Nextdoor Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 11 speakers on the call.

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. After the speakers' remarks, there will be a question and answer session.

Operator

You may now begin your conference.

Speaker 1

Thank you, Jordan. I'm John C. Williams, Head of Investor Relations. Good afternoon, and thank you for joining us to review Nextdoor's Q3 financial results. With us on the call today are Sarah Fry, our Chief Executive Officer Mike Doyle, Chief Financial Officer and Matt Anderson, Head of Finance and Strategy.

Speaker 1

Call. 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. Are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward looking statements.

Speaker 1

Call. For a discussion of 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 Q3 2023 shareholder letter released today. With that, I'd like to turn the call over to Sarah.

Speaker 2

Thank you, John Key. We're thrilled to have you on the team. Q3 was another quarter of progress at 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 85,000,000 neighbors globally.

Speaker 2

Wow! Increased by $2,100,000 or 6 percent year over year to $40,400,000 globally and is up nearly 50% over the last 3 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 from the fashion 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 budgets and advertising verticals that are important for Nextdoor.

Speaker 2

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. 2 years ago when we listed on the NYC, 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.

Speaker 2

Starting in Q2 of 'twenty two 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've 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 areas such as our new ad tech stack.

Speaker 2

What does this mean for our business? 1st 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.

Speaker 2

First, we continue 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. 2nd, we are delivering more relevant local content to Nabors.

Speaker 2

Nabors 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 load. We're 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 they comment or react, AI helps us increase the relevance and timeliness of content and drive increased engagement during each session. We're also using AI to drive content creation. Our Post assistance suggests post content that fosters positivity and community engagement, Whether it's helping neighbors find a service or helping business owners promote their services, the Post assistance has a roughly 70% suggestion acceptance rate.

Speaker 2

3rd, 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 2 key areas. First, we delivered more sophisticated pacing methods to better deliver ads over the course of a day and the course of a campaign.

Speaker 2

2nd, 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.

Speaker 2

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 mid market advertisers are already using the Nextdoor Ads Manager, this effectively serves 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 neighbor perspective, Our efforts to improve the long term user experience through an evolved notification strategy had a negative near term effect on Wow! While the short term impact of these changes certainly weighed on Q3 Wow, 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.

Speaker 2

From an advertiser perspective, compared to improving momentum through Q2 and strength in July, we saw uneven demand trends in August 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.

Speaker 2

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 a 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 1, add more verified neighbors in 2024 than we did in 2023. 2, deliver improved formats, reduction 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 3, accelerate the path to quarterly free cash flow breakeven by the end of 2025.

Speaker 2

Before turning over to Mike, I want to acknowledge his significant contributions to Nextdoor over the 5 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'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 in making Nextdoor what it is today, call. And we wish him all the best in his future endeavors.

Speaker 2

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 6 years in the finance organization when I was CFO at Block.

Speaker 2

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.

Speaker 3

Thank you, Sarah, for those kind words. It's been my privilege to be a member of the Nextdoor team since 2018, and I'm 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 4 years ago. I have immense respect for Matt as a leader and I'm confident he'll be excellent as Nextdoor's CFO.

Speaker 3

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 $56,000,000 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 of these customers to the Nextdoor ad server is yielding results.

Speaker 3

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 were 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, The 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.

Speaker 3

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, we monetize at a relatively higher rate, made up a smaller share of the total ad impressions delivered. Q3 adjusted EBITDA loss was $20,000,000 representing a negative 35% margin.

Speaker 3

Non GAAP operating expense growth of percent year over year outpaced revenue growth and drove margins lower versus the year ago period. The main drivers of expense growth We're hiring within select R and D and sales teams offset in part by more efficient neighbor acquisition spend. Our Q3 operating cash burn of $12,000,000 was again better than the adjusted EBITDA loss reflecting another quarter of benefit from interest income. We ended the quarter with $540,000,000 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.

Speaker 3

With that, I'll turn it over to Matt.

Speaker 4

Thanks, Mike. I really appreciate the kind words from both you and Sarah. It has been a pleasure to partner and to learn from you over the last 4 plus years. And I want to say thank you for all you have done for Nextdoor. I'm incredibly excited about the opportunity to step into this role.

