $0.12.

 

Please note that for the foreseeable future, our GAAP tax rate will be higher than our cash tax rate, until we have fully utilized our large net operating loss carryforwards. Due to the mechanics of the Global Intangible Low-Taxed Income (GILTI) provisions, we will continue to calculate GAAP taxes on worldwide earnings in the US without the benefit of foreign taxes paid until we utilize the net operating loss carryforwards in the US.

 

On a non-GAAP basis, Q4 net income was $244 million or a non-GAAP net margin of 27%, and non-GAAP diluted EPS was $0.31. This compares to non-GAAP net income of $141 million, a non-GAAP net margin of 19%, and non-GAAP diluted EPS of $0.19 in the same period of the prior year.

 

As a result of the US Tax Act, the blended US federal and state statutory tax rate used to calculate our reported non-GAAP provisions for income taxes decreased from 37% in 2017 to 24% in 2018. Approximately $42 million of the $103 million year-over-year increase in non-GAAP net income resulted from this change.

 

Adjusted EBITDA for Q4 was $397 million, or 44% of total revenue. This compares to $308 million, or 42% of total revenue, in the same period of the previous year. Both adjusted EBITDA and adjusted EBITDA margins were above our guidance ranges due to better-than-expected revenue.

 

Balance Sheet and Statement of Cash Flows

We ended the quarter with approximately $6.2 billion in cash, cash equivalents, and marketable securities.

 

GAAP net cash provided by operating activities in the quarter was $332 million, an increase from $198 million in the same period last year. Capital expenditures totaled $69 million, compared to $63 million in the same period last year. We continue to invest in infrastructure to support our product priorities.

 

Our adjusted free cash flow for Q4 was $263 million, compared to $135 million in the same period in 2017.

 

Looking Ahead

As we enter 2019, we remain focused on the following investment priorities:

 

Health is our top priority, from a mindset and resourcing perspective, as we continue our work to help people find credible information and feel safe participating in the conversation on Twitter.

 

Conversation is Twitter’s superpower. Promoting more conversation on Twitter ensures we are the place where people all around the world go to see and talk about what’s happening. We believe making it easier to participate in conversation, organizing around interests and events, and making it easier for people to find what they are looking for when they come to the app will drive more people to enjoy Twitter every day.

 

Revenue product and sales support the growth of our customers around the world and their investment in our service. We will continue to invest in revenue product as we work to improve our ads platform and ad formats to help our ad partners launch new products and services and connect with what’s happening on Twitter. We will also grow our sales teams in the US and internationally to better serve large and medium advertisers.

 

Platform investments will ensure Twitter is set up for long-term success, both in terms of the data centers that host Twitter, the security of our customers’ data, and the technology our team leverages to support and improve our service.

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A Note About Our Disclosures

As we enter 2019, setting new objectives and priorities for the year, we are updating our quarterly disclosures to best align them with our strategy. Our goal is to provide a set of metrics that help investors better understand our strategy and evaluate our business, while at the same time enabling us to make good long-term decisions that drive great business outcomes. We value consistency with historical disclosures and have a high bar to make changes during a fiscal year.

 

With those principles in mind, we are making the following changes:

 

 

We will provide guidance ranges for total revenue and GAAP operating income for the upcoming quarter.

 

We will disclose average monetizable DAU in absolute numbers for both the US and international markets, as well as year-over-year growth rates.

 

After Q1’19, we will discontinue reporting MAU, as mDAU will be our audience and engagement metric going forward.

 

 

Outlook

 

For Q1, we expect:

 

Total revenue to be between $715 million and $775 million

 

GAAP operating income to be between $5 million and $35 million

 

For FY 2019, we expect:

 

GAAP and cash operating expenses to be up approximately 20% year-over-year in 2019 as we support our existing priorities of health, conversation, revenue product and sales, and platform

 

Stock-based compensation expense to be in the range of $350 million to $400 million

 

Capital expenditures to be between $550 million and $600 million

 

 

Note that our outlook for Q1 and the full year 2019 reflects foreign exchange rates as of January 2019.

 

For more information regarding the non-GAAP financial measures discussed in this letter, please see "Non-GAAP Financial Measures" and "Reconciliation of GAAP to Non-GAAP Financial Measures" below.

