Pinterest, Inc. (NYSE:PINS) Morgan Stanley Technology, Media & Telecom Conference March 7, 2023 7:30 PM ET

Company Participants

William Ready - CEO & Director

Conference Call Participants

Brian Nowak - Morgan Stanley

Brian Nowak

Good afternoon, everyone. Hope day two has been a productive day here at the 2023 Morgan Stanley TMT Conference. We are thrilled to wrap up day 2 with Bill Ready, the CEO of Pinterest. Bill, it's good to see you. Thanks for joining us.

William Ready

Yes. Thanks for having me. I'm standing the last thing between folks and drinks apparently. So hopefully, we'll make it entertaining.

Brian Nowak

So there's a lot to cover. But first, the disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. The disclosures are also available at the reception desk. Some of the statements that Pinterest will make today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that Pinterest makes are based on assumptions as of today. And Pinterest undertakes no obligation to update them. Please refer to Pinterest's Form 10-K for a discussion of the risk factors that may impact actual results.

Question-and-Answer Session

Q - Brian Nowak

Okay. So it has been about 9 months since you joined Pinterest, let's sort of start with a high-level picture around -- you've had a lot of investor meetings. You've gotten your hands pretty dirty in sort of a lot of the ins and outs of the company. What is still sort of you think the most misunderstood opportunity for Pinterest as you sort of look ahead at the next 2 to 3 years?

William Ready

I would say, I think there's emerging understanding of these things. I'd say I think it's probably still underappreciated how fundamentally different Pinterest is than the rest of social media on some pretty important dimensions. I'd say, first and foremost, is that most of social media, the user is in sort of a lean back entertainment mode, so like passively consuming, whether it's pictures of friends or funny dance videos or whatever, there's sort of passive consumption mode.

Pinterest, the users and a lean forward mode. They come to Pinterest with intent and purpose, whether it's shopping or redesigning a room or finding a great recipe, they're in a lean forward mode, which is pretty different than the rest of social media.

I'd say the second thing is really different about Pinterest and the rest of social media is that Pinterest is a full funnel platform. Our revenue actually splits 1/3 upper funnel, 1/3 mid-funnel, 1/3 lower funnel. And there are other places, other ad platforms that you can find, what I would call, a synthetic full funnel where the advertiser sees a full funnel, but it's actually distributed across; multiple different consumer products. I'd say, in the Western world, we're the only place that is a true full funnel from the consumer perspective, where the consumer goes from upper to mid- to lower funnel in the same place.

And then the last thing I'd say that's fundamentally different from the rest of social media is that Pinterest, it's quite different than the rest of the social media in the ways that I already talked about as well as from the user perspective, it's avoided a lot of the toxicity of social media. And in fact, I've come out and talked about this a lot more publicly recently. I think that is a huge differentiator for our platform. The fact that it's a -- we can tune for positivity, users after they spend time on Pinterest, 80% plus of users -- multiple studies on this, 80% plus of users say they feel better after having spent time on Pinterest. And the opposite is true of much of the rest of social media that users end up feeling worse after spending time.

And so I think that's a pretty fundamental differentiator and one that we're leaning a lot further into. And I think in the long term may end up being our biggest, most important differentiator.

Brian Nowak

Okay. That's a good place to start. Maybe just sort of to level set before we get into a lot of the micro level drivers, can we just sort of hear the of the state from a macro perspective on the advertising side? Any changes or pockets of weakness across your different points in the funnel or verticals where you'd say, here's an area that's particularly strong or particularly weak as you sort of start 2023.

William Ready

It's shifting sands across the head market, I think most folks know. I'd say we're seeing sort of puts and takes across the board and those shifts a little bit, but there's been some surprising positive elements of that. We talked about how brand advertising has had some strength with us, especially as we're making it more performance tying it into the full funnel. I think it's particularly true when we can do full funnel and say that users that do multiple objectives on our platform tend to see 50% better sales results. And so I think some of that is the full funnel nature of our platform, but we're seeing some pockets of positivity there.

I would say that generally, advertisers are still adapting. And so I think advertisers are making decisions closer to time. So there's a sort of shorter lead time. But while I don't know that I can predict any better than anybody else wins sort of the ad market sort of fully normalizes, our bet is not on just sort of riding the tide of the market. Our bet is that we can take market share in that market.

