A Foolish Take on Twitter's Analyst Day Marathon

My goal in going through the 111 page transcript from Twitter's recent analyst day was to learn more about Twitter (TWTR) the business and management's strategies for the coming years. It was not to write down every single note of everything that was presented. There can be levels of granularity that simply don't serve the needs of long-term focused investors like us and 111 pages is a lot. I'm offering up my big-picture takeaways first; feel free to then read on to digest some of the notes from the day that seem relevant.

The bottom line first

I believe that Twitter's business, to a degree, is misunderstood. The market is trying to make sense of what it is and can't see much past the communication platform, monthly active users and engagement via timeline views. Part of that is the fault of management not communicating the company's strategies better and part of that I believe is the market looking at it with a shorter time frame in mind.

It's a tech company

Twitter is a tech company. What goes on behind the scenes in mobile app development, tools, and data is making Twitter a very powerful and relevant company from a number of perspectives. Management did a good job communicating Twitter's reach beyond just the monthly active users that the market focuses so heavily on. Investors can look at monthly active users, impressions, and whatever other metrics we want, but at the end of the day the money is going to tell the real tale.

Twitter's outstanding sales growth will eventually translate to profitability and meaningful cash flow, but this isn't going to happen immediately. Management is reinvesting at a rapid clip to grow the business and will continue to do so for some time to come. But as the business scales management sees a long-term EBITDA margin opportunity in the 40%-45% range. Regardless, as I've always said, this isn't a stock for those can't look at least five years out.

Credit: Twitter

Fabric (Twitter's modular SDK) will play a major role in how Twitter grows and monetizes in the coming years. Fabric is a robust set of tools for developers to build apps and ecosystems; tools such as Crashlytics, Twitter Kit, MoPub Kit and Digits. These tools will not only allow mobile developers to build great apps, but they will also broaden Twitter's syndicated reach over time.

Tens of thousands of mobile apps leveraging the infrastructure that Twitter is building could be extremely powerful not only from an ad model perspective, but from a data perspective as well. We'll want to pay close attention to the traction Fabric gains with mobile developers. If it doesn't and management doesn't have an answer, that could pose a big problem. I am optimistic however that it will (and in fact already is) based on the presentation.

It's not so clear today

Growth opportunities will sprout from this strategy that may not be so plainly obvious today. Think of it as a "build it and they will come" strategy. To be sure one of the biggest keys for Twitter in the coming years will be exploiting the power of the data in its platform and continuing to diversify its revenue stream. The recent IBM deal is a great first step and the acquisition of Gnip was key to getting this ball rolling. Investors should also be encouraged by management using the terminology "intermediate term" and "long term." By CFO Anthony Noto's own definitions, intermediate is 5-8 years down the road and long is longer than that. Management appears to be long-term thinkers and they're making their business decisions accordingly.

I'm still bullish

Was this presentation more than it needed to be? Perhaps. But I also think it was a genuine and effective companywide effort to educate investors about the business, what it's doing, how it's measuring itself and what it thinks it's capable of doing. Make no mistake, there were a lot of questions from analysts wanting predictions and guidance and more or less beating the dead horse on a number of "if/then" scenarios that seemed geared toward their own instant gratification. I find those to be more or less useless and thankfully management didn't bite very often. What I want to know is what management is going to do and how they're going to do it. Then just execute.

Click here to see the speakers at the event and their bios.

