Q1 2023 Nextdoor Holdings Inc Earnings Call

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Good afternoon, and thank you for attending today's next door Q1, 2023 earnings call. My name is Jason and I'll be the moderator for today's call.

All lines will be needed during the presentation portion of the call was an opportunity for questions and answers that the end if you'd like to ask a question. Please press star one on your telephone keypad.

Not like the best conference over to our House Matte Andersson head of Investor Relations.

Thank you Jason.

Afternoon, and thank you for joining us today through the next door first quarter of 2023 financial results.

With us on the call today, or stir Fry, Chief Executive Officer, and Mike Doyle Chief Financial Officer.

During this call we may make statements related to our business at a forward looking statements under federal Securities laws.

These statements are not guarantee 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 can affect our actual results. Please.

Please refer to our SEC filings available on the SEC's website.

And any investor relations section of our website as well as the risks and other important factors disgusting today's earnings release.

Additionally, non-GAAP financial measures will be discussed with today's conference call.

A reconciliation of these measures to their most directly comparable GAAP financial measures can be found in the queue. One glaring twenty-three shareholder letter released today.

With that I'd like to turn the call over to Sir Thank you ma'am Hello, everyone.

Started 20th 23, with a strong corner and we're saying meaningful progress across the range of business outcomes.

Starting with the neighbors Wow, 16% year over year six per cent of sequentially in Q1, demonstrating healthy and growing engagement. This closest blood my neighbors in the U S, where we added over 2 million nap, while a quarter over quarter.

Over 80 million verified neighbors come to the next door with <unk> join next interviewed.

You said you'd entry back.

Finding unique value from the utility and the community offered on the popcorn.

And 20 twenty-three within building product momentum focusing on growing the faith of neighbors and organizations next door through work on constant.

Thompson Sharon.

We've been decent engagement I'm driving sign the conversation to better feed and discover personalization and new content such as events.

Finally, we're making progress on our local AD platform for businesses of all sizes.

From next door.

The audience and the ability to target neighborhoods everywhere.

Our investments in AI, including them at all have been shorn strong return, particularly in deepening engagement.

One was the leading driver of wild growth, we continued to personalise notification to be relevant and timely each neighbor.

Making the new state law personal focus area in 2023 by enabling content. Meanwhile, likely festival based on the use case.

For example, a neighbor may want a broader view when looking for a service provider or something to do luckily over the weekend, but a much narrower view when searching for a lost pet.

There's so much greater growth on the platform and is important to neighbors, who increasingly see next door at the local network that allows you to connect to the neighborhoods that matter to you.

Yeah, it's already an integral part of products experiences that next door.

Scratch the surface of its potential use across Wow and revenue outcomes.

We are excited to explore the possibilities for generated by applications on our platform built on the foundation of our unique local knowledge crafts and content that is Austin already labeled by neighbors. For example, this post is the recommendation is posted the lost and found that this is content to potential moderating.

And so on.

Leveraging the Chap G. P T. A T I offered by open AI in April we launched and assistance feature that helps neighbors write posts that are more engaging timed and constructive.

This is based on our data of what works well on next door to achieve the outcomes that neighbors are looking for for example, making a recommendation about a beloved local business that needs help getting the word out or finding the best clerk to delight younger kids.

Helping a neighbor and pay for groups that come together for a local community garden belts.

Continued a fair updates here in the coming quarters.

And if you want we also launched several other products features to deepen engagement through dragon conversation and the volume and diversity of content.

For example, we launched the ability for organizations to access all form of types, including event calls and video it.

It has increased posting from businesses and agencies, helping Quebec connect them with high intense nearby audiences and creating a better local experience for neighbors.

We also launched our share Cat, which places next door logo on partner sites like <unk> and patch.

Users of external sites can post directly to next door.

Another important step in our <unk> from a private 20 local network. These.

These are my steps have driven more posting and posters across more areas of the platform.

We've made progress introducing new viral gruffudd.

Verified neighbors added organically in the U S grew up 24% year over year two one.

Bring your neighbors and organizations to next door through invites and content sharing today features like contact Pink hop neighbors invite each other to our platform.

And coupons, we both features for businesses and bike neighbors, and we're seeing carpet of traction with the number of business invaders growing by 34%. Since the features were introduced in January of this year.

Come in quarter, we plan to launch new partners with our updated contents API. So that content that is flagged as anyone content can be sure to other platforms.

