PINTEREST Earningcall Transcript Of Q2 of 2024
Bill Ready -- Chief Executive Officer Thanks, Andrew. Good afternoon, and thank you for joining our second-quarter 2024 earnings call. Q2 marked another strong quarter of growth in users and revenue, driven by continued progress against our strategic initiatives. On the User side, we're leaning into what our users love most about Pinterest, the ability to find inspiration and take actions seamlessly in one platform. And as we said before, we found our best product market fit in years. Q2 global MAUs reached another record high of 522 million, growing 12% year over year. On the monetization side, our investments to become a true full-funnel platform, particularly our efforts to build out our lower funnel offerings are paying off with Q2 revenue of $854 million, up 21% year over year. We also continued to drive significant improvements in profitability, resulting in Q2 adjusted EBITDA of $180 million or a 21% margin, up 600 basis points versus Q2 last year. Before I dive into my usual business update, I wanted to start with a few anecdotes from my time last month at Cannes Lions, one of the largest advertising industry events of the year as it reflects the momentum building around Pinterest. Advertisers are taking note of Gen Z love for Pinterest and are increasingly understanding how they can meet this audience on our platform across their inspiration-to-action journey. They're also seeing firsthand how our investments in the lower funnel are driving tangible success through our increased clicks and conversions. And this momentum was evident at Cannes as we saw a 50% increase in the number of visits to our activation this year and a 40% increase in the number of advertisers we met with at this important event. While at Cannes, we created an immersive activation experience, where attendees could discover user behavior on Pinterest firsthand, and what one CEO said, "felt like stepping into a real-life inspiration board." We created a space where attendees, many of whom were Gen Z, could take a break from talking and hearing about creativity and actually be creative with Pinterest. We also previewed our latest AI and automation tools to drive even more performance for our advertisers through the launch of Performance Plus, which was very well received. I'll discuss more about Performance Plus later in my remarks. Shifting now to our quarterly update, beginning with Users and Engagement. Last quarter, we reviewed the initiatives over the last two years that have taken us from declining users to sustained user growth. These initiatives are, one, utilizing AI to drive increased relevance and personalization; two, doubling down on curation through boards and collages to help users navigate their inspiration to action journey; three, increasing actionability, particularly for shopping, allowing our users to bring their inspiration to life; and four, creating a more positive alternative to traditional social media. When combined, these initiatives have had compounding effects and have led to the healthy MAU growth we're seeing today across all geographic regions and the age cohorts we track. Now, I'll share more about the key recent product launches that demonstrate continued progress against our strategy and the initiatives I've outlined. First, we're helping our users more effectively find inspiration and discover new relevant content that resonates with their interest through our investments in AI. We've made ongoing progress to modernize the core AI that powers the content users are shown, leading to meaningful improvements to the relevance and personalization of our content recommendations. As an example, in Q2, we upgraded our search ranking algorithm to incorporate new signals, enabling us to recommend more relevant and ultimately engaging content for the user. This resulted in a significant increase in our global search fulfillment rate, which means our users are finding more of what they're looking for when they search on Pinterest. A part of our efforts to improve content discovery is to help users refine their searches, which often started short, broad queries as users come to us with a general sense of what they're looking for but don't have the precise words to describe it or we'll know it when they see it. We're continuing to invest in bolstering content discovery through generative AI-based guided search, which we first rolled out several months ago for the Home Decor vertical. Guided search provides a structured way to break down these broad queries in the narrower avenues of exploration. For example, a search for a broad query like kitchen ideas might lead a user to more refined options like DIY kitchen projects or backsplash inspiration, to further explore their taste and move down the inspiration to action journey. We're finding a notably strong product user fit for guided search with our more episodic users, who are generally less familiar with the platform and thus find value in the structured experience to discover fulfilling results. Second, we're leaning into curation, a key differentiating feature of Pinterest and one that users leverage as a pivotal step to navigate their journey from inspiration to action. Said simply, it's how they refine their choices and decide what to buy. Human curation on the platform bolsters our content flywheel, providing