Nextdoor Holdings, Inc. (NYSE:KIND) Q3 2023 Earnings Call Transcript November 7, 2023
Nextdoor Holdings, Inc. reports earnings inline with expectations. Reported EPS is $-0.1 EPS, expectations were $-0.1.
Operator: Good afternoon. My name is Jordan, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to Nextdoor’s Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] You may now begin your conference.
John T. Williams: Thank you, Jordan. I’m John T. Williams, Head of Investor Relations. Good afternoon and thank you for joining us to review Nextdoor’s third quarter 2023 financial results. With us, on the call today, are Sarah Friar, Chief Executive Officer; Mike Doyle, Chief Financial Officer; and Matt Anderson, Head of Finance and Strategy. 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 Q3 2023 Shareholder Letter release today. With that, I’d like to turn the call over to Sarah.
Sarah Friar: Thank you, John T. We’re thrilled to have you on the team. Q3 was another quarter of progress of Nextdoor as we delivered year-over-year growth in revenue, verified neighbors, weekly active users, and session depth. New neighbors are finding value on the platform, and those coming to Nextdoor are engaging more. In Q3, we added more new organic verified neighbors than in any quarter in our history, bringing our quarter-end count to approximately 85 million neighbors globally. WAU increased by 2.1 million or 6% year-over-year to 40.4 million globally and is up nearly 50% over the last three years. While we saw a slight sequential decline in Q3, we have seen a rebound quarter-to-date. On engagement, we’re pleased to note that we’ve seen strong momentum of session depth increasing approximately 30% year-over-year.
But despite our strong progress driving new neighbors to the platform and increasing depth of engagement, it’s impossible to ignore the macro challenges that continue to weigh on the budgets and advertising verticals that are important for Nextdoor. Earlier today, we announced a significant cost reduction plan that includes a reduction in our workforce by approximately 25%. This reduction in force was a tough decision to make, but a needed change in how we operate. Let me share some context. Three years ago when we listed on the NYSE, we were generating differentiated revenue growth of over 50% quarter-after-quarter, well ahead of industry peers. In order to keep up with this growth, we scaled our team. Starting in Q2 of 2022 and continuing into this year, we began to face increasingly challenging macroeconomic headwinds driving reduced advertiser budgets.
This has particularly impacted advertisers with high levels of home-related spending, one of the key advertiser categories on Nextdoor. We fought hard to maintain our employee base with the belief that the macro environment would begin to recover by the end of this year. We decided to bridge the downturn by using our strong balance sheet, but the recovery we expected hasn’t yet materialized. So we must adapt our investments to better align with market realities and focus our work on our highest priorities, including ensuring that we continue to invest in the areas such as our new ad tech stack. What does this mean for our business? First and foremost, it accelerates our path to free cash flow breakeven by the end of 2025. It rightsizes the business and aligns our workforce and other expenses with our near-term revenue expectations.
It maintains our very strong balance sheet and allows us to continue to deploy capital thoughtfully and with a long-term lens. Now, let’s shift gears and discuss the key drivers of Nextdoor’s revenue growth and profitability. First, we continued scaling new channels to grow our base of verified neighbors. This was a Q3 highlight as the number of new neighbors coming to the platform organically accelerated 32% quarter-over-quarter. This was driven in large part by our digital invite strategy. We also made significant efforts to verify previously unverified neighbors and deliver more personalized and hence better-performing email-based neighbor invitations. Second, we are delivering more relevant local content to neighbors. Neighbors are finding value and engaging more as they visit Nextdoor, which drives sustained growth in ad impressions.
As I mentioned earlier, session depth, the number of ad impression opportunities during each user session, grew approximately 30% year-over-year, an acceleration driven entirely by increases in consumption of user-generated content, not ad loads. We are using AI at Nextdoor today and in a very real way to improve our local knowledge graph and personalize relevant local content, whether it’s seeing how neighbors engage with invitations, notifications, or how often may comment or react, AI helps us increase the relevance and timeliness content and drive increased engagement during each session. We’re also using AI to drive content creation. Our Post Assistant suggests post contents that fosters positivity and community engagement, whether it’s helping neighbors find the service or helping business owners promote their services, the Post Assistant has a roughly 70% suggestion-acceptance rate.
Third, we are delivering advertiser value and reducing advertiser efforts. The Nextdoor Ad Server is transformative for the company. It’s the foundation for delivering advertiser performance and for increasing ARPU growth through improved revenue yields. In Q3, we delivered in two key areas: first, we delivered more sophisticated pacing methods to better deliver ads over the course of the day and the course of the campaign; second, we built the core components required for performance optimization, so that we can begin experimenting with this capability later in Q4. In Q3, we saw immediate favorable results. Starting in July, 100% of ads from U.S. SMB advertisers were served via our Nextdoor Ad Server, which drove accelerated SMB customer and revenue growth.