This compact that'd be picked up by S. C O, which raises our brand awareness and draws in more neighbors discovered.

Can use cases.

Local platform.

We also continue to make progress on our AD platform and Q1, we completed the majority of the work on our unified platform offering for advertisers of all sizes.

<unk>, 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 next door as manager will reduce the time it takes to onboard next door and to create and lunch and that.

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, it's products in local stores.

We leverage predicts there have been some target I need to reach beauty shoppers. When they were most interested and engaged on next door in order to drive them from the app into the local store.

Foursquare study found the campaign was so successful that it resulted in in approximately 52 times return on ads Ben.

Another study by Oracle most analytics conduct a campaign also far exceeded industry benchmark and attention related performance categories like interaction right and proper right.

The brand has continued to spend on next door partnering with us on spring and summer campaign.

In closing we started 20th 23 on a strong note and we're excited to continue executing on our top three priorities growing our base of neighbors and organization deepening engagement and driving revenue growth by enabling better advertised or outcome on our proprietary ad platform.

We remain confident better efforts will enable us to return to sustained revenue growth and is margin improvement in 2023.

Turn it over now to Mike for more details on our financial.

Good afternoon, everyone.

Q on revenue at $50 million came in 7% about the mid point of our guidance range represented progress in the sequential growth rate.

2% year over year decline Q1 revenue demonstrated an upward trajectory in the quarter.

<unk> year over year revenue comparisons to either the new through 2023.

We saw several areas of revenue growth in Q1.

Mid market continues to be an area of strength with average spend per customer growing every built relationships with and demonstrated value for customers.

So seeing success from our strategy of building relationships with advertising agencies, which allow us to increase revenue diversity and retention enter more efficiently activate new logos.

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 vertical and customers and we are seeing benefits and vertical like health care.

International was another area of strength with UK revenue growing year over year at the 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 spanned across the top and the bottom of funnel AD campaign objectives with a continuing trend towards direct response focused campaigns, which accounted for more than 60% advantage spend in the quarter.

Q1, or $2.17 declined 16% year over year. The result of progress made in growing while which outpaced the advertiser demand in the period.

Q1, adjusted EBITDA loss was $22 million, representing the negative 44% margin.

A year over year decrease in adjusted EBITDA margin, primarily reflects deleveraging from the reduction and revenue combined with growth and personnel costs and hosting costs of neighbor engagement gross.

Are operating cash burn a $14 million was better than adjusted EBITDA loss.

Benefited from positive working capital dynamics in interest income.

And Q1, we continue our close focus and operational efficiency clothing total operating expenses largely stable over the past three quarters.

We held our year over year operating expense growth rate of just 5% primarily through increased customer acquisition efficiency.

We will continue to balance expense management with ensuring that we are resource to deliver on our longterm products and go to market initiatives.

We ended Q1 with $575 million in cash catch equivalent to marketable securities.

We will continue to evaluate our capital allocation opportunities looking forward.

What goes with our outlook R. Q2, 2023 revenue guidance is $53 million or $54 million a year over year growth rate at minus two per cent at the midpoint of the range.

Revenue trends are improving we continue to see some uncertainty, but some advertiser budgets in April .

Some progress today, we expect our return Rebecca returns a year over year revenue growth in 2023.

Turning to adjusted EBITDA, We expect you to adjusted EBITDA loss to be minus $24 million minus $23 million at the midpoint of the range to comply with an adjusted EBITDA margin that is approximately flat sequentially.

If you look to the second half of 2023, we expect improvements and year on year EBITDA margins.

We remain highly focused on driving sustained wow and revenue growth and we were pleased with our two one <unk> progress.

Thank you for joining our earnings call today with that I'll turn it over to the operator for Q&A.

Alright.

If you would like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove that question. Please restore followed by two again to ask a question. It is star one.

My first question is from Eric Sheridan with Goldman Sachs. Your line is now open.

Thank you so much for taking the question what is your <unk> your comments with respect to the edge plus appointment maybe escape multi order can you give us sort of <unk> in terms of timeline worthy and a platform will be fully deployed between these are now and the end of the year is removed out of 23 to 24 and based on what you've learned.

The rollout of via a platform.

Thinking about that informing mix of advertiser use it by advertise your type.

Promoting further advertiser diversity and driving new verticals as Mike pointed out like the health care vertical in particular, just pick about density as a driver of monetization not only a twenty-three but over the medium to long term. Thanks, so much.

