Pinterest, Inc. (NYSE:PINS) Q4 2019 Results Earnings Conference Call February 6, 2020 5:30 PM ET
Company Participants
Jane Penner - Head of Investor Relations
Ben Silbermann - President and Chief Executive Officer
Todd Morgenfeld - Chief Financial Officer
Conference Call Participants
Colin Sebastian - Baird
Stephen Ju - Credit Suisse
Eric Sheridan - UBS
Justin Post - Bank of America
Ross Sandler - Barclays
Mark Mahaney - RBC
Jason Bazinet - Citi
Mark Shmulik - Bernstein
Lloyd Walmsley - Deutsche Bank
Tom Forte - D.A. Davidson
Doug Anmuth - JP Morgan
Heath Terry - Goldman Sachs
Brian Fitzgerald - Wells Fargo
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Pinterest Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Jane Penner, Head of Investor Relations. Thank you. Please go ahead.
Jane Penner
Thank you, Sheryl. Good afternoon, everyone and thank you for joining us. Welcome to Pinterest's earnings conference call for the fourth quarter and full year ended 2019. Joining me today on the call are Ben Silbermann, our President and CEO and Todd Morgenfeld, our Chief Financial Officer.
Now I'll 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 or 10-K filed with the SEC and available on the Investor Relations section of our Web site.
During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and letter to shareholders, which are distributed and available to the public through our Investor Relations Web site located at investor.pinterestinc.com.
And now, I'll turn the call over to Ben.
Ben Silbermann
Hello everyone, and thanks for joining the call. After the market close, we've released our latest shareholders letter. We're going to share some highlights today and since its start of the New Year, we're also going to look forward and talk about our strategic priorities for 2020.
Let me just start by saying how proud I am with the progress we made in 2019. It truly was a milestone year for the company. In April, we went public giving us new resources to invest back into our business. We continue to attract creative and talented employees who are working hard to innovate every day on behalf of our pinners. And we continue to improve the Pinterest experience for both our users and our advertisers. Much of that progress is reflected in a strong close to 2019.
In Q4, revenue grew 46% year-over-year to help fuel annual revenue growth of 51%. We have 335 million monthly active users, a 26% annual increase and we had our first profitable year as a public company on a non-GAAP basis. So we're happy with how we closed 2019 and we want to keep this momentum going in 2020. How are we going to do that? Our mission is to bring everyone the inspiration to create a life they love and our strategic plan this year is created in service of that mission.
I want to talk briefly about our four strategic priorities for 2020; first, ensuring that Pinterest is the home to inspiring content; second, scaling our ads business with a focus on attracting more mid-size and international advertisers; third, helping people see the value of Pinterest for more and more use cases in their lives; and forth, making Pinterest more shoppable so it's easier for people to take the inspiration they see and make it part of the reality.
Let's start with ensuring that Pinterest is the home to inspiring content. In total, pinners have saved roughly 240 billion pins to over 5 billion boards. Each one of those boards represent a person's project, passion and plan. And so our first job is to show pinners inspiring ideas at the right time. This means recommending ideas to the right person and it's at the heart of our mission as a company.
Delivering on this promise of inspiring content and personalized recommendations is evergreen, and we're focusing on 2020 in three distinct ways. First is relevance. We will continue to enhance the core machine learning algorithms that drive our search and recommendation engines. We made big strides on this in 2019, and we'll continue to invest heavily this year. Second, we want to create an environment that's positive and inspirational. We've seen on the Internet that positive environment don't just happen on their own they have to be engineered that way.
And that's how we plan to continue to invest in keeping unsafe content off of our platform, like our efforts to remove the anti-tax information, as well as to drive better outcomes with new features like the ones we launched last year, offering activities people can do if they're feeling stressed, anxious, or depressed. Third, we want to innovate on creative formats. We know the Internet is evolving towards richer and more expressive types of content and this is a priority for us too.
In 2019, we made progress in introducing pinners to more video, organic video views increased 6x. We've also invested in AR, including a new feature called Try-On that helps you virtually try and make up before buying it. This is an area where we're just getting started, so stay tuned for more updates throughout the year.
Our second strategic priority in 2020 is scaling our ads business. We've always said that great ads improve the user experience on Pinterest. People come to plan big and small moments, and relevant ads can play an important part in making those moments happen. For example, Q4’s football season, a lot of people create boards to plan game watching or tailgating parties, and it's actually helpful if you've seen that for a food company like Frank's RedHot Sauce with game-day recipes for dips and wings.
When ads are relevant and useful, it's a win-win. Pinners get inspired and advertisers like Frank see great results. In fact, the company saw 3x increase in the percentage of people saving their ads this season. The key here is making sure ads are relevant to our pinners’ interests, projects and plans and we just do that at scale. To serve ads that are relevant to the incredibly diverse range of ideas being explored on Pinterest, we need to increase the number of ads in our system, by bringing more advertisers and building tools that meet their needs.