Select Notes From the Transcript

• Today more than 284 million people log in to Twitter every month. Further there are more than 500 million unique users each month who visit Twitter owned and operated properties but don't log in.
• Three objectives in order to build the world's largest daily audience: Strengthen the core for the core user; reduce barriers to consumption; deliver new services and apps conducive to building the largest audience.
• Fabric SDK will be a key to much of their success. Success here means that developers are using it to build new things based on the data and value Twitter has to offer, this puts Twitter content in front of more people more often. Thousands of developers already signed up and ready to develop.
• Page out of the book of face, grow additional mobile apps beyond Twitter; build a portfolio of apps.
• CFO Anthony Noto: "So, here is our strategy statement. We want to reach the largest daily audience in the world by connective everyone to their world, your information, sharing and distribution platform products and be one of the top revenue-generating Internet companies in the world."
• CFO Anthony Noto: "If we required every user to come to Twitter's owned and operated properties in order to consume our content, we would not be creating value ... They display our content in their platforms to millions of people. And that has produced 185 billion impressions on a quarterly basis."
• Impressions metric is a marriage of Twitter info as well as info from syndicate partners. In theory, more syndicate partners would boost the impressions metric. This will be a metric that matters going forward and it will get better.
• There hasn't been a significant focus on marketing to date, they will take "baby steps" toward better marketing and measuring the returns from it. If it doesn't drive value, they won't do it.
• Every product is built to embrace Twitter's four key differentiators: public; conversational; real-time; and widely distributed.
• Today, the content we see on Twitter is entirely based on those we choose to follow; a model that has worked very well to date, yet it also shuts out a world of tremendous content that we aren't aware of yet. Bringing this content forward to users is a challenge and an opportunity.
• New onboarding experience is streamlined and focuses on a few key items; simplifying the process in order to show the user value immediately. They have also introduced the ability for a user to sign up using their phone number or email address.
• This instant timeline has shown a 200% increase in the number of accounts followed for a new user and it's all based on the interests the new user notes in the sign-up process. Address book upload is also vital to the process for new users as it increases engagement. Those you follow then follow you back because you already know them.
• Onboarding education also aims to teach the new user the Twitter vernacular (hashtags, at handles, replies, at mentions, etc.). Making Twitter work for the users who didn't grow up with technology (our parents).
• Photo Tweets have more than doubled since making them instantly appear in the timeline, adding album capability and tagging has also helped enhance engagement.
• Video is where they have really worked hard and they are seeing results, sports vertical in particular.
• Reducing barriers to consumption is framed in three core areas: showcasing more content; organizing in a more familiar way; and recommending awesome content, bringing it to the forefront for the user.
• Getting that great content to users before sign-up (those 500 million uniques), they have not focused on these in the past, they get to Twitter via: profiles experience; Tweet experience; a single Tweet; and search result experience to front page.
• Making the profiles (movie stars, musicians for example) much more media rich, easier access to videos and pictures they share, avatar, banner, visually stimulating.
• A change earlier in the year to allow outside search engines to crawl the top 50 thousand hashtag searches on Twitter platform any given day has resulted in a material boost (10X) in logged out, yet valuable users.
• More focus on location-based Tweets holds promise as well, garnering a lot of attention. Must understand where the content is coming from (country, city, event, etc.) and what the user is interested in.
• World Cup and NFL are serving as invaluable testing grounds to deliver robust experiences for thousands of real-time events annually.
• Neilsen Twitter TV Ratings will continue to grow reach and exploit the value proposition of Twitter as the second screen. Highlighting events and promotion such as #TGIT (Thank God It's Thursday) is boosting engagement for viewers as actors in the shows live Tweet during the shows.
• LeBron's chalk toss vote exclusively on Twitter generated about 65,000 votes from just a couple of Tweets which in turn generated approximately 4 million impressions. Impressions obviously extend well beyond Twitter to its platform partners and other media outlets.
• An interesting point to note that much of the Twitter team (at least the global media team) comes from TV, music, sports industries. As such they believe they have an intimate knowledge of these industries and are able to build Twitter to complement them and make them better.
• The "while you were away" feature of Timeline Highlights is an important initiative; they really need to nail this in order to keep the conversations going for longer stretches of time. Figuring out new ways to gather and curate all of this great stuff that's on Twitter.
• Fabric will play a tremendous role in the future as more mobile apps are developed and mobile takes control. It will be important to grow a robust offering for developers so they see it as a credible and excellent experience.
