Pinterest, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Pinterest operates a visual discovery platform and generates substantially all revenue from advertising.
Financial and operating results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $279.7 million | $190.2 million | $742.9 million | $482.7 million |
| Operating loss | $133.7 million | $22.4 million | $1,345.7 million | $118.8 million |
| Net loss | $124.7 million | $18.9 million | $1,325.7 million | $110.0 million |
| Adjusted EBITDA | $3.9 million | $(13.4) million | $(60.6) million | $(90.7) million |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $8.9 million | $41.5 million |
- Q3 revenue increased 47% year over year; nine-month revenue increased 54%. Q3 monthly active users (MAUs) were 322 million, up 28% year over year.
- Q3 global average revenue per user (ARPU) was $0.90, up 14%; U.S. ARPU was $2.93, up 26%, and international ARPU was $0.13, up 127%.
- Q3 gross margin was approximately 70%, compared with 67% a year earlier. Operating expenses were $413.4 million, or 148% of revenue, versus $212.6 million, or 112%, in Q3 2018.
- Share-based compensation was $130.3 million in Q3 and $1,265.6 million for the first nine months, compared with $3.9 million and $12.7 million, respectively, in 2018. The IPO triggered recognition of accumulated expense on eligible pre-IPO restricted stock units, substantially increasing reported losses. The company had $717.1 million of unrecognized share-based compensation expected to be recognized over a weighted-average 3.4 years.
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $1.034 billion and marketable securities were $691.9 million, totaling $1.726 billion. Current liabilities were $144.2 million; total liabilities were $324.1 million.
- Cash, cash equivalents and restricted cash totaled $1.061 billion. The company had no borrowings outstanding on its $500 million revolving credit facility and reported compliance with its covenants. The facility includes a $350 million minimum liquidity covenant.
- Nine-month financing cash flow was $1.138 billion, primarily reflecting the IPO, partly offset by $425.0 million of share repurchases for tax withholdings on released RSUs. Investing cash flow was a $202.8 million use.
- The April 2019 IPO and overallotment raised net proceeds as reported of approximately $1.573 billion before offering costs; a portion was used for tax withholding obligations. The company said available liquidity and the facility were expected to meet working-capital and capital-expenditure needs for at least 12 months.
Changes, outlook and risks
- Revenue growth reflected increased advertising demand and more ads served. The company reported U.S. revenue growth of 39% and international growth of 212% in Q3 based on estimated user location; international growth was supported by MAU expansion and improved monetization. Pinterest served ads in 28 countries, versus six a year earlier.
- Research and development, sales and marketing, and general and administrative expenses rose sharply, driven in large part by IPO-related share-based compensation and higher headcount. Management said headcount was 2,098 and expected it to continue growing for the foreseeable future.
- No specific revenue, profit or cash-flow guidance was provided. Management expected international MAU growth to outpace U.S. growth in the near term. Adjusted EBITDA is a non-GAAP measure and excludes share-based compensation, among other items; it should be considered alongside GAAP results.
- In March 2019, Pinterest signed a lease for approximately 490,000 square feet of future office space. If specified contingencies are met and the lease commences in 2022, noncancelable minimum payments would total approximately $420 million through 2033.
- Principal disclosed risks include dependence on advertising and continued user engagement, ability to monetize international growth, competition, ad measurement limitations, privacy and content regulation, reliance on third-party search and login services, and dependence on Amazon Web Services. The company also highlighted execution, profitability and stock-price risks. It reported ordinary-course legal matters and did not expect their resolution to have a material adverse effect.
- Class B shares carry 20 votes per share; holders had approximately 96.9% of voting power at September 30, 2019, concentrating control. The company also noted potential dilution from equity awards and future share issuances.
Important facts for investors to verify
- How much of reported expense and future earnings impact is attributable to IPO-triggered and ongoing share-based compensation, including the remaining $717.1 million unrecognized balance.
- Whether user growth—particularly international growth—continues to translate into sustained ARPU, advertiser demand and revenue growth.
- Whether operating costs and headcount growth can be managed as revenue scales, given persistent GAAP losses and negative nine-month operating cash flow.
- The conditions and eventual financial impact of the proposed $420 million office lease, and continued compliance with revolving-credit covenants.
- Potential dilution and governance implications of equity awards, the dual-class voting structure and future share issuance.