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Appendix

 

Fourth Quarter and Full Year 2018 Webcast and Conference Call Details

Twitter will host a conference call today, Thursday, February 7, 2019, at 5am Pacific Time (8am Eastern Time) to discuss financial results for the fourth quarter of 2018. The company will be following the conversation about the earnings announcement on Twitter. To have your questions considered during the Q&A, Tweet your question to @TwitterIR using #TWTR. To listen to a live audio webcast, please visit the company’s Investor Relations page at investor.twitterinc.com. Twitter has used, and intends to continue to use, its Investor Relations website and the Twitter accounts of @jack, @nedsegal, @Twitter, and @TwitterIR as means of disclosing material nonpublic information and for complying with its disclosure obligations under Regulation FD.

 

First Quarter Earnings Release Details

Twitter will release financial results for the first quarter of 2019 on April 23, 2019, before the market opens at approximately 4am Pacific Time (7am Eastern Time). On the same day, Twitter will host a conference call to discuss those financial results at 5am Pacific Time (8am Eastern Time).

 

About Twitter, Inc. (NYSE: TWTR)

Twitter is what’s happening in the world and what people are talking about right now. From breaking news and entertainment to sports, politics, and everyday interests, see every side of the story. Join the open conversation. Watch live-streaming events. Available in more than 40 languages around the world, the service can be accessed via twitter.com, an array of mobile devices, and SMS. For more information, please visit about.twitter.com, follow @Twitter, and download both the Twitter and Periscope apps at twitter.com/download and periscope.tv.


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A Note About Metrics

Twitter defines monetizable daily active usage or users (mDAU) as Twitter users who logged in or were otherwise authenticated and accessed Twitter on any given day through twitter.com or Twitter applications that are able to show ads. Average mDAU for a period represents the number of mDAU on each day of such period divided by the number of days for such period. Changes in mDAU are a measure of changes in the size of our daily logged in or otherwise authenticated active user base. To calculate the year-over-year change in mDAU, we subtract the average mDAU for the three months ended in the previous year from the average mDAU for the same three months ended in the current year and divide the result by the average mDAU for the three months ended in the previous year. Additionally, our calculation of mDAU is not based on any standardized industry methodology and is not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Twitter defines monthly active usage or users (MAU) as Twitter users who logged in or were otherwise authenticated and accessed Twitter through our website, mobile website, desktop or mobile applications, SMS, or registered third-party applications or websites in the 30-day period ending on the date of measurement. Average MAU for a period represent the average of the MAU at the end of each month during the period.

 

Company Metrics

Q1’17

Q2’17

Q3’17

Q4’17

Q1’18

Q2’18

Q3’18

Q4’18

Monetizable Daily Active Usage (mDAU): Worldwide

109

110

114

115*

120

122

124

126

Quarter- over-Quarter growth

6%

1%

3%

1%

4%

2%

2%

1%

Year-over-Year growth

14%

12%

14%

12%

10%

11%

9%

9%

mDAU: United States

26

25

26

25

26

26

26

27

Quarter-over-Quarter growth

7%

-3%

3%

-1%

4%

-1%

1%

1%

Year-over-Year growth

14%

9%

10%

6%

3%

5%

3%

5%

mDAU: International

83

85

88

89

94

96

98

99

Quarter-over-Quarter growth

6%

2%

3%

1%

5%

3%

2%

1%

Year-over-Year growth

14%

13%

15%

13%

12%

12%

10%

11%

 

*Please note that the sum of US mDAU and international mDAU does not add up to total mDAU in the above due to rounding.

