Pinterest, Inc. (PINS) Earnings Call Transcript & Summary

Good morning, and welcome to the next session of the Deutsche Bank Technology Conference. My name is Lloyd Walmsley. I lead the Internet research effort here at Deutsche Bank. And we're excited here to have Pinterest with us next. Todd Morgenfeld, the CFO, as well as Jane Penner from the IR team will be on the line. Todd and Jane, thanks for being here.

Yes. Thank you, Lloyd. Thanks for having us.

Glad to be here. Thanks a lot, Lloyd.

Great. So I wanted to just kick off with just -- COVID has driven a nice lift in engagement. So just wanted to get your sense of how sticky you think those users are going to be over the medium term?

Yes. Lloyd, that's a great question, and COVID, for sure, had an impact on engagement here. But I want to open -- just to make sure we set the context for how we're going to cover questions today here. So first of all, thanks for having me. And really, whenever I speak at investor conferences, I want to remind people that our goal is just to further the general understanding of our business, our mission, our differentiation from peers, our core strategic objectives and how we're pursuing them. But what I can't do today is provide a material update to what we said on our most recent earnings call. So nothing I say here today should be interpreted as a reaffirmation or a material update to the information we communicated on that call and then our other Q2 earnings materials. So with that bit of housekeeping clear, I'll come back to your -- the COVID engagement question, which is a good one. Our Q2 monthly active user growth exceeded the typical seasonal trend, driven by the very unique circumstances around COVID-19. But it's important to note that COVID-related use cases were Pinterest use cases. So how do you make a freezer-friendly recipe? How do you entertain stir-crazy kids? Turn your garage into a home office, those are all things that demonstrate that Pinterest is a unique utility for people who are facing new challenges that were posed by the pandemic. When you think about the demographic trends in terms of the monthly active users, in the U.S., we saw a lot of strength from 2 areas. The first of which was resurrected users, people who had returned to Pinterest after a lapse of, in some cases, several years. And then secondly, and really encouraging trend in Gen Z. So people under the age of 25 grew twice as fast as those 25 and over. And that's not a new trend. So as we mentioned on the earnings call, our engagement, including our monthly active user growth generally began to moderate in May as some of the shelter-in-place restrictions began to be lifted. And despite all that, the COVID cohort continued to show strong engagement through June and July relative to other new cohorts we've seen in the past. So we're encouraged by the overall engagement we've seen from that COVID cohort, but we're also keenly aware that these users became a monthly active users during unprecedented conditions. So it's really not clear quite how sustainable that engagement will be, and we'll monitor it carefully. But if you think back in the beginning of the year, beyond COVID, the longer-term opportunity for us and engagement is to help people use Pinterest for more things in their life. That's what we talked about when we described use case diversification as one of our core strategic pillars. So we're investing in that today by building better machine learning capabilities, improving our recommendation engine and building new features like the Today tab, which is curated content to bring people back to Pinterest more regularly and introduce them to trending information that may be consistent or actually not consistent with what they would typically come to Pinterest to see, but should introduce them to more areas of finding utility on the platform. And the reason that's important is that for those people who use Pinterest for more things in their life, it's much less likely that they will churn. So monthly active users who come to the platform for like 3 to 4 use cases very rarely churn, and that's why it's really important to us. I don't know if that gets to your question. We've seen like a very unusual trend through this COVID cycle, but the early signs have been encouraging.

So you mentioned kind of this dichotomy between resurrected versus kind of brand-new MAUs. What mix should we think about going forward on the delta between the 2? And then what are the differences in engagement between those different types of users?

