Q4 2023 Nextdoor Holdings Inc Earnings Call

Participants

Matt Anderson; Chief Financial Officer and Principal Financial Officer; Nextdoor Holdings Inc

Nirav Tolia; Independent Director; Nextdoor Holdings Inc

Eric Sheridan; Analyst; Goldman Sachs Group, Inc.

Ronald Josey; Analyst; Citigroup Inc.

Brian Fitzgerald; Analyst; Wells Fargo Securities, LLC

Presentation

Operator

Good afternoon, and thank you for attending the Q4 2023 Nextdoor Earnings Call. My name is Matt, and I'll be your moderator for today's call. (Operator Instructions)
I will now pass the conference over to our host, John Williams with next door. John, please go ahead.

Thank you, Matt. I'm John T. Williams Head of Investor Relations. Good afternoon, and thank you for joining us to review Nextdoor's fourth quarter and full year 2023 financial results. With us on the call today are Sarah Friar, Chief Executive Officer, Nirav Tolia, Chief Executive Officer Designate, Matt Anderson, Chief Financial Officer.
During this call, we may make statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements.
For a discussion of the material risks and other important factors that could affect our actual results. Please refer to our SEC filings available on the SEC's website 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 Q4 2023 shareholder letter released today.
With that, I'd like to turn the call over to Sarah.

Thank you, John T. Our Q4 results demonstrated renewed strength. We added a record number of organic verified neighbors for the second straight quarter and ended the year with more than 88 million verified neighbors growing 13% year over year Q4 while grew to 41.8 million, up 5% year over year and 3% sequentially.
We expect this sequential growth in wild continue into Q1. Users remain active and engagement is high on our platform impression growth with strong session depth, which reflects the number of ad impression opportunities during each user session increased by 36% year over year and accelerated versus Q3 ending the year at a record level.
Our growth algorithm of simple continued user and engagement growth, new advertiser growth boosted by our self-serve capabilities, increasingly durable advertiser retention as more demand delivered via our proprietary ad server and a reduced cost base to better enable both growth and positive free cash flow of harvest wasn't limited to user growth and engagement metrics were leveraging AI and machine learning across our platform in a variety of ways from using our local knowledge graph to help businesses reach their target audiences, improving notifications and optimizing ad delivery through enhancing platform vitality.
As we noted in our recently released 2023 Transparency Report, 26% of neighbors use the revised language suggested to them by generative AI to make their posts more constructive and member feedback suggests very high levels of satisfaction with our AI based kindness reminder. So it's very clear that even at this early stage, the AI tools we've developed are having a measurable impact on our user experience that experience driving positivity. We also made progress delivering advertiser value and reducing advertising efforts. For the full year, we retained 90% of our top 50 customers.
We saw continued strong performance from mid-market and SMB customers, many of whom have begun to see the benefits of our owned and operated ad platform and are benefiting from the performance optimizations. We can now make we get a lot of questions about our specific vertical exposures for clarity and FY23, our top three advertising verticals for Home Services, Retail & Tech & Telco, though the contribution from each can vary greatly from quarter to quarter and year to year.
We continue to decrease our vertical concentration and have seen increasing contributions from smaller but faster-growing emerging verticals like healthcare and government and nonprofit, which have more than doubled their share of the pie over the last two years.
On the technology side, we made ongoing progress on our transformative Maxtor ad platform. In mid 2023, we achieved our goal of having 100% of ads from SMB advertisers served via the Nectar app server, and we're pleased to say that almost all of our self-serve mid-market customers are now fully migrated. We expect this move to start to tip our mid-market business more and more towards self-serve.
And that is happening that should drive new revenue opportunities, but also improved advertiser performance and revenue delivery. Our ad platform is the foundation for delivering advertiser value and increasing RPU growth through improved revenue yield.
We're now beginning to leverage our unique knowledge, local knowledge graph and help advertisers deliver increasingly relevant and personalized ads to neighbors on our platform. Simply put, we believe it's a game changer for next door and will prove to be a must buy solution for advertisers of all sizes.
Switching gears, as many of you have already seen, our Board authorized a $150 million increase to our existing share repurchase program. Matt will have more to say about this in his remarks, but this is a clear demonstration of our confidence in our business and opportunity. Our focus on bringing new neighbors to the platform, growing engagement and building powerful solution for advertising customers hasn't changed, nor has our approach to making these things happen.
Our Q4 results are a demonstration of how we continue to evolve and improve and approach that will continue in 2024 and beyond. And I'd like to take a moment to discuss our recent announcement that I'll be stepping down as the CEO of next door.
We've made great progress over the last 5.5 years, scaling the business, tripling the number of verified neighbors on the platform, raising capital, taking care of our people and going public, while always remaining true to our purpose and mission, I will be a neighbor forever, and I'm enormously grateful for the opportunity to lead such a wonderful group of people here at Nexstar.
Having said that, I'd like to introduce or reintroduce for some Europe totaling up as Maxtor's incoming CEO, Miura of as well is well equipped to lead Maxtor going forward. He cofounded the company and has a current Board member served as CEO prior to my joining and knows it well, he and I have had a very close working relationship.
And with the growing user base and strong advertising momentum, the time is right to put the Company back into his hands, Mara that's here with us today and will participate in our Q&A session. And I will be staying on into Q2 to support him and the team and to ensure a seamless transition. I've also find our 10-K, which was filed earlier today.
And with that, I'll now turn it over to Matt.