Last year, we focused on making Pinterest accessible to small advertisers by building a suite of mobile tools, basic analytics and reporting, and those are now available in all 28 of our ad markets. This year, we plan to focus on improving the experience from midsize international advertisers. That means, building more robust desktop self service tools so sophisticated advertisers can succeed with less accounts sales support, more creative tools so they can create inspiring content, in scalable measurement so they know the value they're getting from Pinterest. It also means navigating the evolving regulatory landscape around issues like targeting and measurement, so we can continue to deliver value even as the environment changes around us.
We're still at the beginning of this roadmap, but the hard work is essential to fulfilling the promise of Pinterest; hundreds of millions of people planning, deciding and acting on commercial content, which means driving measurable conversions for our advertisers and in turn powers our business forward.
Our third priority is helping pinners get more value by expanding their use cases. People come to Pinterest to get inspired and plan their lives. A lot of these people are highly engaged and use Pinterest for multiple interests, projects and hobbies. For example, in the shareholder letter you'll see the story of a pinner named, Britt. She's a fashion stylist that uses Pinterest to show her clients with different looks, but she's also created boards on everything from her studio space, to furniture, to food. We see the people like her who use Pinterest for multiple use cases will stay more engaged over time, and we want to deliver this experience to those who come to Pinterest for one project like a baby shower or home renovation. We want to show them how useful it can be across their entire lives.
In 2019, we began to build products and features that encourage Pinterest to use -- and cherish pinners to use Pinterest for multiple things such as personalized search recommendations. This year, we'll continue to build new features that help people do more than just see other Pins. We want them to easily see new reasons and use cases for Pinterest and we're excited about that road forward.
Our fourth and final priority is making Pinterest more shoppable, so people can easily take the inspiration they see and make it part of their lives. Last year, we dramatically increased our inventory in stock products by making catalog upload or self-serve and by driving its adoption across our managed advertiser base and we're going to be more than that this year. We're going to make it easier to discover shoppable products so Pinterest can move seamlessly from inspiring images to shopping services where they can buy what inspires them.
We'll be launching our verified merchant program, so pinners know they're buying from merchants that meet our quality guidelines. Finally, we'll keep building on ad formats that help merchants put their products and services in front of customers. In 2019, we've created our foundational shopping app products, including the standard shopping ad and shop to look ads and there's more to come in 2020.
So in closing that's a look at our four priorities for the year. I'm excited about how far we've come and more excited about where we're going. Thank you for taking the time to listen.
And now, Todd and I will open it up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Colin Sebastian of Baird. Please go ahead. Your line is open.
Colin Sebastian
I have a couple of questions. First, on the shopability of the platform, specifically how quickly are the shopping related experiences helping to bridge the gap between usage and monetization, including how important are newer initiatives like verified by Pinterest and they are Triy-On. And then obviously international, still very early. But can you talk about what's working, in particular in other geographies and maybe what's not working as well? Thank you.
Ben Silbermann
So the question that I heard was, how quickly are the shopping efforts accelerating monetization. The answer to that is we think that we're still in the early innings of shopping, and we're building a lot of the foundational components. So we're improving the amount of inventory that we have to programs like the verified merchant program. We're building the shoppable surfaces and we're improving the ML that matches inspiring images, but we don't expect that to create a discontinuous change in our revenue for next year.
What I will say is that we're serving retail in a lot of different ways and shopping advertisements help complete the suite of offerings that we've already been giving them. So we've always allowed them to reach their audience. We've allowed them to build awareness through things like our video campaign and now we’re extending that with things like shopping ads, so people can really reach people throughout the full funnel from inspiration with thinking of new things all the way to purchase.
Now a great example of that this year was floor and decor. They started before we had things like shopping ads, really building an audience and driving people to their Web site, but shopping ads now let them target people who are later in the funnel and kind of see that full funnel picture really opening up.
Todd Morgenfeld
On the international question, I would say we were delighted with the performance of our investments in international markets over the course of the year, in particular in Q4 where our revenue from those markets went from 6% to 13% of total, so scaling nicely. And I would point to the newer markets like Canada, Germany and France, as being examples of where we've seen significant scaling and a lot of opportunity.
There are two things that I would say that we could continue to focus on over the course of the year. One is moving from test budgets into always on budgets. We continue in the moment to be new and nascent in those markets, and that means that a lot of people are testing rather than moving to always on budgets and that's an area for us to continue to focus on through the year.