Speaker 4

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 $60,000,000 annually. These actions, while difficult, Increase our focus and 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.

Speaker 4

We now expect Q4 2023 revenue in a range between $50,000,000 $52,000,000 and 2023 revenue in a range between $213,000,000 $215,000,000 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 $21,000,000 and $19,000,000 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 $81,000,000 $79,000,000 One other note, we currently estimate that those one time severance and related costs associated with our cost reduction plan will be approximately $12,000,000 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're making continued progress transitioning to our proprietary ad platform and saw positive early results in Q3.

Speaker 4

Call. And as we look at the 2024, we remain focused on growing Wow! And revenue. Thank you for joining our earnings call today. With that, I'll turn it over to the operator for Q and A.

Speaker 4

Thank you.

Operator

And please ensure you're unmuted when speaking. Our first question comes from Mark Mahaney of Evercore. Mark, please go ahead.

Speaker 5

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 talk to 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's platform?

Speaker 5

Thank

Speaker 2

you. Great. 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.

Speaker 2

So you saw with our Wow, dollars 40,400,000 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, there is a cadre of Nabors who come organically to the platform, but often Nabors come because of a notification that we have sent them. In Q3, we wanted to reflect on a reduction in notification to certain user segments.

Speaker 2

And then In addition to also reduce certain high engagement notifications, particularly crime and safety to better align kind of the platform perception on the content, kind of what you call negative content there. And really it's because when we use an algorithm around notification, Primacy is clearly an area people tend to click on, but over time, we do get concerned about the perception that that drives all 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 notification and to make sure we sustain our high levels of long term leisure retention. As you know, we actually do have a very high degree of retention over a 2 year timeframe, whether it's Verified Neighbor to Wow! It's around 50%, but Even over a 2 year period, we haven't seen any changes, but we think we can do better.

Speaker 2

As we look forward. Why will Wow grow again? I know you didn't really ask that, but why will we see it grow? Why are we confident in the Q4? Number 1 is definitely just that outcome that we saw in Verified Neighbors.

Speaker 2

The fact that we saw the almost over 30% sequential lift And new neighbors joining the platform, clearly they take a little time to become weaklays, but we see them already engaging actually at slightly higher levels than on their other channels. On your second question, go to market with advertisers. So what's the biggest Push back to get them to consent 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 Nextdoor.

Speaker 2

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. I know that won't surprise you in those 2 verticals, but clearly they're very endemic to the Nextdoor platform. In fact, if I look at Q3, I think we have 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.

Speaker 2

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 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 Nextdoor platform, but then also advertisers that really care 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.

Speaker 2

So net net as we look out, we see a lot of reasons to be really Excited about the traction we can get, whether it's pent up demand from advertisers who should come back when their budgets release more, New advertisers are getting to know us, but should spend more. And then, of course, our ability to keep adding on 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.

Speaker 5

Thank you, Sarah.

Speaker 2

Thank you, Mark.

Operator

Our next question comes from Eric Sheridan of Goldman Sachs. Please go ahead.

Speaker 6

Thanks so much for taking the questions. First, Mike, thanks for everything. I've enjoyed all the insights over the years. And Matt, congrats on the new role and Wishing you success, Amit. So if I could just follow-up on Mark's question on advertising.

Speaker 6

I think what we're trying to discern from the call is You clearly have a lot of momentum in SMB and midsized advertisers around the ads manager. Is there a way to better discern what that momentum is in of a backdrop or tailwind for growth exiting 2023 and or thinking about what the headwind to revenue growth is from either category under spend versus more normalized trends, so we can better understand sort of the recovery rate to sort of think about in 2024? Thank you.

Speaker 2

Yes. So I mean, clearly, we're not happy with our performance right now from an overall revenue cover. It's what I was trying to get to is to say, we do see a lot of room for optimism. Maybe I split our ad base into the 3 areas. So Larger enterprises, more mid market clients and then the SMB.

Speaker 2

I'll start on the SMB side because that actually was a real highlight in the quarter. SMB revenue grew about 23% year over year. And why that's particularly important is this is the group that is on our proprietary stack today. They moved on to what we call Nextdoor ad servers, so the server on the back end. They can also self serve on the front end if they choose through NAM.

