Pinterest, Inc. (NYSE:PINS) Q3 2023 Earnings Call Transcript October 30, 2023
Pinterest, Inc. misses on earnings expectations. Reported EPS is $0.0098 EPS, expectations were $0.21.
Operator: Good afternoon. Thank you for attending today’s Pinterest Third Quarter 2023 Earnings Conference Call. My name is Hannah, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Neil Doshi, Head of Investor Relations. You may go ahead.
Neil Doshi: Good afternoon, and thank you for joining us. Welcome to Pinterest’s earnings call for the third quarter ended September 30, 2023. I’m Neil Doshi, Head of Investor Relations for Pinterest. Joining me today on the call are Bill Ready, Pinterest’s CEO; and Julia Donnelly, our CFO. Now I’ll cover the safe harbor. Some of the statements that we make today regarding our performance, operations and outlook may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. In addition, our results, trends and outlook for Q4 2023 and beyond are preliminary and are not an assurance of future performance. We are making these forward-looking statements based on information available to us as of today, and we disclaim any duty to update them later unless required by law.
A close up of a user’s hand scrolling through a mobile social media application.
For more information, please refer to the risk factors discussed in our most recent Forms 10-Q or 10-K filed with the SEC and available on our Investor Relations website. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release and presentation, which are distributed and available to the public through our Investor Relations website located at investor.pinterestinc.com. Lastly, all growth rates discussed in today’s prepared remarks should be considered year-over-year unless otherwise specified. And now, I’ll turn the call over to Bill.
William Ready: Thanks, Neil, and thank you all for joining our third quarter 2023 earnings call. We made great progress in Q3, as we accelerated our revenue growth and strengthened our fundamentals. Our efforts in deepening engagement and growing monetization are yielding results. We ended the quarter with 482 million monthly active users, up 8% to an all-time high exceeding our peak users from the pandemic period surge by refocusing on Pinterest’s unique differentiators as a visual search, discovery and shopping platform. Total revenue was $763 million, up 11% on a reported and constant currency basis. This represents the third quarter in a row of accelerating revenue growth. Finally, the strong revenue growth, coupled with disciplined expense management allowed us to deliver adjusted EBITDA of $185 million and an adjusted EBITDA margin of 24%, a 1,300 basis point improvement from the year ago quarter.
Last month, we hosted Pinterest’s first ever Investor Day, where we shared an in-depth view of our strategy, the progress we’ve made to date, and what we’re building for the future. It was great to see many of you in person. And if you haven’t seen it, you can watch the event on our Investor Relations website. You heard there from many members of our senior management on why Pinterest is unique and different from other platforms, and why we have such a massive opportunity ahead of us. Pinterest users engage in dynamic multi-session journeys that go from inspiration to action. In other words, people are saving and curing ideas and products they hope to make, do or buy today and in the future. That means they easily pick up where they left off every time they use Pinterest with our recommendation getting increasingly relevant each time.
These user journeys can span many verticals and include a wide variety of actionable outcomes like freshening up your wardrobe, finding gift ideas or recruiting a travel itinerary. The inspiration to action journey we’re furthest along in building a shopping. We know more than half our users view Pinterest as a place to shop. So our focus over the last year has been to make Pinterest more shoppable. When users are in a commercial mindset, we can drive better engagement through highly relevant ads and we can grow monetization by delivering more views, clicks and conversions and customers to our advertising partners, thereby fueling our flywheel for engagement and revenue growth. This ability to have a full funnel for users and advertisers on the same platform provides compounding benefits to both parties and is one of our core differentiators.
We also laid out our financial targets for the future, where we expect to drive revenue growth at a mid to high-teens compound annual growth rate and expand our adjusted EBITDA margins to reach the low 30% range in the next three to five years. We plan to achieve this by focusing on three key priorities: growing users and DPA engagement per user, improving monetization and delivering profitable growth through operational rigor. Today, Julia and I will provide you with an update on those priorities. Let’s start with our work on growing users and deepening engagement. We continue to use AI to improve the relevance and personalization of our content recommendations and satisfy user intent on our platform through improved shopping experiences. As we noted at our Investor Day, we’re seeing strength with our Gen Z users, who are our fastest-growing and most engaged users.