rich first-party signals early in customer shopping journeys. These signals are predictive of user interest and allow us to drive even more relevance to users via enhanced content recommendations. We've been reinvesting in making the curation journey on Pinterest easier to use and more engaging for our users through updates to boards and through our new content format collages. On the board side, it's more intuitive to create, save to, and share boards than ever, with a refined user interface and new features like auto organization that utilizes AI to identify and automatically group together Pins into new boards, saving users the need to organize it themselves. We're also making it easier for users to share their taste and style with others. In Q2, we launched board sharing, a new feature allowing users to share engaging videos of their Pinterest boards like dream home decor or ultimate travel bucket list to other social platforms for the first time. This feature also enables us to include a link for others to explore their boards on a platform as well. We're also collaborating with power users like musician Avril Lavigne, who use board sharing to give her fans a sneak peek into the inspiration behind her tour outfits. To bring this feature to life for a broader audience and showcase the magic of curation on Pinterest, we're continuing to make progress with collages. A highly interactive new content format developed using advanced computer vision technology, which allows users to cut out components like a shirt or a pair of shoes from other images and piece them together into one highly engaging and interactive Pin. And as we've mentioned before, we're seeing that this content format resonates with our audience, who save collages roughly three times more often than our traditional Pins, especially with our Gen Z audience who uses collages to express their personal aesthetic. In Q2, we extended collages to advertisers, meaning they can now create engaging collages using cutouts of product Pins from their own catalog and promote them as ads. In fact, brands like Nike, John Lewis, and Bumble and bumble. are utilizing collages to showcase their product catalog in a unique and visually appealing way. And finally, we're driving further actionability across Pinterest by launching features that allow users to move further along in their shopping journeys and take action on what they see. In doing so, we more than doubled the number of outbound clicks we sent to advertisers year over year for the third quarter in a row. And as we improve overall actionability and make it easier for users to find what they're looking for, we're seeing that users are able to successfully complete their journeys on Pinterest more quickly. In Q2, we shipped more new filters like price, retailer, and brand on high shopping intent search queries across fashion and home decor verticals. We're also experimenting with other filters, including On Sale, to give users more control over their shopping journeys and find products tailored to their style and budget. And with this valuable signal, we can then recommend even more relevant and personalized shoppable content to our users. We're also making video more shoppable on the platform as it is an integral content format on the inspiration-to-action journey. As an example, in Q1, we launched Shop the Look on video to help users shop items that bring them inspiration and videos they were already watching. In Q2, we introduced video shopping ads to complement all the work we've been doing to drive actionability across formats and surfaces. With video shopping ads, merchants can seamlessly add videos to their product catalogs on Pinterest and promote them. Hundreds of advertisers have already started incorporating video in their product catalogs, given the strong visual nature of our platform. For mass retailers who have adopted this format, shoppable video ads drove a higher click-through rate and lower cost per action compared to static catalog ads. Next, I'd like to discuss how we are improving monetization by making Pinterest more valuable and performant for advertisers. We delivered strong revenue growth in Q2, and the momentum we're driving in the business is evidence of all the work we've been doing over the last several quarters to significantly improve our ad offering. As the initiatives we outlined at our Investor Day continue to deliver as we expected or better, this includes, one, our investments to become a true full-funnel ad platform, particularly through our new lower funnel offering that are creating significant value for advertisers; two, continuing to increase ad load driven by the synergies between our users' strong commercial intent and relevant ads; and lastly, third-party partners, resellers and international, as additional levers to revenue growth. We're seeing advertisers take notice of the growing momentum in our business, and we're gaining share with some of the largest and most sophisticated advertisers in the world. As I look ahead, there's a lot more to do, but it is clear that the strategy we've employed is working. Shifting to our full-funnel ad solutions. We've been hard at work improving our offering to help advertisers meet consumers the full funnel. Pinterest is a place where advertisers can build their brand in a positive environment, drive consideration when the consumer