Nerdwallet, Inc. Q1 FY2022 Earnings Call

Thank you for joining us for the NerdWallet, Inc. Q1 2022 Earnings Call. I will now turn the call over to Caitlin MacNamee, Head of Investor Relations.

Thank you, operator and welcome to the NerdWallet Q1 2022 earnings call. Joining us today are Co-founder and Chief Executive Officer, Tim Chen; and Chief Financial Officer, Lauren St.Clair. Our press release and shareholder letter are available on our Investor Relations website and a replay of this update will also be available following the conclusion of today's call. We intend to use our Investor Relations website as a means of disclosing certain material information and complying with disclosure obligations under SEC Regulation FD from time to time. As a reminder, today's call is being webcast live and recorded. Before we begin today's remarks and question-and-answer session, I would like to remind you that certain statements made during this call may relate to future events and expectations and as such, constitute forward-looking statements. Actual results and performance may differ from those forward-looking statements as a result of the risk factors discussed in our annual report on Form 10-K dated March 24, 2022 and in other reports filed or to be filed with the SEC. We urge you to consider these risk factors and remind you that we undertake no obligation to update the information provided on this call to reflect subsequent events or circumstances. You should be aware that these statements should not be considered a guarantee of future performance. Furthermore, during this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. With that, I will now turn it over to Tim Chen, our Co-Founder and CEO of NerdWallet. Tim?

Thanks, Caitlin. Before we get into our Q1 results, I wanted to take a few minutes to talk about where we're headed as a company and why we're confident the business we've built will get us there. Today, consumers and SMBs are faced with a seemingly endless amount of financial challenges, decisions and questions as well as an expanding number of financial products to choose from. Money is only getting more complicated and consumers and SMBs need someone they can turn to and trust for well-informed financial guidance. That's what we're focused on delivering at NerdWallet, trustworthy and knowledgeable financial guidance across all of life's financial decisions. Building trust with consumers has always been core to our strategy and has informed a lot of decisions we've made. We've never lost sight of this long-term focus because we believe that the trust we've built and will continue to build with consumers and SMBs is key to achieving our vision and it's also our single biggest differentiator in the market. Over the past several years, we've been steadily climbing towards becoming a financial ecosystem, a place consumers and SMBs can connect their data, receive data-driven nudges, learn about various financial topics and shop for financial products, all with the peace of mind that the guidance they are receiving is trustworthy and knowledgeable. We started by helping consumers with their credit card decisions powered by our industry-leading editorial team and we've since expanded to other financial areas. Today, we're moving further up the mountain by finding opportunities to leverage our trusted brand to vertically integrate in areas that capture reoccurring revenue. And it's working. Our SMB business grew well in excess of 100% year-over-year in Q1 and is our fastest-growing vertical. Simultaneously, we have been focused on delivering more values to consumers and SMBs through email, push and in-app notifications designed to engage and nudge them to make smart money moves. In Q1 2022, we continued to excel by investing in our brand, registering a record number of users and providing timely financial guidance. We made strategic investments in building our awareness and reputation via brand marketing. We believe continued investment in our brand serves as an accelerant across all areas of our business. It helps us succeed quickly as we land and expand and vertically integrate. It supports registration growth and it enhances the trustworthiness of our guidance. One example of this is Fundera by NerdWallet. Our team has found that when we test communications under the Fundera by NerdWallet name versus just Fundera, we see a noticeable lift in conversions. This example highlights the value of the trusted brand we've built. Our 'Unlock Your Dreams' brand campaign, which we launched in December of last year, helped us achieve all-time high aided brand awareness and brand preference metrics. This campaign was also extremely effective in reaching our target audience, consumers of choice, with whom our brand awareness and preference metrics spiked even higher. As a reminder, consumers of choice are extremely valuable because they are the group that is most likely to be in the market and eligible for financial products. Historically, we've also seen our brand marketing investments support user registration and Q1 '22 was no exception. We drove a record number of quarterly registrations to our platform. We believe our 'Unlock Your Dreams' brand campaign, combined with a significant increase in the number of registration on-ramps we rolled out across our desktop and mobile experiences, helped us achieve a 65% increase in registrations year-over-year as well as registered user revenue growth of over 80% year-over-year. Moving forward, we will continue efforts to grow and retain this base of registered users by providing more relevant nudges and further contextualizing registration on-ramps throughout our site and app experience. The high-quality financial guidance developed by our content Nerds reinforce trust in our brand during yet another period of macroeconomic volatility and also served as the basis for some of our most successful nudges of the quarter. Faced with new financial challenges, consumers and SMBs turn to the Nerds for guidance across a variety of timely topics, including the impact of interest rate hikes on credit cards, mortgages, bank accounts and personal loans, how to save gas at the pump and the return to travel and more. We leveraged this relevant guidance to engage our users, nudging them with personalized insights about smart money moves they could make during this volatile period. Overall, we're very excited about our Q1 results. With our track record of trust and our commitment to our long-term vision, I'm confident NerdWallet is uniquely positioned to secure its place at the center of the massive financial services industry. With that, I'm going to hand it over to Lauren St.Clair, our CFO, who will discuss our Q1 results.

