Our operating expense guidance does not include cost of revenue. However, we plan to continue our infrastructure optimization efforts, and therefore, we anticipate non-GAAP cost of revenue expense to be relatively consistent with Q4. The increase in non-GAAP operating expense year-over-year is driven by investment increases in R&D, where we are investing in head count for AI talent across our business and in sales and marketing, where we will be investing in B2B marketing to advertisers. As we said during Investor Day, we plan to have a steady ramp to the low 30s percent adjusted EBITDA margin range in the next three to five years. Consistent with that, we are anticipating margin expansion again in 2024, but at a more modest level than the 660 basis point expansion we delivered in 2023 as we balance investing in growth and falling profitability through to the bottom line.
As a reminder, the pacing of that margin expansion in 2024 is likely to be more front-loaded in the first quarter due to the strengthening adjusted EBITDA margin we saw as we progress through the quarters of 2023. In summary, 2023 was an instrumental year as we built the foundation for our future growth and return to double-digit revenue growth in the second half of the year. Our Q1 guidance implies further acceleration, which shows that we are making good progress towards our long-term goals. As we look to this year, we plan to build on that momentum and continue executing against our key strategic priorities. Now I’ll turn the call over to Bill.
William Ready: Thanks, Julia. I’m proud of all we were able to achieve in the last year, and I’m even more excited for the year ahead. I want to thank our teams at Pinterest, our advertising partners and all the people that come to Pinterest to find inspiration in the shop. And with that, we can open the call up for questions.
Q – Eric Sheridan: Thanks so much for taking the question, and thanks for all the details in the prepared remarks. I want to go back to some of the comments more broadly on the advertising environment because I think generally investors and analysts have heard a variety of messages about the health of brand advertising and direct response advertising and certain geographic exposure over the last sort of two weeks. Can you just go into a little bit more detail on what you saw in Q4 and how you sets you up for cumulative advertising budget conversations into Q1 and through the remainder of 2024? Thanks so much.
William Ready: Yeah. Thanks, Eric. So we also see the broader ad market as stable to improving. For us, Retail was the fastest growing segment. And we’re seeing across the entire ad industry, performance matters more than ever, and we’re winning on that front. We’re driving more performance to advertisers than ever before. As I mentioned in my remarks, large advertisers are opening up their performance budgets for us. Doubling our clicks sent to advertisers year-on-year, a strong indicator of not only the value that we have already created, but of how much more value capture is still left in front of us on that. So we also see that improvement, but performance is the name of the game, and we’ve made a major progression on performance over the last 18 months. And so those are the comments I’d make offer because Julia wants to add any more on some of the other things that we saw in the market there.
Julia Donnelly: I’d say the only other thing we called this out in the script, Eric, is we did see not a significant impact from the Middle East, if we talked about on the prior earnings call. So that was a very temporary impact to us. It was fully recovered by the time we got on the last call. So that to us was not a major headwind, given the fact that we are making this transition to more performance budgets, as Bill alluded to. We did see a little bit of tail off in December from the food and beverage category, which is consistent with the public commentary that we’ve seen elsewhere, we’re seeing that headwind continue into Q1. But in general, Q1 is off to a really, really good start, and we feel very confident in the acceleration that we’re seeing and guiding to in Q1, which is a result of a lot of the lower funnel investments that Bill was alluding to earlier.
Eric Sheridan: Great. Thank you.
Operator: Thank you. The next question will be from the line of Ross Sandler with Barclays. Your line is now open.
Ross Sandler: Thanks, guys. Question on the Google partnership. So Bill, everybody can see that the ARPU gap between Europe and U.S. for you guys is about twice as big as Meta. So can you talk about, I guess, the difference between the Google partnership and what you have going with Amazon right now? And is the mix of categories outside of retail that Google brings to the table going to – could that be more meaningful in terms of your ARPU improvement? And are you allowed to use any of those non-retail categories in the U.S. from Google or not? Thanks a lot.
William Ready: Thanks, Ross. Great question. And as we’ve talked about on the international front, we see Pinterest significantly undermonetized across the board. But the most undermonetized internationally. We have approximately 80% of our users outside the US, but only 20% of our revenue. So as we shared at our Investor Day, we think that’s a meaningful opportunity for us to increase that ARPU internationally. At Investor Day, we talked about how we would leverage both 3P, as well as resellers and other partnerships to help us advance there. So, we’re quite excited about the partnership with Google as particularly for those unmonetized markets, we think it can help us to accelerate the ARPU journey for those markets and bring more relevant content and actionable content to users in those markets.