Matt Anderson

Thank you, Sarah, and good afternoon, everyone. Q4 revenue of $56 million grew 4% year over year, while grew sequentially and record-setting depth drove stronger than expected impression growth. We expect both of these trends to continue into Q1. From a revenue perspective, self-serve customers continued to grow and now contribute more than 40% of total revenue.
Additionally, revenue from our home services vertical grew 16% year over year in Q4, recovery from the year-over-year decline we experienced in Q3. Growth in self-serve customers and revenue continued to outpace growth from our managed accounts demonstrates our progress driving adoption of our next store Ads Manager, which serves as our self-serve interface for advertisers of all sizes.
Further as of mid-February, 100% of Nextra Ads Manager impression demand is serving on our next or ad server given timing during the quarter. This will not immediately impact Q1 revenue. However, it does represent a key milestone as we work to deliver durable advertiser value and growth in the quarter as Q4 RPU of $1.33 was stable year over year.
We were encouraged by two, particularly notable trends in Q4 first, mid-market advertisers increased their average spend levels by more than 125% year over year, signaling a return to healthier budgets. Among this set of customers. Second, neighbors continued to increase the amount of content they view in each session.
As Sam noted, impression opportunities during each session increased by 36% year over year Importantly, this growth occurred without any changes to our outlook. At the same time, these areas of progress were offset by mixed performance from certain enterprise advertisers and verticals, including financial services and travel. Q4 adjusted EBITDA was a loss of $14 million, representing a negative 25% margin and a seven percentage point improvement year over year.
This margin improvement reflects lower personnel-related expenses following the completion of our cost reduction plan in Q4 and continued reductions in marketing expenses as neighbor acquisitions remains strong. We ended the quarter with $531 million in cash, cash equivalents and marketable securities and zero debt. With that in mind.
And as I mentioned earlier, we are pleased to announce a $150 million increase in our share repurchase program as well as our intention to immediately begin to deploy the remaining $23 million on our prior authorization. We see two primary benefits from this plan.
First, we believe our shares are significantly undervalued and see a compelling potential return on our capital. Second, instituting this buyback program allows us to minimize share count dilution now onto our outlook and financial guidance for the full year 2024, we expect our revenue growth rate will exceed our 2023 revenue growth rate in our adjusted EBITDA margin will improve by approximately 10 percentage points year over year.
For Q1, we expect wireless to increase quarter over quarter, driven by continued strong organic growth and verify neighbors. We expect revenue will be in the range of $50 million to $51 million. And we have seen increasing momentum as the quarter has progressed and we expect adjusted EBITDA to be a loss of approximately $20 million.
This increased loss relative to Q4 is primarily attributable to the normal seasonal decline in revenue from Q4 to Q1, we continued to see leverage from lower personnel-related expenses. However, this is offset by sequential increase in business and labor market initiatives that we do not expect to scale meaningfully beyond Q1.
Now before we close a few additional notes on our guidance, we expect further increases in certain depth will yield strong growth in ad impression opportunities enabling full year 2024 revenue growth above 2023 levels. Additionally, through a combination of our newly increased share repurchase program and our recently implemented net share settlement for our employee RSUs, we expect to limit share count dilution over multiple years.
Finally, and most importantly, we entered 2024 in a good position with a streamlined cost structure, healthy balance sheet, neighbor growth momentum, increasing depth and engagement and progress against our ad platform milestones. As they're noted earlier, our growth algorithm to simple user and engagement growth, advertiser growth and retention at a reduced cost base. We remain committed to driving growth and positive free cash flow while delivering value for Nabors advertisers and shareholders in 2024 and beyond.
As we wrap up our prepared remarks, I'll turn it over to Naren for final word.