We are also seeing our strongest product market fit in years as evidenced by our recent cohorts who saved 2 times more content in their first year on Pinterest relative to older cohorts. Let me walk you through some of the product updates we’ve made that are driving these outcomes. Among our efforts to deepen engagement with our users is helping users rediscover existing use cases and find new use cases in categories on Pinterest. During the quarter, we launched the More Ideas tab at the top of the home feed to allow users to easily access their board themes and quickly refocus on an ongoing use case. Our AI recommendation engine builds off of the save content from those boards to recommend additional pins that provide users with more points of inspiration, resulting in strong growth and saving on the platform.
We also made continued progress on incorporating shopping into the forefront of the user experience on Pinterest, which is driving engagement by helping users seamlessly pick up where they left off from previous sessions and complete their inspiration to action journeys. Our new Shop the Look module, which we launched in Q2, helps users to easily shop what they see in lifestyle images. When a user clicks on one of these lifestyle images, the Shop the Look module will appear as a carousel within the Pin Closeup. Within that module, we employ AI and computer vision to then recommend similar buyable items within our merchant catalog that users can easily shop. In fact, 70% products recommended in Shop the Look are rated as exact or highly relevant matches.
We’ve previously discussed the launch of a new AI-driven guided browsing experience to recommend new content from adjacent use cases based on user interest. In Q3, we expanded our guided browsing modules in the U.S. and Canada region to promote more shopping behavior by resurfacing relevant viable pins based on content users have engaged with in the past. For example, if you previously saved or clicked on a leather jacket and a pair of boots, we can serve a personalized carousel on the home feed resurfacing those same pins or related items to encourage you to continue your shopping journey. These improvements enable us to show users shoppable content aligned with their interests with seamless hand-offs to the merchant app or website that users can easily purchase.
Next, I’d like to discuss how we’re improving monetization by making Pinterest more valuable for advertisers as a full funnel platform. The continued innovation in our ad stack across formats, tools and measurement solutions enables us to improve performance for our advertisers and grow our revenue. At the lower end of the funnel, which now makes up roughly two-thirds of our revenue, we are focused on helping advertisers gain clicks, conversions and customers. On past earnings calls, we discussed the success we’re seeing with Mobile Deep Links, or MDL, where advertisers can now direct link users directly into the relevant product page and checkout experience in their mobile app. This is a great solution for merchants who have stand-alone apps with broad consumer penetration.
As we’ve noted before, MDL is performing extremely well in our tests. Participating advertisers saw a 235% lift in conversion rates, along with a 35% improvement in their CPAs. We’re now bringing this solution to those advertisers who either don’t have an app or rely primarily on their website for traffic and sales. This product is called Direct Links, which we launched in Q3. I’d like to spend a moment to dive deeper into Direct Links and why I believe this can become a significant unlock for advertiser value. Direct Link brings a user experience similar to MDL to merchant websites taking the user from an add-on Pinterest directly to a product purchase experience on the merchant website in just one click. This simplified experience creates a more seamless shopping journey for the user and drives more website traffic and conversions for the advertiser.
So far, we’ve migrated approximately 60% of our lower funnel revenue to Direct Links and have seen strong results. As we noted at our Investor Day, we saw 88% higher outbound click-through rates and a 39% decrease in cost per outbound click for CPC objectives from early adopters. We plan to roll Direct Links out to the remaining eligible lower funnel objectives, including CPC video ads and conversion ads by the end of Q1 ’24 to increase our penetration of Direct Links and lower funnel revenue. On the video side, we believe bringing Direct Links to video will be an important unlock for us given the strength we’re seeing with video ads on the platform, especially in the lower funnel. And for conversion objectives, results from initial testing have been very strong driving similarly substantial results as we saw with CPC campaigns.
In addition to lower funnel innovation, this year, we continued to launch new formats building on our strength at the top of the funnel, such as Premier Spotlight, showcase and quiz ads (ph). These formats help brands interact with the user and tell their story in an engaging way. In Q3, we expanded our Premier Spotlight ads from search to the home feed, and we are seeing good traction from this ad unit among brand advertisers. For example, Madelin Canada leveraged both Premier Spotlight on the home feed and search to promote their new concealer. This high-impact format drove a 2 times higher video completion rate versus the average video campaign. Not only are we driving full funnel outcomes for advertisers. We are also helping them measure the value that Pinterest uniquely delivers in privacy safe ways.
