Ladies and gentlemen, thank you for standing by, and welcome to the Pinterest Third Quarter Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Jane Penner, Head of Investor Relations for Pinterest. Thank you. Please go ahead.

Thank you. Hi, everyone. Good afternoon. Thank you for joining us. Welcome to Pinterest Earnings Conference Call for the Third Quarter 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 filed with the SEC and available on the Investor Relations section of our website. 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 a letter to shareholders, which are distributed and available to the public through our Investor Relations website located at investor.pinterestinc.com. And now I'll turn the call over to Ben.

Thank you, Jane, and hi, everyone. Thanks for joining our Q3 earnings call. After the market closed today, we released our latest shareholder letter. In it, you'll find a detailed report on our business. We're going to start with some quick highlights, and leave the majority of the time out for your questions. In Q3, we saw significant progress in the company. Revenue grew 47% year-over-year, monthly active users grew 28% to 322 million people, and we had our first profitable quarter as a public company on a non-GAAP basis. So we're seeing a lot of momentum, and that progress is the result of a lot of work the team is doing to enhance the Pinterest experience for pinners and for advertisers. Inside our company, we talk a lot about our mission of bringing everyone the inspiration to create a life they love. In the third quarter, we took a lot of important steps in service of this goal. To help our users, we improved the relevance of recommendations, more than doubling the engagement with search recommendations, for example, year-over-year. We launched new home feed controls, helping people control what they see and what they don't see on Pinterest. This reduced the rates at which people hide pins they don't like by 25%. We simplified the design of our app based on pinner feedback and launched dark mode, so people can have a calmer experience as they wind down their days. And we worked with emotional health experts to launch a collection of well-being activities people could do on Pinterest if they're feeling stressed or down. To help businesses grow, we're now advertising in nine new markets, including Greece, Poland, Hungary and Romania. In total, we now serve out in 28 countries, up from 19 at the end of Q2. We continue to diversify advertisers of Pinterest by focusing our new self-serve features for small businesses, including PinAcademy, a free e-learning tool for small businesses who want to make better ads on Pinterest. And we continue to make Pinterest more shoppable. The number of merchant catalogs uploaded its current 75% quarter-over-quarter. We launched a new business profile that includes a shopping tab for retailers. And we're working with commerce platforms, including Shopify, to bring merchants and advertisers onto the platform. The full picture is captured in the shareholders' letter at our Investor Relations website. And it shows that we're making a lot of progress across the company. I'm excited about the tremendous opportunities ahead of us. So thank you again for joining, and now Todd and I will open it up for questions.

[Operator Instructions]. The first question comes from Eric Sheridan of UBS.

Maybe two, if I can. One, on advertiser demand, and I want to separate it between the U.S. and international. There was a little bit of color on the shareholder letter, but I just want to understand what sort of reception you're seeing as the product evolution on the advertising side continues to make progress. And with - especially with an eye towards 2020, how conversations with advertisers from large and agency advertisers all the way down to SMBs sort of continue to evolve? And on the international side, what you're seeing in terms of driving more depth of advertisers on the platform to eventually sort of capitalize on the base of users globally?

Yes. Thanks for the question. In terms of feedback for advertisers, I'll start with the U.S. There are three kind of generally positive themes that we're hearing from advertisers. One comes down to sales impact. We're driving net new customers and new occasions to buy more top line sales. Second, we hear advertisers are especially excited about insights, especially about early intent and finding early signal on some of the coming end market. And finally, we hear advertisers universally saying that they want to appear on platforms where the general tone is positive. Across the board, we're also hearing that increase in the number of buying tools and targeting options is making it easier to spend. On the flip side, we see a bunch of opportunities to continue improving our product offering. One on ad expenditure. We want to bring in even more advanced features to manage campaigns, things like custom reporting and simplify workflows. On the measurement side, we want to do more sophisticated measurement modeling like incrementality testing. And on the creative side, we want to make sure it's easy for brands to bring their creatives on to Pinterest and reduce the amount of bespoke work they have to do to appear on the platform. So those are the major themes in the U.S. You also asked about SMB. This quarter, we increased our SMB offerings. So we added things like click Insights to complement the mobile ad manager that we've already built, and we're seeing great traction from advertisers. Internationally, as we talked about in the past, we're still in the early innings of building out both our go-to-market strategy and we're also expanding into new markets. And so the plan to increase is really a plan to increase our resources that are going into all of those emerging markets.

