Pinterest's Cash Flow Slipped as Its Holiday Outlook Fell Short

Pinterest's third-quarter user growth could not prevent a sharp decline in reported profit or a softer holiday outlook. Revenue rose 12% from a year earlier to $1.174 billion, while global monthly active users increased 10% to a record 661 million.

The profit picture was mixed. Adjusted EBITDA rose 11% to $339 million, but GAAP net income fell 77% to $21.5 million from $92.1 million. Free cash flow declined 6% to $300 million from $318 million, even though operating cash flow reached $316 million.

Those measures answer different questions. Adjusted EBITDA strips out several costs and showed that Pinterest's core operating earnings still grew. GAAP net income includes a broader set of expenses, while free cash flow shows how much cash remained after capital spending. Taken together, they show a business that is still producing substantial cash but did not convert revenue growth into stronger bottom-line or cash growth during the quarter.

The immediate concern is the fourth quarter, when digital advertising companies normally benefit from holiday spending. Pinterest forecast revenue of $1.425 billion to $1.475 billion, equivalent to growth of roughly 8% to 12% from the $1.319 billion reported a year earlier. Even the top of the range was below the roughly $1.52 billion analyst estimate cited by Proactive.

Pinterest also guided adjusted EBITDA to $538 million to $588 million. The $563 million midpoint was about $42 million below Proactive's cited $605 million estimate, a gap of roughly 6.9%. The midpoint of the revenue range was about $70 million, or 4.6%, below the cited consensus.

Management attributed much of the slowdown to Europe, where cross-border advertisers cut spending after regulatory changes. Revenue in the United States and Canada still grew 14%, but European revenue was unchanged at $193 million.

The quarter did not show a cash crisis. Pinterest generated $300 million of free cash flow and continued to grow users. It did show that adjusted profit growth alone is not enough to support the earnings story when reported net income, free cash flow and holiday guidance all move in the wrong direction.