STOCK BRIEF | PINTEREST (PINS)

Ticker/Company: Pinterest (PINS) Headline: Reports from the J.P. Morgan Technology, Media and Communications Conference Summary: On Tuesday, May 23rd, Pinterest's CEO fielded questions at the JP Morgan TMT Conference. He discussed the platform's resilience in the face of a choppy ad market, their new ads partnership with Amazon, and how investments they’ve made in their product and ad platform have begun to pay off in terms of user engagement and increased conversions. Position: We remain Long Pinterest (PINS) in the Hedgeye Communications Position Monitor. The biggest takeaways from the conference were 1) the company's commitment and ability to deliver on its EBITDA margin expansion target and the potential for upside on a modest acceleration in revenue, and 2) incremental detail on the Amazon partnership that is consistent with the thoughts we published after earnings (Click Here for Note).

Key Takeaways:

Bill Ready (CEO, Pinterest)

On his first year at Pinterest:

Ready said he was proud of the company’s success in three areas since he came on as CEO in 2022:

• Return to user growth.

• In Q1, Pinterest grew MAUs 6.7% YoY – accelerating from 4.2% YoY growth in 4Q22 and the first quarter of YoY growth since 3Q21, when MAUs grew 0.9% YoY.

• Competing in the world of short-form video.

• Ready spoke to Pinterest’s ability to capture their user’s commercial intent, help the user shop and drive better monetization as a differentiating factor between Pinterest and SFV-centric platforms.

• Capturing the monetization opportunity.

• Pinterest has continued to grow through a choppy ad market.

• “I think we’re probably to only ad platform that has grown consistently through it.”

• Mentioned the largest advertisers taking up measurement tools are seeing great engagement + growth

• “Then from the advertiser side of this, we're seeing that the largest, most sophisticated advertisers, those that have adopted measurement tools are really leaning in and accelerating with us. And so there's a lot of puts and takes across the market, but those sort of hardest to please customers that in past life, I would say if you can make them happy, you can make anybody happy. We're seeing really great engagement and growth there, largely because as we bring users more actionability on the products they're discovering on Pinterest."

On the company’s cautious Q2 revenue guide (See our note “PINS | It’s All Evan’s Fault”):

From our post-earnings note on 4/27: “The stock is down because management offered 2Q23 revenue growth guidance of 4-5% YoY -  in line with 4Q22/1Q23 reported growth rates despite an easier comparison and below the Factset consensus of 6%.”

Ready identified some puts-and-takes with respect to the guide:

• Adoption of privacy safe measurement tools

• “When they [advertisers] adopt our measurement tools, see better performance than expected, 28% lift in conversion is what they tend to see. And their spend with us, on average, has gone up 30%. So if you look at those that have adopted our measurement tools, 30% lift year-on-year in spend. But we're on an adoption curve, right? And so which of the advertisers have adopted? Well, it's only 10% that have adopted so far.”

• The 90% who have not adopted are seeing revenue declining MSD % YoY.

• Net-net, Pinterest has outpaced the market and grown revenue in MSD % YoY.

• Ready also pointed out that the platform skews more towards things like retail, and called out distressed retailers are a full 2-point headwind to Pinterest’s business:

• “And if you looked at just the retailers, just the retailers that are, I would say, distressed. And by distressed, I mean, not the broader map, I mean distress isn't like bankruptcies, having trouble raising funding, things like that. Those are 2 full points of headwind for us.”

• So, in the medium to long term, the focus on the revenue front will be getting the 90% of advertisers through the adoption curve to become 30% growers instead of MSD decliners.

On the Amazon Partnership:

Ready acknowledged people were expecting a Google deal given his history, but called Amazon the “Best First Deal”

• Pinterest has been the only major ad platform not ingesting 3P demand

• Ready made it clear that they see an end state where Pinterest ingests 3P demand from multiple sources, not just Amazon

• “Pinterest sort of solved digital window shopping, but all the stores were closed. So a big part of the opportunity for us is as we open those stores and make it so that not only do you find the thing you're interested on Pinterest, but you can take action on it.”

• Ready said Pinterest is growing their advertising supply 30%+ YoY whereas a year ago they were supply constrained – and they found a partner in Amazon that has grown demand 20% YoY.