Thanks, Tim. We are proud to have started 2022 with a strong first quarter. Despite rising interest rates and headwinds in several verticals, we delivered Q1 revenue of $129 million, up 43% year-over-year and above the high end of our guidance. Even in these uncertain times, our successful diversification efforts laid the groundwork for our Nerds to execute and deliver great results. We recognize that the year-over-year growth rate is partially driven by lapping the first quarter of 2021, which was recovering from COVID-19 lows. As we said last quarter, we will continue to look at our pre-COVID revenue CAGR from 2019 which, at roughly 30%, is consistent with our historical growth. Let's take a deeper look at the revenue performance within each category. Credit cards delivered Q1 revenue of $45 million, growing 97% year-over-year. As a reminder, we experienced multiple quarters of credit cards recovery in 2021 from the lows of 2020, primarily through pricing gains. Credit card continues its strong growth due to the overall macroeconomic recovery, the high-intent nature of our audience and our deep alignment with partners to deliver quality matches. Loans generated Q1 revenue of $34 million, growing 6% year-over-year. In particular, personal loans grew significantly as we saw strong consumer demand and optimized our user experience to drive increased conversion. Despite the extension of student loan forbearance, student loans also grew as we continue to provide valuable content during the changing environment. We are encouraged by our execution and year-over-year growth in the loans category, although we are seeing increased headwinds in mortgages as interest rates rise. Finally, other verticals delivered Q1 revenue of $50 million, growing 43% year-over-year. As Tim mentioned, SMB continues its impressive growth trajectory as we run our integration playbook and direct our strong organic traffic through Fundera's efficient and recurring funnel. Banking also posted significant year-over-year growth benefiting from an increasing interest rate environment. This growth was only partially offset by headwinds we faced in other areas such as investing which declined as a result of comping the mean stock phenomenon last year. Moving on to investments and profitability. We earned $8.9 million of adjusted EBITDA in Q1 at a 7% margin as we strategically invest in brand. We had a GAAP net loss of $10.5 million which includes $3.9 million of expense related to the change in fair value of contingent consideration of our 2020 acquisitions as we continue to see strong performance. Please refer to today's earnings press release for a full reconciliation of our GAAP to non-GAAP measures. Consumers continue to turn to the Nerds for their money questions. We provided trustworthy guidance to 22 million average monthly unique users in Q1, down 3% year-over-year. We see strong engagement across many of our verticals such as SMB products and credit cards. But as mentioned on our previous earnings call, the year-over-year decrease in MUUs was impacted by lapping the abnormally high user engagement in our investing vertical in Q1 of '21 as a result of the mean stock phenomenon. On to our financial outlook. Q1 positions us incredibly well for the rest of the year. And in the second quarter, we expect revenue in the range of $118 million to $121 million, which at the midpoint represents 30% growth year-over-year. As mentioned last quarter, our plan is to provide quarterly guidance. We expect the remainder of 2022 to return to our historical pre-COVID seasonal cadence and believe that our diversification efforts will help us weather any individual vertical headwinds. We also expect Q2 adjusted EBITDA in the range of $8 million to $10 million. Even with our goal to drive modest year-over-year accretion in our annual adjusted EBITDA margin, we are still able to invest significantly in our trusted brand. We've seen great results since our first national campaign in Q1 of '20. In 2021, we continue to test and learn. And while this year will be no different, the timing of our campaigns will vary. We expect to run brand campaigns during the first three quarters of 2022. And as such, we anticipate margins during these three quarters to be roughly similar. We will remain disciplined in how we allocate capital. Our tenets for capital allocation include organic investments that provide long-term sustainable growth as well as evaluating inorganic growth opportunities as they arise, accelerating our mission and vision while leveraging our brand strength. Between our continued organic growth, progress towards our product vision and our successful vertical integration through acquisition, we are proud of our strong start to 2022 and remain confident in the journey ahead.