So in Q2, our monthly active user growth was driven by a mix, as you note, of brand-new users and resurrected users. And as I mentioned, many of those resurrected users came back after being lapsed for several years. And I think that's one of the things that we've been talking about, and we demonstrated how that can happen during this COVID shelter-in-place period because we think we have a pretty differentiated opportunity to resurrect former users here versus other consumer apps and services. And when I say that, I mean, if you are someone who uninstall the game from your phone because you don't like it or you delete a social media app because you don't like the way it makes you feel about yourself, those users are very unlikely to be resurrected because they just didn't have a good experience. But on our platform, our users often churn from being monthly active users because they completed their task. For example, the bathroom renovation that they were planning on Pinterest is finished or the wedding is over. And these users are often -- what they tell us is they're often very willing to return to Pinterest if they discover that they need it for a new use case. And in Q2, COVID-related use cases became a catalyst for returning. That was a kind of a test case for something we've been talking about for a while. How do we get some of our lapsed users to return, and that's been convincing them that Pinterest is for more things in their lives, and this unique set of circumstances helped to drive some of that. On your point around new cohort engagement versus resurrected cohort engagement and how those things differ, both cohorts tend to use Pinterest for our endemic use cases, home, food, fashion and beauty. But in general, our newer cohorts tend to engage more with our newer functions and features or services like search compared to our older cohorts who tend to engage more with the home feed, which was the original product. So it's same use cases, slightly different application of the service and its features.

Okay. Shifting to kind of the impact on advertising from COVID, was the -- how do you think about the negative impact of store closures versus kind of an acceleration in e-commerce and wondering if kind of you see retail continuing to recover and kind of CPG continuing to be robust?

Yes. Obviously, the market was quite different during the shelter-in-place and COVID-19 period and continues to be different than a normal period. But as we mentioned on our Q2 call, during the last few weeks of June and into July, we did see a broad-based recovery in advertiser demand across objectives and verticals. And this recovery was driven by improving macro trends as the lockdown is lifted and economic activity resumed, but it was also significantly driven by advertisers who are embracing the Pinterest platform and the investments we've made in our ad stack. And so specifically on that point, the investments we've been making and have been now talking about for quite some time, around conversion-based ads and the automation of our tech stack, attracted small and medium advertisers, who are a very important part of our Q2 revenue growth. And more than ever, this group of advertisers are seeking sales and conversions from end market consumers, and we were able to deliver exactly that. To your question on CPG and retail, one of the things we highlighted earlier in the year is that historically, CPG and retail have been our largest contributors to retail. That's kind of where we started building our monetization efforts. And CPG was a source of relative strength during Q2 as demand for essential household products was robust through the lockdowns. On retail, on the Q2 call, we did mention that a recovery in retailers' ad spend had lagged CPG ad spend, but that we were starting to see some green shoots there in the month of July. If overall conditions improve and as advertisers adapt to this post-COVID environment, if I can even use the post-COVID, post initial COVID environment, it's reasonable to assume that there could be some further improvement in ad demand for retailers. And in Q2, just to complete the picture, we did see some relative weakness in non-endemic verticals that had been growing, but still a small mix for us in travel, automotive and restaurants. And another emerging vertical, technology have been far more resilient. So if you really want to dive into retail because that has been historically a big component for us. Back in the shelter-in-place period, the U.S. essential goods omnichannel retailers think big box stores initially paused their spend during April due to overwhelming consumer demand and supply chain concerns and then started to resume their ad spend as consumer demand normalized and supply chain stabilized in the months of May and June. And nonessential omnichannel retailers think off-line clothing stores, as an example, just had much slower recovery in Q2 because many stores remained closed or had reduced foot traffic and therefore, consumer demand. And another emerging area, and we talked about some of the mid-market resilience we've seen. But ad spend in pure-play e-commerce and direct-to-consumer retailers were far more resilient in Q2, but that's just a much smaller mix of our products.

And I guess as we think about kind of this unique environment, how do you guys think about spend on customer acquisition? You've done some experimenting in the past on marketing. Is this something you guys are kind of might push to the background, given the strength you've been seeing, or is this something where you lean in and try new kind of marketing to engage users or attract users in this period?