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Forward-Looking Statements

This letter to shareholders contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements generally relate to future events or Twitter's future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expects," "plans," "anticipates,” “going to,” "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of these words or other similar terms or expressions that concern Twitter's expectations, strategy, priorities, plans, or intentions. Forward-looking statements in this letter to shareholders include, but are not limited to, statements regarding Twitter’s future financial and operating performance, including its outlook, guidance and statements regarding future disclosures; Twitter’s expectations regarding its strategies, product, and business plans, including its priorities, areas of geographic growth, product initiatives, and product experiments; strategies for improving the health of the platform, enhancing the conversation on the platform, removing spammy and suspicious accounts from our service, increasing shareholder value, and improving safety; the development of, investment in, and demand for content (from content partners and users), its products, product features, and services, including video and audio, and the impact thereof on its business; the behavior of Twitter’s users, content partners, and advertisers; Twitter’s expectations and strategies regarding the growth of its revenue, including the drivers of such growth, profitability, audience and engagement (including, in each case, any potential impact of its information quality efforts, GDPR, potential changes to carrier relationships and other operational decisions), monetization, advertiser base and spending, headcount growth targets, application of its abuse rules, allocation of resources, and execution by its sales and operating teams; and Twitter’s expectations regarding the applicability of certain tax provisions. Twitter's expectations and beliefs regarding these matters may not materialize, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include the possibility that: Twitter's user base and engagement do not grow or decline; Twitter’s strategies, priorities, or plans take longer to execute than anticipated; Twitter's new products and product features do not meet expectations; advertisers reduce or discontinue their spending on Twitter; data partners reduce or discontinue their purchases of data licenses from Twitter; and Twitter experiences expenses that exceed its expectations. The forward-looking statements contained in this letter to shareholders are also subject to other risks and uncertainties, including those more fully described in Twitter's Annual Report on Form 10-K for the fiscal year ended December 31, 2017, and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018, June 30, 2018, and September 30, 2018, each filed with the Securities and Exchange Commission. Additional information will also be set forth in Twitter's Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The forward-looking statements in this letter to shareholders are based on information available to Twitter as of the date hereof, and Twitter disclaims any obligation to update any forward-looking statements, except as required by law.

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Non-GAAP Financial Measures

To supplement Twitter's financial information presented in accordance with generally accepted accounting principles in the United States of America, or GAAP, Twitter considers certain financial measures that are not prepared in accordance with GAAP, including revenues excluding foreign exchange effect, which we refer to as on a constant currency basis, adjusted EBITDA, non-GAAP net income, non-GAAP costs and expenses, non-GAAP income before income taxes, non-GAAP provision for income taxes, adjusted EBITDA margin, non-GAAP net margin, non-GAAP diluted EPS, adjusted free cash flow, adjusted net income (loss), and adjusted diluted net income (loss) per share. Twitter defines adjusted EBITDA as net income (loss) adjusted to exclude stock-based compensation expense, depreciation and amortization expense, interest and other expense, net, provision (benefit) for income taxes, restructuring charges, and one-time nonrecurring gain; Twitter defines non-GAAP net income as net income (loss) adjusted to exclude stock-based compensation expense, amortization of acquired intangible assets, non-cash interest expense related to convertible notes, non-cash expense related to acquisitions, impairment of investments in privately held companies, restructuring charges, and one-time nonrecurring gain, and adjustment to income tax expense based on the non-GAAP measure of profitability using Twitter’s blended US federal and state statutory tax rate. Twitter defines non-GAAP costs and expenses as total costs and expenses adjusted to exclude stock-based compensation expense, amortization of acquired intangible assets, non-cash expense related to acquisitions, restructuring charges, and one-time nonrecurring gain; Twitter defines non-GAAP income before income taxes as income (loss) before income taxes adjusted to exclude stock-based compensation expense, amortization of acquired intangible assets, non-cash interest expense related to convertible notes, non-cash expense related to acquisitions, impairment of investments in privately held companies, restructuring charges, and one-time nonrecurring gain; and Twitter defines non-GAAP provision for income taxes as the current and deferred income tax expense commensurate with the non-GAAP measure of profitability using Twitter’s blended US federal and state statutory tax rate. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by revenue. Non-GAAP net margin is calculated by dividing non-GAAP net income by revenue. Non-GAAP diluted EPS is calculated by dividing non-GAAP net income by non-GAAP share count. Non-GAAP share count is GAAP share count plus potential common stock instruments such as stock options, RSUs, shares to be purchased under employee stock purchase plan, unvested restricted stock, the conversion feature of convertible senior notes, and warrants. Adjusted free cash flow is GAAP net cash provided by operating activities less capital expenditures (i.e., purchases of property and equipment including equipment purchases that were financed through capital leases, less proceeds received from disposition of property and equipment). Twitter defines adjusted net income (loss) as net income (loss) excluding the net benefit from deferred tax asset valuation allowance release. Adjusted diluted net income (loss) per share is calculated by dividing adjusted net income (loss) by non-GAAP share count. In order to present revenues on a constant currency basis for the fiscal year and quarter ended December 31, 2018, Twitter translated the applicable measure using the prior year's monthly exchange rates for its settlement currencies other than the US dollar, which Twitter believes is a useful metric that facilitates comparison to its historical performance. Twitter is presenting these non-GAAP financial measures to assist investors in seeing Twitter's operating results through the eyes of management, and because it believes that these measures provide an additional tool for investors to use in comparing Twitter's core business operating results over multiple periods with other companies in its industry.


