Nextdoor Holdings, Inc. (NYSE:KIND) Q4 2023 Earnings Call Transcript

Nextdoor Holdings, Inc. (NYSE:KIND) Q4 2023 Earnings Call Transcript February 27, 2024

Nextdoor Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. Thank you for attending the Q4 2023 Nextdoor Earnings Call. My name is Matt, and I’ll be your moderator for today’s call. All lines have been muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, John Williams with Nextdoor. John, please go ahead.

John Williams: Thank you, Matt. I’m John T. Williams, Head of Investor Relations. Good afternoon and thank you for joining us to review Nextdoor’s fourth quarter and full year 2023 financial results. With us on the call today are Sarah Friar, Chief Executive Officer; Nirav Tolia, Chief Executive Officer Designate; and Matt Anderson, Chief Financial Officer. During this call, we may make statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties. Our actual results could differ materially from reflected in any forward-looking statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC’s website and in the Investor Relations section of our website, as well as the risks and other important factors discussed in today’s earnings release.

Additionally, non-GAAP financial measures will be discussed on today’s conference call. A reconciliation of these measures to their most directly comparable GAAP financial measures can be found in the Q4 2023 shareholder letter released today. With that, I’d like to turn the call over to Sarah.

Sarah Friar: Thank you, John T. Our Q4 results demonstrated renewed strength. We added a record number of organic Verified Neighbors for the second straight quarter and ended the year with more than 88 million Verified Neighbors growing 13% year-over-year. Q4 WAU grew to 41.8 million, up 5% year-over-year and 3% sequentially. We expect this sequential growth in WAU to continue into Q1. Users remain active and engagement is high on our platform. Impression growth was strong. Session depth, which reflects the number of ad impression opportunities during each user session, increased by 36% year-over-year and accelerated versus Q3, ending the year at a record level. Our growth algorithm is simple: continued user and engagement growth, new advertiser growth boosted by our self-serve capabilities, increasingly durable advertiser retention as more demand is delivered via our proprietary ad server, and a reduced cost base to better enable both growth and positive free cash flow.

Our progress wasn’t limited to user growth and engagement metrics. We’re leveraging AI and machine-learning across our platform in a variety of ways from using our local knowledge graph to help businesses reach their target audiences, to improving notifications and optimizing ad delivery, to enhancing platform vitality. As we noted in our recently released 2023 transparency report, 26% of neighbors use the revised language suggested to them by generative AI to make their posts more constructive. And neighbor feedback suggests very high levels of satisfaction with our AI-based kindness reminder. So it’s very clear that even at this early stage, the AI tools we’ve developed are having a measurable impact on our user experience driving positivity.

We also made progress delivering advertiser value and reducing advertiser effort. For the full year, we retained 90% of our top 50 customers. We saw continued strong performance from mid-market and SMB customers, many of whom have begun to see the benefits of our owned and operated ad platform and are benefiting from the performance optimizations we can now make. We get a lot of questions about our specific vertical exposures. For clarity in FY ’23, our top three advertising verticals were home services, retail, and tech and telco though the contribution from each can very briefly from quarter-to-quarter and year-to-year. We continue to decrease our vertical concentration and have seen increasing contributions from smaller but faster growing emerging verticals like healthcare and government and non profit, which have more than doubled their share of the pie over the last two years.

On the technology side, we made ongoing progress on our transformative Nextdoor Ads platform. In mid-2023, we achieved our goal of having 100% of ads from SMB advertisers served via the Nextdoor Ad Server, and we’re pleased to say that almost all of our self-serve mid market customers are now fully migrated. We expected this move to start to tip our mid market business more and more towards self serve and that is happening. This should drive new revenue opportunities, but also improved advertiser performance and revenue delivery. Our ad platform is the foundation for delivering advertiser value and increasing ARPU growth through improved revenue yields. We’re now beginning to leverage our unique local knowledge graph and help advertisers deliver increasingly relevant and personalized ads to neighbors on our platform.

Simply put, we believe it’s a game changer for Nextdoor and will prove to be a must buy solution for advertisers of all sizes. Switching gears, as many of you have already seen, our board authorized a $150 million increase to our existing share repurchase program. Matt will have more to say about this in his remarks, but this is a clear demonstration of our confidence in our business and opportunity. Our focus on bringing new neighbors to the platform, growing engagement, and building powerful solutions for advertising customers hasn’t changed nor has our approach to making these things happen. Our Q4 results are a demonstration of how we continue to evolve and improve, an approach that will continue in 2024 and beyond. I’d now like to take a moment to discuss our recent announcement that I’ll be stepping down as the CEO of Nextdoor.