It's a really good question. We had talked about marketing leading into kind of the post-IPO period and then entering this year. And it's probably worth pausing on this just for a second because most of our historical growth in terms of users on this platform has come organically. So people discover Pinterest through word of mouth and from search engine optimization. So they go to Google and they search for something and then they get directed to Pinterest. Those are the 2 primary ways that people have come to us. There's still significant potential to attract new users and even resurrect former users on Pinterest organically as we make the platform more inspiring with content and more actionable with shopping, as we talked about a little bit earlier. We have used some performance marketing, user acquisition marketing to attract both users and advertisers in the past, and we'll continue to do that opportunistically as we see the right returns, and that's worked well for us. But I think you're going toward brand marketing or awareness marketing, and that is a newer initiative for us. We ran some local test campaigns in a couple of U.S. cities and in Germany in the fourth quarter of 2019. And we were encouraged by the positive impact it had on brand comprehension on both the user side and on the advertiser side. So we had entered this year expecting to run a national brand marketing campaign in 2020. But our plans included experiential, TV and out-of-home content, and that just didn't seem like it made sense in the COVID environment. So we postponed that project now pending developments in the pandemic. So that's still out there as an idea.

Okay. So let's shift gears to shopping. It's something we've been very excited about. So maybe starting with what -- can you help us with your vision for the shopping product and then the monetization potential? Would you ever -- and kind of touch on like how you may or may not ever shift to kind of a paid inclusion model there? How do we think about that?

No. It's, again, a really interesting thread in these times, and I'll come back with the broader picture kind of at the end of this answer. But what's abundantly clear is that our Pinners, our users, have been coming to the platform more than ever to discover and buy products. And so a couple of stats on that. The percentage of users who visited are shopping-only surfaces. So I think the most commercial intent, high intent shopping surfaces on the platform. They grew more than 50% in the first half of 2020. And product-only searches, so think again, toward a full funnel shopping experience down to product-only searches grew 8x in the same period. And so that surge in shopping engagement is the result of investments we've made over the last year to do 2 things. Grow our reliable product inventory and improve discoverability of products on the platform. And on the inventory side, what that means is that our catalog ingestion by getting shoppable content on the site, increased more than 350% sequentially in Q2 and grew 10x in the first half of 2020, largely driven by the Shopify integration, which became generally available in early May. And also by infrastructure improvements to our feed uploader, so we made it easier for merchants to get their catalogs on the platform. As a result of that, our merchant -- Verified Merchant Program merchants, our approved merchants grew 350% quarter-over-quarter in Q2 and showed very healthy retention at 99%. That's a good sign from a product inventory perspective. And then on the user side around discoverability, new features like our Shop tab and an improved ability to shop directly from boards have made it much easier for Pinners, our users, to discover the products in that expanding inventory. So we're connecting users and the commercial intent that people bring directly to high-quality shoppable products better than ever. On the monetization potential, which is a good question because how do you get paid for that over time, that high commercial intent, right now our shopping ad revenue is growing off a pretty small base and it's a pretty small contribution to our overall revenue. And when you think about what we're trying to solve for, right now, we're majoring in driving from a business model perspective, it's more about shopping ad revenue and getting our users. It's not really about driving just the shopping ad revenue, but more about our users being habituated to shop on the platform to creating a really compelling user experience where our Pinners can come, find new ideas and reliably buy them without trying to drive at the expense of that user experience, advertising revenue. And so right now, it's first user experience; second, advertising, shopping ads and we're evaluating other business models right now, but nothing really to speak of beyond shopping ads, which I think would be more of a driver going through next year and beyond. And that's really important because we don't -- one of the things that I found, especially in the last 6 months in this COVID period. This progress is all based on the fact that Pinterest offers a fundamentally different experience to consumers than other e-commerce websites. And so the e-commerce is great if you already know what you want to buy and you're trying to find just a smooth transaction. But on Pinterest, our consumers are browsing inspiring images to discover what they want to buy, to find the products related to those inspiring scenes and purchase from merchants that they trust. And in a world where it's harder and harder to discover new ideas in physical stores due to lockdown orders as well as the pre-existing pressure that we've all been witnessing on off-line retailers, Pinterest is quickly becoming a compelling digital analog. It's the place online where you can truly shop and not just transact. And I think that's -- your question about shopping overall, I think that's the place to start, is that there are very few places online to truly discover a new idea and have a full funnel shopping experience that culminates in a reliable transaction. And I think we've got one of those platforms.