Our work in Q3 also prepares us to serve substantially all Nextdoor Ads Manager demand on the Nextdoor Ad Server by the end of Q4. Given a subset of midmarket advertisers are already using the Nextdoor Ads Manager, this effectively serves as the first phase of our migration of midmarket customers. In Q3, we also encountered some challenges and are adapting and improving. From a neighbor perspective, our efforts to improve the long-term user experience through an evolved notification strategy had a negative near-term effect on WAU. While the short-term impact of these changes certainly weighed on Q3 WAU, the changes represent a deliberate step that we believe will reduce negativity, improve the timeliness, proximity, and relevance of notifications, and ultimately sustain our high levels of long-term user retention.
From an advertiser perspective, compared to improving momentum through Q2 and strength in July, we saw uneven demand trends in August and September. Weaker growth among U.S. enterprise advertisers, particularly those with higher exposure to home-related spending, offset much of the momentum we saw among international and SMB customers. We believe these enterprise demand trends will likely persist for at least the coming quarters. This more muted near-term growth trajectory reflects neither our desired progress nor the strength of the long-term drivers of our business. And with that in mind, our focus is squarely on performance through 2024. Performance for neighbors seeking relevant and timely local content and connection, performance for advertisers seeking unique brand activations with the community or local orientation to those seeking reach and ROI, and performance for shareholders seeking a clear path to free cash flow generation.
To get there, we aim to number one, add more verified neighbors in 2024 than we did in 2023; two, deliver improved formats targeting and tools for advertisers and improved yield on our ad inventory with sustained benefits coming from the introduction of video ads and lead generation campaigns on Nextdoor Ad Server and the migration of ads delivery for Nextdoor Ads Manager campaigns to Nextdoor Ad Server; and three; accelerate the path to quarterly free cash flow breakeven by the end of 2025. Before turning over to Mike, I want to acknowledge his significant contributions to Nextdoor over the five-plus years as our CFO. In that time, Mike has led multiple rounds of funding, including our public offering on the NYSE and built an excellent finance function.
While he will be stepping down as CFO effective today, we are grateful that he is staying on through December 1st to assist with the transition. Mike will always be a neighbor, and I am enormously grateful for his partnership and the contributions in making Nextdoor what it is today. And we wish him all the best in his future endeavors [Technical Difficulty] deep and talented bench. And I’m very happy to introduce Matt Anderson as Nextdoor’s next CFO. As many of you know, Matt has served as our Head of Finance and Strategy since he joined in 2019. He has made numerous contributions over that time, including leading our Investor Relations function. I also had the privilege of working closely with Matt during his nearly six years in the finance organization when I was CFO at Block.
And I know that he is a terrific finance leader and has the experience to be a great CFO. Earlier in October, we welcomed Dana Evan to the Nextdoor’s Board of Directors. Her expertise and proven leadership in finance, operations, and strategy are bringing valuable perspective to the Nextdoor Board and to the role as Chair of the Audit and Risk Committee. Her strong track record as a public company CFO will be enormously valuable, and I’m thrilled to have Dana on our Board and Matt on our leadership team. So with that, I’ll turn it over to Mike.
Mike Doyle: Thank you, Sarah, for those kind words. It’s been my privilege to be a member of the Nextdoor team since 2018, and I am tremendously proud of what we’ve accomplished. Our business is financially strong, and Nextdoor remains well positioned for the opportunities ahead. I’ve worked closely with Matt since hiring him over four years ago. I have immense respect for Matt as a leader, and I’m confident he’ll be excellent as Nextdoor’s CFO. Matt has a deep understanding of the finance function and has demonstrated the ability to align the company to reach our long-term strategic goals. Before I discuss our results, note that I’ve signed our Q3 10-Q, which was filed earlier today and, as Sarah mentioned, I will be staying to support the team to ensure a smooth transition.
Turning back to the business, Q3 revenue of $56 million grew 4% year-over-year despite uneven demand trends that emerged and weighed on revenue as the quarter progressed. We saw several areas of revenue growth in Q3, small and medium-sized businesses or SMBs performed well, an encouraging early indicator that our transition of these customers to the Nextdoor Ad Server is yielding results. And international revenue grew by 79% year-over-year, a sequential acceleration reflecting sustained new logo growth and broader awareness of Nextdoor’s audience and ad platform. Enterprise advertiser demand was mixed in Q3, and while we are encouraged to see solid enterprise and mid-market account growth, average spend per advertiser declined during the period.
Regarding specific verticals, we saw resilience in technology and telecom, retail and healthcare, though home services spend has slowed, and we’ve not yet seen a meaningful rebound in financial services and real estate, which are key for Nextdoor. Q3 ARPU of $1.39 declined 2% year-over-year, a sustained ad impression growth was offset by a year-over-year decline in CPMs for our U.S. news feed as direct-sold advertisers who monetize at a relatively higher rate made up a smaller share of the total ad impressions delivered. Q3 adjusted EBITDA loss was $20 million, representing a negative 35% margin. Non-GAAP operating expense growth of 6% year-over-year outpaced revenue growth and drove margins lower versus the year-ago period. The main drivers of expense growth were hiring within select R&D and sales teams, offset in part by more efficient neighbor acquisition spend.