• “So in a constant demand environment, this would have been a 30% plus growth quarter for us, right?”

• “So as you look across the major ad platforms, clearly, Amazon has excess demand, given they're growing 20% plus, in a really great buying experience for the consumer. So that made them a great first partner. And again, we've said this consistently that an end state for this is that we'll have multiple partners. But given the marriage of sort of excess demand on their side and excess supply on our side as well as the great shopping experience, made them a great first partner.”

On inventory allocation / monetization:

Ready said Pinterest has been significantly undermonetized in two ways

• Ad load

• “The opportunity to take ad load up much higher is significant…In a commercial context, if you look at the other analogs out there, you would see oftentimes, you can count the slots on the page, 60%, 70% ad loads in the commercial context because as long as the ads are relevant to the user, then the user is sort of indifferent as to whether it's an ad or organic.”

• “Even in the commercial context on Pinterest, you see roughly 1 in 5 would be as of 20% theoretical limit on that would be 60% or 70%. So when I came in, my view was like, okay, you could never sign another user, never get another unit of engagement and you can multiply the business several times over just by getting the proper monetization per unit of intent.”

• Low-Funnel Conversions

• “Those lower funnel conversions pay much more, in fact, roughly 5x more. So not only can you significantly take up the ad load on the page in the commercial context, you can also shift from impression-based advertising to conversion-based advertising that pays 5x more.”

• Ready said this is where Amazon partnership comes in – Pinterest can not only increase their ad load but also drive significantly more lower funnel traffic, which results in higher revenue. But Ready said don’t expect the revenue guide to change – “I think we'll sign it [the deal] this year but don't change our expectations for revenue this year”

On the pipeline/timing of the Amazon deal:

Ready asserted his desire to get the consumer experience right, because then you can increase the ad load and get the higher dollar conversions.

• In Q4, they launched Whole Page Optimization

• “Really lets us start to take the whole page and optimize it toward what's the most relevant thing for the user and taking an integrated view of between the organic and the ads if there's a more relevant ad or an equally relevant to add to be able to show that to a user, so it's a monetizable event.”

• Whole Page Optimization + Mobile Deep Linking and the Amazon Partnership all work together, but ultimately there’s still about half a year until we see tailwinds from the partnership

• “We've talked about things like mobile deep linking, driving the majority of our growth in shopping ads. Shopping ads is growing at 40% plus year-on-year. So we know what a lot of that buying experience looks like. So we're going to spend the next, call it, 6 months, really making sure that we get this one really right.”

On user growth and seasonality in the business:

Ready is proud of their return to user growth and sees engagement increasing even faster.

• “Engagement is actually deepening for users. So engagement clearly consistently growing double-digit plus. But then if you look at like our mobile app users, which mobile app users are 80% of our -- more than 80% of our engagement and monetization, those are growing at 16% year-on-year. So we've really, really shifted sort of the direction on users and even more importantly, on engagement.”

• With regards to quarter-by-quarter trends, he did say to expect a softer Q2 just due to seasonality / school letting out but expects an equal turnaround in Q3. All in all, he said pay attention to YoY % growth – not QoQ

• “By the way, when you get into Q3, it looks back the other direction is back to school and people are shopping. And so you see a seasonal lift there. So it's just important to look at the year-on-year on those things. From a year-on-year perspective, we've clearly returned to growth year-on-year, and we commented on the call, we expect that to continue.”

On birthday verification:

Bill addressed Pinterest’s recent decision to verify their users’ birthdays and the potential impact that has on user growth:

• “We're we were getting out in front of a regulatory requirement in Europe. In fact, we went broader than that, even doing it in the U.S. because we thought it did some really good things to us bring safety for our users at the time of the call. We were much of the way through it, but not all the way through. We're all the way through it now. It's not a consequence, it's behind us. And so we feel really good about sort of how all that's playing out, both in terms of continued growth in users and engagement, as well as getting out in front of some of the regulatory things that were coming later down the road and really leading the way on user safety in doing that, not just in Europe but in the U.S. as well.”