The second thing I would say is a general comment about where we're investing, which is making it easier for advertisers to be successful on Pinterest and that includes both U.S. markets, as well as international where things like automated targeting, bidding and budget utilization, more sophisticated measurement, and analytics and creative optimization, will make it easier for those mid market advertisers internationally to find success on the platform. In particular in international markets, those tools will be useful with respect to agencies where the concentration of revenue is a little bit higher.
Operator
Your next question is from Stephen Ju of Credit Suisse. Please go ahead, your line is open.
Stephen Ju
So Ben, I think on the content section of the letter, you're talking about consumption of video content rising at what is probably a faster clip versus the overall. So can you talk about how your compute and I guess the contextualization needs change and become more intense? And how your current ad units, especially for shopping, may need to change as we move away from, I guess consumers consuming -- looking at more of the static images and more to video? Thank you.
Ben Silbermann
I have two parts, one, is how is increasing consumption of video and other new formats kind of impacting our cost structure. And second is really how we're thinking about video terms of ads. So on the first question I think that video obviously is more expensive to serve than images. I don't know that it necessarily changes compute in a big way. But that said like we have to go where the markets going. And what we see from our users is they love video. If you think about use cases like a tutorial for makeup, how to do a recipe and exercising, those are just the best expression videos so we really want to invest heavily there, because we think that's where the future is going.
Your second question is how it applies to ads. And to counterbalance the expense of serving more video, we've seen great uptake from our various ad products. We've launched a lot of improvements for advertisers. We've made it faster to upload. We've improved experience on consumer side making it faster to stream. We've offered them new analytics and new buying options, things like cost per view. And we've seen a lot of advertisers take great advantage.
One of the ones that I thought was really inspiring was from our neighbor, Airbnb.
They really wanted to drive awareness of tourism in France outside of the major cities and they partnered with our team to create a campaign called First Night on Us, the video campaign and they just saw great results, so double digit increase in awareness in that market. So we think that it is more costly but we have to give users the most inspiring experiences. And on the flip side of it, video represents still a very bright and fast growing opportunity on our advertising side.
Operator
Your next question is from Eric Sheridan of UBS. Please go ahead, your line is open.
Eric Sheridan
Two on the advertising side, one, in the letter you talked about automation and measurement being a big priority for 2020. Just want to talk about how far you are through the investments you need to make to amplify those as elements of the business going forward and delivering for advertisers and/or how much you've started to see return on those investments that are made in prior periods? And then one just clarification, you talked about the number of active advertisers doubling year-on-year. Were there any specific industry sectors or verticals between small advertisers and large advertisers that were big drivers of that doubling since it was such a big deviation from growth rates in prior years from the shareholder commentary? Thanks so much.
Ben Silbermann
So Eric the first part of your question kind of got to how far we are along in that roadmap. And the answer is despite the fact I'm very proud of all the progress we've made, there's still a really long way to go. You've got to remember that advertisers are used to sophisticated solutions built by companies that have been in this market for more than a decade and we see opportunities really all over the place. On the measurement side, we want to really make sure that there’s self-serve measurement tools, so you don't need an account manager, you can pull that data in real time.
On the tools side, you pointed out automation but that covers a whole range of things. Automated bidding is a huge opportunity for us, as well as automation on creative optimization. Finally, we do have a lot of progress still to making formats and it's something I touched on a video, but we're very early on in all those areas and so we do see more opportunity to come.
Your second question was where the growth in the number of advertisers came from. And last year, we made an important investment to make a lot of our advertising tools accessible to folks on the phone for the first time, so we saw a lot of growth in very small and medium sized businesses. Now those businesses today don't make up a large proportion of our revenue, but we think they're important for two reasons; first, because long-term a lot of those businesses will grow up; and second because relevance is sort of our North Star and a lot of those small businesses increase the number of ads and therefore drive relevance.
This year, we're shifting a little bit and we're starting to focus on what we call mid size advertisers. So these are folks that are very sophisticated, they're super quantitative in the way they advertise, but they may not be at the scale to be able to have a dedicated account manager. And the investment in a lot of the automation in the desktop ads manager is really to support them.
Operator
Your next question is from Justin Post of Bank of America. Please go ahead, your line is open.
Justin Post
Since shopping is a priority, I was wondering if you could help us a little bit about the business model. Is that a take rate model or is it still bidding for placement? And then secondly, how do we think and I know you can't quantify exactly. But how do you think about the yields when people come in for a shopping experience versus current, just the uptick there? Thank you.
BenSilbermann
Justin, I'll try to answer both questions. The first one was about the business model. We're not doing a take rate. The monetization comes when businesses who start to see organic traction choose to use our shopping ads, and that's proven to be something that's really, really high quality. Internally, one thing we're excited about is that as we grow the amount of inventory in the system, we can show people more and more relevant products on the organic side and on the paid side. And that's why things like catalog uploader and the verified merchant program are really important. And in Q4 alone, we were happy to see 70% increase from the number of catalogs, all of that's in services idea that the more trustworthy products you have in the index, the more relevance you can drive.