Your next question comes from Mark Mahaney of RBC.

Yes. I'll just ask one question just on the U.S. ARPU, and I know it's a bit of an output. But could you talk through the drivers of U.S. ARPU? There was something of a notable deceleration there. And help us think about what the trajectory of growth for U.S. ARPU should be going forward?

Thanks, Mark. It's Todd speaking. I think you pointed out the real issue, which is it's more of an output. It's mathematics. And so I'll take the question really back to revenue growth. We posted 47% growth overall in terms of the business, both U.S. and international, and 39% growth in the U.S., and that's driving the ARPU dynamic that you've described. We saw a fair amount of strength in three areas from a customer segment perspective: CPG advertisers, direct-to-consumer advertisers and in the SMB space that Ben had referenced a bit earlier. And so as we think about growth going forward, it's really going to stem, especially in the U.S., around two new product areas that have been - we've been focused on now and talked about for some time, but will scale going forward. They will drive advertiser diversification. And those two areas are shopping and SMB. Ben had referenced some of the product introductions that we've made, but it's still very early days around things like age targeting, region targeting, dynamic retargeting around our products, product ads and shopping ads. And that stuff is just table stakes for us to be successful. It's basically the plumbing or the infrastructure we need to diversify our advertiser base in the U.S. before we scale. And while we've had good success in scaling our share of wallet with incumbent advertisers, for example, Kraft had three new dessert brands, Jell-O, Jet-Puffed and Baker's chocolates that have started to advertise with us that has extended our share of wallet with them. A lot of those basic tools that small and medium businesses need to see results easily onboard and began scaling are things that we're rolling out now. I think that will drive growth going forward because it will increase the relevance of our promoted content on Pinterest, which will make ads content for our users and deliver acceptable return on advertising spend to our advertisers and drive more demand. That's sort of where we are. I hope that gets to your question.

Your next question comes from Ross Sandler of Barclays.

Two questions. Ben, first, you mentioned that you're doing the redesign, which I think you said in the letter will be neutral to revenue. So I guess, as you're rolling this out, what measures are you taking to make sure the process is smooth and some other companies in the space have had problems with redesign. I just want to hear your level of confidence around that. And then what will the redesign do in terms of unlocking future revenue opportunities? Is this going to have higher engagement, higher monetization or both? And then, Todd, just going back to the U.S. ad revenue. So you came in above our estimate, but it did decelerate from the tougher comp. Anything that surprised you guys in the quarter? And as you look out next year, can you talk about specifically some headwinds and tailwinds that you expect to see in 2020 for U.S. ad rev?

Thanks, Ross. I'll start with your question about the redesign. So we spent a lot of time talking to both pinners and folks that don't use the platform yet, and we collect a lot of the feedback on their pain points, and a lot of those pain points are addressed in the redesign. So some things that we think are going to be a lot better as we continue to roll it out. We simplified the navigation. So we separated things like home and search. We made the product a lot more visual. So we've reduced unnecessary texts so the focus really is on the content. And then we've also kind of cleaned it up. So we've given space, so we can roll out more features, things like shopping and modulize a lot of those pieces. We take the rollout really seriously. And so we've rolled it out progressively. We've tested each component, and we look at a basket of metrics. We look at engagement, long-term retention. We look at the revenue impact because. We rolled it out progressively and continue to do so, I feel confident that at the very least, it will be neutral in terms of engagement, and it will certainly give our product teams more opportunity to build out a lot of the features that we want to in the future, things like shopping and more interactivity on pins.