We’ve made great progress over the last five and a half years scaling the business, tripling the number of Verified Neighbors on the platform, raising capital, taking care of our people, and going public while always remaining true to our purpose and mission. I will be a neighbor forever, and I’m enormously grateful for the opportunity to lead such a wonderful group of people here at Nextdoor. Having said that, I’d like to introduce or reintroduce for some Nirav Tolia as Nextdoor’s incoming CEO. Nirav is well is well equipped to lead Nextdoor going forward. He cofounded the Company and as a current board member, served as CEO prior to my joining, and knows it well. He and I have had a very close working relationship. And with a growing user base and strong advertiser momentum, the time is right to put the Company back into his hands.

Nirav is here with us today and will participate in our q and a session, and I will be staying on into q two to support him and the team and to ensure a seamless transition. I’ve also signed our 10-K, which was filed earlier today. And with that, I’ll now turn it over to Matt.

Matt Anderson: Thank you, Sarah, and good afternoon, everyone. Q4 revenue of $56 million grew 4% year-over-year. While grew sequentially and record session depth drove stronger than expected impression growth. We expect both of these trends to continue into Q1. From a revenue perspective, self-serve customers continued to grow and now contribute more than 40% of total revenue. Additionally, revenue from our home services vertical grew 16% year-over-year in Q4, a recovery from the year-over-year decline we experienced in Q3. Growth in self-serve customers and revenue continued to outpace growth from our managed accounts. This demonstrates our progress driving adoption of our progress driving adoption of our Nextdoor Ads Manager, which serves as our self-serve interface for advertisers of all sizes.

Further, as of mid-February, 100% of Nextdoor Ads Manager impression demand is serving on our Nextdoor Ads Server. Given timing during the quarter, this will not immediately impact Q1 revenue. However, it does represent a key milestone as we work to deliver durable advertiser value and growth in the quarter ahead. Q4 ARPU of $1.33 was stable year-over-year. We were encouraged by two particularly notable trends in Q4. First, mid market advertisers increased their average spend levels by more than 125% year-over-year, signaling a return to healthier budgets among this set of customers. Second, neighbors continue to increase the amount of content they view in each session. As Sarah noted, impression opportunities during each session increased by 36% year-over-year.

Importantly, this growth occurred without any changes to our outlook. At the same time, these areas of progress were offset by mixed performance from certain enterprise advertisers and verticals, including financial services and travel. Q4 adjusted EBITDA was a loss of $14 million representing a negative 25% margin and a 7% point improvement year-over-year. This margin improvement reflects lower personnel related expenses following the completion of our cost reduction plan in Q4 and continued reductions in marketing expenses as neighbors acquisition remains strong. We ended the quarter with $531 million in cash, cash equivalents and marketable securities and zero debt. With that in mind, and as Sarah mentioned earlier, we are pleased to announce a $150 million increase in our share repurchase program as well as our intention to immediately begin to deploy the remaining $23 million on our prior authorization.

We see two primary benefits from this plan. First, we believe our shares are significantly undervalued and see a compelling potential return on our capital. Second, instituting this buyback program allows us to minimize share count dilution. Now on to our outlook and financial guidance. For the full year of 2024, we expect our revenue growth rate will exceed our 2023 revenue growth rate, and our adjusted EBITDA margin will improve by approximately 10 percentage points year-over-year. For Q1, we expect WAU increase quarter over quarter, driven by continued strong organic growth in Verified Neighbors. We expect revenue to be in the range of $50 million to $51 million and we’ve seen increasing momentum as the quarter has progressed. And we expect adjusted EBITDA to be a loss of approximately $20 million.

This increased loss relative to Q4 is primarily attributable to the normal seasonal decline in revenue from Q4 to Q1. We continue to see leverage from lower personnel related expenses. However, this is offset by a sequential increase in business and neighbor market initiatives that we do not expect to scale meaningfully beyond Q1. Now before we close a few additional notes on our guidance. We expect further increases in session depth will yield strong growth in ad impression opportunities, enabling full year 2024 revenue growth above 2023 levels. Additionally, through a combination of our newly increased share repurchase program and our recently implemented net share settlement for our employee RSUs, we expect to limit share count dilution over multiple years.

