Nextdoor Holdings, Inc. (NYSE:KIND) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good afternoon, and thank you for attending today’s Nextdoor Q1 2023 Earnings Call. My name is Jason, and I’ll be the moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Matt Anderson, Head of Investor Relations.

Matt Anderson : Thank you, Jason. Good afternoon, and thank you for joining us today to review Nextdoor’s First quarter 2023 financial results. With us on the call today are Sarah Friar, Chief Executive Officer; and Mike Doyle, 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 expectations 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 Q1 2023 shareholder letter released today. With that, I’d like to turn the call over to Sarah.

Sarah Friar : Thank you, Matt, and hello everyone. We started 2023 with a strong quarter and we’re seeing meaningful progress across a range of business outcomes. Starting with neighbors, WAU grew 16% year-over-year and 6% sequentially in Q1, demonstrating healthy and growing engagement. This growth was led by neighbors in the US where we added over 2 million net WAU quarter-over-quarter. Over 80 million verified neighbors come to Nextdoor with high intent to join, connect, contribute, and transact thus finding unique value from the utility and the community offered on the platform. In 2023 we have been building product momentum focusing on growing the base of neighbors and organizations on Nextdoor through work on invites and content sharing.

We’ve been deepening engagement and driving client conversation through better feed and discover personalization and new content types such as events. Finally, we are making progress on our local ad platform for businesses of all sizes to benefit from Nextdoor’s [high-intent] audience and the ability to target neighborhoods everywhere. Our investments in AI including ML have seen strong returns, particularly in deepening engagement. In Q1, this is the leading driver of WAU growth. We continue to personalize notifications to be relevant and timely to each neighbor. We’re making the newsfeed more personal, a focus area in 2023 by enabling content to be more widely acceptable based on the use case. For example, a neighbor may want a broader view when looking for a service provider or something to do locally over the weekend but a much narrower view when searching for a lost pet.

This unlocks greater growth on the platform and is important to neighbors who increasingly see Nextdoor as the local network that allows you to connect to the neighborhoods that matter to you. AI is already an integral part of product experiences at Nextdoor and we’ve only scratched the surface of its potential use across WAU and revenue outcome. We are excited to explore the possibilities for generative AI applications on our platform built on the foundation of our unique local knowledge graph and content that is often already labeled by neighbors. For example, this post is a recommendation, this post is a lost and found item, this is content that potentially use moderating, and so on. Leveraging the chatGPT API offered by [open] AI, in April, we launched an assistance feature that helps neighbors write posts that are more engaging, kind, and constructive.

This is based on our data of what works well on Nextdoor to achieve the outcomes that neighbors are looking for. For example, making a recommendation about a [full local] business that needs help getting a word out or finding the best park to delight younger kids or helping the neighbor and [place a] groups that come together for our local community garden bell. We’ll continue to share updates here in the coming quarters. In Q1, we also launched several other product features to deepen engagement through driving kind conversations and the volume and diversity of content. For example, we launched the ability for organizations to access all format types including events, calls, and videos. This has increased posting from businesses and agencies helping connect them with high-intent nearby audiences and creating a better local experience for neighbors.

We also launched our share kit, which places Nextdoor’s logo on partner sites like GoFundMe and [Patch] so users of external sites can post directly to Nextdoor. This is another important step in our shift from a private to a local network. These initiatives have driven more posting and posters across more areas of the platform. We’ve made progress introducing new viral growth loops. Verified neighbors added organically in the US grew at 24% year-over-year in Q1. We bring new neighbors and organizations to Nextdoor through invites and content sharing. Today features like content sync help neighbors invite each other to our platform. In Q1, we booked features for businesses and [by] neighbors, and we’re seeing positive traction with a number of business inviters growing by 34% since the features were introduced in January of this year.

In the coming quarters, we plan to launch new partners with our updated content API so the content that is flagged as anyone content can be shared to other platforms. This content can then be picked up by SEO which raises our brand awareness and draws in more neighbors as they discover the specific use cases of our local platform. We also continue to make progress on our ad platform. In Q1, we completed the majority of the work on our unified platform offerings for advertisers of all sizes. For SMBs, we will be maintaining the simplicity of the original self-serve experience while also adding advanced tools and reporting capabilities that were not previously available, such as a more flexible location targeting. For larger advertisers, Nextdoor ads manager will reduce the time it takes to onboard Nextdoor and to create and launch an ad.

Let me give you an example of the success of the platform for an international beauty retailer who ran a campaign to drive neighbors to shop its products in local stores. We leveraged predictive intent targeting to reach beauty shoppers when they were most interested and engaged on Nextdoor in order to drive them from the app into the local store. Our Foursquare study found the campaign was so successful that it resulted in an approximately 52 times return on ad spend. Another study by Oracle Moat analytics found that the campaign also far exceeded industry benchmark in attention related performance categories like interaction rate and [proper] rates. The brands have continued to spend on Nextdoor, partnering with us for spring and summer campaigns.