Speaker 2

So they are the group that can actually take the most advantage today of what we're able to do once you're on our platform, which is optimize and better target. On the mid market side, what we're seeing there is that advertisers are coming. We added more new logos in mid market than we've done in any other period. However, they are still shifting more towards what we would call managed because our Tech platform still needs to add a lot of the features that they come to expect when they're managed on Nextdoor. So we want to get them into more of a self serve motion.

Speaker 2

And then finally, on the enterprise side, I think the headwind there really has been advertiser budgets. When I look at what are the verticals that did well for us in the quarter, so we've continued to do well in areas like healthcare, Government, professional services, verticals like tech and telco and retail stayed fairly stable. But what we did see was a number of larger advertisers that tend to be in the home services space or in the financial services space is they really retracted their budget. When we talk to them about it, it's a little bit it's not you, it's us sort of conversation of They're generally just pulling that budget back across the board. So their intention is when they have more budget to come back to Nextdoor.

Speaker 2

But for right now, they are just finding it very tight in terms of their ability to spend. And that clearly has ramifications for us given our scale.

Speaker 4

Eric, I'll add one more thing and listen to what Sarah highlighted. And as we think about the ad stack, really one of our core focuses is advertiser performance. And so we talked last quarter about moving SMB customers to our Nextdoor ad server. As we mentioned, that's an area of significant momentum and even as we double indicators of momentum in the future periods. When we look at things like budget utilization rate as an indicator of advertiser value, As we look at how that shows up in terms of revenue retention for that set of customers, we see some really positive signs.

Speaker 4

So that is an area where We continue to see momentum, we continue to have conviction and we're really balancing that against some of the vertical dynamics that Sara noted. Thank you. Thanks, Harry.

Operator

Our next question comes from Brian Fitzgerald of Wells Fargo. Brian, please go ahead.

Speaker 7

Thanks. And again, congrats, Matt, and Mike, thank you for all the help we've had over the years. We really appreciate it. Two quick ones from us. When you think about campaigns like the one with Verizon that you ran this quarter, How effective are those in attracting new neighbors to the platform?

Speaker 7

Do you see equal benefits across neighborhoods at different levels of penetration? And then second question was on the can you give us an update on the Progress with business to business initiatives like weather.com or Axios or BBC? And how is that impacting content generation and consumption?

Speaker 2

Yes. Let me take that. I'll lift it up a level because it's really a question about how do we grow new neighbors on the platform. And if you look at our top of funnel efforts, which really became a big focus for us in Q3, because we said in order to grow Wow! We need to go back up to top of funnel Because we feel very good about our ratios such as VMs to Wow!

Speaker 2

About 50%. Wow! To DAOs, also about 50%. So the real growth is going to come from bringing new neighbors in at the top of funnel. We grow that in 4 ways: invites, brand awareness, Content sharing, which is the partnership piece that you just asked about as well as things like SEO and even just our own content that gets shared out even on to other social channels.

Speaker 2

And then finally paid. And paid is definitely the 4th of 4 there. So I'll put it to one side because In this period and in the last couple of periods, well over 90% of our verified neighbors are coming unpaid or organically. If I I've already touched on invites. That's been the place where we put in the most investments in the quarter.

Speaker 2

And that included really reinvigorating our digital invite strategy. That's where we're able to match someone's location with either an email address or a text message And invite them to Nextdoor. It's a place we're actually able to use generative AI to create an invitation, that is even more enticing for them. And that's where we saw that big acceleration, 32% growth quarter over quarter. Because of our digital invite strategy, as people join the platform, They're more inclined to invite others as well.

Speaker 2

And so we've really invested into our Neighbor Hub. Today, we're seeing almost 1,000,000 visits per week in our Neighbor Hub and that's contributing to about 100% year over year growth in digital neighbor to neighbor invites. Coming to your question, another way that we can drive growth is through brand awareness. Those can be campaigns we do on our own. So things like, we did A whole list with BlueStar families.