Our first question comes from Youssef Squali from Truist Securities.

This is Robert Zeller on for Youssef. On the all-time brand awareness, are you guys taking market share right now? And if you can answer that, if it's a yes, if so, from whom? And then secondly, just on the back half of the year, if you could remind us what the growth rates look like for the quarters in 2019. I'm not sure we have it or it's out there but just curious on the puts and takes for each vertical in the back half of the year, as you mentioned that we may return to pre-historical norms similar to pre-COVID.

Rob, I'll take the first part of that question. We really think about our brand awareness on an absolute basis. We had ambitions to continue to march up over time. In terms of share, I really think we're taking share from constituents like agents, brokers and advisers, asking your family members or friends for help or just not doing the research and making uninformed decisions. In terms of digital competition, that's actually a much smaller piece of the competitive landscape for us. And so yes, we feel really good that we are continuing on a great trajectory there and filling this void of being a trustworthy and knowledgeable source for financial information.

And Robert, I'll take the second part and then Tim and I can talk about some of the vertical dynamics that we're seeing today and sort of expectations as we move forward. But we did say that we expect 2022 to be more in line with our pre-COVID seasonality in which we usually see flat to sort of a slight decrease in revenue from Q1 to Q2, followed by an increase into Q3 and then again a decrease in absolute revenue into Q4. And then in terms of some of the vertical dynamics, I can kick it off, Tim, and then you can add some. Obviously, we're seeing really, really strong growth and recovery in credit cards and, as we've talked about, personal loans. Our SMB products are also doing incredibly well. And a rising interest rate environment tends to help things like high-yield savings accounts, so we see banking. And so we would expect similar type things. And then, Tim, some of the headwinds we've talked about, obviously, rising interest rates, impacts refi. Any other call-outs that you would make?

Also just a challenging market out there for insurance, as you may have heard from others, carriers are struggling with profitability and resetting pricing right now.

For our next question, we have Nat Schindler from Bank of America.

Regarding the previous point, it's important to understand the metrics in relation to the fluctuations caused by COVID and meme stocks. The monthly unique user numbers were notably high in the first quarter of last year, which explains the year-over-year decline. Could you provide additional metrics to help us compare the differences and interpret that number more effectively? For instance, what were the figures for Q4 2020, and how do they compare to Q4 2021? Additionally, what do you consider a normalized growth rate for unique users?

Yes. So maybe I'll comment on a couple of things. I mean first, we feel really good about our diversification efforts like we talked about. And so we expect there to be puts and takes from macro factors. And again, we believe that diversification will continue to help insulate us. As it refers to MUU growth, as we talked about, Q1 MUUs were down 3%. This was expected. We called this out in the previous earnings call and this is mostly related to sort of comping a much tougher period from Q1 of '21 with the mean stock phenomenon. We do expect, though, to see our typical seasonal cadence return. As we talked about with revenue, we would expect the same thing with our monthly unique users as well. And so if you look at our Q4 to Q1 performance, we see our typical seasonal step-up. This year, the quarter-over-quarter growth which was 22%. And moving forward, we expect to see that typical seasonality and a return to growth overall. We have not broken out monthly unique users by individual verticals or revenue categories because there is cross-shopping and it's not very easy to do. We still would have expected users to grow in the quarter if we've excluded some of the impacts from last year's investing phenomenon.