12


Twitter uses the non-GAAP financial measures of revenues on a constant currency basis, adjusted EBITDA, non-GAAP net income, non-GAAP costs and expenses, non-GAAP income before income taxes, non-GAAP provision for income taxes, adjusted EBITDA margin, non-GAAP net margin, non-GAAP diluted EPS, adjusted net income (loss), and adjusted diluted net income (loss) per share in evaluating its operating results and for financial and operational decision-making purposes. Twitter believes that adjusted EBITDA, non-GAAP net income, non-GAAP costs and expenses, non-GAAP net margin, adjusted EBITDA margin, non-GAAP diluted EPS, adjusted net income (loss), and adjusted diluted net income (loss) per share help identify underlying trends in its business that could otherwise be masked by the effect of the expenses and one-time gains or charges that it excludes in adjusted EBITDA, non-GAAP net income, non-GAAP costs and expenses, adjusted EBITDA margin, non-GAAP net margin, non-GAAP diluted EPS, adjusted net income (loss), and adjusted diluted net income (loss) per share. Twitter also believes that revenues excluding foreign exchange effect, adjusted EBITDA, non-GAAP net income, non-GAAP net margin, non-GAAP costs and expenses, adjusted EBITDA margin, non-GAAP diluted EPS, adjusted net income (loss), and adjusted net income (loss) per share provide useful information about its operating results, enhance the overall understanding of Twitter's past performance and future prospects, and allow for greater transparency with respect to key metrics used by Twitter's management in its financial and operational decision-making. Twitter uses these measures to establish budgets and operational goals for managing its business and evaluating its performance. In addition, Twitter believes that adjusted free cash flow provides useful information to management and investors about the amount of cash from operations and that it is typically a more conservative measure of cash flows. However, adjusted free cash flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of its ability to fund its cash needs. Twitter presents revenue without the effects of TellApart, which has been fully deprecated and no longer contributes to revenue, as well as net income, net margin, and diluted EPS without the effect of the release of deferred tax asset valuation allowances as such amount is non-operating.

 

These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly titled measures presented by other companies.

 

 

Contacts

Investors:  

Cherryl Valenzuela

ir@twitter.com

Press:

Giovanna Falbo

press@twitter.com

 

13


 

TWITTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

1,894,444

 

 

$

1,638,413

 

Short-term investments

 

4,314,957

 

 

 

2,764,689

 

Accounts receivable, net

 

788,700

 

 

 

664,268

 

Prepaid expenses and other current assets

 

112,935

 

 

 

254,514

 

Total current assets

 

7,111,036

 

 

 

5,321,884

 

Property and equipment, net

 

885,078

 

 

 

773,715

 

Intangible assets, net

 

45,025

 

 

 

49,654

 

Goodwill

 

1,227,269

 

 

 

1,188,935

 

Deferred tax assets, net

 

808,459

 

 

 

10,455

 

Other assets

 

85,705

 

 

 

67,834

 

Total assets

$

10,162,572

 

 

$

7,412,477

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

145,186

 

 

$

170,969

 

Accrued and other current liabilities

 

405,751

 

 

 

327,333

 

Convertible notes, short-term

 

897,328

 

 

 

 

Capital leases, short-term

 

68,046

 

 

 

84,976

 

Total current liabilities

 

1,516,311

 

 

 

583,278

 

Convertible notes, long-term

 

1,730,922

 

 

 

1,627,460

 

Capital leases, long-term

 

24,394

 

 

 

81,308

 

Deferred and other long-term tax liabilities, net

 

17,849

 

 

 

13,240

 

Other long-term liabilities

 

67,502

 

 

 

59,973

 

Total liabilities

 

3,356,978

 

 

 

2,365,259

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

4

 

 

 

4

 

Additional paid-in capital

 

8,324,974

 

 

 

7,750,522

 

Accumulated other comprehensive loss

 

(65,311

)

 

 

(31,579

)

Accumulated deficit

 

(1,454,073

)

 

 

(2,671,729

)

Total stockholders’ equity

 

6,805,594

 

 

 

5,047,218

 