Nirav Tolia

Thanks, Matt, and good afternoon, everyone. I'm delighted to return to next door. I love this company, and I'm excited about the fantastic opportunity ahead of us. I want to first and most importantly, acknowledge Sara for her inspired leadership and incredible contributions to our growth and progress over five plus years as our CEO.
Thank you, Sarah. My plan for the next few weeks is to listen and learn our purpose and mission here next door are unchanged. And while we'll naturally see some refinement and evolution in our product strategy moving forward, we'll also focus on continuing to scale the benefits of our ads platform and a more personalized neighbor experience.
Both of these efforts were amplified by AI. and are just starting to be visible in our results. I'm really looking forward to engaging with all of you in the coming months.
Thanks for joining our earnings call today. I'll now turn it over to the operator to begin Q&A.

Question and Answer Session

Operator

(Operator Instructions)
Eric Sheridan, Goldman Sachs.

Eric Sheridan

Thanks so much for taking the question, and I'll echo our Thanks, Sarah, for all the insights and time and help with the business in terms of understanding it over the last couple of years, maybe just sticking with one big picture theme from my question, then I'll turn it back on just users. You're seeing a lot of momentum coming out of 2023 and implying that momentum continues into Q1.
Can you talk a little bit about what you're seeing broadly in terms of the user funnel and conversion of users into engagement coming out of last year and how you're thinking about the mix of investments that are key to keeping that momentum and some of the execution pieces as you look out into 2024?

Thanks. So much. Absolutely. Thanks, Eric. And it's been certainly fun getting slightly better on the user front. Diving in right at the top of the funnel. So first of all, we've had really sustained organic verified neighbor growth for now a second consecutive quarter hit a new record. And that effectively all of the VMs that are coming in today are coming in that organic way effectively, no cost, why is that sustainable?
Or if you remember, even prior to that, a lot of the investment we have done recently in areas like digital invitations, we have always seen a baseline of adding about $2 million verified neighbors as to the platform. So we continue to expect the base to continue to grow at that rate. But then the new investments that we have in areas like digital and BiP to be strong again in Q1 and as we go through 2024.
And in terms of engagement, though, it's not just about getting neighbors to the platform, but it's obviously showing up for them and making sure that they're getting value when they arrive. And so we've been driving contribution from concept through features like events, for example, for cell and free recommendation, like how do we keep connecting that loop between neighbors and businesses, for example, and this is a place where we've done have a lot of done a lot of investment in ML., as you know, to make sure that first of all, when it comes next or you're getting more and more personalized and feed, but also from a notification standpoint that we're able to send you a notification at the right time to the right neighbor that draws you back on platform into the app itself.
And our wells have stayed very, very engaged on average on a weekly active comes back about four times a week. So in effect, our well-developed ratio has stayed in that kind of 50% ish type range, and we feel very good about that. And beyond that, in terms of other areas of investment, as we go into next year. It's all about how do we help people discover and discuss how do we help them continue our commercial journey of finding that business that they want to work with.
And then finally, we are investing in communities. We do see this as both a new way to bring in new verified neighbors, but also to give people a better sense of who or what their neighborhood and sometimes that might be the building that you're living in some months, it might be a cul-de-sac. Sometimes it's a whole DMA. And so making sure we can flex on real-time messaging is something that we rolled out in Q4, and we're already starting to see a good pickup because now of course, people can be simplified just messaging within a building or they can go broader into the new speed and experience of an extra has to bring.

Eric Sheridan

Thank you.

Thank you.

Operator

Ronald Josey, Citi.