Speaker 2

Military families are more likely to move. New movers are a category that do very well on Nextdoor. But it's also a place where we can work with brands like Verizon and almost have a win win on both sides. They are a paid advertiser, but they want to do something unique locally. And in this case, they came to Nextdoor in order to do more of their neighbor months and neighbor meetups.

Speaker 2

Those are something that are done in real life. And again, a core component of Nextdoor is often the online to offline motion of how do you build great community in real life. So they are effective in terms of building up that brand, building up that brand awareness. Those campaigns are also very effective And selling to other equally large spenders in, for example, the tech and telco vertical, but even across other verticals, We might want to do something that just feels very unique and differentiated, very much about community, localism and so on. And we saw a lot of this at Adweek in New York just a few weeks back where the sales team was there in full force.

Speaker 2

In terms of the second part of your So much is the progress on B2B initiatives, that is the other way that we can drive a growth loop. So our content When it's taken out onto other people's platform, like for example, BIM from Microsoft, that can be a really great way to both Provide a partner with really unique differentiated local data. But then when someone clicks on that, They come back into Nextdoor, either as a Wow that's returning or potentially as a net new neighbor that's going to Sign up in order to sign up more. With initiatives like weather.com, Axios, BBC, Those are examples where we can take in information coming from others, and it allows us to surface to neighbors Something that feels very of the moment. Weather is a great example.

Speaker 2

It's something that's hyper local and particularly in emergency situations, weather alerts are really what a neighborhood cares about. So it's a really good two way street with a partner like that. So we're continuing to build out our API so that we can do that. We just launched soft launched our developer API website out there into the world so that others can come and be part of that same growth strategy. So we feel good about it, very early days, but it's yet the 3rd lever of how we grow.

Speaker 2

So invite, Brand awareness, content sharing and then finally paid is a much smaller piece today.

Speaker 7

Awesome. I appreciate it, Sarah. Thanks so much.

Speaker 2

Thank you.

Speaker 8

Thank you, Brian. Our next question comes from Youssef Squali of Churit. Youssef, your line is now open. Please go ahead.

Speaker 9

Thank you. This is Robert Zeller on for Youssef. A few questions. On the organic user growth, I'm just curious where that occurred, that was U. S.

Speaker 9

Or international. And on the 4Q revenue guide, What were some of the things that you expected to play out that didn't materialize? And then On the session depth reaching all time highs, I'm just curious what drove this. If it was, I think last quarter you Talked about how you are expanding the vicinity of Nabors that content reaches. And I think you also previously called out Notifications are the driver of increasing engagement and user growth.

Speaker 9

So I'm just curious with the new strategy And what you're doing around notifications, if that might impact engagement or user growth at all? Thanks.

Speaker 2

Sure. Great. Thank you. So lots of great questions there. I'm going to quickly take the organic user growth.

Speaker 2

I'll throw it over to Matt to talk about Q4, what did and didn't materialize and then I can finish out on session depth. So on the organic user growth, you're right to differentiate between the 2. Both international and the U. S. Grew in the quarter and in the period year over year.

Speaker 2

However, the big push on digital invites has really had an impact more in the U. S. Right now. That's good because it's the market that is most mature in terms of monetization. It's also true that some of the other areas that I was Outlining previously things like our partnership strategy today have been bigger in the U.

Speaker 2

S. Aside from someone like the BBC. So I would say the U. S. Is benefiting most from a lot of the work just done in Q3 around organic user growth.

Speaker 2

But international clearly remains a focus for us as we get into 2024 because in terms of a long term growth strategy it's incredibly important that we continue to grow at countries Like the U. K, Western Europe, Canada and so on. And I do want to give a shout out that on the revenue side, international really was a highlight, Growing 79% year over year. So it's a good indication that if we do continue to add more new users there and do continue to drive Wow that we can sell that. With that, Matt, can I pass it to you in terms of Q4 guidance?

Speaker 4

Yes. I'll touch on that and also close a loop on your question, Robert, with regard to the session depth dynamics. So first, with regard to the Q4 revenue guide, it really is a couple of different components. The first and the one we've highlighted already quite clearly is starts with the vertical dynamics. And specifically, we started to see we've seen continued slowdowns in areas like we've highlighted, the Financial Services.

