Pinterest Inc (PINS) 2019 Q2 法說會逐字稿

Good afternoon.

My name is Sheryl, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Pinterest Second Quarter Earnings Conference Call.

(Operator Instructions) Jane Penner, Head of Investor Relations, you may begin your conference.

Thank you, Sheryl.

Good afternoon and thank you for joining us.

Welcome to Pinterest's earnings conference call for the second quarter of 2019.

Joining me today on the call are Ben Silbermann, our President and CEO; and Todd Morgenfeld, our Chief Financial Officer.

Now I'll quickly cover the safe harbor.

Some of the statements that we make today regarding our business performance and operations and guidance for full year 2019 may be considered forward looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially.

For more information, please refer to the risk factors discussed in our most recent Form 10-Q filed with the SEC and available on the Investor Relations section of our website.

During this call, we will present both GAAP and non-GAAP financial measures.

A reconciliation of non-GAAP to GAAP measure is included in today's earnings press release and letter to shareholders, which are distributed and available to the public through our Investor Relations website located at investor.pinterestinc.com.

And now, I'll turn the call over to Ben.

Thanks, Jane.

Hi, everyone.

Thank you so much for joining our second earnings call.

Earlier this afternoon after the market closed, we released our quarterly shareholder letter offering a detailed look at our results.

We're not going to repeat all of it because we want to save a lot of time for Q&A, but Todd and I are going to start with some brief highlights from our quarter, and then we'll open it up to questions.

As you can see in the letter, we had a strong quarter.

We delivered healthy revenue growth of 62% year-on-year, and with continued user growth of more than 300 million people now using Pinterest every month.

These results were driven by investments we are making to help people get inspiration to plan their lives and help them to make their plans a reality off-line.

For our users, we've improved experience by making Pinterest more personal, with improvements to search recommendations so people can more easily find ideas that they love.

By making Pinterest more inspiring, by adding video content and making Pinterest more shoppable so people can go from inspiration to action with progress in a number of initiatives, including growing our inventory of unique product pins by over 50% in the quarter.

And for our advertiser, we've been improving our products in a couple of ways.

We added 6 new international markets where we're now serving ads.

We simplified our ad system for small and medium businesses, diversifying our advertiser base and we're working to improve advertisers' ability to measure the effectiveness of their ad spend.

We're excited about the momentum we've had across the board, but we know there's a lot of work ahead.

We believe that our mission of bringing everyone inspiration to take action in their real lives is needed and important, and then you can build a great business achieving this mission.

We're excited that many of you are joining us on this journey, so thank you very much.

And now I want to turn it over to Todd for some quick financial highlights.

Thanks, Ben.

Just a few things I want to call out before we start the Q&A portion of the call.

As Ben mentioned, our second quarter revenue grew 62% year-over-year, continuing the momentum we've seen over the last several quarters as more advertisers recognize the power of our platform to reach consumers.

Please note that our year-over-year growth was also positively impacted by the later timing of Easter relative to 2018 when it impacted Q1 rather than Q2 results.

Further down the income statement, please also note that our GAAP net loss of $1.16 billion was impacted by RSU expenses recorded in connection with our initial public offering.

This quarter included a onetime RSU catch-up charge for all prior periods as a result of the company meeting the performance testing condition tied to our public offering for all historical RSUs that had already satisfied the service condition.

Finally, our adjusted EBITDA was negative $26 million as EBITDA margins expanded by 10 percentage points year-over-year.

Operator, we're now ready to open it up for questions.

(Operator Instructions) The first question comes from Ross Sandler of Barclays.

Two questions.

First on the international ads and then on the U.S. MAU.

So you called out all the success you're seeing in Canada from a sales execution standpoint.

So -- and you mentioned you're bringing some of those learnings to Europe.

So I guess how much of that can be applied to the non-English-speaking international countries?

And should we expect the similar kind of cadence in terms of how those markets are going to ramp in a year from now?

You said Canada was up 4x, I think, year-on-year in the second quarter.

And then in the letter, you mentioned you expect the U.S. international users to kind of continue to grow throughout 2019.

So is the 85 million U.S. MAU -- is that reflective of the seasonality you talked about last call?

And should we expect that to pick up over the next couple of quarters?