Great. Thanks, so much I appreciate that so <unk> on the AD platform itself really good momentum and Q1 and that's the reason why you see the revenue.

Bad relative to how we got it on the next door AD manager itself. We continue the emirate on that software easy to use and could have platform and then you wanted a unified that so that now every customer of all any size is working off of the same platform and so by creating one self serve option.

A simplified products all around if you look at what that meant if you are a small business.

The same software easy to use elements, but it is also adding on new faucet like for example, some of the apartments targeting them. So on that I put spot in my prepared remarks, if you're a larger enterprise and Mick Mark It all the way up large even an AD agency. It now means that there is.

That you can create a self service at as well as being something that format.

Back in the next door App server.

Where we are unlocking our ability to better use our first party data and that will help advertisers understand their audience is better <unk> I'd, probably getting a delivery and increase add relevant so there right at the right person at the right time quite content and <unk> platform like next door, that's very high on utility, but it's also great for they advertise.

<unk> like search it very very very fun. So in terms of where we are into one would continue to move forward on that we're pleased with the progress.

So as we look towards the back half of the year. Our goal is to have R. S. N b as all up on the on the platform and then slowly moving towards MS. Marquez ultimately into the large enterprise. We're gonna do this wisely, because we don't want that access to it in any way upset our current momentum on the revenue front. So we'll do it with a lot of pets.

<unk> of course, it's not just about that.

For myself, it's also about things like measurements.

As an example, we do have first part you mentioned about like around pixel, but we also continued to add new third parties and the Max perfect New Star Oracle.

Loose that four square thesis and so on because the more that we can show advertisers that.

So I can get.

The more likely they are to stick around that's one of the reasons why our attention right has been so high across the platform in terms of the mix of <unk> of customers by type of my vertical mm.

Lost here as we headed into a kind of a tougher time and the AD market, we weren't that sounds like quite a close to vertical slice of natural services real estate that had done.

Nominally while on next door, because they often are targeting and a hyper local y.

Advertisers will come back when the environment and <unk>. So we think there's a lot of 10th up demand and no protocols that we didn't have it as I went to places where we can see opportunity for example, more recession resilient protocols like government and health care will continue to invest in areas like packing telecom does it really well for thank you one and then we both at our mid March.

<unk>. So now we are able to go after not just really large advertisers or the smallest S. M b.

That kind of course, all the the MS. Marquez, they are often not per se national but they're awesome Multistate and then finally in terms of the type of adventure, Mike talked about the fact that we work across the final all the way some brands for consideration and to direct response, clearly because of the environment where.

Heading more towards direct response, but I'd expect that balance to come back to be more balance frankly as the AD environment approved we know there's a lot of debate, what's the amount right now.

The power of brand marketing.

I just want to be able to put numbers behind us and so being able to utilize the digital platform allows me to put a lot of numbers behind what you're doing while you're doing that.

Yes.

Anything you want to add on the density or or we get yeah, maybe just connect the opportunity for them with your questions specifically about.

The impact on each of the segments and we do feel like the AD platform has a huge benefit for all of the segments and given where we are in our penetration and the advertisers mutual segments.

Don't expect a large changing composition, because there's so much opportunity and each one so thinking about our enterprise tapes midmarket that somebody has the ability to use first party data to improve targeting them to have self serve access to.

Two campaigns to be able to experiment in shifts budgets between a campaign objectives testing creative across different target audiences. Those are all benefits that will accrue to to each segments of the of the business and we can still accelerate growth in all three segments.

Great. Thank you. Thank you.

Our next question comes from you <unk>. Your line is now open.

This is Robert on for you too thanks for taking the questions I just wanted to ask a couple of questions in regards to AI. So it seems you're investing more heavily now in AI.

I would explain to step up and R&D first <unk> first prior periods or is it a much larger investment in that.

And then my second question is in relation to.

Increasing the radio some neighborhoods and showing content from nearby neighborhoods. How far did you expand the neighborhood distance for content that you show now I'm curious what it was previously and what it is now.

Okay. So why don't I start uhm. Thank you. Thank you just first of all why don't I start talking about our investment in AI I'm talking about the radio a question and then I'm gonna flip the R&D cough questions <unk>.

For me I perspective, we definitely want to make sure you're hearing the message loud and clear that would be the best thing care for multiple here. So it's not a new phone for next door and one of the reasons I came to next door is because of the data fast that we've had super unique currently on the local knowledge craft and we do see the neighbors are.