And then I think the second part of the question on our revenue outlook - I'll come back to sort of where we are in this quarter and then discuss a little bit about our guidance for the rest of the year. Number one, I would say that the growth rate that we posted from an overall business perspective at 47% was consistent with our expectations and very much in line with the guidance we gave last quarter. And update it again and confirm basically with the guidance we issued in the shareholder letter today. And it's probably worth taking a step back to where we were in the last quarter's call where we talked about the outlook. If you rewind the clock back to the third quarter of last year, that was the highest growth quarter we had in the last two years at 64% growth year-over-year, and that's just the math. The product reasons why that happened were we were scaling our conversion optimization product in Q3, a trend that continued into Q4 last year, and we were scaling our video awareness product in Q3. Again, a trend that continued into Q4. And so when you think about the dynamics that you're referring to in growth for Q3 and our outlook for Q4, that's all reflected in the guidance that we gave last quarter and confirmed again today. It's a tough comp based on the success we had with those products a year ago. And what I'd referenced in my prior answer around the things that we're building. So to make this product - to capitalize on the commercial intent of our users, which aligns advertisers with what users are on Pinterest to do, we've got to deliver relevant promoted content. And the way we're going to get there is by diversifying our advertiser base so that we can put the right ad in front of the right person at the right time. The things that we're doing to enable that right now are a lot of the product initiatives that Ben had referenced. So our catalog ingestion program; and our shopping ads, where we've increased the amount of shop - of catalogs ingested by 75% quarter-over-quarter; the e-commerce partnerships that we referenced in the letter; and the tag integrations that are now a tenfold improvement over where we were in May; and the SMB tools that we've done a lot of investment as we referenced last call were an important technology program for us this year. Mobile app manager adds credits, bid suggestions and our Pinterest Academy, those are all making it easier for small and medium businesses to onboard and see results from Pinterest, and that's what's going to drive growth going forward.

Your next question comes from Lloyd Walmsley of Deutsche Bank.

You got Chris on for Lloyd. Can you just talk a little bit about how you guys are thinking about deploying around ad dollars with a focus on direct versus brand and then acquiring new users versus new advertisers? And then the second part of our question, you guys have always messaged that ad load really hasn't been a constraint for you. So I think those ads are content. So just curious if you guys are thinking about the possibility of giving away fresh and new advertisers doesn't mean - as a means of acquiring new asset.

Lloyd, just to make sure I understand the question. When you're referring to ad spend, are you talking about ad spend to kind of boost and enhance the Pinterest platform or ad spend from our customers? I just want to make sure I'm clear.

Yes. Your own ad spend and spending dollars either go out and acquiring new advertisers for the platform or acquire new users.

Sure. So we're still in the early days of our marketing programs, but we're deploying them in a couple of different ways. First, to your point, we are working on using advertising dollars to acquire small- and medium-sized businesses. And really, what we're looking to do there is build a program where we can make sure that the spend that we're having is - can be recouped on a pretty fast clip. So these programs take time. We invest pools of money. We look at the spend in advertiser yield, and then we adjust that and see how it scales over time. We think that's pretty important because it gives us a pipeline of small and medium-sized businesses. And then as we improve the offering with things like mobile ads manager, click promote, credits to make it easier to take the risk out of a small- and medium-sized business getting started, we have a set of advertisers that we can start with. On the consumer side, we haven't yet done a big brand push. We focus more on opportunities to reengage existing users who might have used Pinterest in the past for one use case. We want to remind them if a seasonal event comes back that we think are interested in, that Pinterest is a platform that can create value from them. We're talking internally about efforts to sort of build awareness through brand. We haven't deployed big dollars against that just yet.

Your next question comes from Doug Anmuth of JPMorgan.

I have two. First, Ben, you're in the early days here of expanding shoppable products on Pinterest. I was just hoping you could share what you've learned so far? And how you feel like users are responding to the newer functionality? And then second, Todd, you mentioned that you're serving ads in 28 countries. Can you just talk more about what that actually means? And how many of these countries do you have salespeople on the ground versus doing things more self-serve? And then can you also just talk about how - it sounds like you'll pause expansion into new geos until you build scale in the existing markets and possibly how long that could take?