Can you just remind us what the seasonal pattern for MAUs look like?

Thanks, Ross.

First, on the international ads.

The reason we called out Canada as an example is because that's the playbook we're using to build our direct go-to-market channel in Western Europe.

And so in October of 2018, we staffed our first dedicated office in Canada with a direct sales force, scaled the team and built a playbook that's working exceptionally well there.

It's still very early days, and those numbers, even 4x is on a very small dollar amount.

So when we think about the future, I think there's growth opportunity, for sure, in international markets.

But I wouldn't look specifically at that number and try to model impact like that directly to performance internationally next year and beyond.

I do think that, that playbook that we've developed for non-English-speaking countries in Western Europe is replicable, and we've seen those results, and we're applying that to Germany and France now.

In terms of the U.S. MAUs, we grew 13% year-over-year off of a pretty soft comp last year because of changes to the SEO algorithm and some of the identity and authentication partners that had changed the way that things operated.

So we were benefiting from that in Q2 from a year-over-year comparison perspective.

But as you know, Q2 is our softest quarter from a user growth perspective sequentially, and so we expected flattish seasonality from Q1 to Q2, and that's what we saw.

I would expect typical seasonality to pick up over the course of the remainder of the year, but again, U.S. growth will be far behind overall growth where we're less mature.

Your next question comes from Lloyd Walmsley of Deutsche Bank.

Two, if I can.

First, just looking at the progress you guys are making on the catalog products uploaded to the platform.

Obviously, there's a lot of organic value to brands...

(technical difficulty)

Next question, please?

Lloyd Walmsley, your line is still open.

Lloyd, I think we lost the last -- we lost most of your question.

I think there was some kind of technical problem.

Oh.

Great.

I'm still online.

I apologize.

No problem.

Can you just repeat your question?

Yes.

Sorry, I figured you had moved on.

I appreciate it.

So I was just going to say on the catalog -- the product upload catalogs, clearly a lot of brand value to having those catalogs up, but can you just talk about what you're seeing in terms of maybe how ad spend from companies that are uploading those catalogs just changing how you expect that -- the impact of those catalogs to kind of flow into the business over time?

And then just the second one I had -- was just looking at the first half, I mean, remarkable 58% growth on the top line.

The high end of guidance implies about 41%.

So what should we be keeping in mind that might lead to that deceleration aside from a slightly harder comp in the third quarter, particularly as you scale up the international business?

Any color you could give there would be great.

Thanks, Lloyd.

This is Ben.

I'll take the first question and I'll pass it on to Todd.

Just taking a step back, our shopping strategy is to basically fulfill the commercial intent that users already have.

And so this year is really about 2 things.

One, to your point, it's growing the amount of high-quality viable inventory, and catalogs are one of the strategies we have to do that.

We've improved that inventory by 50%.

The other is then to match it to users who are looking for products, and we released a number of product features to let people go from inspiration to action.

As that strategy plays out, what we expect and what we're seeing in the early days is that as retailers get organic value, they're more and more amenable to paying to increase that value through our shopping ads products, and so we continue to kind of release features to enable that -- things to let them measure the conversions in a really clear way, things that let them get analytics on which of their products are performing well.

All that said, think of it as a long-term investment.

We don't think that shopping is going to be an independent revenue stream that will show up for a while, but we do think long term, it's really essential for both of our users and for a lot of the businesses that are really going to get value from the platform.

And so the second question was more about guidance, and I can walk through why you see that change in the growth rate that you referenced.

So I thought we had a terrific quarter in Q2.

We grew 62% overall, 55% in the U.S. and 199% in international markets.

That was driven by advertiser diversification in 3 ways.

The first was more share of wallet with our incumbent large advertisers.

So folks like Beyer, as an example, launched -- activated 10 new brands in the first half of the year, and we're getting more spend from people that had been on the platform that are like that.

The second is success in some of our new and emerging verticals.

So we've talked previously about auto and entertainment as area -- some new verticals where we're starting to see some traction.

And in this quarter, we, for example, had success with Toyota.

The third area is going downmarket into the SMB space, in particular, with digitally native brands like Buffy, a direct-to-consumer bedding company.

We're seeing a lot of success with our performance advertising products.