Your second question and I apologize I don't fully understand it. It kind of had to do with the yields of folks that come in with commercial intent versus those who don't. But what I would say to that Justin is it's something that we can't quantify right now, but we know something from our research, which is a lot of folks for many years have come to Pinterest with commercial intent. They'll be redecorating their home, they'll be thinking about outfits for. So they become frustrated when they can't find the exact product that they're seeing.
We also know that when people then go into those shopping surfaces that are all products, we see good click through rates and good conversions. And so while I can't give you kind of the math on what the difference is, we think that it's good on two fronts. One is satisfying user experience, because they come in and they can go from inspiration and then turn that into reality.
And second, we think it's a good business opportunity for us and for their advertisers, such as we've got people that have genuine commercial intent, but they didn't come in with a specific idea of an exact product they were looking for and that's something really unique to our platform. Unlike a search engine where people are often searching for a specific brand name or really long query, these are people that start with something like living room ideas, or fall fashion, or vacation plans and then are guided to a product that generates net new demand for advertisers. And we think in the long term that value proposition is very differentiated in the market.
Operator
You next question is from Ross Sandler of Barclays. Please go ahead your line is open.
Ross Sandler
Maybe just two questions on the retail advertising category. So you said conversion optimization ads our guess is for all categories was up 150% and then you also said shopping ads are huge from first half to second half. So I guess how big is the retail segment of your business at this stage? And then with OCPM, are there any learnings that you're seeing from e-commerce company retailers using those types of ads that you think you could bring into other transactional advertising categories outside of retail? And Todd, as we look at your 2020 guide calls for 33% growth at the 1.52 level. So with this higher mix of retail, how do we think about modeling the seasonality of the business in 2020? Thank you.
Ben Silbermann
Ross, I'll take the first part of the question and Todd can talk about modeling seasonality. We don't break out our revenue by industry sector, but we have seen that retail has been a historically strong sector for us overall. And on conversion optimization as well as shopping ads, we've learned a lot. One of the things that we've learned is the importance of properly implemented measurement so that advertisers and retailers specifically can see those conversions.
Starting in Q2 last year, we started to invest in first party tags, so we could see those conversions. But we've learned is that while integrations with things like Google tag manager and square commerce are good, we also need to invest in helping to make sure that those businesses have implemented things correctly and that they set the right conversion windows.
And I think that's possibly like the most interesting opportunity, but it's also a challenge for the business. A lot of our advertisers are used to a last click model, even though they know that their average buying cycles are a lot longer than just one day. So we've been working on multiple fronts to help them quantify how many conversions they're missing out by having short windows. I mean, we're baking that into both our sales motions and into our products.
Todd Morgenfeld
So with respect to, Ross, to the guide for the year, what I would say is that we had a very strong Q4 this year. And it was strong in three areas that may not be directly extensible into Q1, Q2 and Q3, even though I have a lot of confidence that toward the end of next year, it will show up again around Black Friday and Cyber Monday time period. So the first source of strength in Q4 was around conversion optimization. As you noted, it grew 150% and that's driven by a 2.5 times improvement in attributable conversions that we saw this Q4 versus a year ago.
And frankly, investments in the product that we made that paid off like new conversion events, like add to cart that we launched earlier in the year that paid off in Q4 and a lot of the work that we've been talking about on the calls around tag integration and efforts to make sure those tags were working as expected in Q4, those help to drive that that performance. A year ago, we had three times as many conversions in Q4 as we did in Q1. And so that speaks to some of the seasonality that you may expect to see in Q1, where I would frankly expect a little bit more --slightly more seasonality or slight increase in the amount of a step down in Q4 to Q1 sequentially.
I would say the second source of strength would have the same impact. We saw a lot of strength inflated campaigns around seasonal moments from CPG advertisers in the fourth quarter. These are advertisers like Albertsons who came up with static and video, festive theme, food and drink idea, pins around events like holidays like Halloween, Thanksgiving and the end of your holidays and that drove a lot of store lift. But those types of campaigns, again, are heavy, they're slighted and their Q4 events. So I think we'll have strengthened CPG, but it's skewed towards Q4.
And then finally, the international market, as I talked about earlier, tends to be still in test phase and not necessarily always on budget. So I'm super encouraged by what we saw in Q4, but it speaks to a little bit more seasonality going into Q1. The only other thing I would say is Easter last year was almost entirely a Q2 event. And this year, it's basically split between Q1 and Q2.
Operator
This concludes today's conference call. You may now disconnect.