Pinterest, Inc. (NYSE:PINS) Q4 2022 Earnings Call Transcript

Pinterest, Inc. (NYSE:PINS) Q4 2022 Earnings Call Transcript February 6, 2023

Operator: Good afternoon. Thank you for attending today's Pinterest Inc. Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. My name is Hana 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. I would now like to pass the conference over to your host Neil Doshi, Head of Investor Relations. Please go ahead.

Neil Doshi: Good afternoon and thank you for joining us. Welcome to the Pinterest earnings call for the fourth quarter and full year ended December 31, 2022. I'm Neil Doshi, Head of Investor Relations for Pinterest. Joining me today on the call are Bill Ready Pinterest CEO and Todd Morgenfeld, our Chief Financial Officer and head of Business Operations. 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 Q1 2023 and beyond are preliminary and are not an indication 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. 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 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 measures is included in today's earnings press release and presentation, which we -- 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.

Bill Ready: Thanks Neil. Hi everyone and thank you for joining our Q4 earnings call. I'm proud of our team's focus and execution over the past year and in particular Q4. We reinvested in our core product experience that led to deepening engagement and a return to user growth. We built and shipped new ad tech and measurement solutions that resulted in improved returns for our advertisers. And we're just getting started. I have strong conviction that we will continue to innovate and deliver value to our users and business partners. We grew global MAUs in Q4 to 450 million, up both sequentially and year-over-year. Our global mobile app users which account for over 80% of our impressions and revenue grew 14% and our US and Canada mobile app users grew 5%, accelerating from last quarter.

More importantly, sessions continue to grow significantly faster than users, demonstrating deepening engagement per user as we focus on driving greater per user monetization. In Q4, we delivered revenue of $877 million growing 4% or 6% on a constant currency basis, roughly in line with our mid-single-digit guidance range. Strength came from large US retail advertisers and international markets, excluding the impact of FX as these advertisers leaned into our full funnel platform during the holiday season. However, this strength was partially offset by CPG advertisers, as well as small and mid-market advertisers in the US who faced headwinds from the macroeconomic environment. For the full year we generated revenue of $2.8 billion, growing 9% or 11% on a constant currency basis.

We're pleased with our results this quarter despite headwinds from the softening ad market, which Todd will speak to later. We remain confident in our long-term strategy in our ability to execute and drive value for users and advertisers. We're also increasing operational rigor and have taken actions to control costs in Q4. For example, we significantly slowed the pace of hiring such that our headcount was flat quarter-over-quarter. We reduced our infrastructure spend, which declined sequentially, despite strong engagement volume increases, and we closed some of our smaller offices for future cost savings. These actions put us on the path to meaningful EBITDA margin expansion in 2023 and demonstrate our focus on generating strong cash flow.

As we build upon the solid foundation we set in 2022, we're laser focused on our four strategic priorities: one, growing monetization and engagement per user; two, integrating shopping into the core of the product experience; three, improving operational rigor and therefore, margin expansion; and four, strengthening our leadership as a positive and brand-safe platform. First, as I mentioned last quarter, we're focused on growing monetization per user. Given the users come to our platform with intent to make, do or shop, we are well positioned to achieve this by deepening user engagement, driving more intent to action and helping advertisers better monetize our supply. On deepening user engagement, we believe that we have a large opportunity to grow the frequency of engagement from episodic users.

On top of our 450 million MAUs, hundreds of millions of logged in users come to Pinterest episodically. In 2023, we're pursuing more ways to bring these users back more often and to find the next use case by leveraging our machine learning models and building new experiences for them. We're also continuing the work, we began last year to serve more personalized, relevant and ultimately more engaging content. This effort has already yielded results, including our return to MAU growth and double-digit growth in mobile app users. However, we have more opportunity to leverage the unique first-party signal on our platform. Our users save and organize content to boards and active human curation at scale that is unique to Pinterest. This gives us insights into emerging trends and product associations as well as the ability to assist users when they have intent but have not yet decided what to buy.

We're actively working to refresh the Pinterest board experience to make it easier for users to organize their interest, which should yield more and higher-quality signals. This, in turn, enables us to deliver increasingly relevant and timely content recommendations. I'm particularly excited about the work we've done to bring new and emerging demographics onto the platform. In Q4, Gen Z was once again our fastest-growing cohort, growing double digits and accelerating from Q3. We're building an experience that resonates with this audience on Pinterest, specifically around video. In fact, nearly half of all new videos penned in Q4 were from Gen Z users. And in Q4, Gen Z sessions grew much faster than sessions from our other demographics. As I discussed last quarter, video also drives deeper engagement.