So consistent with what we talked about in the past about advertiser diversification being a source of our growth going forward, we saw it across those 3 vectors.

But I think the nature of your question is more why are you not projecting more growth in the back half of the year off of a quarter like we just saw?

And there are 3 reasons for that.

The first of which we called out in the opening.

Easter this year is a seasonal moment where a lot of brand advertisers like to participate.

Last year, Easter and the run-up to Easter largely fell in Q1.

This year, it fell in Q2.

So we saw some additional benefit just based on the timing of Easter.

The second is a little harder to quantify frankly.

We went public in mid-April and we saw significant year-over-year growth in the months of April and May that significantly exceeded our year-over-year growth in the month of June.

I would imagine that the listing had some impact on that just based on what we saw in terms of trend throughout the quarter.

But most importantly, last year in the second half of the year, we scaled 2 new products.

One was video on the advertising side, so video for brand awareness objectives.

And the second was our new conversion optimization product, both of those scaled quite a bit through the second half of last year, which makes the second half of this year a bit of a tougher comp.

Your next question comes from Douglas Anmuth of JPMorgan.

Great.

First, you talked in the letter a little bit about the benefits of video on the platform.

Just hoping you could help us understand more around what percentage of pins or video today or what percentage of overall content and then how you're trying to get more video onto Pinterest?

And then secondly, Todd, can you quantify in any way the benefit that you saw in 2Q from Easter?

So yes, Doug, I'll start on the question on video.

We are seeing video be super successful in Pinterest.

If you think about some of the ways people use Pinterest, how-tos, exercise, recipes, it makes a lot of sense.

People love video.

They tend to save it at a higher rate.

We don't disclose the exact percentage.

What I can say is that in Q2, this year alone, there were more videos viewed than all of last year put together.

And so it's growing really quickly.

Some of the things that are enabling us to scale that are, one, bulk upload tools so publishers can publish a lot more videos onto the platform; and two, better analytics tools so people can understand which videos are performing really well.

Overall, we think video is super important for consumers.

And then as everyone knows, video is increasingly a preferred medium that advertisers want to tell their story.

And so as Todd just mentioned, we're seeing really good uptake not only of our first video product that was focused on brand, but also our second performance video product, which we see growing at a faster rate this year than our other product lines.

And then, Doug, on your second question, it's hard to be super specific about it, what I would say is, we had a couple of points, a few points of growth, low single-digit percentage impact on our year-over-year growth rate as a result of Easter.

Your next question comes from Mark Mahaney of RBC.

I'm wondering if you could talk about user growth in different verticals.

I'm particularly interested in the travel vertical though and to what extent you think you've been able to gain a larger mass of both advertisers and on the consumer side people using Pinterest for travel-related ideas.

Sure, Mark.

We do see travel as a vertical, and we continue to see strong engagement there.

I think when you look at how people use Pinterest for travel, it's pretty specific and distinct from some other travel properties online.

If you type in any location, a lot of the pins you see are 6 great things to do in Barcelona or family-friendly vacations in Yellowstone during the summer.

And so they're really about that upper funnel intent where people are looking for ideas on where to travel.

They'll save those ideas.

They get a sense for where they want to go and activities they want to plan.

What we don't see yet, and what frankly Pinterest isn't as good at as some other properties, is people doing that detailed bottom of the funnel travel planning like booking a very specific hotel or booking their flights.

And so a good opportunity for us, although not a focus right now, is how do we bring people down funnel in partnership with folks that are really good in those specific use cases and verticals.

Your next question comes from Heath Terry of Goldman Sachs.

If you could just give us a bit of an update on shop-the-look and just maybe even more broadly, the move into more transactional activity on Pinterest, whether on the user side or also certainly on the advertising side.

What kind of impact you're potentially seeing that had in the breadth of your advertisers and then of course the monetization that you see on the ad units that you're able to move into that kind of format?

Yes, Heath.

So I'll go back to first what I said a little bit earlier about our general strategy.

Part of our strategy right now is to grow inventory.

At the same time, we want to match that inventory with pinners who are getting inspired about specific things, and those 2 are a virtuous cycle.

The more products that we have are the better than we can match.

Shop-the-look is a really important format for us because it kind of does both of those things at the same time.