Speaker 4

But at the same time, areas like Home Services Started to see more pressure relative to prior periods and prior expectations. Now while we see continued momentum in a number of different verticals, We called out a few of those things like healthcare in Q4 areas like retail. At the end of the day, that wasn't enough to offset The near term pressures on our enterprise direct sold demand that downstream has effects on our CPM in the period. And so those supply and demand dynamics Meant that a greater share of in the Q4 specifically, the greater share of our ad impression inventory, which is still growing significantly, will ultimately met by Slightly lower CPM dynamics. Now this is on top of broader industry wide CPM pressures that a number of our peers have highlighted.

Speaker 4

At the end of the day, though, this comes back to one key point, which is we continue to see very high levels of advertiser retention. And so that gives us confidence that as we expand in new verticals, as those new logos that Sarah added continue to ramp on the platform, that there still is a very solid foundation for future growth. Unfortunately, that growth is going to be over a slightly longer time horizon than what we've previously indicated. So that's on the revenue front. And then with regard to session depth, you also referenced session frequency.

Speaker 4

That certainly is a core part of our notification strategy. Sudden death is really getting into the dynamics when a neighbor comes and engages on the platform. And so, Juan, I'll start by highlighting that 30% growth that Sarah mentioned is quite substantial and it is a continuation of the dynamics that we saw in Q2 and it's something we expect to continue in Q4. And that's really a function of content or relevant or personalized content. This is where areas like AI become really important and have played a role in Helping us be smarter about understanding how neighbors engage with notifications, how different neighbors interact with different types of notifications and ultimately we have a richer picture How they engage and how to make their time in the app better.

Speaker 4

So that's really been a core part of our SaaS and DEV dynamics and that's That's an area where we continue to have production.

Speaker 9

Okay, great. Thank you, both.

Speaker 8

Thank you, Youssef. Call. Our next question comes from Brian Nowak of Morgan Stanley. Brian, your line is now open. Please go ahead.

Speaker 10

Hi. This is Chloe on for Brian. Thank you so much for taking our questions. I guess, first, just could you please speak a bit more to the changes You're making in the Nextdoor Ads Manager. It sounds like there's a lot of positive traction and momentum there, particularly for SMB advertisers.

Speaker 10

But as you think into next year, what areas and sort of what's the roadmap going forward for that to drive revenue and hopefully contribute to results. And then second on generative AI, also just curious for a little bit more color on how you're thinking about Expanding the ways that AI can both improve the user experience and the advertiser experience on the platform sort of above and beyond some of the current tools and offerings. Thank you.

Speaker 2

Great. Thank you, Chloe. I appreciate the questions. Let me start Taking the first one on overall the ad tech stack. So front end and back end, you talked to Nextdoor Ads Manager.

Speaker 2

That's the Actual interface, it's where people create an ad. And really our work there is all about reducing advertiser effort. So today where we've gotten to, An advertiser of any size can now self serve on Ma'am. In addition, we continue to build out Other features and functionality with larger advertisers and their agency partners. So that includes releasing things like user roles and permission, Creative duplication, pixel tooling, audience exclusions, ad credits tooling, multi edit functionality, M and M.

Speaker 2

So you can kind of see the list is long. It gets very, very specific to ads, but we are making progress every single period to make that better and better for businesses of all sizes. On the back end, Nextdoor ad server, as we've mentioned, we're now delivering 100% of all U. S. SMB demand and we're seeing faster loading times, better distribution of ad impressions.

Speaker 2

So overall that's driving better retention of those SMB customers. It's also driving better revenue, up 23% year over year in the quarter. And then of course, those are places where we do also want to use more ML or AI, make sure that the right ad content is getting in front of the right user, Which of course then will drive engagement. Beyond our ad platform, it is also worth noting that we do continue to build out 1st and third party integration. So for example, on the first party side for Benjamin, we now see that the majority of our CPA focused customers have adopted our own Pixel.

Speaker 2

Scripps is a great example of a customer who's used our pixel to better understand the neighbor activity to optimize for lower CPAs And they've increased spending really meaningfully year over year. On the 3rd party side, we now have measurements with folks like Newstar, Oracle, Lucid, Foursquare, CFS. And on the brand safety side, which always remains important in social, we're already live with Moat, around things like verified impression, And we're in the process of integrating IAS. But of course, one of the things we always felt to advertisers is you're starting from a point of verified neighbors. So in terms of verifying the impression, we've already told you that it's a real person that we know where they live locally.