Ronald Josey

Great. Thanks for taking the questions. Area, what you'll be missed near, welcome back on. I wanted to ask about your commentary on the ad server now at 100% of US. S & P's, I think, are are using the ad server. And I think Jerry you might have mentioned the game changer. Just talk just about the benefits here. Is this what helped to drive the adoption of self-service ads overall? And while we're on monetization here, maybe help us understand some of these verticals. So home services returning to growth, I think it was it was pretty notable. We'd love to hear your thoughts and see as to the drivers there? Thank you.

Yes. Yes, absolutely. So as you know, we've been in investment mode with our ad server, and we feel like we're now really starting to cross the chasm, getting a large number of overall advertisers on Nexstar onto our own owned and operated ad tech stack. Why is that important? It means Number one, we can leverage our own proprietary data.
Number two, it allows us to better optimize on things like latency because we're not having to do a call outside of our own ad platform into some analysis and then third, it starts to allow us to do better performance optimizations and also better targeting mass before we even start to build new ad formats and so on. So everything should speed up from here.
As you noted, it's been a journey where we started with SMBs. So midpoint of last year is when SMBs were fully on us, both being able to great campaigns using MR Ad Manager and have observed through Nexar ad server. And you can see from both our Q3 and our Q4 results, the growth rates that we're seeing in SMBs say that the ad servers work and that's great news worth of Q4 was to move on the mid-market, but particularly the self-serve portion of the mid-market over.
And that is now also completed. Why that's important is we've always thought that this would be a big new opportunity for us to go out to mid-market advertisers who wanted to do something easy self-serve, but couldn't do that previously on Nexstar. So effectively unlocks a new segment of the market for us, of course, as the journey continues, the focus for the rest of 24 is our managed clients who can be large enterprises. They can be ad agencies or they can be mid-market.And you'll hear us more and more begin to talk about the platform as self-serve and managed as we look forward and beyond that and you asked, I think about verticals as well. And so we are seeing some green shoots and the home services vertical. Matt said it in his prepared remarks from services grew 16% year over year, and that was just good to see the other verticals that have remained strong for us are areas like retail, Tech & Telco has remained very, very strong.
And we have, of course, been investing in new verticals like health care, government, nonprofit, professional services. There's so many smaller cell, but they're becoming more 90 as we get some reps under our belt, get some good case studies and the sales team really knows how to go out and sell them at the start of on funding in areas like financial services and travel as well.
We do expect recovery there. And the good news is the advertisers who are in those segments I've had to stick around when they do not spend, they bring it back to the next store. However, they haven't had a lot of sense relative to where they were maybe two years ago. So that remains a big focus for us is both keeping has advertisers happy.
So when they have money, they'll come back to next door, making sure that the current advertisers continue to spend more environment improve and then bringing on new logos, bringing on new segments like the market tougher on all, but just give us some build as we go through 2024p at Matt's guidance that we expect '24 revenue to grow faster than '23 revenue generally or does two things.

Matt Anderson

First on the software side as we really think about how to measure success and progress. There were things that's most exciting is and overall growth in advertisers really pleased with the new logos in the quarter. And that's been driven primarily from self serve mid-market customers. So that's one key thing of the progress we're making this an area that gives us confidence into 2024. And then from a from a vertical perspective, share hit all the key points.
The one thing I'd add that that also is really attuned to and seeing progress on increasing diversification. We talked about emerging verticals like health care over the last couple of quarters. But as a reference point, that's now its biggest financial services from a vertical perspective. So it shows how far we've come. And certainly as the market evolves and services, he still believes endemic for the fact that we're diversifying in that way at that scale is something that we think positions us relatively well, 2024 versus a year ago.

Ronald Josey

Thank you, Sara. Thank you.

Thank you.

Operator

Brian Fitzgerald, Wells Fargo.

Brian Fitzgerald

Hi, this is the time vertical for Brian. Thanks for taking our questions. First, can you remind us what's the normal seasonality in net member additions. Is it fair to say that 2023 was an outlier to the general pattern observed in prior years? And then second session that continues to outpace wild growth, how much runway do you think there is left for a eye to drive this metric over the longer term?

Matt Anderson

Yes, Stan, as you mentioned, seasonality with a little bit trouble hearing you. Would you mind clarifying which metric you're referencing are seasonality in a well, basically the net new member additions.