So even in a softening market, the last couple of quarters, you've seen us growing faster than most of our peers, if not all of our peers. And I think that's because we're getting much better performance in our ad platform as we're investing in that. And as we're solving for that full funnel, the lower funnel, the intent to action has historically been weaker for Pinterest. And as we're really leaning into that and really leveraging the fact that we have the user in the right mode, the user is here to shop, more than half our users say they come to Pinterest to shop. As we're getting better intent to action, we're seeing that come through as well. So that's helping us pace faster than the market. And that plus investments in the ad platform, I think, are shining through, and so we're 1% of the market. Our plan is much more about how we grow that market share than it is about just riding the tide of the market.

Brian Nowak

Part of the, one of the keys to driving the outsized advertising growth always starts with engagement with a lot of these platforms. There have been a lot of puts and takes around engagement over the last couple of years. I guess as you sort of sit here now, what are sort of the key executional areas that you have to really hit right to grow -- continue to grow users, sessions, time spent per user and the overall minute pie on the platform?

William Ready

Yes. So when I came in at the start of Q3 last year, the two biggest questions, and obviously, I felt like there was going to be a good answer to these questions. I with my feet if that was the case. But the two biggest questions that I had and that I heard from others was, one, can you return to growth on users after multiple quarters of decline after sort of pandemic unwind? How do you get users and engagement growing again? I think we've answered that question pretty emphatically. We've returned to user growth. Engagement growth is now double-digit plus. In fact, I think this is third-party data, it's not our data. So you all can choose how much weight you put in it.

But most of the third-party data that we've seen would have us on a percentage basis, growing engagement in time spent faster than pretty much all of our peers over the last 2 quarters. So I think this question of like, can we return the user growth, can we return the engagement, we have answered pretty emphatically. And we've done that really by leaning into better personalization, core use cases on Pinterest that are differentiated from others like really leaning into the fact that people can do Pinterest with intent and purpose and driving more of that intent to action. We're seeing good traction there.

And then the second biggest question when I came in was on this intent to action issue, can you get users -- yes, users are discovering on the platform will you get users to take action on the platform? And we're still early days in that, but we're seeing really good progress there.

We talked about shopping ads growing 50% year-on-year, new formats that drive seamless conversion like mobile deep linking, which is where you discover a product on our site or in our app, and we link you straight into the retailer's app to the place to go make that purchase. That was 40% of our shopping revenue over the . And that was a brand-new format that we released in Q3 and Q4. And that was 40% of our shopping revenue. So that's a really good indication that users will take action there.

And then the last one I give is that as we're making shopping a core use case. So more than half the people on Pinterest say that they are there to shop. But if you looked at the product historically, it'd be really hard to find shoppable content. You find a lot of products, but most of them you couldn't click to where to go buy those products. Or if you could, it was in a separate tab of the app, a separate corner of the app. It wasn't on the main surfaces. It wasn't in the home feed or search results.

And so as we're bringing that shopability onto our main services, which we are early in that journey, but as we're doing that, we've seen really compelling results. So one tangible example as we brought, as we updated our model, our algorithm for our home feed to consider shopping in our catalog, in the test that we've done on that, we've seen 90% increase in the product saves from users when we update our algorithm on the home feed to consider shopping as a primary use case and our product catalog as a primary input to that, 90% lift in the product sales from users.

So those are good indications on that second big question of, can your users to take action. And so I think those all -- while none of that is fully solved, I think, good proof points. The theory of the case that, yes, that latent intent on the platform is very actionable and very monetizable.

Brian Nowak

So getting the users to take action, rolling out the shopping ads, getting deep linking, those are sort of important to driving higher monetization and ad revenue per user over time. What are some of the key underlying blocking and tackling steps you still have to sort of really get together on the back end to scale those tools to have more shopping instances that are relevant for the users?

William Ready

Well, I'd say a lot of the right raw materials sort of existed. So even when I joined like data investor bunch and the product catalog, 1 billion-plus items in the product catalog, including most of the large retailers, partnerships with Shopify that would have most of the direct-to-consumer brands. So good product catalog, good foundation laid on that.

We made a pretty meaningful update to the shopping strategy that shifted from Pinterest as the retailer or serving a lot of the functions of the retailer, which would be, I'd say, a slow and arduous implementation to one of Pinterest as a close partner to the retailer where we're going to help you discover and find the things you want, help you take action on those but create a really seamless connection to the retailer. Not only is that better for the consumer because that's really what the consumer wants the vast major or the time, better for the retailers to partner with us and you can move a lot faster. So we're -- the biggest thing for us has been changing the core user experience to have shopping as part of the core experience versus a sort of separate sideshow or as a sort of endpointing as a retail but endpointing as the platform for retailers. Those have been pretty big unlocks, and we're, like I said, early days, but good proof points, I think, a lot more opportunity there.