As we’ve demonstrated that our users have a commercial intent on our platform, the ads can be great content. You’ve seen that in our increase of impressions, ad impressions, while also increasing engagement, demonstrating that the ads can be great content when they use it in a commercial context, we think it will also be additive from that perspective as well. Your question on Amazon, we feel really good about the way the Amazon partnership is scaling also. And there are international markets that can be in play there as well. So as we’ve talked about the 3P strategy overall, we think about 3P as a way to fill in gaps in our auction and bring more relevant content to our users. And so we’re quite pleased with the way the Amazon partnership is progressing.
And the Google partnership with the focus on our unmonetized or undermonetized international markets, we think will be quite additive as well.
Operator: Thank you. The next question will be from the line of Rich Greenfield with Lightshed Partners. Your line is now open.
Rich Greenfield: Hi. Thanks for taking the question. I’m seeing more and more video ad units when I’m on Pinterest, just scrolling through the feed. I guess the question, Bill, is when you talk about AI and machine learning, I guess, how should we think about how your algorithms and systems are figuring out whether to deliver a static image ad or a video ad for each available ad opportunity. And then just any comments on sort of the conversion of ROEs [ph] that you’re seeing for video ads versus the static ads, any trends? Or any color you can give us would be really helpful? Thank you.
William Ready: Sure, thanks. Thanks, Rich. So video remains more than 30% of our revenue. It’s been a bright spot for us on the platform that we are driving really great monetization on video. And we’ve talked about how much AI is a core competency for us and how much that has driven increases in relevancy on the organic side, as well as improvements on the ad side as well. Our model being 100 times larger than they were a year ago, as we talked about last quarter. And so one of the things we’re seeing from that AI-driven improvement in relevancy is a really good ability to discern what’s relevant for which user at the right moment in time, and that includes both video and still images. And so we’re seeing that work quite well in our fee, the balance between video and still imagery and I think you see it reflected quite well in our progress with users that we just put up our best user growth quarter since Q1 of 2021.
We’re deepening engagement per user. Gen Z is now our largest fastest-growing demographic. They’re very video-centric as well. We are winning with Gen Z. So I think those are all the things I’d point to that say we’re really getting the right balance of still imagery versus video with really good multi mobile capabilities and our AI-driven relevancy on those things.
Rich Greenfield: And when I look at Gen Z, is it fair to say that they’re seeing an even higher percentage of video then?
William Ready: Gen Z, the demographic tends to be more video-centric and as we’ve talked about, we are performing quite well with Gen Z. But interestingly, it’s not just video. When we see things like I talked about collages in my comments, we are creating entirely new content types on Pinterest like collages where users can curate, and they’ve done that historically on board, but collage as now make that an even deeper level of granularity where people can put together outfits and room designs at much greater granularity driven by AI recommendations on those things. And so we’re seeing Gen Z really engage deeply with that as well. And as I mentioned in my remarks, not only is that driving engagement it’s driving shopping behaviors of 75% plus of those collages that are created contain shoppable products.
And so quite pleased with how our team leveraging AI is finding great ways to bring new content types to the right users at the right moment in time, particularly around commercial intent.
Richard Greenfield: Thank you.
William Ready: Thank you.
Operator: Thank you. The next question will be from the line of Doug Anmuth with JPMorgan. Your line is now open.
Doug Anmuth: Thanks for taking questions. I have two. You talked about doubling down on momentum in ’24. I was just curious if you can talk about any key priorities for the year that really stand out? And is there any change to how you’re thinking about profitability in ’24? And then just quickly on China advertiser spending. Any color on exposure levels and perhaps how it trended in 4Q? Thank you.
Julia Donnelly: Sure. Thanks for the question, Doug. I’ll take that one. So overall, we’re feeling really good about the progress that we’re making on our 3 to 5 year outlook, and we talked about at Investor Day, having a steady ramp to that low 30-ish percent EBITDA margin range in the next three to five years. As I said in my prepared remarks, we do intend to expand margin again in 2024, but at a more modest level than the 660 basis points that we delivered in 2023. So we are planning to drive more margin expansion and see operating leverage in the business in 2024. On an absolute dollar basis in terms of where the areas where we’re increasing our levels of investment, we plan to focus in our R&D area, tying to head count additions primarily in AI, both for – to benefit our users and our advertisers.
On the sales and marketing line, we also anticipate adding to our sales organization with a focus on enhanced technical selling capabilities and also expansion of some frontline sellers in our international markets as well. To your question about China-based e-commerce retailers, we are seeing some benefit from that category of advertiser in Q4. That is a nice contributor for us. But it is by no means the only contributor. We are seeing strong growth in the retail category that is broad-based, including several other major retailers aside from those categories in China. And so we think we’re a great fit for those retailers. And I don’t think we’re as exposed there as some of our other peers may be.
Doug Anmuth: Got it. Thank you, Julia.