We remain focused on growing our supply of videos from multiple sources, including creators, brands and publishers. Last quarter, we grew our supply of video content 30% quarter-over-quarter. And we recently announced a deal with Condé Nast Entertainment to create high-quality video content aligned with Pinterest's key seasonal and cultural moments like fashion months, wedding season, summer and back-to-school. We believe high-quality and inspiring content will further deepen engagement, especially for Gen Z. Monetization per user should also be driven by our ads initiatives. Pinterest is unique because users come to our platform with intent, and we are one of the few places where people can go from seeking inspiration to fulfilling that intent through action.

And we've built a full ad solution that helps advertisers meet users in their journey across the funnel from top to middle to bottom. In fact, our revenue is roughly split across the funnel with one-third brand, one-third consideration and one-third conversion. We've seen advertisers who take a full funnel approach see more success than those who are only active on one campaign objective. In 2022, advertisers adopting a multi-objective media strategy saw up to a 50% improvement in sales lift compared to those who use one objective based on our conversion less study. I believe ads when relevant and personalized can be highly valuable content for users, fostering authentic interactions between brands and consumers. In Q4, we launched ad load management with whole page optimization, which flexes ad load opportunistically in context where ads are most well-suited for the user.

In our initial testing, this drove double-digit improvements in ad relevance on search, while simultaneously reducing CPAs for advertisers. We expect the whole page optimization will enable us to continue to improve the efficiency with which, we monetize our platform over time. In addition, we continue to improve conversion visibility through our measurement solutions in a privacy centric way to demonstrate the value that Pinterest brings to advertisers. For example, in Q4, we launched our conversion API, and we recently integrated this API with Shopify so that merchants can use our conversion measurement tool. Based on our tests, for advertisers using our conversion API with the Pinterest tag, we found an average of 28% lift in the attributed checkout conversions and 14% improvement in the checkout CPA metric.

At CES this January, we announced our new privacy safe clean room solution with LiveRamp and Albertsons. Pinterest's integration with LiveRamp provides a protected third-party space where brands can join the first-party data and Pinterest platform data in a secure, privacy safe environment. Our second strategic goal for 2023 is to lean into the high intent that users express on Pinterest by integrating shopping into the core of the product experience. Based on surveys of our users, over 50% say they view Pinterest as a place to shop. Yet we haven't made it easy for them to shop historically as shoppable content was not integrated into core experiences. In our endeavor to make Pinterest the home of taste based shopping, we're integrating shopping across our most traffic surfaces, including home feed, search and related p-ns to show users products most relevant to them.

Over the long-term, we also want to make every pin shoppable. To that end, we're making video content on Pinterest more actionable using the same playbook we applied to static images. Over the course of this year, we will be deploying our computer vision technology across our video corpus to find products and videos and make them shoppable. To make Pinterest more shoppable, we're creating a more seamless handoff by taking the user directly to the product detail page on the merchant's app. To this effort, we continue to deploy our mobile deep linking format, or MDL, on shopping ads. During the Black Friday, Cyber Monday period, MDL accounted for 40% of our shopping ad revenue, which grew 50% in Q4. People are shopping on Pinterest, and we are helping merchants find end-market consumers.

Third, we're driving operational rigor and are committed to delivering value to our shareholders. While 2022 started off as an investment year, we took steps to cut down on costs in this challenging macroeconomic environment starting in early Q3, and we are continuing to find ways to reduce our expenses so that we can meaningfully expand EBITDA margins. As I've said before, I'm a strong believer that constraints breed creativity, and I believe our teams will deliver more compelling products and experiences that set us up for sustainable growth long-term. Furthermore, Todd and I have been evaluating our broad capital allocation strategy, including investing in the business, maintaining flexibility for strategic acquisitions and options for returning capital to shareholders.

Given the significant cash balance at Pinterest today, combined with our robust ongoing operating cash flow generation, we're planning to execute a stock buyback program of up to $500 million, which we plan to commence this quarter to help mitigate dilution from stock-based compensation. Todd will go into more details on our buyback program. Finally, one of the biggest differentiators of Pinterest is that we are an inspirational platform and we're intentionally tuning our business to be a positive place on the Internet. Pinterest's mission is to bring everyone the inspiration to create a life they love. And I believe in an online environment that is increasingly full of toxicity, this is more important than ever. Not only does it help our users, but also our advertisers as they look for more brand-safe environments to attract customers.

