Q3 2023 Nextdoor Holdings Inc Earnings Call
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Good afternoon, My name is Jordan and I'll be your conference operator today at this time I would like to welcome everyone to next stores third quarter 2020 Free earnings Conference call. All lines have been placed on mute to prevent any.
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After the Speakers' remarks, there'll be a question and answer session if you'd like to ask a question. During this time simply press Star one followed one on your telephone keypad, if you'd like to withdraw your question. Please press star followed by two <unk>.
You May now begin your conference.
Thank you Jordan Johnson Williams head of Investor Relations. Good afternoon, and thank you for joining us to review net stores third quarter 2023 financial results with us on the call today are <unk>, 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 and 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.
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 Q3 2023 shareholder letter released today with the.
I'd like to turn the call over to Sarah.
Thank you John Mccain, we're thrilled to have you on the team.
It was another quarter of progress at next door as we delivered year over year growth in revenues verified neighbors weekly active users an assessment that your neighbors are finding value on the platform and the <unk>.
Coming to your next door 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.
While 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.
While we saw a slight sequential decline in Q3, we have seen a rebound quarter to date on the <unk>.
Engagements were pleased to note that we've seen strong momentum affecting about increasing approximately 30% year over year.
But despite our strong progress driving new neighbors to the platforms and increasing depth of engagement.
Possible to ignore the macro challenges that continue to weigh on budgets and advertising verticals that are important for next door.
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 it needed change in how we operate.
Let me share some context here.
Ours 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 'twenty, two and continuing into this year, we began to face increasingly challenging macroeconomic headwinds driving reduced advertiser budgets.
This is particularly impacted advertisers with high levels of home related spending one of the key advertiser categories on next door.
We fought hard to maintain our employee base with the belief that the macro environment will begin to recover by the end of this year, we decided to break the downturn by using our strong balance sheet, but the recovery, we expected huggins yet materialized. So we must adapt our investments to better align with market realities and focused our work on our highest priority.
Including ensuring that we continue to invest in 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.
At right sizing 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 line.
Now, let's shift gears and discuss the key drivers of <unk> revenue growth and profitability.
First we continue scaling new channels to grow our base of verified neighbors. This was a Q3 highlights 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 the better performing email base neighbor invitations.
Second we are delivering more relevant local content to neighbors neighbors are finding value in engaging more as they visit next door, which drive sustained growth in ad impressions.
As I mentioned earlier question about 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 load.
We're using AI at next door today and in a very real way to improve our local knowledge graph and personalized relevant local content.
Whether it is seeing her neighbors engage with invitation notifications.
My comments are react AI helps us increase the relevance and timely content and drive increased engagement during each session.
We're also using AI to drive content creation, our poster system suggests post content with Foster's positivity and community engagement, whether it's helping neighbors find the service are helping business owners promote their services. The postal system has a roughly 70% suggests an acceptance rate.
Third we are delivering advertiser value and reducing advertiser effort. The next door AD server is transformative for the company. It's the foundation for delivering advertiser performance and for increasing <unk> 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 think 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 next door AD server, which drove accelerated SMB customer and revenue growth.
Our work in Q3 also prefers prepares us to serve substantially all next door and manager demand on an extra AD server by the end of Q4, given a subset of mid market advertisers are already using the next our ads manager this effectively serve as the first phase of our migration of mid market customers.
In Q3, we also encountered some challenges on our adapting and improving from a labor perspective, our efforts to improve the long term user experience through an evolved notification strategy had a negative near term effect from well while the short term impact of these changes certainly weighed on Q3, while the changes rep.
Presents a deliberate step, but we believe we were curious negativity improve the timeliness of proximity and relevance of notification 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.
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 dessert desired progress nor the strength of the long term drivers of our business.
That in mind, our focus is squarely on performance through 2024.
Performance for Nabors, seeking relevant and timely local content and connection.
<unk> for advertisers seeking unique brand activations with the community our 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.
To 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 extra AD server and then migration of ads delivery for an extra ads manager campaigns, some extra AD server and three access.
In the past quarterly free cash flow breakeven by the end of 2025.