has not yet decided, and ultimately deliver conversions all on one platform. We see that over 90% of search queries don't specify a brand or specific product, but rather a categorical interest such as fun summer dresses or cool white sneakers, or mid-century bedroom decor. This is a magic moment for advertisers to connect with users who have clear commercial intent but have not yet decided what they want to buy. Many of our advertisers are taking advantage of the full funnel, with over half of our large advertisers using multiple campaign objectives. Moreover, advertisers who use upper and lower-funnel objectives see two times higher conversion rates than those who use one objective alone. Within the full funnel, we focused the majority of our monetization efforts on the lower funnel to drive performance in the form of clicks and conversions to advertisers. We've made substantial progress across our entire platform to improve actionability and allow users to shop at the point of inspiration. Nowhere does this manifest more than within the lower funnel, where relevant shoppable ads can be great content on Pinterest. And whole page optimization powered by AI allows us to show more of these relevant shoppable ads when users are in moments of high commercial intent. Over the last year, we've also made significant progress in making the purchase journey more seamless for our users, with products like mobile deep linking and direct links. Now, nearly 100% of our lower funnel revenue is covered by direct links or mobile deep linking, which means it takes just one click to leave the user directly to an advertiser's product or purchase page. The changes we've made are having real impacts, as we've now more than doubled the amount of clicks to advertisers year over year for the third quarter in a row. As advertisers have begun to notice improvements in their measurement sources of truth, many of the largest, most sophisticated advertisers are voting with their dollars and driving more budget to Pinterest. We're beginning to see value capture from the next tranche of advertisers as well and believe much of the value captured from direct link is still ahead of us, as advertisers continue to take note of the consistent increase in click volume we are delivering. However, the pace at which advertisers adjust their budgets depends on a variety of factors, including seeing performance appear in their individual measurement sources of truth and the level of resourcing required to implement incremental campaigns. We anticipate that with the rollout of our new automation suite Performance Plus, which I'll discuss shortly in more detail, we'll be able to alleviate some of this heavy lifting on the advertiser side. This should drive even greater value creation through improved campaign setup and efficiency, leading to compounding performance effects through our full lower funnel solution set and ultimately further value capture. Finally, we're also continuing to drive more actionability in the lower funnel through incorporating third-party ads into our auction to grow relevant shoppable ad demand. As we expected, third-party ad demand became an even larger source of revenue this quarter and is continuing to fill in gaps in the auction, especially on our high-intent surfaces like search and related items, where relevant ads are additive shoppable content for our users. We know that performance is only as good as the advertiser's ability to measure it. Because of this, we're focused on driving adoption of our privacy-centric measurement tools like conversions API and clean rooms. We've continued to grow adoption of these tools in Q2, with a sharp focus on advertisers with lower funnel shopping and conversion objectives. This adoption has been driven by a few key initiatives. First, we are easing the onboarding process for advertisers with the goal of meeting advertisers where they are with whatever third-party solutions they are using. As such, we revamped our developer site and continue to increase the number of third-party integration partnerships. Second, we have bolstered our own seller training efforts and education to help advertisers understand how these solutions can strengthen their conversion visibility. With that, we continue to make measurement adoption a key priority for our sales force and tie a portion of seller incentive compensation to propriety-centric measurement adoption. While we want advertisers to adopt our own solutions and best practices, we recognize that many of them have their own measurement source of truth. To that end, we focused our efforts on making sure we are showing up correctly and consistently, wherever an advertiser measures their performance. Moving to AI and automation. Our work to build out our lower funnel suite continued in Q2 with the announcement of Performance Plus. This brand-new offering, which recently entered beta for a limited number of advertisers brings together all of our AI and automation tools across bidding, budgeting, and targeting to improve campaign performance on Pinterest. With Performance Plus, lower funnel advertisers can use these tools in concert to unlock our most powerful automation and AI features, all within a new simplified campaign setup. Advertisers can also apply any of these features to non-Performance Plus campaigns, giving them the ultimate control based