Yes. So on the question of shopping, we break it into a few different buckets. The first one starts with a growing amount of really high-quality products that we have on the platform itself. So Todd mentioned, we launched catalog uploader. A little while ago, we've seen a really nice increase of 75% quarter-over-quarter increase the number of catalogs that are increasing. We also now allow those businesses to upload their catalog to have a richer profile where they can actually showcase all of their goods. So a good example of this is a barbecue guys kind of a barbecue-focused company in Baton Rouge. They installed grills. They were able to use products like catalog uploader, and they saw a significant increase in the return on their shoppable spend. So it really folds into their ability to promote and grow their business. The second area that we think about is how do you take all of those products and match them to inspiring scenes. And that's where our investments in things like computer vision really come into play. What you'll see is more and more scenes will be matched to products that can actually buy. We started in home decor. We recently expanded that into areas like fashion. And then the third and final piece is letting businesses who want to spend money to promote their products, have a richer set of shopping ad features. And so those continue to roll out. We took Shop the Look, which has always been an organic product for several months. We brought that into beta as a paid product. So we're giving retailers more and more options to showcase their products, not just showing a product on a white background, but actually showing an inspiring scene. Now overall, we think it's going to be a long journey, but we're seeing really good progress. The percentage of our users that are engaging with shopping products has increased significantly. So we're seeing engagement roughly double since the beginning of the year.

And then, Doug, on the second question on international. You referenced how we've now localized our ads manager for 28 countries, and that's up from seven at the end of last year. What that means is that our ad manager product is localized. Meaning people can buy ads in those markets and we can serve ads in those markets. It does not mean that we have 28 regional sales offices spread across each of those countries. In fact, only a fraction of those 28 actually have sellers on the ground in offices, and we cover those markets from regional hubs or through the self-service product because that ad manager is now localized. When you referenced the pause that we put in our letter, what that means is that we've got a lot of opportunity in those markets outside of the U.S., particularly in English-speaking countries and in Western Europe. Or while the product is localized and we have sellers on the ground, we have a lot of runway before we reach maturity in those markets. And we want to make sure we're executing to potential before we get distracted in other places. But the real reason I put that in the letter was that I didn't want to have the question or react to the question in a quarter, why didn't you add nine more countries in the fourth quarter. The reason is that we're focused on the 28 that we've already started with.

Your next question comes from Brian Fitzgerald of Wells Fargo.

There's no update on video usage in the letter. So any color there this quarter? Anything you can mention there because you noted it's an area of strength last quarter. Along the same lines, you added video view objective in the quarter in August. So we know it's still early days there, but anything you could say about how the advertisers are engaging with that. And then maybe one last one, really quickly. Cost of revenue per user. The growth there was 0%. And how are you driving that efficiency there? And can you perpetuate that?

Yes. Thanks, Brian. So on the video side, it sounds like you're asking specifically about video ads and Q3 revenue from video formats grew significantly year-over-year, about 3x. What we find is that advertisers. They want to tell their stories with video. And so we're building a lot of the back-end features to improve upload speed, client performance, analytics. We also launched a new cost per view objective in Q3, and that's really for advertisers wanting to push their brand awareness schools. I mean, really, let's them focus on people viewing the majority of their video. So we're seeing a lot of momentum, like a great example would be NARS, cosmetics company that launched their new lipstick on Pinterest, using that cost per video view objective to launch a brand-new product. We think it's going to continue to contribute significantly to revenue in the future.

And then the second part of the question was a gross margin-related question on cost of revenue per user. I would say that we have had tremendous success, and I'm very proud of our infrastructure engineering team here who has continued to drive optimization programs over the course of the year. And that's the principal driver of the 4-point improvement in our gross margin from 67% to 71% in the latest quarter. And so those optimization projects have been many in number, and the cumulative impact has been quite impressive. I don't believe that we will continue to run the table on the effectiveness of those programs going forward. But I'm very proud of the success that they posted over the course of the last few.

Your next question comes from Heath Terry of Goldman Sachs.

I just want to dig a little bit deeper into the impact of some of - the quarterly impact of some of these product developments. You mentioned several of the ones that you had in Q2 sort of impacting the growth rate in Q2. I guess I'm a little surprised that we didn't see more of a follow-on impact into Q3. And so I guess it would be helpful if you could kind of give us the - a sense of sort of how those impact an individual quarter. And particularly, as you go - as maybe we went from Q2 to Q3, where there was admittedly, a few hundred basis points tougher comp, just understanding kind of the deceleration without those new products or those products in Q3, if there's a better way for us to sort of understand the individual contribution in a given quarter like that.