This is a critical element to our success, especially, as we look towards a cookie-less future. We continue to move along the adoption curve for our API for conversions product. Adoption for this product comes from two avenues, direct implementation with advertisers and partner integrations. Our sales force continues to make great strides in getting advertisers to integrate with our API for conversions, with revenue coverage being a top-level goal across the sales organization. We are also integrating with partners that many of our advertisers plug into. For instance, in Q3, we onboarded several partners like Adobe Commerce and Salesforce Commerce Cloud to help drive more adoption of API for conversions. Integrating with partners allows us to meet advertisers where they are and enables a more frictionless experience and improving conversion visibility.
For example, PacSun, a leading U.S. based retailer that is popular with Gen Z, seamlessly adopted our API for conversions through our new Salesforce Commerce Cloud app. After installing API for conversions, PacSun saw a 7 times increase in attributed conversion rate. And as we mentioned during our Investor Day, we are making solid progress here. Our API for conversion solution accounted for 28% of our total revenue as of August, up from 14% at the start of the year. In addition to helping advertisers measure the value of Pinterest, we’re also working towards fundamentally improving our ability to show the right ad to the right user at the right time, which feeds into the overall performance of our ads. We’ve long said that ads, when relevant, are additive to the user experience.
This year, we’ve made step function modeling improvements to better match ads to the users for whom they are most engaging and relevant. And as we flex up ad load with whole page optimization, we’re able to serve more of these relevant ads to users who are displaying commercial intent, all while simultaneously growing engagement on the platform. For example, in Q2, we expanded our use of GPU serving to our monetization engine, which enabled us to use models that were 100 times larger. As a result, we’re able to better use our first-party user signals to understand commercial intent and thus show more relevant ads to match that intent. In Q3, we began leveraging a longer history of users on-platform behaviors in our ads models. Longer user history means more user signals, which in turn enables us to better predict and surface ads tailored to our users’ preferences and tastes.
On search specifically, we made improvements in our ability to match relevant ads to user search queries. By utilizing AI and large language models, we were able to more precisely link product metadata to user queries to show ads that are visually and contextually relevant. These two launches drove meaningful improvements across cost per click and cost per action and better ad relevance. Improved capabilities in our ad delivery model are also important as we think about augmenting our first-party sales efforts. Opening up our platform to third-party ad partners will allow us to accelerate monetization by improving ad relevance and auction density. As we mentioned during our Investor Day, our first 3P partnership with Amazon Ads is ramping ahead of schedule and we are pleased with early results with over 50% improvement in relevance on search and a 100% improvement in relevance on related items in early tests.
We noted that we were testing this on search in the U.S., and we are now beginning to roll out this test on our related item surface in the U.S. as well. Consistent with our prior comments on this topic, A partnership of this scale is a multi-quarter implementation with the most meaningful revenue impact likely being in early 2024. Our extensive upfront work integrating third-party demand into our platform has laid the groundwork for more streamlined integrations of potential additional third-party partners in the future. Finally, we’re continuing to drive operational rigor through further cost discipline, which resulted in strong EBITDA and EBITDA margin expansion again this quarter. We are tracking nicely toward our mid to long-term margin expansion goals.
I’m proud of our teams for all their hard work and execution this past quarter, the results of which are abundantly clear. I’ll now turn the call over to Julia, who will provide further updates on our financials.
Julia Donnelly: Thanks, Bill, and good afternoon, everyone. Today, I’ll be discussing our third quarter financial results and provide an update on our preliminary fourth quarter outlook. All financial metrics, except for revenue will be discussed in non-GAAP terms unless otherwise specified and all comparisons will be discussed on a year-over-year basis unless otherwise noted. To echo Bill’s sentiment, I am proud of our team’s execution, which resulted in a great quarter, marked by strong monthly active user growth, continued revenue acceleration and significant year-over-year adjusted EBITDA margin expansion. It is clear that the strategic shifts we have implemented in our business over the last year leaning into the differentiators of our platform and accelerating our ads product velocity are resonating with users and advertisers alike.
We ended the quarter with 482 million global monthly active users, growing 8% and reaching a new all-time high. Our investments in increasing shopability and deploying AI across our recommendation engine are paying off. In the U.S. and Canada, we had 96 million monthly active users, up 1% year-over-year and we added approximately 1 million users versus last quarter. In Europe, we finished the quarter with 128 million monthly active users, up 7%, an acceleration from last quarter. In our rest of world markets, monthly active users were 258 million, up 12%, continuing the trend of acceleration throughout 2023. Now to revenue. The strength we saw this quarter further demonstrates how we are driving value for advertisers across the full funnel.