So instead of using something like computer vision to match products to a scene, shop-the-look is allowing retailers to actually upload the entire look, and we're giving them good tools to identify the individual products that are just within that scene.

And so that's how shop-the-look fills in the strategy.

Other things that you might have seen in the letter are including things like brands you've engaged with showing up in your home feed or better products in related pins.

So when you see a pin, scroll down, we can show related pins.

We're seeing kind of a lot of enthusiasm from retailers.

The catalog product that we upload -- that we provided earlier this year has grown significantly and has contributed significantly to the amount of inventory.

I just mentioned before we think that's a great on-ramp to getting people to shoppable pins and promoted pins.

We can monetize some of that intent.

And Heath, I think your question may have been a little bit more about shopping but taking a step back on the breadth of advertiser point that you're asking about.

It's probably worth pointing out that we continue to accelerate the growth in the number of advertisers on the platform.

We talked last quarter that -- about having done that, and we accelerated yet again in the number of advertisers this quarter as well.

Your next question comes from Justin Post of Bank of America.

Just sort of a high level, I know video's growing rapidly.

How do you see that impacting overall engagement on Pinterest?

And also, do you think it creates more inventory than you would have in the static images overall as you look out 2 to 3 years?

And then secondly on the U.S. side, just wondering about if you're extending your demographics to other age groups and more males?

Have you seen a difference in the new users over the last year as far as those demographics than the core base for Pinterest?

Justin, your first question about video 2 to 3 years out, how do we think about that format impacting things like engagement, we think video is going to be pretty fundamental to the way that people want to interact with a lot of the use cases.

So I mentioned a few that are really obvious, things like recipes, exercise, do it yourself.

But as people become more and more accustomed to video on their phone and the things like 5G, increased bandwidth speed, we think video's going to be a pretty standard way the people get inspiration across the board.

And so we're making those investments now, and we think that it will contribute to healthy engagement in the future.

I don't know how it will change that until we get there, but I do know that as a consumer, when I talk to our pinners, they're excited about video, and that's an experience that they want more.

And so we're doing everything we can to encourage it.

Your second question was more about the demographics and whether we're seeing very different patterns outside the United States than we are in the United States, and the answer is that it's looking quite similar today.

We really think about Pinterest primarily through the lens of these use cases.

And even though the cultures are different, the things people use Pinterest for tend to be the same.

And they tend to be things like lifestyle, that's food, decor, things that I wear, travel, activities I do with my family and so that remains pretty consistent, and we haven't noticed major demographic differences outside the United States than we see inside the United States.

The only thing I would add is -- your question was also a little bit about ad inventory growth as well, and I think there are couple of points I'd make there.

First, if we were only promoted video or videos were the only -- the content that was most closely tied to advertising and we had no organic video, I think we would suffer from that blindness issues, and so it's nice to have both organic and promoted content scaling in video.

If your question is more about inventory creation around different forms of video content pre-roll, mid-roll, et cetera, we're focused first on video that enriches the user experience versus inventory growth right now.

Your next question comes from Colin Sebastian of Baird.

Ben, you mentioned improvements to measurement and analytics.

So I was hoping you could expand a little bit on that in terms of functionality that's gaining particular traction.

And as advertisers are getting a better handle on ROI, are you seeing an inflection in auction bids and pricing?

Or is growth still primarily from impressions?

Yes.

I'll speak to the first part of the question on measurement.

We know measurement is pretty fundamental to getting advertisers to trust us to be good stewards of their investment, and so we're making a bunch of improvements.

One is we're working to implement kind of the Pinterest first-party tag, and we announced that we did a number of integrations with platforms that make implementing a tag just as simple as pushing a button.

So we announced integrations with Google Tag Manager, PixeLayer site, Tealium E-Commerce and Square on this quarter, and we look to expand that coverage overall.

Additionally, we're working to improve our analytics tools in 2 ways.

One, to better illustrate the organic value next to the paid value that folks are receiving.

And that's important because if you think about it, a lot of our advertisers are introduced to Pinterest because content from their website was pinned and all of a sudden, they start getting traffic and so being able to show them the organic value is a good proof points that encourages them to have paid value.

We're also educating more and more advertisers that by expanding their conversion window from 1 day to something more like 30 days, they can generate a lot more value.