Pinterest, Entertainment, Internet

Photo by Souvik Banerjee on Unsplash

From a user perspective, we've long been investing in being a more positive platform from products like inclusive search to important business decisions like banning political ads because we want our users to be in a positive space for inspiration and action. Users are noticing this investment. We have research confirming the positivity of our platform and emotional benefit to our users that we're planning to release in the coming weeks. We're seeing this sentiment come through with our advertisers as well. Some of our latest research also shows that ads that appear in a more positive environment drive more purchases at every stage of the funnel. We believe that positivity makes people more open to brands, more likely to remember them, and more driven to purchase.

As I mentioned in our last call, I value the communication, input, and feedback with the investor and analyst communities. As part of that, we plan to host an Investor Day later this year, and we'll update you in the future on timing and additional details. Finally, as you may have seen in our press release today, Todd Morgenfeld, our CFO and Head of Business Operations, will transition from the company to pursue new career opportunities on July 1st. Todd has been instrumental to Pinterest's growth over the last six-plus years and is committed to ensuring a smooth transition, while we search for a new CFO. I'd like to take a moment to recognize Todd for his dedication to our employees, our Pinners, advertisers, and our shareholders. Todd has made significant contributions to our business over the last six-plus years, including leading the company's IPO process, helping the company navigate the pandemic, advancing our revenue functions, maturing our business operations, and partnering with me when I joined the company last year.

So, Todd, we thank you for your partnership and leadership. Everyone at Pinterest will be cheering for you in your future endeavors, and I intend to be cheering the loudest.

Todd Morgenfeld: Thanks Bill. I appreciate the kind words and the partnership. I also want to thank the entire Pinterest team and the Board for the opportunity to contribute over the past six years. I look forward to watching the company continue to innovate, execute, and grow. I'll now discuss our results. In my remarks today, I'll talk about our Q4 financial performance and our preliminary Q1 outlook. All financial metrics except for revenue will be discussed in non-GAAP terms unless otherwise specified. And as a reminder, all comparisons will be discussed on a year-over-year basis unless otherwise noted. In 2022, we made platform-wide innovations that resulted in improving the user experience through more personalized content, showing more relevant products that fit users' tastes and preferences, and delivering increased value to advertisers through ad stack innovation, new measurement solutions, and more seamless handoffs to merchant sites.

Even though softening demand lowered ad pricing across the industry, including on our platform, we grew revenue in the fourth quarter. Furthermore, we expect our 2022 investments in our ad stack to help deliver competitive cost per action as the demand environment normalizes in the future. As we continue to innovate on new products like mobile deep linking, whole page optimization and improved measurement solutions, we believe these investments will drive better returns on ad spend for our partners. As Bill mentioned, we remain focused on deepening engagement with our existing and episodic users, which should allow us to grow our revenue per user over time. From Q4 2019 to Q4 2022, our revenue grew at a compound annual growth rate of 30%, while our monthly active users grew at a compound annual growth rate of 10%.

Our growth opportunities should continue to be robust as we improve frequency of visitation, make Pinterest more shoppable to satisfy intent to action, deliver more solutions for advertisers and improve the relevance of our advertising to match our users' commercial intent. During the quarter, 450 million global monthly active users came to Pinterest, growing 4% year-over-year and 1% sequentially. We believe that our investments in relevance and personalization are the primary drivers of our return to seasonal growth. In the US and Canada, monthly active users were 95 million, back to year ago levels. As we've noted before, our mobile application users are our most monetizable users and account for over 80% of our total impressions and revenue.

Global mobile application monthly active users accelerated to 14% growth, and US and Canada mobile app MAUs accelerated to 5% growth after returning to growth for the first time this year in Q3 of 2022. Furthermore, global and US and Canada sessions grew significantly faster than monthly active users and accelerated from the third quarter. In addition, we saw growth in many of our core verticals as well as some of our emerging verticals like travel, vehicles and men's fashion. Turning to our financial performance. Q4 global revenue of $877 million grew 6% on a constant currency basis or 4% on a reported basis. Strength came from large retailers looking to drive sales during the holiday season, and we had solid growth from our international markets when adjusting for foreign exchange headwinds.