Thanks for the question, Heath. I think the basic message is we launched a lot of stuff that's scaled really aggressively in Q3 and Q4 last year. And while the innovation pipeline has continued, and I'm very proud of the products launches that we've made over the course of the last couple of quarters, many of the things that we're talking about are very early stage and not having a meaningful impact today, but I think will drive growth going forward. The thing to think about is - and this is why I called it out in the guidance last time on the call, is the impact of the scaling of our conversion optimization product and our video awareness product last year was far more material in its impact than the newer launches that we made mid-quarter in Q2. And I believe things that we announced like our performance video product are indeed scaling, and they're going to be important for our product portfolio. The impact of those wasn't as material as the scaling of our conversion optimization and video awareness products in Q3 and Q4 last year.

Okay. That's helpful. And then to the - I realize this is one that's certainly further out, but can we get a bit of an update on the commercial adoption that you're seeing with Shop the Look? And I guess not just the commercial adoption, but also sort of where you feel the technology is? And what kind of progress you feel like you're - you have in front of you on that product, maybe particularly as we go into the all-important holiday shopping season.

Yes. I mean, Shop the Look, as I mentioned before, it's kind of in an early beta when it comes to the paid product. It's been part of the organic product portfolio for quite a while. Your question more broadly, it sounds like how are we doing on shopping as a whole. And I think we're making great progress, but we're building a lot of the primitives that are building a shopping ecosystem. So we have to take care of the supply side. We can't have the right products there that are relevant for trustworthy retailers. There's not a lot we can do. Then we have to match them. And so we've increased the verticals that we're applying our computer vision to. That's a really significant step forward. And then some of the things that are new is we're beginning to look at early partnerships with folks like Shopify to bring more inventory in. But all these things work as an ecosystem. Our ambition over the long term is that whenever you see something inspiring with things that you can buy inside of it, you can scroll down and tap and find products that are relevant, at your price point, from a retailer that you trust.

Your next question comes from Colin Sebastian of Baird.

Two for me, please. I wanted to ask about the sequential decline in R&D and sales and marketing, I think, at least on a non-GAAP basis. Was there any timing issue in expenses? Like a conscious choice to forgo some near-term growth or any change in the strategy in terms of balancing growth and investments versus profitability? And then secondly, the relationship with Shopify, just considering a lot of their platform relationships with Amazon, Instagram and others are transactional in nature. Curious if there's a revenue share between you and them? Or how that relationship works.

Thanks, Colin. I'll start on the cost side. We're continuing to invest for growth. Our year-over-year operating expense growth approached 40% in the quarter. And so I would say the meta message here is that we're very much focused on scaling the company, and we were growing our investments across every line in the income statement. But you rightly pointed out that there's a sequential decline in the non-GAAP expense line, and that was entirely driven by IPO expenses. So there were two things in there. One was payroll taxes associated with the RSUs that vested in Q2. And then a couple of other million - a couple of million dollars of other IPO-related expenses. So if you strip out $20 million there, you can see that sequentially, we continue to increase investment quarter-over-quarter as well as significantly year-over-year. But I included those payroll taxes because I want to be conservative. It's a cash expense, will incur in every quarter going forward. And so I didn't back it out last time, but that's why you see that noise in the quarter-over-quarter OpEx line.

Yes. And your second question is about Shopify. And what I can share now is that we're working with Shopify on building unique commerce experiences. And we'll have more details to share in the year ahead.

Your next question comes from Justin Post of Bank of America Merrill Lynch.

The guidance for the year suggests a little bit more deceleration in Q4. I know you kind of covered it a little bit. But anything unusual in the holiday quarter, you're thinking about this year versus last? And then maybe one for Ben, I know one of the goals of the company is to expand verticals. So maybe you could talk a little bit about activity levels you're seeing on the site? And then any new verticals or categories you're seeing adoption in maybe things will be attractive to the male demographic?