• Syndication is a big part of the strategy that is gaining traction. Management sees it as a virtuous cycle where content creators come to Twitter because of the large audience but syndication (where that content is then taken further to syndication partners like TV networks, websites, etc.) vastly expands that audience. So the original content creator comes back to Twitter to create more content because of that vast reach via syndication. Twitter today has tens of thousands of syndication partners and while it is not monetizing this model yet, the strategy has been to prove value first and monetization will come from value provided. All signs point toward value being provided.
• When ads feel like content, when they seem like a part of the app, users engage more; they like the ads better. This was the thinking behind the acquisition of MoPub last year which is the leading native mobile ad exchange. MoPub will extend Twitter's ad network beyond just Twitter.
• VP Product Kevin Weil: "Marketers will come to Twitter to setup campaigns, but they'll be able to use our advertising platform to reach users wherever they are -- in Twitter, in other apps on their mobile phone, and potentially on any other devices they use throughout the day all in real-time. That's the future of marketing with Twitter, great data, rich, creative, cross device measurement, and the ability to reach any device in the world in real-time. We couldn't be more excited."
• Here's an interesting link on how MoPub, Twitter and Facebook play together: http://www.adweek.com/news/technology/twitters-mopub-welcomes-facebooks-mobile-ads-its-platform-157404
• Interesting and helpful testimonial from real-life advertising customers John Legere (CEO of T-Mobile), Simon Lowden (CMO of PepsiCo NA), Beth Comstock (CMO of GE) talking about why they use Twitter for ad campaigns. Very positive reviews, encouraging.
• Gnip infrastructure is what is driving that IBM relationship; real-time and historical data processing at scale. Gnip's data capability is likened to a pair of glasses that, when put on, you know exactly what the world is thinking at any moment in time around any topic. Their belief is that in the future every significant business decision will have Twitter data as an input simply because it is that powerful.
• Director, Fabric Jeff Seibert: "There's now roughly three million mobile developers on earth and it's become the case that these three million individuals are largely dictating the experiences that the three billion connected people on earth are seeing and having every single day."
• What Twitter is doing via SDK/Fabric, they are offering the infrastructure for developers to build apps and ecosystems, drop MoPub into the apps which will broaden Twitter's syndicated reach over time. The idea is that over time, there will be tens of thousands of apps leveraging the infrastructure that Twitter is building. Growth opportunities will sprout from this strategy that may not be so plainly obvious today. Kind of a build it and they will come strategy.
• YTD sales stand at $925 million, 284 monthly active users at the end of 3Q2014, 185 billion quarterly syndicated impressions, this number is seen as being light of what future numbers will reflect as not all partners are self-reporting yet due to the nascent nature of the metric, ad load is 1.3%, sales presence in 60 countries.
• Twitter's ad load is one of the lowest in the business, management sees the opportunity over time to potentially get it to 5%. So if all things remained equal today and MAUs stayed flat, getting the load to 5% would result in about $5 billion or so annual sales. Is 5% reasonable? That's the question. Does it even have to be?
• Attracting new advertisers, increasing chargeability though data, frontend analytics, improving advertiser ROI are the keys to getting ad load from where it is today to the 5%.
• IDC forecasts social mobile users growing at approximately 19% from 2013 to 2018, management believes they can grow at least this fast which puts them at 516 million monthly active users by 2018.
• Scenario: If they hit 560 million with a 5% ad load and all else is equal to today's numbers annual revenue starts closing in on $10 billion. Again, scenario.
• Licensing, Fabric, Vine, Twitter Publishing Network, strategic M&A, these aren't even considerations in the numbers that are being offered up today. They are still in development; monetization will come in time from well-developed products.
• There's been a lot of management shuffling over the past year and Costolo has taken some heat lately. The question was asked whether he thinks they finally have the right team in place and he answered yes. So we shall see.

Some New Products in Development

• Instant Timeline will offer chance for users to dive right in, this timeline can be different for everyone, depending on the inputs from when the user first signs up; continue to build out private messaging functionality.
• Product in beta now, the Promoted Video Card, one-touch video ad priced on a cost-per-view basis (pay for performance), Budweiser has been using this product with success, saw 2.5 million views with one card in one week.
• Twitter Publisher Network extends Twitter Cards beyond just the Twitter platform into other apps on your device in a targeted fashion. You Tweet about wanting coffee, then maybe you see a promoted card in your Twitter feed from a coffee purveyor, close Twitter and in any other app on your device you'd be targeted with the same ad.
• Commerce product has only just begun testing (Buy Now button); not much more to say at this point other than they are enthusiastic about the early response.
• Timeline Highlights will be a way to filter the very best of each individual's Twitter account over longer periods of time, so if you've missed something in real time, Highlights will be there to make you aware of it when you come back. This is currently in testing.
• First half of next year, users will be able to take, edit and share videos in real time on the Twitter platform. This is an opportunity to truly exploit Twitter's real-time dynamic.
• Later this quarter, they will introduce the ability for users to share Tweets privately in an aim to add to the private messaging front.