Brian Nowak

How are you sort of prioritizing the U.S. versus the international monetization? So I know for years, the international piece has been a part of the story. Just walk us through sort of how the product road map is rolling out, U.S. tools and then how long to the international.

William Ready

Yes. For U.S., if you think about Pinterest as -- I always have sort of in my mind, a continuum from low intent to high intent for different platforms. And then what's the monetization per unit of time spent based on that intent. And I think at the low intent end, you have platforms that tend to be more entertainment-based or you're looking at news or pictures of your friends, that's going be low intent.

And then at the very high intent in, you have things like Google Search or Amazon that are like Pure intent. And then in the middle, you'd have things that have mostly entertainment with some shopability like an Instagram, and I think Pinterest ought to be somewhere -- there's greater intent than you can find on like a Facebook or Instagram because the core reason people are here is to shop, more than half the users. But it's not pure intent the way that Google or Amazon is. So ought to be somewhere in between there.

Where are we now? We're at the very south into that spectrum.

And so as we think about where we ought to be and giving that user more actionability, more intent to action, not only does that solve a lot of leaked engagement for us because these are discovering things on the platform already, but then they'd have to go someplace else to take action, as we bring that action into it, it plugs a lot of leaked engagement for us. It also plugs a lot of leaked monetization. That shouldn't move us on that continuum to sort of the higher intent side of that. So in the U.S. and sort of the developed markets, I think that's more of the story, how do we capture that leaked engagement, capture that leaked monetization.

When you look outside the U.S., we have a significant majority of our users outside the U.S. but a tiny fraction of our revenue outside the U.S.

Now if you look at other platforms, it would be pretty common that you would see the majority of user outside the U.S. because it's just where the people are, right? But you'd see a better balance of oftentimes half or more of the revenue outside the U.S. as well. And so you'd have maybe a lower ARPU outside the U.S. than in the U.S., but because there are many more users outside the U.S., even at a lower ARPU, you'd have more than half the total revenue outside the U.S. For us, it's less than 20%. So it will be a multiyear journey to go solve that, but we think that's an opportunity in the long term.

And we've got good progress there as well. We've really increased our agency partnerships, particularly in Europe. We're seeing that start to accelerate. Some of the things that we're solving are not distinct to the U.S. This intent to action. Users wanted to shop on the platform. These are core use cases outside the U.S. as well.

So in the U.S., the intent to action, the better personalization is driving great results. Better personalization works outside the U.S. as well. Outside the U.S., some of it is very nascent in the ad stack outside the U.S. because we're building more connections into more agencies, more tools for partners outside the U.S., we're seeing that start to pick up as well. So we're not going to get to 50% of the revenue outside the U.S. in the next year or 2, but over the long term, I think we'll start to gravitate more towards that kind of place in the long term, as you've seen from other more mature platforms.

Brian Nowak

On the ad stack point, I want to ask, Bob I want to ask a couple of questions about increasing the number of advertisers on the platform. So let's start with the ad stack. Maybe just for everyone in the audience, walk us through the conversion API. Why is that important? And what has that done to your overall pace of advertiser growth and spend per advertiser?

William Ready

Yes. So implementing privacy safe measurement tools. So I would say, generally speaking, Pinterest ad platform has been nascent relative to others. So there's a tailwind for us just in sort of catching up to where others have been just because it's been a younger, more nascent ad platform.

As we're implementing privacy safe measurement tools like conversion APIs, like clean rooms, we're seeing those to be really effective. And the adoption of those is accelerating. So when we've seen people implement our conversion APIs. And these are large sophisticated advertisers, they implement our conversion APIs, they're seeing 28% lift on attributed conversions. If you're an advertiser, that's huge. And that's 20% lift in attributed conversions in a -- as we're moving to privacy safe tools. So that's one example of how much opportunity there is. And we've gone from hundreds of advertisers on that to thousands of advertisers getting to that. And we still have a lot more to go.

So we're making the core user experience better, making the monetization, the ad formats, the intent to action better and then making the measurability better for the advertiser. And there's sort of a compounding effect of those things all happening together.

Last thing I'd say on this point on ad tech and ad stack, I think that we're -- as an industry, we are still relatively early in the journey to privacy safe measurement and privacy safe advertising. And Apple has made their changes. And that was a big shoe to fall when that happened. Google has spoken publicly about the changes that will come for Chrome and for Android. But they haven't happened yet. When they do, that will be another really big shoe to fall. And when that happens, I think you'll see a much more clear dichotomy between platforms that have intent expressed directly on the platform versus what were the platforms that didn't have intent to express on the platform, and we're really relying on sort of tracking people around the web to know what they're interested in.