So first, on the guidance question. I would - I go back. The fundamental principle here is that we're investing in a bunch of new things around advertiser diversification that I think will bear fruit over the coming several quarters and years. Those are principally around international coverage and around our mid-market and SMB presence, which I'm delighted with the progress we're making, but it's just going to be a journey. We're still in the early days of that, and it will unfold over a period of time. The compare, however, versus a year ago was off of quarters where we were already scaling those two products we talked about earlier. And so there's a bit of a sequencing and timing difference there. That's driving the real issues that you're seeing, the points that you're making about Q3 and Q4. There is a shorter holiday shopping period this year. And I know that's been cited on a number of calls. I don't know how to quantify that exactly, but it's not upside for us.

And your second question, Justin, was really about how we're thinking about expanding use cases. The way that we think about it is we know there's a core set of use cases that Pinterest is really good at. Think of your core lifestyle use cases. What do I wear? What does my homework like? What do I want to eat at special event? But we also know that a lot of users who come into Pinterest use it for one use case, but they don't go to a second, a third, a fourth, a fifth use case. And partly, that's because the machine learning and personalization that you built in the past would actually recommend more of what you've seen. So if you're using it for cooking, we're going to send you more and more cooking recommendations. We're doing a couple of things to change that. One is we're introducing more diversity into the home feed. So we're building machine learning models that focus not only in the quality of recommendations based on what you've seen in the past, but we're beginning to introduce things that are adjacent that you might like to see in the future. As you ramp that up, we'll get more and more sophisticated. We're also looking to add more functionality, a lot more utilitarian functionality. The first example being make it easy to buy the things you see, but we're looking at things like collaboration. So it's easier to work on group projects.

Your next question comes from Ygal Arounian of Wedbush Securities.

Just when we think about the growth, I guess, in 4Q and just kind of look out into next year, what do you think is the right way to think about the balance between the efforts you're putting behind engagement, the inventory growth opportunity that you have and then pricing a new product growth? And then second, we'll wait to hear more on the - Shopify partnership sounds really interesting. Just wondering if there are any other e-commerce platforms or marketplaces and things like that, that you're focused on in developing relationships in other areas of the market?

Thanks. When I think about the mix of effort and investments, we're putting behind things like monetizable supply growth, product innovation, sales coverage, et cetera, we're investing in all of the above. We're trying to make Pinterest more useful for our users. And Ben talked about the catalog feed ingestion to make shopping - which has been one of the primary user questions for us and asks to make Pinterest more shoppable, we think that will bring new users on to the platform and drive supply. We've got a concerted effort around use case diversification. And Ben talked about tuning our home feed recommendations and personalized searches before. That will convince people to use Pinterest for more things in their life. And the comprehension marketing that we're beginning to test we think will bring churn users who probably had a great experience, planning a wedding, but need to be shown what else Pinterest can be used for in their life to come back. All of those things will drive monetizable supply, and our product teams are focused on them. At the same time, we've got a lot of work to do, as we talked about earlier on, just the blocking and tackling behind building an ads business. And a lot of the introductions that we've made on the product side have been designed to build the plumbing that we think we can scale over time. And the third thing we're investing in is the right go-to-market engine, whether that's self-service tools and marketing associated with that or the direct coverage model to address those very deep markets outside of the U.S., where we have a monetizable audience that's quite under-monetized today but has enormous potential.

And the other question was what other commerce players are we working with? And there are a number of other commerce players that we're working with on tag integration. And for us, tag integration is important because it's how, if you're spending money, you can measure whether a transaction actually happen, improve the return on ad spend. So some of the folks we've done integrations with include Google Tag Manager, PixelYourSite, e-commerce, Square. And all of these, again, are with intent of making sure that when an advertiser spends money, particularly in a retail objective, they can really understand the return on ad spend from that.

This completes the allotted time for questions. I will now turn the call over to Ben Silbermann for closing remarks.

Well, I just want to thank everyone again for taking the time to join us. We appreciate the questions, and we look forward to continuing the conversation down the road. Thanks.

This concludes today's conference call. Thank you for your participation. You may now disconnect.