Yes. It's a really interesting confluence of events here with you guys building the product you've built and now kind of the world moving or reacting to COVID. Maybe you can give us a sense how much -- for how much GMV do you guys think you're driving or some other way of thinking about growth in the shopping kind of at an aggregate level?

Yes. I think building on this point about our users tending to be in market consumers that are discovering new projects or products and planning projects. The organic content we have on the platform is often on that path to purchase. And until recently, we've only been able to measure GMV associated with paid content. So it's kind of -- it's a super interesting question, but we've been unable to measure that full funnel GMV across both organic and paid content until very recently. But understanding the value of merchants' organic distribution is a powerful tool for upselling them advertising over time. And so it will be much easier as we're building more and more tools to show the complete value of both organic and paid content on the site. Say to a merchant, this item from your catalog is trending really well in Pinterest and based on our analytics, we think we can improve your sales if you promote it. We know that others have built businesses around shopping on that basis, and we hope to do something similar over time. So the basic message is we're really excited to offer a more holistic picture of the value created by a merchant's presence on the platform, but it's still very early days, and it's only available to those in the Verified Merchant Program, many of whom joined the platform through our integration with Shopify. So early days on that, but it will be a powerful way to capture that full funnel shopping experience on Pinterest.

So shifting to the Shopify partnership in a bit more detail. You mentioned this is part of the 350% sequential growth in catalog ingestion. But can you talk specifically to Shopify, how has adoption been from Shopify merchants? And then how do you all think about converting those people uploading catalogs into advertisers on the Pinterest platform?

Yes. I'd break it into kind of 3 different categories. One is on the catalog adoption point, one is on conversion of those to merchants, to advertisers and then third, the benefits -- the algorithmic benefits from tag integration. We've seen -- on the first point, we've seen a really good ingestion of catalogs from the Shopify merchants, although it's still early, and we just announced this a couple of months ago in May as generally available. But a large percentage of Shopify merchants that have the Pinterest app upload their catalog and even more adopt the Pinterest tag. And so I think we mentioned, but I'll say it again, in Q2, we saw a catalog ingestion increased more than 350% sequentially and grew 10x in the first half. And I think that's important to show that, that objective around getting more discoverable products on the site has been really important to the user experience, and I think we'll have downstream benefits to the Shopify merchants as well. In terms of the conversion to advertisers, it's still early, but we are seeing Shopify merchants convert to advertisers, even though that's not a significant revenue driver for us in the near term. It's worth noting that while some become advertisers immediately, others may convert over time as they start to see the value of their organic distribution on Pinterest. And I'm hearing that from some of the merchants that I've spoken to that they're beginning to appreciate the value of that organic distribution and are contemplating ways of capitalizing on it with more promotion. And so that convergent insights tool that I was referencing a moment ago about seeing the value of both organic and paid GMV will be, hopefully, a powerful tool in upselling that advertising down the road. And on the benefits of tag installation, almost all of the Shopify merchants that have the Pinterest app have the Pinterest tag installed because that installation is really, really easy. It's simple, a couple of clicks, and you have it installed. And the value of that is that it helps the measurement -- helps the merchant measure the holistic value of being on Pinterest while improving our inventory of high-quality products. So it's good for them and it's good for us. And we see more reliable inventory on Pinterest as being crucial to delivering a really good user experience. As we referenced before, we were trying to make sure shopping for users is a really compelling experience, especially on our high-intent shopping-only surfaces, where our users are really down the funnel looking for things, specific products at a specific price after discovering new ideas on Pinterest. So I don't know if that frames the Shopify question well. If there's anything else that you'd like on that front?