Speaker 2

The second question was around generative AI. So from a and then probably AI overall. So, 1st and foremost, AI is already a really integral part of the product experience here at Nextdoor, whether it's about improving core experiences, such Such as newsfeed and notifications, make them seem more personal, or around applications that use generative AI. We've talked a little bit about, For example, our use of our post assistance. So when you're creating a post on Nextdoor, in particular, if you're trying to look for a recommendation, Just this week, I was looking for family photography.

Speaker 2

Or if you want to post about a business saying what a great business they were, Our post assistance jumps into action for you and creates a post that we know because it's trained against Nextdoor data will perform better on the form and we see about a 70% increase in or 70% acceptance rate of that post suggestion. We're also going a lot deeper on our active machine learning models in the products overall. That's increased since 2022, that's increased about 10x. And in fact, the number of successful model experiments has increased by approximately 100 times. So we are prioritizing the velocity and the breadth of different large language model across markets and across user needs.

Speaker 2

As I look forward, probably the area I'm most excited about in terms of AI Is the ability to leverage it not just within the ad server itself to help advertisers understand audiences better, optimize ad targeting and so on, But also to think about for those small businesses, how do we leverage GenAI to help them assist with, for example, their page creation Or with a campaign. In an ideal world, they show up. We've already recreated it for them based on either what we know about their business already or what we see happening with other local businesses and their community and we can create the perfect campaign to get what they want, which is more customers, more revenue, But we can do it in a way that feels seamless and literally real time for them. So that's a place that we are investing in. I also did mention that we saw almost 300,000 pages created using GenAI To put out there from an SEO perspective, that's a really good way to drive people back to Nextdoor to make sure we keep showing up as being highly relevant.

Speaker 2

It's also important because it's a way to not show all of our data externally rather to effectively give a really performance summary, But to ensure that our proprietary data stays proprietary within the Nextdoor fault.

Speaker 8

Thank you. We have no further questions in the lineup. So I'd like Turn the call back to Sarah Friar for any closing thoughts.

Speaker 2

Great. Thank you so much, operator. Thank you all for dialing in today. We always appreciate your support and your interest in Nextdoor. When I look at what the quarter brought call.

Speaker 2

Positively, we felt good seeing year over year growth across our key metrics. Wow up 6%, revenue up 4% And in a tough environment, seeing a record number of new verified neighbors come to Nextdoor. We do feel like we have a lot of levers At all stages of our user funnel to keep driving growth. So whether it's top of funnel, where as I said, we added our highest number ever of organic users to the platform. If it's mid funnel where we continue to see folks engage, BN to Wow ratios remain in that 50% range Or if it's bottom of funnel, so sessions apps, as Matt talked about, up 30% year over year.

Speaker 2

We did see strength in areas such as international, Ad agency partnerships and with the push from neighborhood phase. We now have 4,300,000 claims business pages, A really fertile ground for upselling advertising. We do expect verticals like sim serve, real estate, home services to improve over point. We know we performed really well for them. So we view that as an area of pent up demand, but unfortunately are just not seeing it at the moment.

Speaker 2

AI is really important for Nextdoor. We own the local knowledge graph with labeled data With a really high intense audience of real people and 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 neighbors and organizations, Really highlighting the importance of local.

Speaker 2

2nd, we need to keep investing in our platform initiatives to keep growing that engagement and that's where AI comes And then finally, we need to keep iterating on our monetization capabilities for advertisers of all sizes. So building up the Nextdoor Ads platform to make sure that those advertisers get better outcomes, but that we also reduce advertiser effort to be on Nextdoor. Right now, we're very focused on near term performance, but we don't want to be shy to continue to invest in long term opportunities of this very unique global hyperlocal on neighborhood network. What are we going to do in order to drive that in 2024? We're going to make sure that we add more verified neighbors in 2024 than we did in 2023.

Speaker 2

And 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.

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Earnings Conference Call
Nextdoor Q3 2023
00:00 / 00:00