Passively labeling that date of birth, which makes it really interesting and 2022 that was a really big year for the filled out of our AI team with our fastest growing team and with that we have invested in areas like notifications, taking a new speed more personal and so that's why you're seeing that great growth and Wow that way.

Right the ninth consecutive quarter of growth in fact, I'm. We're definitely excited to continue to explore more possibilities. For example, how do I use a I drive more new neighbors coming to the platform, maybe a <unk> battery invitation neighbor to neighbor or a new investment for us, which is having businesses and <unk> to the plot.

How do we need data at the <unk> <unk>.

Most recently, we've talked about January that the AI. So last Tuesday, we made it or not.

About the lines for assistance feature and then also the addition of January to the AI and took some of our vitality areas as well we are in the business of user generated content and so therefore using anything that is January the covered very natural set here uhm, what gifts Lisa very excited about the the Aif.

<unk> is it really helping neighbors got xylona thing, they're coming up with a platform to do but hopefully helping them do it even more effectively so we're training that model.

<unk> open AI.

The door of data so it's giving the neighbor a response that is related to our platform on what works on our platform, so as or Palestine, and asking for help maybe they're giving a recommendation maybe they're trying to aggregate their neighbors cause I talked about the <unk> community gardens were helping them create a close that isn't that much.

More engagement for the next door, a platform and I really enjoyed myself getting to use it because it's right. There it's easy to see what it's for but it took a lot of control into the hands of the user and then I'm Gonna Vitaly. Besides this is a place where I feel we have been really bleeding edge, even relative to other really large platforms and the social media space.

We were the first to implement a kindness reminder, I think I'm 2017, the slow people down and remind them to be more construct up but up to this point was really just given the option to edit that post now we could ask them to address or we can even offer a suggestion on how to be more constructive and I think that's just continues.

Same vein, how do we increase the vitality overall of next door, because we know that helps create better neighborhoods help customers get things found that they wanted to get done.

The radius of neighborhood, if you recall I think Fox at the end of 2021, we shifted to something called anyone content. So this is the first time, we allowed neighbours tag their contact and say I'm fine with this content going to anyone depending on how you pull it out so sometimes you want to make.

Cause that's really better off just in the neighborhood like you've lost a pet.

But sometimes you want to post about something much bigger right on a personal note living here on the west coast. When fires were happening I wanted to know what was going on even if those fires where maybe hundreds of miles of life, sometimes cause I want it to be able to help neighbors immediate sometimes cause I wanted to know what was going on but that's content that we want to move to the extent.

It's so interesting and this is a place where AI comes to play again, because it's not about setting a hard and fast rigid boundaries and saying this content can only travel the system. Instead is much more about asking the question about is the content so interesting to the person I'm, making it very personal.

For some people they may only wanted to see things that are literally in their building and for others. They might care about seeing something across the whole county, maybe even across the state line and so this is where the data itself strikes to become very powerful when we married to a I.

The user to personalize, what that's people look like.

Okay, Mike on the R&D cough.

But I wanted to pick up there on on AI and then just operating expense management more generally so certainly we are investing deeply in this area of the business just giving me the potential for for impact.

And that is true and and R&D generally uhm, we have managed cost very tightly over the last several quarters withstanding basically flat.

Sequential opex growth over the last three quarters, that's true as well within the R&D line.

I'm thinking about head count Uhm.

Going forward in the rest of the year, we are selectively adding to our product development team will include investment gang.

Capabilities, and you'll see a little bit about it and in the quarters to come but we really are remaining in on performance management and really being very targeted and where are we adding incremental resources.

Other area, where AI impacts are P&L, it's worth calling out uhm is and gross margin and first I just wanted to to your call out. The fact that we have a very high gross margins by industry standards. We we finished the quarter.

80% gross margin this quarter down just a point seasonal age and it remains.

Redintegrate sailing in the business.

Most important cost and cost of revenue driving gross margin is hood are hosting cost.

And compute costs are included here.

I think she is our very worthwhile investments to be making <unk>.

For us to be unlocking Additionally engagements.

Knowing more about the impact that hey, I can have on the business.

Okay, great. Thank you very much for the clarity.

Thank you thanks for the Great question.

Our next question is from Jocelyn, who with Evercore. Your line is now open.

Hi, This is Jonathan asking a question for Mark maybe first could you.

Give us an update on maybe an advertiser vacation right I think I'm, probably one langdale whichever corner to go deal with some disclosure around three months, usually vacation about 75% and then.