on their unique needs. We are excited about Performance Plus as the next iteration of our lower funnel suite, as we roll out these tools, we expect a similar multi-quarter product uptake and adoption curve as our previous lower funnel launches like shopping ads, mobile deep linking, and direct links and conversion APIs. This suite of tools when used together compound upon each other to drive powerful lower funnel performance for our advertisers. While still early, the test results have been positive. Many of the advertisers who participated in our Performance Plus Alpha test this spring saw a greater than 10% improvement in cost per acquisition for their lower funnel conversion and shopping ad campaigns or a greater than 10% improvement in cost per click, CPC, for consideration campaigns. For example, outdoor apparel brand Timberland was an early tester of Performance Plus in the U.K. and saw a 34% lower cost per action, a 16% increase in click-through rate, and ultimately, a 50% higher return on ad spend from their Performance Plus-enabled campaign versus their traditional campaigns. In addition, Performance Plus significantly reduces the time required for advertisers to create a campaign with 50% fewer inputs than a traditional creation flow. We are also testing additional automation solutions, which we plan to incorporate into the Performance Plus suite in the coming months. These include Performance Plus bidding for ROAS, which automatically optimizes advertisers' bids to drive the highest ROI, and Performance Plus Creative, which helps advertisers make new ad creative using generative AI and optimize their existing creative across multiple ad formats. Performance Plus Creative is already driving tangible results for advertisers. Fashion Marketplace, Poshmark, an early tester of the product saw a 25% lift in click-through rates on products with a Performance Plus generated background versus a white background. As we continue to iterate, we will roll these features out to a broader swath of lower-funnel advertisers, and we'll have more to share as we progress through the second half of the year. Overall, I'm proud of our latest automation rollout, a continuation of our efforts to deliver the best possible performance for advertisers and reduced friction in doing so. Our goal is for advertisers to be able to provide us with a budget, a goal, and their seed creative and we'll do the rest. With that, I'll turn the call over to Julia to share more details about our financial performance. Julia Donnelly -- Chief Financial Officer Thanks, Bill, and good afternoon, everyone. Today, I'll be discussing our second-quarter 2024 financial results and provide an update on our preliminary third-quarter 2024 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. Let's dive into our second-quarter results. We ended the quarter with 522 million global monthly active users, or MAUs, growing 12% and reaching another record high. Users continue to grow year over year across all of our geographic regions due to the compounding effects of the initiatives Bill mentioned earlier in his remarks, were improved personalization, curation, and actionability are driving enhanced inspiration to action journeys for users. Specifically, in Q2, in the U.S. and Canada, we had 98 million MAUs, growing 3%. In Europe, we had 136 million MAUs, growing 9%, and in our Rest of World markets, we had 288 million MAUs, growing 17%. Now, on to revenue. In Q2, our global revenue was $854 million, up 21% on a reported and constant-currency basis. The revenue strength this quarter, which exceeded the high end of our guidance range, highlights how we are driving value for advertisers across the full funnel with particular strength coming from our lowest funnel conversion objective. From a vertical perspective, we once again saw broad strength in retail. Our larger, more sophisticated advertisers continue to lean into the platform as they have adopted our lower-funnel tools and are seeing continued success. We're also starting to see signs of value capture from the next tranche of advertisers, as we have doubled clicks for the third quarter in a row and those advertisers are beginning to see that impact in their measurement sources of truth and adjusting spending accordingly. Additionally, emerging verticals like technology, autos, and financial services were sources of strength. However, this growth was partially offset by softness within CPG, specifically food and beverage advertisers, who are navigating broader headwinds within that category. Next, as expected, revenue from our third-party demand partnerships continued to ramp in Q2, growing sequentially off the revenue base we delivered in Q1, as it continues to complement our growing first-party business. Turning to our geographical breakout for Q2. In the U.S. and Canada, we generated $673 million in revenue, growing 19%, strength came from retail and from emerging categories, including technology, autos, and financial services. In Europe, revenue was $143 million, growing 25% on both the reported and constant-currency basis. Strength in Europe was driven by retail. Revenue from Rest of World was $38 million, grew 32% on a reported basis or 36% on a constant-currency basis. In Q2, ad impressions grew 35%, while ad pricing declined 11% year over year. These dynamics were similar to Q1 with ad impressions