For our next question, we have Justin Patterson from KeyBanc.

I just want to ask a question about registered users versus nonregistered users. How should we think about the returns between those two groups? And then it sounds like there's brand investment staying elevated over the course of the year. That sounds like it's having some good conversion. So how should we think about just that potential to grow registered users over the course of the year and drive more nudges?

Yes. I'll take that one. Our registered users have five times the lifetime revenue of a nonregistered user. So they're far more engaged. We do end up registering a lot of users organically as they learn or shop or manage their financial products on NerdWallet. And so we kind of don't break that out into more of an organic versus inorganic acquisition. It's largely organic. And so the flywheel for us is really turning on more on-ramps into registration. So that can happen throughout our site for various reasons. It can happen through more personalized shopping experiences in our marketplaces. It could happen through app convenience features such as budgeting, cash flow, net worth, credit score, etc. And then the other part of the flywheel is really reengagement. So as we get smarter and smarter about using first-party data to really be helpful in letting people know when they can make a smart money move, that drives the reengagement. So expect more to come on that in the coming quarters.

Certainly. I can provide more details about our brand spending. In the first quarter of 2020, we initiated a national TV brand campaign. We increased our brand investment in both the first and second quarters of 2021. For 2022, we plan to continue testing our brand strategy in the third quarter. Our intention is to allocate brand spending over three of these quarters, which should result in a similar adjusted EBITDA margin profile across them. Additionally, it's important to keep in mind that while there may be quarter-to-quarter variability, we anticipate a modest increase in adjusted EBITDA from 2021 to 2022.

For our next question, we have Ross Sandler from Barclays.

Tim, just a follow-up on the last question. You guys have talked historically about how Credit Karma did a nice job of like getting folks back into their app and getting them to engage with some of these smart notifications. So it sounds like you're doing a little bit of that today but not fully kind of embraced or rolled out. So can you guys talk about how large the app audiences or the logged-in audience relative to that 22 million total MUU number? And then like for users that are in the app, getting some of these nudges, what does engagement look like for them versus kind of the garden-variety NerdWallet user? That's my first question. And then just a couple of housekeeping questions. Performance marketing as a percent of revenue was up a little bit. I know that was part of the plan but how do you see that trending relative to revenue and the rest of '22? And then can you remind us how big mortgage is as a percent of that loan segment?

Sure. I’ll address the first part. Our long-term product vision is centered around understanding our users better to assist them with smart financial decisions. Currently, out of 22 million monthly active users, a portion are registered, and this segment is expanding faster than the overall user base. Regarding nudges, some can be quite straightforward. For instance, with rising interest rates, we're encouraging users who saved more last month and this month to transfer extra funds into high-yield savings accounts. Our reputation for providing valuable advice makes this guidance significant for them. Additionally, as gas prices continue to rise, we are offering tips on how to save money at the pump. There are excellent gas credit cards available, but there are other methods to save without needing new financial products. Our focus is to maintain a consumer-oriented approach to being helpful.

Great. And I'll take the last two parts of your question there, Ross. So first on performance marketing. Before I jump in, I'll just remind everyone that our shareholder letter includes a breakdown of all of our sales and marketing spend and how we think about those areas of investment for us. And specifically, for performance marketing, we really see this as a variable cost that we can quickly dial up or dial back as needed. As we talked about, we've seen really nice recovery in pricing. We've also seen some really nice improvements in conversion. And those two things allow us to invest more in things like performance marketing. And so you can see a little bit of increase there, benefiting from the pricing and, like I said, conversion improvements. And then the third question in terms of mortgages. We don't provide the vertical level breakdown but what we did say is that mortgages remains the largest vertical in the loan category despite the rising rates. And the majority of that revenue is coming currently from purchase versus refi.