Total liabilities and stockholders’ equity

$

10,162,572

 

 

$

7,412,477

 

 

 

 

 

 

 

 

 

 

 

14


TWITTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

Three Months Ended

 

 

Year Ended

 

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

$

908,836

 

 

$

731,560

 

 

$

3,042,359

 

 

$

2,443,299

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

268,345

 

 

 

217,979

 

 

 

964,997

 

 

 

861,242

 

Research and development

 

141,174

 

 

 

133,996

 

 

 

553,858

 

 

 

542,010

 

Sales and marketing

 

211,774

 

 

 

189,572

 

 

 

771,361

 

 

 

717,419

 

General and administrative

 

80,635

 

 

 

79,915

 

 

 

298,818

 

 

 

283,888

 

Total costs and expenses

 

701,928

 

 

 

621,462

 

 

 

2,589,034

 

 

 

2,404,559

 

Income from operations

 

206,908

 

 

 

110,098

 

 

 

453,325

 

 

 

38,740

 

Interest expense

 

(37,273

)

 

 

(26,700

)

 

 

(132,606

)

 

 

(105,237

)

Interest income

 

37,013

 

 

 

13,349

 

 

 

111,221

 

 

 

44,383

 

Other expense, net

 

(111

)

 

 

(3,194

)

 

 

(8,396

)

 

 

(73,304

)

Income (loss) before income taxes

 

206,537

 

 

 

93,553

 

 

 

423,544

 

 

 

(95,418

)

Provision (benefit) for income taxes

 

(48,766

)

 

 

2,474

 

 

 

(782,052

)

 

 

12,645

 

Net income (loss)

$

255,303

 

 

$

91,079

 

 

$

1,205,596

 

 

$

(108,063

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.34

 

 

$

0.12

 

 

$

1.60

 

 

$

(0.15

)

Diluted

$

0.33

 

 

$

0.12

 

 

$

1.56

 

 

$

(0.15

)

Weighted-average shares used to compute net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

760,525

 

 

 

741,822

 

 

 

754,326

 

 

 

732,702

 

Diluted

 

776,129

 

 

 

754,631

 

 

 

772,686

 

 

 

732,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15


TWITTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Three Months Ended

 

 

Year Ended

 

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

255,303

 

 

$

91,079

 

 

$

1,205,596

 

 

$

(108,063

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

110,723

 

 

 

92,520

 

 

 

425,498

 

 

 

395,867

 

Stock-based compensation expense

 

81,887

 

 

 

102,454

 

 

 

326,228

 

 

 

433,806

 

Amortization of discount on convertible notes

 

31,017

 

 

 

20,417

 

 

 

105,926

 

 

 

80,061

 

Deferred income taxes

 

(53,354

)

 

 

(5,072

)

 

 

(801,720

)

 

 

(6,415

)

Impairment of investments in privately-held companies

 

 

 

 

 

 

 

 

3,000

 

 

 

62,439

 

Other adjustments

 

(8,301

)

 

 

7,005

 

 

 

(14,139

)

 

 

5,753

 

Changes in assets and liabilities, net of assets acquired and liabilities assumed from acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(166,260

)

 

 

(152,930

)

 

 

(130,871

)

 

 

2,668

 

Prepaid expenses and other assets

 

23,236

 

 

 

(18,327

)

 

 

126,470

 

 

 

(13,974

)

Accounts payable

 

21,057

 

 

 

22,829

 

 

 

(1,533

)

 

 

8,371

 

Accrued and other liabilities

 

36,691

 

 

 

38,132

 

 

 

95,256

 

 

 

(29,304

)

Net cash provided by operating activities

 

331,999

 

 

 

198,107

 

 

 

1,339,711

 

 

 

831,209

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(74,021

)

 

 

(40,159

)

 

 

(483,934

)

 

 

(160,742

)

Proceeds from sales of property and equipment

 

4,943

 

 

 

 

 

 

13,070

 

 

 

2,783

 

Purchases of marketable securities

 

(1,280,084

)

 

 

(667,099

)

 

 

(5,334,396

)

 

 

(2,687,214

)

Proceeds from maturities of marketable securities

 

982,546

 

 

 

555,969

 

 

 

3,732,973

 

 

 

2,579,747

 

Proceeds from sales of marketable securities

 

16,590

 

 

 

16,008

 

 

 

58,721

 

 

 