Finally, and most importantly, we entered 2024 in a good position. With a streamlined cost structure, healthy balance sheet, neighbor growth momentum, increasing depth of engagement and progress against our ad platform milestones. As Sarah noted earlier, our growth algorithm is simple, user and engagement growth, advertiser growth and retention, and a reduced cost base. We remain committed to driving growth and positive free cash flow while delivering value for neighbors, advertisers, and shareholders in 2024 and beyond. As we wrap up our prepared remarks, I’ll turn it over to Nirav for a final word.

Nirav Tolia: Thanks, Matt, and good afternoon, everyone. I’m delighted to return to Nextdoor. I love this company, and I’m excited about the fantastic opportunity ahead of us. I want to first and most importantly acknowledge Sarah for her inspired leadership and incredible contributions to our growth and progress over her five plus years as our CEO. Thank you, Sarah. My plan for the next few weeks is to listen and learn. Our purpose and mission here at Nextdoor are unchanged. And while we’ll naturally see some refinement and evolution in our product strategy moving forward, we’ll also focus on continuing to scale the benefits of our ads platform and a more personalized neighbor experience. Both of these efforts are amplified by AI and are just starting to be visible in our results. I’m really looking forward to engaging with all of you in the coming months. Thanks for joining our earnings call today. I’ll now turn it over to the operator to begin Q&A.

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Q&A Session

Operator: [Operator Instructions] First question is from the line of Eric Sheridan with Goldman Sachs. Your line is now open.

Eric Sheridan: Thanks, Sarah, for all the insights and time and help with the business in terms of understanding it over the last couple of years. Maybe just sticking with one big picture theme for my question, then I’ll turn it back. Just users, you’re seeing a lot of momentum coming out of 2023 and implying that momentum continues into Q1. Can you talk a little bit about what you’re seeing broadly in terms of the user funnel and conversion of users into engagement coming out of last year and how you think about the mix of investments that are key to keeping that momentum and some of the execution pieces as you look out into 2024? Thanks so much.

Sarah Friar: Absolutely. Thanks, Eric. And it’s been certainly fun getting to know you better. On the user front, diving in right at the top of the funnel, so first of all, we’ve had really sustained organic Verified Neighbor growth for now a second consecutive quarter hitting new record. And that’s effectively all of the VMs that are coming today are coming in that organic way effectively at no cost. Why is that sustainable? Well, if you remember, even prior to a lot of the investment we’ve done recently in areas like digital invitation we have always seen a baseline of adding about 2 million Verified Neighbors to the platform. So, we continue to expect the base to continue to grow at that rate, but then the new investments that we have in areas like digital invites to be strong again in Q1 and as we go through 2024.

In terms of engagement though, it’s not just about getting neighbors to the platform, but it’s obviously showing up for them and making sure that they’re getting value when they arrive. And so, we’ve been driving contributions. Sometimes that’s through features, like, advanced, for example, for selling free, recommendations, like how do we keep connecting that loop between neighbors and businesses, for example. This is a place where we’ve done a lot of I’ve done a lot of investment in ML, as you know, to make sure that, first of all, when you come to Nextdoor, you’re getting more and more of a personalized feed. But also from a notification standpoint, that we’re able to send you a notification at the right time to the right neighbor that draws you back on platform into the app itself.

Our WAUs have stayed very, very engaged. On average, our weekly active comes back about 4x week. So in fact, our WAU-to-WAU ratio has stayed in that kind of 50%-ish type range, and we feel very good about that. Beyond that, in terms of other areas of investment as we go into next year, it’s all about how do we help people discover and discuss, how do we help them continue a commercial journey of finding that business that they want to work with. And then finally, we are investing in communities. We do see this as both a new way to bring in new Verified Neighbors, but also to give people a better sense of who or what their neighborhood is. Sometimes it might be the building that you’re living in. Sometimes it might be a cul-de-sac. Sometimes it’s the whole DMA.

And so making sure we can flex. Real time messaging is something that we rolled out in Q4, and we’re already starting to see a good pickup because now, of course, people can do simplified just messaging within a building or they can go broader into the newsfeed and experience all the Nextdoor has to bring.

Operator: Next question is from the line of Ron Josey with Citi. Your line is now open.