There was also resilience in our awareness objective or brand ad spend, as advertisers continue to lean into the brand safety and positivity on Pinterest. Furthermore, some emerging verticals, including automotive, travel and financial services, posted strong revenue growth. While we saw pockets of resilience from some CPG advertisers, many of our CPG partners and our US mid-market and SMB advertisers continue to face some challenges stemming from the current macro climate. In terms of revenue by region, US and Canada revenue was $722 million, an increase of 5%. Total revenue from Europe was $123 million, growing 5% on a constant currency basis but declining 7% on a reported basis due to foreign exchange headwinds. Total revenue from our Rest of World region was $32 million, growing 33% on a constant currency basis and 26% on a reported basis.

Turning to our EBITDA and expense profile. Adjusted EBITDA was $196 million in Q4 with an adjusted EBITDA margin of 22%. This EBITDA figure includes several actions we took in the fourth quarter that we believe will reduce our expense profile for 2023 and beyond. Most notably, this included a realignment of our resources against our shopping strategy as well as reductions to our recruiting staff and closures of some of our smaller and less utilized office spaces. Collectively, these actions accounted for about two percentage points of EBITDA margin. I'd also like to provide more color on how these actions impacted some of our expenses. Total operating expenses were $508 million, up 17% quarter-over-quarter. If you adjust for the costs associated with the actions I described during Q4, our operating expenses grew 13% quarter-over-quarter, in line with our guidance.

These costs were spread across sales and marketing and G&A. More specifically, our sales and marketing expenses grew 29% quarter-over-quarter. The actions I referenced accounted for approximately five points of that growth, while our brand marketing campaign that I've referenced on past calls drove the vast majority of the rest of the growth. G&A expenses grew 25% quarter-over-quarter. Over 80% of that growth was driven by the actions I previously mentioned, as well as increased taxes and bad debt expense. Excluding all of these items, our G&A would have grown 4% sequentially. Finally, we ended the quarter with approximately $2.7 billion in cash, cash equivalents and marketable securities. As we look ahead, while the macroeconomic environment remains volatile and we're experiencing softer advertiser demand, we want to share our best judgment around our guide based on the signals we have today.

For Q1, we expect revenue to grow in the low single-digit percentage range year-over-year. Quarter-to-date, our revenue growth is trending nearly in line with our reported revenue growth from Q4. However, similar to last quarter, we believe the error bars are a bit wider given the volatility in the market. Our guide includes about one to two points of foreign exchange headwind, and we also expect headwinds to persist from our US small and medium business and mid-market advertisers as they continue to face outsized challenges in this macro environment. While we've made significant progress in opening up more monetizable supply and reducing cost per action, these advertisers remain price-sensitive. For the first quarter non-GAAP operating expense, we expect a sequential decline in the low double-digit percentage range.

First, we're not planning to invest in a brand marketing campaign in the first quarter as we did in the fourth quarter. Second, the net impact of the actions we took in Q4 and to date in Q1 related to expense reductions are reflected in the guidance. While these actions resulted in additional costs within these quarters, we believe they will contribute to our full year goal of returning to margin expansion. As you think about our operating expense cadence through the year, you should expect a meaningful deceleration each quarter and year-over-year growth in OpEx, especially as we move into the second half of the year as we will be lapping the significant investment in hiring we made into the business in the first half of 2022. On monthly active users, as you know, we generally do not provide guidance.

We are encouraged that our investments in relevance and personalization brought us back to top line MAU growth, and we're focusing on deepening engagement within our core and episodic users. As Bill mentioned earlier, we're focused on providing long-term shareholder value, including through our capital allocation strategy. Our Board of Directors has authorized a share repurchase program of up to $500 million. We plan to commence repurchasing shares this quarter, and we intend to complete the program over the following 12 months. We believe it's important to have equity as a portion of our overall compensation program as it fosters an ownership culture with our employees, and this share repurchase program will help offset the dilutive impact of this equity compensation.

Our repurchase program is in addition to an operating -- operational approach to mitigate dilution that we implemented in the second quarter of last year called Net Settlement, under which we, as a company, hold back shares to cover the taxes on employees vested RSUs, where the company pays for the taxes from our own cash reserve on behalf of the employees. Net Settlement could amount to a use of cash of approximately $275 million in 2023, depending on a variety of factors, including the stock price and the number of grants that vest through the year. Finally, I want to thank our teams of interest, our advertising partners, and all of the people that come to Pinterest to find inspiration. And with that, we can open it up for questions.

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