Before turning over to Mike I want to acknowledge his significant contributions to next door over the five plus years as our CFO.
That time, Mike has led multiple rounds of funding, including our public offering on the NYSE and both an excellent finance function.
He'll 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'm enormously grateful for his partnership and the contributions and making next door. What it is today and we wish him all the best in his future endeavors.
Deep and talented bench and im very happy to introduce Matt Anderson of next doors next CFO.
As many of you know massive 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 and the finance organization. When I was CFO at block and I know that he is a terrific finance leader and have the experience to be a great CFO.
Earlier in October we welcome Dana Evan to the next Door's Board of directors her expertise and proven leadership in finance operations and strategy are bringing valuable perspective to the extra board and to the role as chair of the audit and risk Committee.
Our strong track record as a public company CFO will be enormously valuable and I'm thrilled to have Dana on our board and mats on our leadership team so with that I'll turn it over to Mike.
Thank you Sarah for those kind words, it's been my privilege to be a member of the next door team since 2018, but I'm tremendously proud of what we've accomplished our business is financially strong and next door remains well positioned for the opportunities ahead.
I've worked closely with Matt since hiring and have over four years ago I have immense respect for Matt as a leader and I'm confident he'll be excellent as next door as 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 have signed our Q3 10-Q, which was filed earlier today and our <unk>.
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 and encouraging early indicator that our transition. These customers to the next door 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 next door'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 health care. So home services spend has slowed and we have not yet seen a meaningful rebound in financial services and real estate, which are key for next door.
Q3, <unk> of $1 39 declined 2% year over year, a sustained AD impression growth was offset by a year over year decline in <unk> for our U S news feed.
So are 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 drove margin is lower versus the year ago period.
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 added the court, we ended the quarter with $540 million in cash cash equivalents in 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.
Thanks, Mike.
Really appreciate the kind words from both you and Sir.
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 next door.
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 gap personnel expenses of up to $60 million annually.
Actions, while difficult increase our focus on efficiency and we will accelerate the path to quarterly free cash flow breakeven by the end of 2025.
As Sarah said earlier 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.
In 2023 revenue in a range between $213 million and $250 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 there was one time severance and related costs associated with our cost reduction plan will be approximately $12 million.
Across many measures next door's growth and momentum continue.
Even in an environment, where important advertiser verticals have been pressured organic verify neighbor growth and engagement are accelerating.
We're making continued progress transitioning to a proprietary platform.
Positive early results from Q3.
And as we look ahead to 2024, we remain focused on growing well and revenue.
Thank you for joining our earnings call today with that I'll turn it over to the operator for Q&A.
Thank you as a reminder, if you'd like to register at all to your question. Please press Star followed.
Your telephone keypad.
Jamal please for Sonus.
I am please ensure you're on mute when speaking.
Our first question comes from Mark Mahaney of Evercore. Please.
Please go ahead.
Hey, Thanks, two questions. Please first on the on the negative content. Sarah has there been a change in that I know thats 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 in the recent past and then secondly at a high level when you.
Talk to go into market with advertisers, leaving aside the verticals that are that are cyclically soft what's the biggest pushback you get from advertisers in terms of their unwillingness to.
Aggressively commit to the next doors and advertising platform. Thank you.
Alright. Thank you Mark So let me start on Wow, and then in particular, how we're thinking about getting the right content. The right neighbor at the right time. So as you saw with our while $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 you know.
Now there is a cadre of neighbors, who come organically through the platform, but often neighbor's club because of a notification that we have sent them.
In Q3, we wanted to reflect on a reduction in medical patients to certainty where five months and then in <unk>.
<unk> also reduced certain high engagement notification, particularly climb and safety to better align with kind of a qualcomm perception on the context kind of what you call negative content, there and really it's because when we use an algorithm around notification primary safety is clearly an area people click on but over time.
You do get concerned about the perception that that drives off the platform.
Take a very deliberate staff in Q3, two to effectively make a change which will reduce negativity improves the timeline that proximity and relevance of notification and to make sure. We sustain our high levels of long term user retention as you know we actually do have a very high launch high degree of retention over a cheater.