On margins:

Pinterest has been guiding to “meaningful margin expansion” to the tune of 200bps, however the light revenue guide + street estimates seem to imply they’ll only get to around 100bps. Ready said clear as day that the company stands by their commitment to ~200bps of margin expansion:

• “But maybe I just say even more clearly, which is in any state of the world, we're committed to that margin expansion on the order of a couple of hundred basis points”

• A big part of this margin expansion is a reduction in infrastructure spending, which people would expect to manifest itself in the form of lower user engagement but they’ve found that to not be true:

• “Well, previously, infrastructure have been growing much faster than users. Well, now we're in a place now we've started really focusing on efficiency there, engages growing faster than what it was a year ago, users growing faster than they were a year ago, but infrastructure spend is reducing. And so when you look at our back half of this year, we'll start to -- instead of right now, we're lapping a lot of that sort of increase in spend that was happening in H1 of last year. As we get to the back half we now start to lap the period where we have started to put in a lot of operational rigor and cost controls. And so that's what gives us confidence that really in a new state of the world, we can deliver on the couple of hundred basis points that we talked about.”

• Ready even said they could exceed their own guidance if conditions get better:

• “Even a modest revenue acceleration, we could see double that on the margin side. And so we feel really confident in our ability to go control the costs and drive operational efficiency in the business.”

On Mobile Deep Linking and Whole Page Optimization:

• Whole Page Optimization

• Ready called this a significant development that is not fully understood.

• On Pinterest before you could find something you like but not fully understand where it comes from, have trouble finding the merchant or product name, etc. Now, they’re bringing actionability so a user can know exactly what product they’re looking at and where to find it – and a lot of that runs back through running highly relevant advertisements and “optimizing” the whole page for the user based on their interests and wants.

• “A year from now, what you should expect to see is that not only are more of those slots on the page actionable, more and more of those ought to be paid content. And paid content that is highly relevant to these.”

• “The big unlock with whole page optimization that we proved out is that we could grow ad load in a way that was enhancing to the user. It was engaged on positive. Again, a lot of people, especially in social media, think of ad load as being sort of a trade-off with the user.”

• “We took up our ad impressions, 30% plus with engagement growing double digits. So part of that is the engagement growth being double digits, but took the ad impressions up 30%, much faster than the growth of engagement overall, while also increasing engagement, which means the relevancy is good, which means we've proven out our ability to go swap in more sponsored content in a way that is enhancing to the user. That's a huge unlock. We launched that in Q4. And so that really is the foundation I've been talking about, about how we get more sponsored content in that we can put in, in a way that is actually enhancing to the user or not sort of taking away from the user.”

• Mobile Deep Linking

• Pinterest has been building towards the full-funnel service and the lower end of the funnel (conversions/actionability) has been their Achilles’ heel for years.

• Mobile Deep Lining takes a user from product discovery on Pinterest straight to checkout with the retailer.

• “Our shopping ads growing 40% plus year-on-year, but then the majority of that growth being driven by our implementation of mobile deep linking, which again, was late last year that we launched that, but it's been a hugely successful launch”

• “This is other shift that we made in the shopping strategy that previously Pinterest have been going down a path of being sort of Pinterest as retailer. And we've shifted that to clearly Pinterest as ad platform, but solving for a really great buying experience in a way that lets the consumer connect directly with the retailer, which is great for the consumer because if you need to make a return, where are you going to go all the support after the sale but also great for the retailer. Retailers love it because they get a customer, not just a transaction.”

On AI

Ready briefly addressed Pinterest’s investments in AI and how they’ve been paying off thus far:

• “We have had years of investment in AI. A lot of our gains are coming from that. So like our personalization, we've already started implementing next-gen AI capabilities. So for example, we're now using recommendation models that are 100x larger than our prior models because of the switch from CPUs to GPUs and next-gen AI technology. So when you look at us making better and better recommendations in fact, 95% perceived relevance by users. A lot of that is leaning into next-gen AI technologies. Same thing on our ad stack. So I think there's just a huge amount of productivity and sort of increased opportunity from that even without the -- what are you doing on like generating new images, a lot of cool stuff you can do there, but those probably take a while to play out. There's an immediate benefit that you're already seeing in our business from that.”