being driven both by increases in total impressions as well as increases in ad load. Similarly, pricing continues to be lower year over year as we continue to drive increased value to advertisers in the form of more clicks and greater efficiency. We continue to drive increases in ad load through whole-page optimization, which increases the supply of relevant ads to users in moments of high commercial intent, and we see opportunity to increase ad load moving forward, as we further improve the actionability of our users' journeys and the relevance of our ads. In Q2, we also saw a greater mix shift to ad impressions with lower average pricing or eCPM. This was influenced by two factors. First, we started serving ads in previously un-monetized markets, mostly in our Rest of World region, many of which have lower eCPMs than our existing monotype markets. And second, on a global basis, we are seeing growth in third-party ad impressions to fill in gaps in our auction in places that were previously under-monetized or not monetized at all. Right now, we are mainly filling these in with relevant demand from third parties, but over time, as we increase demand further, we expect to see greater auction pressure and, therefore, higher eCPMs for these ad products. Moving to expenses. For the past several quarters, we've been able to drive continued margin expansion through effective expense discipline, while allocating resources toward our highest ROI initiatives. In Q2, cost of revenue was $180 million, up 9% year over year and up 2% versus Q1, due to increased infrastructure spend related to user and engagement growth and partially offset by our continued work to drive cost optimizations on our infrastructure spend. Our non-GAAP operating expense was $497 million, up 13%. The increase was primarily driven by head count growth and R&D, increased marketing expense, and increased G&A, driven by non-income-based taxes and other employee-related costs. Our revenue strength and expense discipline led to another solid quarter of adjusted EBITDA and margin expansion, coming in at $180 million with an adjusted EBITDA margin of 21%. This was up approximately 600 basis points versus Q2 last year. Finally, we ended the quarter with cash, cash equivalents, and marketable securities of $2.7 billion. In Q2, we utilized approximately $120 million of cash on net share settlement of equity awards, plus an additional $34 million on share repurchases. Now, I'll discuss our preliminary guidance for the third quarter. We expect Q3 2024 revenue to be in the range of $885 million to $900 million, representing 16% to 18% growth year over year. Let me share some additional context as we look forward to Q3. Our revenue guidance reflects further progress against our strategic initiatives, including continued lower funnel strength and the ongoing emerging contribution from third-party demand partnerships. The underlying health of our business remains strong, and we continue to be excited about the opportunities ahead. However, as we move into Q3, we are facing tougher comps since our revenue growth nearly doubled from Q2 to Q3 last year. It is also worth noting that current spot rates, we are expecting a foreign exchange to move against us for the first time in five quarters, resulting in a one-point headwind for Q3. Finally, our guidance does not assume a material improvement in trend for the food and beverage category, or significant revenue contribution from the launch of Performance Plus as we are still currently in the testing phase with a small number of advertisers. Turning now to our expense guidance. We expect Q3 non-GAAP operating expenses of $485 million to $500 million, growing 17% to 20% year over year. Our operating expense guidance does not include cost of revenue. However, we plan to realize modest additional benefits from our ongoing infrastructure optimization efforts, and therefore, we anticipate Q3 non-GAAP cost of revenue expense to be relatively consistent with Q2. The increase in non-GAAP operating expense year over year is driven by investment increases in R&D, where we continue to invest in head count for AI talent across our business. As we have said previously, for full-year 2024, we are anticipating year-over-year adjusted EBITDA margin expansion, but at a more modest level than the 660-basis-point expansion we delivered in 2023, as we balance investing in growth and flowing profitability through to the bottom line. We also continue to expect margin expansion in both halves of 2024, though consistent with our prior remarks, we expect a more modest level of margin expansion in the second half versus significantly higher expansion in the first half, as we begin to lap the strengthening adjusted EBITDA margins we drove in the second half of 2023. In closing, I'm proud of our team for delivering yet another strong quarter of results as we execute against our strategic plans. Our continued gains are evidence of the momentum in our business and underpin our confidence in our ability to deliver on our plans. Now, I'll hand it over to Bill for some final words. Bill Ready -- Chief Executive Officer Thanks, Julia. I want to thank our teams at Pinterest, our advertising partners, and all the people that come to Pinterest to find inspiration in the shop. And with that, we can open the call up for questions. Operator Questions & Answers: |