And for our next question, we have Ralph Schackart from William Blair.

On credit card, it sounds like you still have some opportunities on pricing growth perhaps coming out of pricing concessions in the market during COVID. Can you maybe sort of talk about your opportunity to still drive price within credit cards? And I know you don't guide to specific product level revenue drivers but just sort of how we should think about credit card growth in general for this year. And then I'll have a follow-up.

Pricing in cards is currently above pre-pandemic levels, putting us in new territory. Historically, we’ve operated in this unique pricing environment since our pricing tends to increase over time. I remember when our first credit card transaction had a $60 CPA, and today that same SKU has seen many multiples of that figure. We believe pricing trends are similar to those seen in all Internet marketing, as they generally rise over time. This is driven by factors such as improving lifetime values at our partners and inflation. Additionally, NerdWallet is increasingly perceived as more than just a direct response channel for our partners. Our reputation with consumers prompts them to value their presence on NerdWallet beyond mere transaction value. In terms of unit growth, we still have ample opportunity to expand across the credit card funnel, from increasing market share at the top to reengaging with our growing base of registered users and enhancing conversion rates in the marketplace.

Great, that's helpful. Maybe just one for Lauren. Lauren, just wanted to clarify what I thought I heard. It sounds like EBITDA margins, Q1 to Q3, at sort of similar levels and the '22 margins perhaps sort of expand or there's some leverage on a year-over-year basis. Is that correct?

Yes, that's correct. You heard that.

For our next question, we have Jed Kelly from Oppenheimer.

You're continuing to see nice growth in credit cards and you talked about how your pricing is improving. Can you just talk about how some of your prequalification tools that you provide your partners are benefiting you relative to some of your competitors?

Yes, Jed, I’ll take that. The prequalification tools are applicable not only to cards but also to any loan-based vertical involving risk-based pricing. Each year, we continue to enhance our matching capabilities through APIs, making them more personalized. This helps our partners understand what they’re receiving, which allows them to better evaluate the quality of the individuals we’re recommending. Consequently, this often leads to an increase in pricing over time.

You mentioned that in your loans category, mortgages still account for the largest share of revenue. As more consumers begin to rely on credit cards, it's reasonable to assume that they will eventually seek to refinance their credit card debt with personal loans. Can you discuss how you're positioning for this trend, particularly in the latter half of the year when we might expect to see an increase in consumers opting for personal loans for credit card refinancing and other financial solutions?

Yes, we’re not expecting any unusual trends. The consumer remains quite healthy in both the card and loan sectors. In the mortgage area, there’s likely a significant shift towards cash-out refinancing, with many individuals using this option to pay off credit cards or to finance other needs. It’s not solely about declining interest rates and refinancing a mortgage; there’s a lot of interaction among these various areas.

For our next question, we have James Faucette from Morgan Stanley.

Just following up on that point about credit cards and the changes in the mortgage market. How is that affecting pricing? Have you noticed any shifts in the credit profiles your partners are seeking? I'm curious about how the evolving environment might be influencing your partners' requirements at this time.

Yes. So we're definitely seeing a little bit more conservatism on the mortgage side. Our partners are just being a little more conscious of quality as they kind of wait and see what happens. We're seeing relative strength in areas like cards and personal loans and small business lending. And so it's a bit of a mixed bag.

When you consider the mortgage side, it makes sense that people are being more cautious, but it appears this caution isn't affecting other offerings for your registered users. Are there areas you are looking to enhance or focus on? How does this affect your assessment of brand development, engagement, and so on, particularly if you have a different mix of products?

That's a really interesting question. I want to highlight that many of the positive factors we're experiencing now were negative factors during the pandemic. There are significant offsetting challenges and opportunities that occur at different times in the cycle. Internally, we are focusing on the long-term. For instance, we are currently investing in mortgages because we believe we can gain market share in both purchase and refinancing with some product enhancements and increased personalization in our marketplace. Despite the current challenges in this area, we aim to be prepared. Additionally, we continue to expand successfully in various sub-sectors of small businesses and in the U.K. and Canada. While the short-term macro environment presents both challenges and opportunities, it does not impact our long-term strategy.