And for us, we're on the high intent side of that platform. I state it very clearly. Pinterest doesn't need to track you around the web to know what you're interested in. People come to Pinterest and tell us what they're interested in. And I think that advantage is shining through more now that we're really investing in the ad platform, really investing in the intent to action. But I think as you have Chrome and Android start to implement their changes with cookies going away, I think that is going to be not just -- from an ad measurement perspective, everybody is in the same boat with the industry rewiring to privacy safe ad measurement tools. Everyone in the same boat on that. The industry is going to go through rewiring to conversion APIs and clean rooms and things like that.

But wherever it's not in the same boat is on the ad relevancy where it's really going to matter do you know the user directly through your own first-party data? Do you know the users? Do you have intent express through a platform and platforms that are relying on tracking users around the web to know what they're interested in. I think there's another really big shoe to fall. And part of why I'm excited about what we can do and how we can continue to differentiate as an ad platform is we don't need to follow the users around the web to what they are interested in, they express their intent directly on our platform.

Brian Nowak

Okay. Another one on adding advertisers to the platform. I know you've spoken in the past about third-party networks and advertising networks that other platforms use to introduce more advertisers into the auction market. So just sort of a 2-parter, one, sort of remind us philosophically about how you think about partnering with some of the networks to add more bid liquidity? How should we think about the impact to your bid liquidity if you were to add some of these partners to the overall auction market?

William Ready

Yes. Well, the first thing I'd say, a pretty fundamental shift in our business from now to where -- from we are now versus where we were 2 quarters ago. 2 quarters ago, we were supply constrained. We grew supply by 15% plus in Q4, and we did that while increasing ad relevancy and increasing user engagement. So we've laid a lot of foundation with things like whole paid optimization that let us go think of ads as relevant content, particularly in commercial context. So getting engagement overall to double-digit plus big supply unlock to say then supply can grow faster than user engagement because we can think of ad as relevant content in a commercial context lets the supply grow even faster than the overall user engagement.

And so that puts us in a place now where we're no longer supply constraint. In fact, we have more supply than we have demand. And so that opens up the possibility to say, "Oh, how can we ingest more demand because we have excess supply fundamentally different than where we were 2 quarters ago."

So then when we think about how we bring in more demand, of course, first-party sales is always our preference. And we have a great sales team. We will continue to invest in selling directly. But even the largest, densest auctions in the world, augment their auction with third-party demand. There are always gaps in the auction to fill.

We're pretty much the only meaningfully sized ad platform out there that I know of that isn't using third-party demand. So as we bring that in, I think -- and we've started some experience with this. We've talked about Retail Media Networks. We've already been doing work with Retail Media Networks. We've seen really, really good results from that. We've not announced any other specific partners or any other specific deals.

But what I have said is that I think about third-party demand as a meaningful opportunity for us and one that we can take action on in the near term. I think in our last earnings call, that's like, well, "hey, Bill, the near term mean like it could be '24 or it could be this year." I think of it within this year in terms of something that we can start to ingest more of especially since we already have the proof point with Retail Media Networks and we are no longer supply constrained, and we've done the work on whole page optimization so that we can think about dynamically flexing up ad load when we have relevant adds to display to users in ways that are going to be engagement positive. Those were sort of the prerequisites needed to go do those kinds of deals.

And so again, no specific partners that I want to talk about. But in the long term, like other platforms, I suspect that we will work with many third-party demand sources. And we've now created a lot of the foundation required to do that. So I think of that as a meaningful opportunity and one that, again, I think of it as a meaningful opportunity for this year, not something that we have to wait until next year to see.

Brian Nowak

Got it. Okay. And the opportunity, if we're just sort of thinking about the impact on the ad business. The primary benefit would be, it helps bid density. And then theoretically, wouldn't it also help you upsell some of those advertisers to your first-party sales over time as there are certain verticals of advertising you [indiscernible] now?

William Ready

I think. One, it helps with relevancy to your point. And by the way, that's been a focus for us is to increase the ad relevancy. Part of the -- we talked about this with whole page optimization, supply increased 15% plus faster than engagement overall, but we did so while increasing the relevancy of the ads. The more we increase the relevance of the ads, the more, particularly in commercial context, you can drive ad load far beyond where we are.

I think the analogs that I would have for the potential ad load for commercial context is a multiple of the ad load that we have today in those commercial context. So I think that's sort of how I think about the medium to long-term side, that opportunity is quite meaningful.