124,826

 

Proceeds from sales of long-lived assets

 

 

 

 

 

 

 

 

 

 

35,000

 

Purchases of investments in privately-held companies

 

(1,200

)

 

 

 

 

 

(3,375

)

 

 

(825

)

Business combinations, net of cash acquired

 

 

 

 

 

 

 

(33,572

)

 

 

 

Other investing activities

 

(5,000

)

 

 

1

 

 

 

(5,000

)

 

 

(10,101

)

Net cash used in investing activities

 

(356,226

)

 

 

(135,280

)

 

 

(2,055,513

)

 

 

(116,526

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible notes

 

 

 

 

 

 

 

1,150,000

 

 

 

 

Purchases of convertible note hedges

 

 

 

 

 

 

 

(267,950

)

 

 

 

Proceeds from issuance of warrants concurrent with note hedges

 

 

 

 

 

 

 

186,760

 

 

 

 

Debt issuance costs

 

(300

)

 

 

 

 

 

(13,783

)

 

 

 

Taxes paid related to net share settlement of equity awards

 

(3,083

)

 

 

(1,913

)

 

 

(19,263

)

 

 

(8,962

)

Payments of capital lease obligations

 

(20,847

)

 

 

(22,090

)

 

 

(90,351

)

 

 

(102,775

)

Proceeds from exercise of stock options

 

164

 

 

 

1,572

 

 

 

3,415

 

 

 

9,444

 

Proceeds from issuances of common stock under employee stock purchase plan

 

12,951

 

 

 

9,901

 

 

 

29,288

 

 

 

23,920

 

Net cash provided by (used in) financing activities

 

(11,115

)

 

 

(12,530

)

 

 

978,116

 

 

 

(78,373

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(35,342

)

 

 

50,297

 

 

 

262,314

 

 

 

636,310

 

Foreign exchange effect on cash, cash equivalents and restricted cash

 

915

 

 

 

1,116

 

 

 

(14,296

)

 

 

9,914

 

Cash, cash equivalents and restricted cash at beginning of period

 

1,956,302

 

 

 

1,622,444

 

 

 

1,673,857

 

 

 

1,027,633

 

Cash, cash equivalents and restricted cash at end of period

$

1,921,875

 

 

$

1,673,857

 

 

$

1,921,875

 

 

$

1,673,857

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with acquisitions

$

 

 

$

 

 

$

19,165

 

 

$

 

Equipment purchases under capital leases

$

 

 

$

22,602

 

 

$

16,086

 

 

$

123,235

 

Changes in accrued property and equipment purchases

$

5,148

 

 

$

39,908

 

 

$

(23,469

)

 

$

16,387

 

Reconciliation of cash, cash equivalents and restricted cash as shown in the consolidated statements of cash flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16


 

TWITTER, INC.

 

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

 

(In thousands, except per share data)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Year Ended

 

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Non-GAAP net income and net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

255,303

 

 

$

91,079

 

 

$

1,205,596

 

 

$

(108,063

)

Exclude: Provision (benefit) for income taxes

 

(48,766

)

 

 

2,474

 

 

 

(782,052

)

 

 

12,645

 

Income (loss) before income taxes

 

206,537

 

 

 

93,553

 

 

 

423,544

 

 

 

(95,418

)

Stock-based compensation expense

 

81,887

 

 

 

102,454

 

 

 

326,228

 

 

 

433,806

 

Amortization of acquired intangible assets

 

4,786

 

 

 

4,929

 

 

 

18,984

 

 

 

46,537

 

Non-cash interest expense related to convertible notes

 

31,017

 

 

 

20,417

 

 

 

105,926

 

 

 

80,061

 

Impairment of investments in privately-held companies

 

 

 

 

 

 

 

3,000

 

 

 

62,439

 

Restructuring charges and one-time nonrecurring gain

 

(2,989

)

 

 

3,102

 

 

 

(4,255

)

 

 

(5,427

)

Non-GAAP income before income taxes

 

321,238

 

 

 

224,455

 

 

 

873,427

 

 

 

521,998

 

Non-GAAP provision for income taxes (1)

 

77,097

 

 

 

83,048

 

 

 

209,623

 

 

 

193,139

 

Non-GAAP net income

$

244,141

 

 

$

141,407

 

 

$

663,804

 

 

$

328,859

 

GAAP basic shares

 

760,525

 