Total revenue came in at $763 million, up 11% on a reported and constant currency basis. Strength in overall revenue was driven by our awareness objectives and conversion objectives, including our lowest funnel shopping ads format. In the U.S. and Canada, revenue was $618 million, an increase of 8%, accelerating to the highest growth we’ve seen since Q3 ’22. Strength came from CPG, retail and certain emerging categories like financial services and restaurants. Europe revenue was $114 million, growing 33%, or 25% on a constant currency basis. We experienced strong growth across CPG, emerging verticals such as travel, technology and auto and from large agencies. Revenue from Rest of World was $31 million, growing 29% or 28% on a constant currency basis.
It is also useful to look at revenue through the lens of ad impressions and ad pricing trends. As we mentioned at our Investor Day, ad impressions growth is driven by total impressions, both organic and paid and ad load. Over the last several quarters, we’ve been able to drive increases in both total impressions and in ad loads simultaneously, thereby demonstrating that relevant ads can be synergistic with engagement. In Q3, we continued this trend with ad impressions growing 26%, driven from both increases in total impressions and increases in ad load. Meanwhile, the price of ads declined 12% this quarter. While pricing still remains under pressure, this is an improvement from the 20% decline we saw last quarter, driven by industry-wide demand stabilization as well as the AI-fueled ad stack efficiencies we drove on the platform in Q3.
Now let’s turn to expenses. Cost of revenue was $167 million, down 7% year-over-year and roughly flat versus Q2. This result is due to efficiencies being driven across storage and compute infrastructure, even amidst our strong user and engagement growth and continued AI deployment throughout our business. Overall, non-GAAP operating expense was $415 million, down 4% year-over-year and down 6% quarter-over-quarter. This outperformed our expectations and is a reflection of our overall focus on expense management as we realized additional cost savings in the quarter on lower spend in technology and outside services. We have been pleased by our ability to drive double-digit revenue growth even as operating expenses declined year-over-year. Adjusted EBITDA had a strong quarter, coming in at $185 million or a 24% margin, up 13 percentage points versus a year ago, driven by strong revenue performance, efficiency in our cost of revenue and the year-over-year decline in operating expenses.
We ended the quarter with approximately $2.3 billion in cash, cash equivalents and marketable securities. Now I’d like to provide preliminary financial guidance for the fourth quarter. For the fourth quarter 2023, we expect revenue to grow in the 11% to 13% range, continuing the trajectory of accelerating year-over-year revenue growth throughout 2023. Our revenue guidance also takes into account a modest foreign exchange impact. Moving down the P&L. While we don’t guide cost of revenue specifically, we do want to remind everyone that cost of revenue as a percentage of total revenue typically runs lower in Q4 due to the higher seasonal revenue we see in the fourth quarter. We expect Q4 non-GAAP operating expenses to decline in the 9% to 13% range year-over-year as we lap our large brand marketing campaign in Q4 last year.
Please note that our operating expense guidance does not include cost of revenue. Finally, our focus on revenue growth and operational rigor has allowed us to meaningfully expand adjusted EBITDA margins over the course of this year. At the beginning of this year, we committed to 200 basis points of adjusted EBITDA margin expansion year-over-year for full year 2023. As the year progressed, we felt confident in our ability to exceed 200 basis points based on our expense discipline, and we doubled our commitment to roughly 400 basis points. Based on our progress in accelerating revenue growth and further controlling costs, we now expect to see significant adjusted EBITDA margin expansion again in Q4, which would put us on track to achieve approximately 600 basis points of adjusted EBITDA margin expansion for full year 2023.
To close, our Q3 performance tells an impressive story, significant monthly active user growth, strong and accelerating revenue generation and effective cost management. all of which continues to put us on the path to deliver on the longer-term financial targets we recently provided. I’ll now turn the call over to Bill.
William Ready: Thanks, Julia. We’ve made great progress across our business in the past year, and we’re just getting started. I want to thank our teams at Pinterest, our advertising partners and all the people that come to Pinterest to find inspiration and to shop. And with that, we can open the call up for questions.
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