Our Q3 operating cash burn of $12 million was again better than the adjusted EBITDA loss, reflecting another quarter of benefit from interest income. We ended the quarter with $540 million in cash, cash equivalents, and marketable securities and no debt. As always, we will continue to evaluate our capital allocation opportunities and judiciously manage our cash position. With that, I’ll turn it over to Matt.
Matt Anderson: Thanks Mike. I really appreciate the kind words from both you and Sarah. And it’s been a pleasure to partner and to learn from you over the last four plus years. And I want to say thank you for all you’ve done for Nextdoor. I’m incredibly excited about the opportunity to step into this role. Now, let’s get into the financial outlook and the cost reduction plan that we announced earlier today. As Sarah noted, our focus is squarely on performance in the year ahead. We are targeting a reduction in current GAAP personnel expenses of up to $60 million annually. These actions, while difficult, increase our focus on efficiency and will accelerate the path to quarterly free cash flow breakeven by the end of 2025.
As Sarah said earlier, the Q4 revenue growth acceleration we initially expected has not materialized to date. We now expect Q4 2023 revenue in a range between $50 million and $52 million and 2023 revenue in a range between $213 million and $215 million, which implies flat to slightly higher year-over-year growth for the full year. We expect a Q4 adjusted EBITDA loss in a range between $21 million and $19 million, which excludes the impact of one-time expenses related to our cost reduction plan. This implies a 2023 adjusted EBITDA loss in a range between $81 million and $79 million. One other note, we currently estimate that those one-time severance and related costs associated with our cost reduction plan will be approximately $12 million. Across many measures, Nextdoor’s growth and momentum continue.
Even in an environment where important advertiser verticals have been pressured organic verified neighbor growth and engagement depth are accelerating. We are making continued progress transitioning to our proprietary ad platform and saw positive early results in Q3. And as we look ahead to 2024, we remain focused on growing WAU and revenue. Thank you for joining our earnings call today. With that, I’ll turn it over to the operator for Q&A.
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Q&A Session
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Operator: Thank you. [Operator Instructions] Our first question comes from Mark Mahaney of Evercore. Mark, please go ahead.
Mark Mahaney: Hey, thanks. Two questions, please. First, on the negative content, Sarah, has there been a change in that? I know that’s always been the challenge for the company, but is there something that’s made the generation amplification or whatever of negative content greater in the recent past? And then secondly, at a high level when you talked – going to market with advertisers, leaving aside the verticals that are cyclically soft, what’s the biggest pushback you get from advertisers in terms of their unwillingness to aggressively commit to Nextdoor as an advertising platform? Thank you.
Sarah Friar: All right. Thank you. Mark. So let me start on WAU, and then in particular how we’re thinking about getting the right content to the right neighbor at the right time. So you saw with our WAU $40.4 million, grew 6% year-over-year but clearly was down 3% sequentially. This was due to efforts that we put in place to improve the long-term user experience; so really evolving our notification strategy. As there is a cadre of neighbors who come organically to the platform, but often neighbors come because of a notification that we’ve sent them. In Q3, we wanted to reflect on a reduction in notifications to certain user segments and in addition to also reduce certain high engagement notifications, particularly crime and safety to better align kind of the platform perception and the content and what you call negative content there.
And really it’s because when we use an algorithm around notifications, crime and safety is clearly an area people tend to click on. But over time, we do get concerned about the perception that, that drives of the platform. So we took a very deliberate step in Q3 to effectively make a change which will reduce negativity, improve the timeliness, proximity and relevance of notifications, and to make sure we sustain our high levels of long-term user retention. As we actually do have a very high degree of retention over a two-year time frame, whether it’s verified neighbor to WAU, it’s around 50%, but even over a two-year period, we haven’t seen any changes but we think we can do better. As we look forward why will WAU grow again? I know you didn’t really ask that, but why will we see it grow?
Why are we confident in the Q4? Well, number one is definitely just that outcome that we saw in verified neighbors. The fact that we saw the almost over 30% sequential lift in new neighbors joining the platform, clearly they take a little time to become weeklies, but we see them already engaging actually at slightly higher levels than other channels. On your second question, go-to-market with advertisers, so what’s the biggest pushback to get them to more consistently on budgets? Overall, if you look at what’s happening in terms of advertiser retention, we are maintaining our advertiser base. So the good news is advertisers are not leaving Nextdoor. They’re continuing to spend. However, what we do see is that they are spending less right now, particularly in the verticals where we have most exposure.
So financial services and home services, and I know that won’t surprise you in those two verticals, but clearly they’re very endemic to the Nextdoor platform. In fact, if I look at Q3, I think we had the highest number of new logos added. So kind of as a second point we are seeing new advertisers come to the platform as they both hear about us. We’ve been working hard on brand awareness and also as we’re able to put out more case studies about how various advertisers on Nextdoor have seen really positive and good outcomes. And then, of course, as we build out our ad tech track, we think we’ll get better and better for a broader group of advertisers, particularly those in self serve. So today you can now self serve across the Nextdoor platform, but then also advertisers that really care deeply on the performance side.