Im frame, whether it's verified neighborhood, while it's around 50%, but even over a two year period, you haven't seen any changes, but we think we can do better.
As we look forward, while while grow again I know you didn't really ask that but why would we see it grow why are we confident that the Q4 number one is definitely just that outcome that we saw on verified neighbors. The fact that we saw the almost over 30% sequential lift in newspapers, joining the platform clearly they take a little.
Climbed to become weak players, but we see them already engaging actually at a slightly higher level than our other channel.
On your second question go to market with advertisers. So what's the biggest pushback to get them more consistently on budget.
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 next door theyre 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.
Now that won't surprise you in those two verticals clearly theyre very endemic to the Nexstar 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 up more case studies about how various advertisers on next door I've seen really positive and good outcomes and then of course as we build out our AD Tech stack, 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 Nexstar platform, but then also.
Advertisers that really cared deeply on the performance side.
We've done a lot of work there, but clearly with our own proprietary AD server, we can do a lot more so.
As we look out we see a lot of reasons to be really.
Excited about the traction we can get whether its pent up demand from advertisers, who should come back when their budgets release more new advertisers, who are getting to know us, but should spend more and then of course, our ability to keep adding on net.
Net new every single period. So it certainly has been a tough quarter in Q3 and as we look into Q4, but we see also a lot of room for optimism as we look out into 2024, ideally with a little bit of tailwind coming out of the AD spending backdrop too.
Thank you Sir.
Thank you Mark.
Our next question comes from Eric Sheridan.
Go ahead.
Thanks, so much for taking the questions first Mike Thanks for everything enjoy Dolby insights over the years and Matt Congrats on the new role and wishing you success in that.
So if I could just follow up on Mark's question on advertising I think what we're trying to discern from the call is you clearly have a lot of momentum in SMB and mid sized advertisers around the ads manager is there a way to better discern what that momentum is in terms of a backdrop or tailwind for growth exiting 2023.
<unk> thinking about what the headwind to revenue growth is from either category understand versus more normalized trends.
So we can better understand sort of the recovery rate to sort of think about.
In 2024, thank you.
Yeah. So.
Great. Thank you so much operator, thank you all for dialing in today and we always appreciate your support and your interest in next door.
When I look at what the quarter broth positively we felt good to see good seeing year over year growth across our key metrics, well up 6% revenue up 4% and in a tough environment seeing a record number of new verified neighbors come to next door.
We do feel like we have a lot of levers at all stages of our user funnel to keep driving growth, whether it's top of funnel, where as I said, we added our highest number ever of organic users to the platform. It was mid funnel, where we continue to see folks engaged.
While ratios remain in that 50% range or if its bottom of funnel, so fashion that as Matt talked about up 30% year over year.
We did see strength in areas such as international AD agency partnerships and the push from neighborhood space. We now have $4 3 million claims business pages are really fertile ground for up selling advertising.
We do expect verticals like sensor real estate home services to approve over time, we know we performed really well for them. So we view that as an area of pent up demand, but unfortunately, we're just not seeing it at the moment.
AI is really important for next door, we own the local knowledge graph with label data with a really high intent audience of real people in neighborhoods everywhere. It's a very unique asset for us as we look forward. We are laser focused on growing wow and revenue. So that means we have to continue delivering value for nabors.
Organizations.
Really highlighting the importance of local.
Second we need to keep investing in our platform and our steps to keep growing that engagement and Thats, where AI comes quite too and then finally, we need to keep iterating on our monetization capabilities for advertisers of all sizes. So building up an extra apps platform to make sure that those advertisers get better outcomes, but we also will do.
Advertising effort to be on next door.
Right now, we're very focused on near term performance, but we don't want to decide to continue to invest in long term opportunities of this very unique global hyper local neighborhood network.
What are we going to do in order to drive that in 'twenty four we're going to make sure that we add more verified neighbors in 'twenty 'twenty four than we did in 2023.
With our expense reduction plan accelerate our past margin improvement and cash flow generation.
So with that thank you. So much I will also be on the follow up analyst call to go a little deeper and appreciate your time this afternoon.