Got it. And does it impact the relative performance of your spend at all? Or is that difficult to determine at this point?

For the most part, no. I would say, of course, on the performance marketing side, there is a bit of following where the heat is during any given period throughout the cycle, but it doesn't really impact our R&D or our brand budgets. Those tend to be much longer-term focused.

For our next question, we have Pete Christiansen from Citi.

Tim, Lauren, great stats on brand awareness and registration. I was curious about the improving match rate. Does that contribute to better pricing by demonstrating to your partners that conversions are consistently improving? Additionally, how should we think about registered users in terms of how often they access the platform each year? Have you noticed any trends among registered users in that regard?

Yes. Thanks for the question. So on the match rate question, I think certainly, it's a win-win for everyone in the ecosystem when match rate goes up, both for the consumer small business and for the lender. I mean you can imagine the lender has to run credit approvals which cost money and take time. And in some cases, like in mortgages, it requires humans to get on the phone, right? So certainly, they want improved personalization and matching. And that's a win for them. And then, yes, for the consumer, it's not great getting rejected or wasting your time on the phone with a broker of some sort. And so our continued improvements in match rate do result in higher pricing as a result of making those dynamics better for everyone. In terms of our registered user engagement, yes, we continue to invest heavily in that. For us, driving that up over time really comes from more nudges and smarter nudges. And so we haven't given any specific metrics but that's a pretty broad-based focus for a lot of our product organization and content organization right now.

Operator, I think we'll take one more question.

For our final question, we have Youssef Squali from Truist.

I apologize if my questions have already been covered since I was on a different call. Tim, could you provide more insight on the loans growth? Specifically, how much of the challenges you've experienced this quarter are related to macroeconomic factors like rising rates versus any recent changes in the competitive landscape over the last three to six months? Additionally, could you discuss the marketing efficiency? You continue to perform well in driving more traffic, so it would be helpful to differentiate between organic and non-organic traffic. Overall, how are you measuring your marketing efficiency?

Sure. I'll address the first part, and perhaps Lauren can cover the marketing efficiency aspect. In terms of loans, we believe we are gaining market share overall, despite facing challenges in certain macroeconomic areas. The extension of student loan forbearance is beneficial for consumers and offers needed relief, but it is certainly reducing refinance demand. Nevertheless, we are still experiencing year-over-year growth in student loans, and we are confident in our share gains there. The situation is similar in the mortgage sector; we believe we are also gaining share. The purchase segment, where we focus most of our efforts, is performing well. However, refinancing is declining due to the macroeconomic conditions. Overall, we feel we are navigating these challenges better than the broader market, and we attribute this more to macro factors than to increased competition.

Great. And I'll take the marketing efficiency. So I'll highlight both brand and performance marketing since I think you missed those, Youssef. But for brand, we feel really good. We are continuing to lean in. This is an investment for the longer term. So we really expect the full payoff to be over the next 18 to 24 months. But what we saw in Q1, we're really proud of the record awareness that we saw. We also see increasing user registration which we think is a combination of our product efforts as well as increased brand awareness. In terms of performance marketing, we really do see this as a variable cost. What we saw in Q1 with really strong pricing and also some improvements in conversion, we've been able to lean in a little bit more on performance marketing. And so we're feeling good about that as well.

There are no further questions at this time. I'll hand it over to Caitlin MacNamee for closing remarks.

Great. Thank you for all of the great questions today. As always, a big thank you to the Nerds for another great quarter. There's a lot to be proud of. We exceeded our revenue and adjusted EBITDA expectations. We achieved a record number of quarterly registrations. Our brand awareness and brand preference metrics both hit all-time highs and we saw even bigger gains among our target audience which are the consumers who are most likely to be in market and eligible for financial products. And all this progress moves us closer to becoming a financial ecosystem and helps us achieve our vision, a world where everyone makes financial decisions with confidence. So, thanks for joining us and enjoy the rest of your day.

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.