Ron Josey: I wanted to ask about your commentary on the ad server now that 100% of U.S. and Ps, I think, are using the ad server. And I think, Sarah, you might have mentioned the game changer. Just talk to us about the benefits here. Is this what helps drive the adoption of self-service ads overall? And while we’re on, monetization here, maybe help us understand some of these verticals. So home services returning to growth, I think, was pretty notable. We’d love to hear your thoughts on to the drivers there. Thank you.

Sarah Friar: Absolutely. So as you know, we’ve been in investment mode with our ad server, and we feel like we’re now really starting to cross the chasm, getting a large number of overall advertisers on Nextdoor onto our own owned and operated, ad tech stack. Why is that important? It means number one, we can leverage our own proprietary data. Number two, it allows us to better optimize on things like latency because we’re not having to do a call outside of our own, platform into someone else’s. And then third, it starts to allow us to do better performance optimization and also better targeting. And that’s before we even start to build new ad formats and so on. So everything should speed up from here. As you noted, it’s been a journey where we started with SMBs. So midpoint of last year is when SMBs were fully on us, both being able to create campaigns using Nextdoor Ad Manager and have it served through Nextdoor Ad Server.

And you can see from both our Q3 and now our Q4 results, the growth rates that we’re seeing in SMBs say that the ad server is working. That’s great news. The work of fourth quarter was to move the mid-market, but particularly the self-serve portion of the mid-market over and that is now also completed. Why that’s important is we’ve always thought that this would be a big new opportunity for us to go out to mid-market advertisers who want to just do something easy self-serve, but couldn’t do that previously on Nextdoor. So it effectively unlocks a new segment of the market for us. Of course, as the journey continues, the focus for the rest of 24 is our managed clients, who can be large enterprises, they can be ad agencies, or they can be mid-market.

And you’ll hear us more and more begin to talk about the platform as self-serve and managed, as we look forward. Beyond that, you asked to think about verticals as well. So we are seeing some green shoots in the home services vertical. Matt said it in his prepared remarks. Home services grew 16% year-over-year, which is good to see. I think other verticals that have remained strong for us are areas like retail. Tech and telco has remained very, very strong. And we’ve, of course, been investing in new verticals like healthcare, government, nonprofit, professional services. They’re still, they’re smaller still, but they’re becoming more mighty, as we get some racks under our belt, get some good case studies, and the sales team really knows how to go out and sell them.

If you still have, flooding in areas like financial services, travel as well, we do expect recovery there and the good news is the advertisers who are in those segments have tended to stick around. When they do have spend, they bring it back to Nextdoor; however, they haven’t had a lot to spend relative to where they were maybe two years ago. So that remains a big focus for us. It’s both keeping those advertisers happy. So when they have money, they’ll come back to Nextdoor, making sure that the current advertisers continue to spend more as the environment improves and then bringing on new logos, bringing on new segments, life and market self serve. All-in-all, that should give us some build as we go through 2024, hence, Matt’s guidance. So we expect ’24 revenue to grow faster than ’23 revenue.

Nirav Tolia: Yes. And Ron, I’ll just add two things. First on the self serve side, as we really think about how to measure success and progress there, I think one of the things that’s most exciting is the overall growth in advertisers, really pleased with the new logos in the quarter and that’s been driven primarily from self-serve end market customers. So it’s one key signal of the progress we’re making in scenario that gives us confidence into 2024. And then from a vertical perspective, I think Sarah hit all the key points. The one thing I’d add that also is really attuned to and seeing progress on is increasing diversification. We’ve talked about emerging verticals like healthcare over the last couple of quarters, but as a reference point, that’s now as big as financial services from a vertical perspective.

So that shows how far we’ve come. And certainly as the market evolves, financial services we still believe, is endemic. But the fact that we’re diversifying in that way at that scale is something that we think positions us relatively well in 2024 versus a year ago.

Operator: Next question is from the line of Brian Fitzgerald with Wells Fargo. Your line is now open.

Stan Velikov: Hi, this is Stan Velikov for Brian. Thanks for taking our questions. First, can you remind us what the normal seasonality in net member additions? Is it fair to say that 2023 was an outlier to the general pattern observed in prior years? And then second, session debt continues to outpace WAU growth. How much runway do you think there is left for AI to drive this metric over the longer term?