And there are a lot of proof points that we're seeing on that.

Todd mentioned as an example, Buffy, which is direct-to-consumer brand.

When they look at their conversions on something like bedding, they found that about 20% of people buy that day, but about 80% of people buy earlier than that.

And that kind of matches the common sense to us, like very few people impulse buy on something as expensive as bedding.

And so as some more advertisers realize that part of the advertising strategy has to be generating net new demand versus just bidding on their own keyword or capturing demand that's already been generated in other sources to retargeting.

That story is getting more and more resonance.

Now I think your second point was a question about what was driving the revenue performance in the quarter between ad impressions and pricing.

And what I would say is that both grew, but almost all of the growth came from ad impressions relative to price.

Longer term, we would expect price to continue to improve because advertisers tell us that they're getting a great return from their investment on Pinterest.

So today, the exercise is trying to get as many advertisers on the platform so that they all see that value and help us with a lot more robust auction.

Your next question comes from Stephen Ju of Crédit Suisse.

So Ben, I think you mentioned lifestyle, travel and some other categories Pinterest is known for, but there are certain content verticals where you may feel like you're under indexed.

So can you update us on what progress you may have made to get consumers to spend more time with you?

Or even to onboard a group of users who otherwise would not have spent time in Pinterest before?

And as an adjunct to that, I think how is that diversification of content propagating internationally?

Where do you think your international markets are in terms of the richness of content versus the U.S.?

Thanks, Stephen.

So I kind of heard 3 questions in there.

One is like how are we deepening engagement; second is how are we growing the number of users and expanding it to kind of new verticals; and the third is how are we doing internationally, so I'll just take them in turn.

In terms of deepening engagement, one of the biggest opportunities that we see is actually getting people to use Pinterest not just for 1 use case, but for 2 or 3 or 4. So part of the reason that we highlighted personalized search recommendations is that's one of the first products that's really designed to expand how people use Pinterest.

So if you're using it for clothing, we might say, "Hey, we thought about it for redecorating your home or reorganizing your closet." Have you been using it for healthy food?

Have you thought about it for exercise?

And we actually think there's a really big opportunity there.

And while our best users use it for many use cases, they often have to figure that out for themselves.

We want to help people do that, and so that's one of the key ways that we're driving engagement.

The other way is, as you make Pinterest more useful to things like shopping, we're seeing people will engage in a different way because they know they can actually go from an inspirational image all the way to a purchase.

In terms of new users, there are couple of vectors that we're looking at.

One, we know for a fact that a lot of people still don't know exactly what Pinterest is, and we haven't today invested a lot in what we call comprehension marketing.

And so we're just starting to make those investments.

At the same time, we know that there are some people that have used Pinterest once for a project, and we have an opportunity to bring them back.

So they might have used it to get married, but we can bring them back in a new way.

And so that represents sort of a second way that people can be converted from a onetime user to a more habitual user.

Internationally, I think we're still working to increase of the content depth in a lot of our countries.

And so when we, inside the company, talk about our international growth strategy, a lot of it begins with how do we continue to bring on more local content, which is a two-part challenge.

One is getting content creators to bring content on board, that's what a lot of our local teams spend their time doing, and they've gotten great success in a lot of the markets we focused on.

The second is being able to automatically detect local content, which is easier in some places, easier, for example, where there's a distinct language.

It can be a little bit more challenging in English-speaking to differentiate local content from Australia versus U.K., versus South Africa, versus the U.S. And so that's how those 3 pieces are looking right now.

Your next question comes from Ygal Arounian of Wedbush Securities.

Another international one, and sorry if I missed this, been jumping around a little bit.

Just there was a really, really good upside in international ARPU growth at least quarter-over-quarter and the growth rate.

As we think about the biggest drivers in the ARPU -- in the international ARPU, what gets you to catch up to the domestic ARPU?

The different drivers in that number, what are the low-hanging fruit?

What's kind of further down the line?

What's the right way to think about that?

And again, sorry if I missed this, were there any new markets in the quarter and plans to kind of roll out new markets over the course of the year?

And then any progress or early progress or highlights from the markets that you launched in first quarter?

Thanks.

So the 2 questions were I think just to summarize, the drivers of ARPU and international markets, and then the second is did we launch new markets?