A lot of that we will solve through our own sales. But bringing in third parties, I think, can help accelerate some of that. And then to your point of like, well, how do you think about that as an on-ramp. That can potentially be an on-ramp for first-party sales. I think the bigger on-ramp for us on first-party sales is actually going to be what we're doing around the organic side, where I spoke about this in path lines of using the free and organic shopping listings as a way for retailers to see, "Oh, my products are actually getting traction. and if I promoted them, I could get even more." I think that is the best glide path into more of those direct sales, more of those direct relationships. And so we're leaning heavily into that as well.

Brian Nowak

Your background, when you were previously at Google sort of puts you in a really unique position around AI and sort of the current [indiscernible] that is AI. We were talking about your old presentations you've given. I remember some of them.

So maybe just talk to us to sort of level set, what are some examples at Pinterest, where you're using AI where you think the market may be under-appreciating it? And then as you sort of look across the platform, what are some opportunities where you can see continued improvement in either user experience, advertiser experience or engagement from using some of the AI tools?

William Ready

So we are huge, not only consumers of but creators of AI capabilities, particularly around computer vision, just to give a sense of like where we are in terms of the quality of the outputs of that. If you look at things like related items on our platform, where you would look at a product and say looking at a pair of shoe, well, that's -- so what have been the direction of the kind of shoes I want, but not exactly the ones like you show me one like it. Pinterest is able to give you really good lateral exploration on that, and the user feedback on that is consistently at 95%-plus relevance.

To be able to take just from the image alone, and say, "Oh, here's a bunch of other items that are comparable to that, but to help you explore laterally, not just exact matches, the ones that are related to it." 95% plus relevant is, I think, really fantastic. And I was looking at this even before coming to Pinterest and saying, okay, that's really, really leading-edge for computer vision.

To sort of peel that back a little bit and say, well, what's underneath that, what a lot of people realize is like these next-generation AI capabilities have been advancing sort of quietly behind the scenes for some time. Google talked about large language models powering search for quite some time, [indiscernible] things. And at Pinterest, similarly, behind the scenes, a lot of our improvements in relevancy and engagement have been through improvements in our AI.

So some tangible examples of this we moved from CPUs to GPUs for anybody that's sort of like deep into this, like we appreciate the importance of that. Like what has that unlocked for us going from CPUs to GPUs. Our models have grown by 100x on the, after switching for CPU to GPU, models have grown 100x. We're processing billions of interactions from users.

So the AI is only as good as the inputs that it gets the user signal that it gets. So we have billions of interactions from our users, 50 million-plus user interactions per second that we're cataloging now. So when you look at like okay, we've got a model that's 100x larger than what we could have done on CPUs, now that we're on GPUs. We get 50 million-plus user interactions every second that we can use to train those models, that's what's getting us to these outcomes like 95%-plus relevancy on related products.

And that's where I think Pinterest is quite unique and the ability to solve the sort of walking the Bazar aspect of shopping, which is the biggest part of shopping in the physical world but as yet unsolved in the digital world, I think that's one of our biggest differentiators as we now come in behind that and make it so that now like you can walk in Bazar and discover, but you can take action on it as well. That's where I see huge go-forward opportunity in the AI behind it. We feel really good about the progress there.

I think there are other more nascent things like Shuffles where we've seen really, really great engagement. Gen Z has been fastest growing demographic across the platform overall. Shuffles is definitely driving a lot of engagement with Gen Z. But when you look at that experience of being able to say, "Oh, I can take an image, pull just 1 product from that image and then recompile that with another set of images that I have pulled, specific products or other images," not only are we seeing that people really enjoy that mode of creation, we've recently started to bring that format from the Shuffles app into the main Pinterest app. And some of the most compelling user engagement -- some of the most compelling examples of user engagement are on commercial use cases where people putting together outfits or putting together rooms in each individual object in this collage that's been created is actionable. And so that's behind the scenes. There's a lot of AI and ML that's powering that.

So again, I think the rate of advancement in AI is quite compelling. There may be some cases where it's a wholly new experience. I think there's a lot more cases where you're getting really great improvement in existing experiences and particularly on platforms that won't have good AI and ML capabilities, which Pinterest does and platforms that have a proprietary data set and the user interactions to train those models. And I talked about the 50 million user interactions every second.

It's also like what are the users doing on our platform? They're curating. The AI is only as good as the inputs that it gets, like, well, what are users doing on our platform? They're making product associations. Which drapes go with the sofa or what handbag goes with what shoes. The AI can't feel that out by itself. We have users curating those things at scale that really feeds our models and that is why we think we can be quite differentiated here.

Brian Nowak

All right. Well, it will be fascinating to continue to watch it evolve. Bill, thank you very much.

William Ready

Thanks.

Brian Nowak

Thank you.

William Ready

Thank you.

Brian Nowak

Thanks. That sounds good.