Nirav Tolia: Yes. Stan, you mentioned seasonality. I had a little bit of trouble hearing you. Would you mind clarifying which metric you’re referencing?

Stan Velikov: Seasonality in WAU basically the net new member additions.

Matt Anderson: Got it. Yes, thanks. So from a user perspective, we see more of our seasonal moves happening intra quarter, specific events happening through the quarter. One thing as we look at Q4 is we’ve been able to counteract what have been seasonal declines in activity around core holiday periods, for example, between Christmas and New Year. I think the most important point for the quarter though is what Sarah mentioned, which is sustained and accelerated growth in new neighbor acquisition that ultimately helps to neutralize any inter quarter seasonality we see. Now as we look ahead to Q1, as we mentioned in our comments, continue to see some nice boost there. Sometimes that’s affected by weather and other external factors. But broadly speaking, there’s less seasonality as it relates to our user base, and that’s why we continue to be focused on things like the top of funnel growth.

Sarah Friar: And then on the session depth let me take that. So thank you for calling it out. We’re really pleased with what we saw in session depth. It grew 36% year-over-year. What is driving session depth? A big part of it is making sure that when a user hits the new feed, the first and foremost, they’re seeing relevant articles, relevant posts, relative content to them. And so, this is a really excellent place for us to be investing in both AI to be able to do, a deep dive on content tagging and so on and to do it at a significantly faster and cheaper rate than what we may have been doing previously with ML and actually using just human tagging. It also allows us to keep pushing more and more relevant content to the top of that news feed.

So that if someone who’s coming back, perhaps frequently multiple times a day, maybe coming back multiple times a week, is again continuing to see relevant content in their news feed. It also is important that that same relevance is true in our notification. And this is a place where we put a lot of work just in the last call it three to six months to go back to notifications and make sure that we are getting the right notifications to the right person at the right time. We’re starting to do a little bit more experimentation with digest. So thinking back to rather than just new and trending notifications, areas like events, areas like for sale and free, where we have incredible richness of content, but getting in front of the user can be hard in a platform that tended to be a little bit more about serendipitous discovery.

So we’re doing a lot of work in that arena too. Of course, AI really helps in all of this. You have to have the data. We own the local knowledge graph, and this, we think, is an incredible differentiator for Nextdoor as we look forward.

Operator: There are currently no further questions registered. [Operator Instructions] There are no additional questions waiting at this time, so I’ll pass the call back to the management team for any closing remarks.

Sarah Friar: Thank you, Matt. Thanks everyone for joining us. We’re super pleased with the quarter that we just put up showing year-over-year growth across all of our key metrics. WAU up 5% and growing sequentially, revenue up 4% and a second straight quarter of record organic VM being added. As you saw there’s lots of levers that we can pull at all stages of the user funnel. Top of funnel, new users joining us organically is at the highest rate ever. Mid funnel, we’re starting to see more we continue to see neighbors be active weekly. And then bottom of funnel that question debt number up 36% year-over-year. So, lots of places to really drive overall growth. We didn’t talk about it much on this call, but we did see strength scenarios such as international, our ad agency partnerships, and of course, the push in areas like neighborhood space continues to up the number of claims business pages, which is really fertile ground for upselling of advertising.

And we expect to see verticals like financial services and real estate began to improve, hopefully, as the overall macro backdrop is improving. AI, we’ve talked a lot about it on this call. We know it’s really top of mind for all of you, generally speaking. Nextdoor is the local knowledge graph. We have incredibly well labeled data, high intent audience, real people in neighborhoods everywhere. And then finally, we are laser focused on growing WAU and revenue from here. Brand awareness and top of funnel product development efforts are playing a really key role in bringing new advertisers to the platform, including that soft serve mid market group. And we’re investing in our platform. We’re lucky enough to be building a modern ad tech stack right at the point in time when a platform shift is happening so we can embed all of the goodness of AI right from the get go.

And then finally, we want to keep iterating on improving our monetization capabilities for advertisers of all sizes. So with that, thanks for all your support through the years for me too. Nirav will be taking the reins as we move into our first quarter earnings next earnings call, but I’ll be here to make sure that the transition is seamless and continue to work with the team. And, of course, as you all know, I will continue to believe green. Be a good neighbor, and hopefully, I’ll see you out there in the neighborhood.

Operator: That concludes the conference call. Thank you for your participation. You may now disconnect your line.