Pinterest, Inc. — Q2 2019 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2019, compared with the same periods in 2018. Pinterest operates a visual discovery platform and generates substantially all revenue from advertising. Its April 2019 IPO and the related vesting conditions for older restricted stock units materially affected reported expenses.
Financial and operating highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $261.2 million | $161.2 million | $463.2 million | $292.6 million |
| Operating loss | $(1,167.1) million | $(41.4) million | $(1,212.0) million | $(96.4) million |
| Net loss | $(1,159.5) million | $(38.4) million | $(1,200.9) million | $(91.1) million |
| Adjusted EBITDA (non-GAAP) | $(26.0) million | $(31.9) million | $(64.5) million | $(77.3) million |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(16.4) million | $(28.8) million |
- Growth and monetization: Q2 revenue rose 62% year over year. Monthly active users reached 300 million, up 30%. Global ARPU was $0.88, up 29%; U.S. ARPU was $2.80, up 41%, and international ARPU was $0.11, up 123%.
- Geographic mix: Revenue allocated by user location was $237.5 million in the U.S. and $23.7 million internationally in Q2. Management attributed growth mainly to increased advertising demand and more ads served; higher ad pricing had a smaller effect.
- Margins and expenses: Gross margin, calculated as revenue less cost of revenue, was approximately 59.6% in Q2, versus 64.0% a year earlier. Costs of revenue rose 82%, partly from hosting costs and IPO-related stock compensation. GAAP operating and net losses were dominated by $1,134.6 million of Q2 share-based compensation expense, versus $4.0 million a year earlier. Adjusted EBITDA excludes this expense and other items, so it should not be viewed as a substitute for GAAP results.
- Liquidity and obligations: At June 30, cash and cash equivalents were $1,408.7 million and marketable securities were $442.0 million, totaling $1,850.7 million. Current liabilities were $139.9 million. No borrowings were outstanding under the $500 million revolving credit facility; the company reported compliance with its covenants. Operating lease liabilities were $155.8 million. A new San Francisco office lease could entail approximately $420 million of noncancelable minimum payments from 2022 if specified contingencies are met.
- Cash flow: For the first six months, investing activities provided $55.3 million and financing activities provided $1,261.1 million, primarily reflecting IPO proceeds, partly offset by $302.7 million of tax-withholding share repurchases. Operating cash use improved from the prior-year period despite the reported net loss, which included substantial noncash stock compensation.
Changes, outlook, and risks
- The IPO raised approximately $1,573.2 million in net proceeds after underwriting discounts and commissions, before offering expenses; a portion funded tax withholding on vested RSUs. Preferred stock converted to common stock at the IPO. At June 30, Class B shares carried 20 votes per share versus one vote per Class A share.
- International MAUs grew faster than U.S. MAUs, and Pinterest was serving ads in 19 countries versus six a year earlier. Management expected international user growth to continue outpacing U.S. growth in the near term.
- The company gave no quantified revenue, earnings, or margin guidance. Management stated existing cash, securities, and available revolving-credit capacity should meet working-capital and capital-expenditure needs for at least the next 12 months, while noting additional capital might be needed in the future.
- Management cited continued investment, including higher headcount and marketing, as operating-cost drivers. It also warned that revenue growth and profitability depend on user engagement, scaling advertising and measurement tools, and international monetization.
- Key risks include reliance on advertising; competition for users and ad budgets; privacy and data-protection regulation, including the forthcoming California Consumer Privacy Act; changes to search-engine traffic and ad measurement; dependence on Amazon Web Services; content, security, and legal exposure; and uncertainty in user metrics. The company said current legal matters were not expected to have a material adverse effect, though litigation may still entail costs and distraction.
- Unusual noncash item: IPO pricing satisfied performance conditions on older RSUs, triggering cumulative compensation expense. The company reported $762.3 million of unrecognized share-based compensation at June 30, expected to be recognized over a weighted-average 3.5 years.
Important facts for investors to verify
- How much of reported GAAP expense reflects IPO-triggered RSU compensation, and how much compensation expense and dilution remain ahead.
- Whether user growth and ARPU gains—especially international monetization—continue, and how advertising demand, ad volume, and pricing develop.
- Progress toward positive adjusted EBITDA and eventual GAAP profitability; adjusted EBITDA excludes significant recurring stock compensation.
- Cash use, investment needs, and compliance with revolving-credit covenants, alongside the conditional $420 million office lease commitment.
- Potential dilution and share supply, including the dual-class voting structure and the filing’s disclosure that a large number of shares could become eligible for public sale beginning October 15, 2019.