And how did we do on launching new markets in Q2?

We launched 6 new markets in Q2.

So we went from serving ads in 13 countries to serving ads in 19 countries.

The 6 that we added that were new were the Nordics and then a couple of extra Western European countries.

In terms of international ARPU, the growth rates look great, but we're talking about very small numbers, and we're still measured in pennies, not dollars.

And so the growth rates like gaudy, but we have a lot of work to do.

The good news is we've built an audience that's global in nature.

300 million people come to Pinterest every month for inspiration and then to go plan things that they do in their actual life, both in the U.S. and internationally.

So that's the lowest hanging fruit right now is that we've already built a compelling audience.

But yes, similar use cases across all markets with commercial intent.

In terms of how we monetize that, the first step is establishing a playbook that works.

We did that in Canada, and we're replicating that with our direct go-to-market channels in France, in Germany right now.

We'll continue to roll that out across the rest of those countries where it makes sense to have a direct go-to-market presence.

The next step will be as we deliver a compelling self-service offering, and you may have noticed in the letter that we announced, mobile ad tools, which is an enhancement to an advertiser in the SMB space's ability to create, buy and deliver ads.

As that rolls out and becomes more seamless, we'll have leverage in the U.S. and an additional international markets.

Your next question comes from Mark Kelley of Nomura.

I just have two quick ones on self-serve, since you just brought it up.

One is you guys keep adding new tools kind of in a good cadence year.

Can you walk us through just the road map, just a little bit more, what are the other tools you think you need to add where you feel like you're going to be on par with social peers?

And then what's the reasonable time frame for us to think about where you'll be at a point where you think a lot of the heavy lifting is done?

Mark, I'll start.

SMB, small businesses, they're definitely kind of a big part of where we see growth opportunity.

We think that they're great for our users.

If you look at a lot of these small businesses, they sometimes have the most what I call expressive products and they're really interesting brands.

When we talk to small businesses, their needs cluster around 3 things: One is, they want to have a really easy interface for them to buy and check on how their ads are doing.

That means a mobile interface.

And so we rolled out version 1 of that, but we still have a long way to go to really bring it to parity with folks that have been building us platforms for 5, 7, 10 years.

The second is they need simplified measurement tools that give them extremely clear understanding of their ROI.

A lot of these are small businesses that don't have a lot of extra advertising dollars.

And so what I mentioned before was things like tag integration into those platforms.

With just one tap, they can have that clear indicator of the return on their ad spend is a really important factor.

And then third, it has to be really easy to make ads and to express themselves in the right way.

And so ad-creation tools, again, that are mobile are really, really important.

So it's still early on.

We had a really good, steady drumbeat of releases there.

We had a lot of success stories, and we were talking to a small business called Jonas Paul.

They sell kids' glasses.

They're seeing great results like 65% increase in average order sizes.

But to your question, when we will be as mature as Google and Facebook, I think that's a long road ahead, and that's why we aren't baking in SMB as a meaningful contributor of revenue this year.

We hope to see it start scaling next year and beyond.

Your next question comes from Thomas Forte of D.A. Davidson.

Great.

I had one for Ben.

There's been increasing government scrutiny on data privacy.

Can you discuss Pinterest's strategy, which it seems to me would give you a competitive advantage against other companies in the digital marketing sector?

Yes.

I mean, I think that we take privacy really seriously.

When we think about it philosophically, we want people to have a choice over their experience.

We think that people come to Pinterest, and what they really are looking for are great recommendations.

And so what we often do is we'll personalize those recommendations based on their past behaviors, and users are extremely positive and receptive about that.

At the same, want people to have controls.

That means, for instance, we should make it extremely clear and extremely simple for people to keep a board secret.

It means that if people want to turn off recommendations that are being generated based on a specific board, we work to make that really easy.

We think that over time, that's a really good strategy.

We think that's what consumers want.

That's what we hear from them.

And we're committed to, as we build products in the future, maintain that philosophy of clarity, control and value exchange.

We've completed the allotted time for questions.

I will now turn the call over to Ben Silbermann, CEO, for closing remarks.

Well, I just want to thank everyone for joining our earnings and for all the questions, and we look forward to speaking again next quarter.

This concludes today's conference call.

You may now disconnect.