In closing, we started 2023 on a strong note and we are excited to continue executing on our top three priorities. Growing our base of neighbors and organizations, deepening engagement, and driving revenue growth by enabling better advertiser outcomes on our proprietary ad platform. We remain confident that our efforts will enable us to return to sustained revenue growth and margin improvement in 2023. I’ll turn it over now to Mike for more details on our financials.

Michael Doyle : Thank you, Sarah, and good afternoon, everyone. Q1 revenue of $50 million came in 7% above the midpoint of our guidance range and represented progress in the sequential growth rate. Despite a 2% year-over-year decline, Q1 revenue demonstrated an upward trajectory in the quarter. We expect year-over-year revenue comparisons to ease as we move through 2023. We saw several areas of revenue growth in Q1. Mid-market continued to be an area of strength with average spend per customer growing as we build relationships with and demonstrated value for customers. We are also seeing success from our strategy of building relationships with advertising agencies, which allows us to increase revenue diversity and retention and to more efficiently activate new logos, a top priority in 2023.

Several of our large advertisers from the quarter were brought on board through agency relationships. We’ve also shifted our sales strategy to focus more on recession-resilient verticals and customers, and we are seeing benefits in verticals like healthcare. International was another area of strength with U.K. revenue growing year-over-year as we expanded our presence in the market and reached an all-time high of total weekly active users in Q1. We saw a healthy mix of spend across both top and the bottom of the funnel ad campaign objectives with a continuing trend towards direct response-focused campaigns, which accounted for more than 60% of managed spend in the quarter. Q1 ARPU of $1.17 declined 16% year-over-year, the result of progress made in growing WAU, which outpaced the advertiser demand in the period.

Q1 adjusted EBITDA loss was $22 million, representing a negative 44% margin. The year-over-year decrease in adjusted EBITDA margin primarily reflects deleveraging from the reduction in revenue, combined with growth in personnel costs and hosting costs as neighbor engagement grows. Our operating cash burn of $14 million was better than adjusted EBITDA loss as we benefited from positive working capital dynamics and interest income. In Q1, we continued our close focus on operational efficiency, holding total operating expenses largely stable over the past three quarters. We held our year-over-year operating expense growth rate at just 5% primarily through increased customer acquisition efficiencies. We will continue to balance expense management with ensuring that we are resourced to deliver on our long-term product and go-to-market initiatives.

We ended Q1 with $575 million in cash, cash equivalents, and marketable securities. We will continue to evaluate our capital allocation opportunities looking forward. I’ll close with our outlook. Our Q2 2023 revenue guidance is $53 million to $54 million, a year-over-year growth rate of minus 2% at the midpoint of the range. While revenue trends are improving, we continue to see some uncertainty with some advertiser budgets in April. Based on progress to date, we expect our return — [reflective return] to year-over-year revenue growth in 2023. Turning to adjusted EBITDA. We expect Q2 adjusted EBITDA loss to be minus $24 million to minus $23 million. At the midpoint of the range, this implies an adjusted EBITDA margin that is approximately flat sequentially.

As we look to the second half of 2023, we expect improvements in year-on-year EBITDA margins. We remain highly focused on driving sustained WAU and revenue growth, and we are pleased with our Q1 progress. Thank you for joining our earnings call today. With that, I’ll turn it over to the operator for Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question is from Eric Sheridan with Goldman Sachs.

Operator: Our next question comes from Youssef Squali with Truist.

Operator: Our next question is from Jocelyn Hung with Evercore.

Operator: [Operator Instructions] There are no questions. So I’ll pass the call back over to Sarah Friar with closing remarks.

Sarah Friar : Great. Thank you so much. As ever, we appreciate your time and support of everyone dialing in for this call. The analysts are asking great questions, but we also know we have a lot of investors and other stakeholders on the line. As you can tell from our quarter, we’re really pleased with how we’ve entered 2023. We continue to control what we can control. So first and foremost, we are driving more neighbors to the platform, while growth up 16% year-over-year and continuing to see progress on both revenue and margin improvement. Sessions growth, as I just talked about to Jocelyn, again, continues to show that users are finding real value on Nextdoor. And because of that, they’re also joining more organically. Over 70% of our U.S. verified neighbors came organically to the platform in Q1.

We’re continuing to see strength in revenue, areas like the mid-market, tech and telco and our ad agency partnerships — and we’re optimistic that once verticals like financial services and real estate return to spending, they will perform well again for us. We’re investing in AI. This is a place where Nextdoor should absolutely thrive because of our local knowledge graph, because of that label data, and because we’re creating products that are actually helping neighbors get done what they need to get done on Nextdoor. We’re laser-focused on growing well and revenue, and you’ll continue to hear us talk about that, whether it’s driving invitations [top of our] growth, whether it’s driving new content types or better discover and feed relevance and then, of course, continuing to build out our proprietary ad tech stack.

And then finally, we’re on track to return to revenue growth and margin improvement in 2023 while also investing in the long-term opportunity that we have. Everyone’s a neighbor, and we’re really excited to bring Nextdoor to them. So with that, thank you so much for your time today, and we look forward to talking to you through the quarter.

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