 

 

741,822

 

 

 

754,326

 

 

 

732,702

 

Dilutive equity awards (2)

 

15,604

 

 

 

12,809

 

 

 

18,360

 

 

 

9,521

 

Non-GAAP diluted shares (3)

 

776,129

 

 

 

754,631

 

 

 

772,686

 

 

 

742,223

 

Non-GAAP diluted net income per share

$

0.31

 

 

$

0.19

 

 

$

0.86

 

 

$

0.44

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

255,303

 

 

$

91,079

 

 

$

1,205,596

 

 

$

(108,063

)

Stock-based compensation expense

 

81,887

 

 

 

102,454

 

 

 

326,228

 

 

 

433,806

 

Depreciation and amortization expense

 

110,723

 

 

 

92,520

 

 

 

425,498

 

 

 

395,867

 

Interest and other expense, net

 

371

 

 

 

16,545

 

 

 

29,781

 

 

 

134,158

 

Provision (benefit) for income taxes

 

(48,766

)

 

 

2,474

 

 

 

(782,052

)

 

 

12,645

 

Restructuring charges and one-time nonrecurring gain

 

(2,989

)

 

 

3,102

 

 

 

(4,255

)

 

 

(5,427

)

Adjusted EBITDA

$

396,529

 

 

$

308,174

 

 

$

1,200,796

 

 

$

862,986

 

Stock-based compensation expense by function:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

4,905

 

 

$

6,019

 

 

$

17,289

 

 

$

23,849

 

Research and development

 

43,589

 

 

 

55,648

 

 

 

183,799

 

 

 

240,833

 

Sales and marketing

 

18,624

 

 

 

25,919

 

 

 

71,305

 

 

 

94,135

 

General and administrative

 

14,769

 

 

 

14,868

 

 

 

53,835

 

 

 

74,989

 

Total stock-based compensation expense

$

81,887

 

 

$

102,454

 

 

$

326,228

 

 

$

433,806

 

Amortization of acquired intangible assets by function:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

4,321

 

 

$

4,464

 

 

$

17,124

 

 

$

29,134

 

Sales and marketing

 

465

 

 

 

465

 

 

 

1,860

 

 

 

17,403

 

Total amortization of acquired intangible assets

$

4,786

 

 

$

4,929

 

 

$

18,984

 

 

$

46,537

 

Restructuring charges and one-time nonrecurring gain by function:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

(179

)

 

$

199

 

 

$

(257

)

 

$

378

 

Research and development

 

(1,011

)

 

 

1,103

 

 

 

(1,436

)

 

 

(9,985

)

Sales and marketing

 

(1,208

)

 

 

1,161

 

 

 

(1,722

)

 

 

2,940

 

General and administrative

 

(591

)

 

 

639

 

 

 

(840

)

 

 

1,240

 

Total restructuring charges and one-time nonrecurring gain

$

(2,989

)

 

$

3,102

 

 

$

(4,255

)

 

$

(5,427

)

Non-GAAP costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

$

701,928

 

 

$

621,462

 

 

$

2,589,034

 

 

$

2,404,559

 

Less: stock-based compensation expense

 

(81,887

)

 

 

(102,454

)

 

 

(326,228

)

 

 

(433,806

)

Less: amortization of acquired intangible assets

 

(4,786

)

 

 

(4,929

)

 

 

(18,984

)

 

 

(46,537

)

Less: restructuring charges and one-time nonrecurring gain

 

2,989

 

 

 

(3,102

)

 

 

4,255

 

 

 

5,427

 

Total non-GAAP costs and expenses

$

618,244

 

 

$

510,977

 

 

$

2,248,077

 

 

$

1,929,643

 

Adjusted free cash flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

$

331,999

 

 

$

198,107

 

 

$

1,339,711

 

 

$

831,209

 

Less: purchases of property and equipment

 

(74,021

)

 

 

(40,159

)

 

 

(483,934

)

 

 

(160,742

)

Plus: proceeds from sales of property and equipment

 

4,943

 

 

 

 

 

 

13,070

 

 

 

2,783

 

Less: equipment purchases under capital leases

 

 

 

 

(22,602

)

 

 

(16,086

)

 

 

(123,235

)

Adjusted free cash flow

$

262,921

 

 

$

135,346

 

 

$

852,761

 

 

$

550,015

 

Adjusted net income (loss):