Six months 65 per cent and then lost earnings call. You mentioned you retain 90 per cent of your top safety advertisers. Just wondering is there anything you can hear on that phone.

Yeah. Thank you I appreciate the question I think the kill there I just Wanna give you is that we continue to see really strong durability in the business and there's been no meaningful change to our retention rate from a neighbor prospect up is still incredibly high I would say best in class in the industry, a fast way, but I think.

About 50, 50, 50, so all of our verified neighbors 50 per cent return on a weekly basis.

[noise] internationally, that's actually more than 50 per cent and then all the folks to come back to weekly they come back on average about four times a week cause that's actually a little bit over 50 per cent from our while to our to our and then the third spot is the one that we gave me way back at her investment Investor Day in 2021, where we continue to see your face.

Three per cent of the neighbors engaged after two years, so that indicates the enduring retention that we see them next door because of what we're bringing to neighbors right utility in the neighborhood and a great way to build a community.

The advertisers five last quarter, we told you that 90% of our top 50 advertisers in 2022 had been retain so again speaking to the fact that advertisers are coming to the platform finding value I'm staying with us and there's been no change in my L. T M about trying it remained in and around about 90 per cent.

Again, it's something we're very proud of because we think that Bill's a great base for revenue growth because if we can keep the advertisers. We have we're continuing to build out how we're going to market I talks about pivoting toward recession, Brazilians vertical pivoting towards the Midmarket building deeper relations.

Ships with AD agencies, all of that should then be added on top of the advertisements where you already have that new logos that are coming and then of course will continue to go deeper within each of our customers. We typically find once we get a foot hold our ability ability to grow revenue in the hundreds of per cent is quite high grade.

[noise] example is the tech and telco provider that we look to here in Q1 of twenty-three.

<unk> 300 per cent Q1 of 2022 as an example, so we feel very good about retention rates on both sides of art marketplace.

Thank you and then just one quick follow up on discussion <unk> dissension grocery is there anything you can provide especially comparing versus Wow <unk>.

Oh, that's such an growth rate continues to grow faster than the wild growth.

If you were kind of asking why is that happening. So we're bringing people back to the platform. But then we're giving them reasons to go deeper why are they going deeper number one is because we're personalizing the fee to the more you're using your news feed the more you're seeing content that is really relevant to you. So you're finding it for someone who loves a local business are probably.

Seeing more recommendations of local businesses, if you're a new mover you may be seeing some examples of places things to do in your neighborhood that you might not know about if you're a millennial parents are key demographic for next door you might be seeing more things to do with kids, particularly now as we head into the summer I'm seeing a lot of stuff in my feet around things.

Like local summer camps as an example, so why about some important is if we bring those neighbors back and I talked about the 50 50 50 durability, we help them to go deeper and you feed him and other surfaces like discover that is just creating more impression that we can ultimately sell to advertisers which increases are <unk>.

Venue, but it should all be done in a look for it feel really high value to that high intense audience is coming to next door to get things done.

Thank you.

Thank you.

Once again, if you would like to ask a question that is star one on your telephone keypad.

There are no question, so attached to call back over to Sarah Friar, we're closing remarks.

Great. Thank you so much.

We appreciate your time in support of everyone <unk>. This call the analysts for 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, Cuba platform wild growth up 16% year over year I'm continuing to see progress on both revenue in March and improve months.

Question describe cause I, just talked about Jack Jacqueline again continues to show that users are finding real value on next door and because of that they are also joining organically over 70 per cent of our U S. Verified neighbors came organically to the platform and Q1, we're continuing to see strength and revenue areas like the mid market Tech and telco on her.

AD agency partnership and we're optimistic someone vertical like financial services in real estate returned to Sunday, They will perform well again for us.

Hi, This is a place for next door should absolutely thrived because of our local knowledge grass because of that label data and because we're creating products that are actually helping neighbors get them, what they need to get done on next door, where laser focused on growing wow and revenue and you'll continue to hear us talk.

About that whether it's driving invitations Papa funnel grouse, whether it's driving new content types are better discover and feed relevant and then of course continuing to build out our proprietary adtec back and then finally, we're on track to return to revenue growth margin improvement in 2023, while also and the best thing in the long term.

Opportunity that we have everyone's a neighbor and we're really excited to bring next door to them. So that thank you. So much for your time today, and we look forward to talking to you through the quarter.

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