Brian Fitzgerald

Got it. Yes, thanks. So from a user perspective, we see more of our seasonal moves having intra-quarter as specific events happening through the quarter. One thing as we look at Q4 is we've been able to counteract what happened seasonal declines in activity around core holiday periods, for example, between Christmas and New Years.
I think the most important points for the quarter, though, is what Sarah mentioned, which is the sustained and accelerated growth in new neighbor acquisition that ultimately helps that neutralize any intra-quarter seasonality we see now as we look ahead to Q1, as we mentioned in our comments and to see some nice moves there. Sometimes that's affected by weather and other external factors. But broadly speaking, there's less seasonality as it relates to our user base. And that's why we continue to be focused on things like the Tomahawk growth.

And then on the question back, let me take that. So thank you for calling it out. We're really pleased with what we saw in fashion that it grew 36% year over year. What is driving fashion back? A big part of it is making sure that when a user hits the news feed but first and foremost, they're seeing relevance, articles, relevant posts relative content and to them. And so this is a really excellent place for us to be investing and both AI to be able to do a deep dive on content tagging and so on and to do it at a significantly faster and cheaper rates than than what we may have been done.
Previously with Amal and actually using acumen end, it also allows us to keep pushing more and more relevant content to the top of that news feed so that someone who's coming back perhaps frequently multiple times a day, maybe coming back multiple times a week is again continuing to see relevant content in their news feed. It also is important to have that same relevance to our notification.
And this is a place where we put a lot of work that's in the last, I'll call it three to six months to go back to notifications and make sure that we are getting the right notifications for the right person at the right time. We're starting to do a little bit more experimentation with digest both thinking back to revenue just new and trending notifications, areas like events like areas like Brazil and free, where we have incredible richness of content, but getting in front of the user can be hard and a platform, but tended to be a little bit more of a serendipitous discovery.
So we're doing a lot of work in that arena until, of course, AI really helps. And all of that, you have to have the data we own the local knowledge graph and this, we think is an incredible differentiator for us.

Brian Fitzgerald

Sure. As we look forward Great. Thanks, Matt, and thanks, Sarah. So thanks for all the insights over the past few years. You'll be missed.

You're welcome. And thank you.

Operator

Thank you for your question. There are currently no further questions registered. So as a reminder, it is star-1 on your telephone keypad. There are no additional questions waiting at this time, so I'll pass the call back to the management team for any closing remarks.

Thank you, Matt, and thanks, everyone, for joining us. And we're super pleased with the quarter that we just put up strong year-over-year growth across all of our key metrics, while up 5% and growing sequentially revenue of 4% and a second straight quarter of record organic VM being added, as you saw, there are lots of levers that we can pull on all stages of the user funnel. Top of funnel new users joining us organically is at the highest rate ever mid-funnel.
We're starting to see more and we're continuing to see neighbors, the active weekly and then bottom of funnel that session, that number of 36% year over year to lots of places to really drive overall growth. And we didn't talk about it much on this call, but we did see strength in areas such as international and our ad agency partnerships. And of course, the push in areas like new perspectives continues to up the number of claims business pages.
There's really fertile ground for upselling of advertising, and we expect to see verticals like financial services and real estate begin to improve. Hopefully, as the overall macro backdrop is improving and we've talked a lot about it on the call. We know it's really top of mind for all of you, generally speaking, mixer is the local knowledge graph. We have incredibly well labeled data, high intent audience of real people in neighborhoods everywhere.
And then finally, we are laser focused on growing well and revenue from here and brand awareness and top of funnel product development efforts are playing a really key role in bringing new advertisers to the platform including that self-serve mid-market group and we're investing in our platform. We're lucky enough to be building a modern tech stack right at the point in time on a platform shift is happening. So we can embed all of the goodness of AI right from the get-go.
And then finally, we want to keep iterating on improving our monetization capabilities for advertisers of all sizes and also the fact that Thanks for all your support through the years for me to me, and I will be taking the reins as we move into our Q1 earnings next earnings call, but I will be here to make sure that the transition is seamless and continue to work with the team. And of course, as you all know, I will continue to believe green be a good neighbor and hopefully I'll see you out there in the neighborhood.

Operator

That concludes the conference call and thank you for your participation. You may now disconnect your lines.