Nerdwallet, Inc. Q3 FY2024 Earnings Call

Thank you for joining us for NerdWallet, Inc.’s Third Quarter 2024 Earnings Conference Call. All participants are currently on mute. After the presentation, we will have a question-and-answer session. This call is being recorded. Now, I would like to introduce your host for today, Caitlin MacNamee, Head of Investor Relations. Please proceed.

Thank you, operator. Welcome to the NerdWallet Q3 2024 earnings call. Joining us today are Co-Founder and Chief Executive Officer, Tim Chen; and Chief Financial Officer, Lauren StClair. 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 expressed or implied by these forward-looking statements as a result of various risks and uncertainties, including the risk factors discussed in 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, except where we are unable, without reasonable efforts, to calculate certain reconciling items with confidence. With that, I will now turn it over to Tim Chen, our Co-Founder and CEO. Tim?

Thanks, Caitlin. In Q3, we exceeded our outlook for both revenue and non-GAAP operating income, despite continued headwinds in organic search and a challenging loans end market. Our business is cyclical, but headwinds and tailwinds will offset each other over time, so our priority is growing from cycle to cycle. To that end, I am especially proud of the share gains we have made cycle over cycle in insurance and small- and medium-sized businesses, which are more than offsetting lending headwinds. Our insurance business has grown 6x compared to the 2021 peak during a challenging market. While this is partly due to unusually high levels of re-shopping occurring as premiums have increased, we have also made significant investments to improve our insurance shopping experience. These efforts have enabled us to scale performance marketing in the category more efficiently as both carrier and consumer demand have increased. At the same time, premiums have dramatically increased since 2021, enlarging the end market. Similarly, in Q3, our SMB vertical saw double-digit year-over-year growth driven by our renewals business and SMB products categories despite a tough macro environment in SMB loans. With these strong results in insurance and SMB, we grew revenue 25% year-over-year. However, credit cards revenue declined 16% year-over-year. We attribute this to both underwriting constraints and pressure on organic traffic in certain subcategories. After a strong start to the quarter, we saw some additional deterioration in our search visibility in mid-Q3. While traffic to our monetizing shopping-oriented content started to rebound as we exited the quarter, traffic to our non-monetizing learning-oriented content did not. As a result, Monthly Unique Users were down 7% year-over-year in Q3. Looking forward, we expect to see a full quarter of impact from search headwinds on our higher volume learning-oriented content in Q4, meaning MUU growth will decelerate. However, we anticipate eventual normalization back to year-over-year MUU growth. We earned $23 million in non-GAAP operating income, up $13 million year-over-year. We are on track to deliver $30 million in annualized savings from the reduction in force we announced in July 2024, and we will see our first full quarter of benefits in Q4. We also adjusted the seasonality of our brand spending to drive more impact, spending less year-over-year in Q3, but with plans to spend more year-over-year in Q4. In my Q2 shareholder letter, I outlined strategic areas of investment as we sought to operate more efficiently while investing in our vision. One of them is vertical integration, which I believe will be key to bringing more people to us directly by improving our shopping experiences and building deep, reoccurring relationships. We recently closed the acquisition of Next Door Lending, a mortgage brokerage, to provide mortgage shoppers with more hands-on guidance. I have really enjoyed getting to know Next Door Lending’s principals, Doug and Jonathon, through this process. They are like-minded individuals who bootstrapped their business and share our focus on operational efficiency as well as a consumer-first orientation with positive customer reviews to match. While the upfront deal consideration is small, the strategic alignment presents a significant opportunity for us to drive better outcomes for consumers, lenders, and NerdWallet. We expect the acquisition to contribute approximately 1 to 2 percentage points of growth to our Q4 2024 revenue outlook. Although I have highlighted vertical integration as a key focus area for our team, we continue to drive progress across all our strategic pillars in Q3: land and expand, vertical integration, and registrations and data-driven engagement. Our land and expand efforts increase the breadth and depth of guidance we provide across financial topics, as well as the diversity of our audience. In Q3, we continued our early expansion efforts in Australia with the launch of our first comparison shopping marketplace for that audience. Additionally, we are seeing our efforts to nurture our Smart Money Podcast audience pay off. Our analysis shows that our Smart Money Podcast audience is increasingly valuable, and we have scaled monthly average downloads to 250,000. We will continue to invest in meeting consumers where they are on podcast platforms, YouTube, and TikTok to drive brand loyalty and expand our overall audience. As I shared, this quarter we made significant investments in vertical integration for the process of pairing NerdWallet’s brand and reach with best-in-class user experiences. Efforts included extending human-assisted support to our home and life insurance experiences. Additionally, our SMB team continued our efforts to improve our sales concierge experience to enhance our renewal process. I look forward to applying learnings from our acquisition of Fundera, the origin of our SMB business, to Next Door Lending and our mortgage vertical, especially as the rate environment improves for shoppers. The acquisition is an exciting step forward in our ability to offer more do-it-together and do-it-for-me services. As with Fundera, we believe we have an opportunity to leverage NerdWallet’s trusted brand to enhance Next Door Lending’s existing business during a cyclical recovery while providing our consumers with a better experience. We believe this partnership will enable us to build deep, reoccurring relationships with consumers and take more market share while improving mortgage unit economics. Part of the reason for our focus on vertical integration is that these improved shopping experiences allow us to register more consumers, enabling us to reengage them over time with new features and opportunities to save or earn more money. As in Q2, the enhancements to our insurance shopping flows drove significant registered user growth this quarter, with cumulative registered users now over 23 million. Additionally, we continue to invest in NerdWallet+, our new membership product. As a reminder, NerdWallet+ rewards members for making smart financial decisions and provides access to exclusive rates on certain products from participating financial institutions. This quarter, we launched an insurance assistant, a tool that analyzes members’ insurance rates and automatically reshops for better policies, if available, as well as a treasury bills account. Although NerdWallet+ is in its early days, we have already seen that members have a higher lifetime value than other registered users who themselves have five times the lifetime value of overall visitors, suggesting significant opportunity as we relentlessly improve the product. Before I pass it over to Lauren, I want to extend my thanks to her. As you may have read, Lauren will be leaving NerdWallet in March. Lauren joined NerdWallet in 2020 to lead our initial public offering and the transition to a public company. She has been a great partner to me in this process. In particular, she has done a fantastic job of building a great team. I’m grateful that we will have Lauren’s assistance in ensuring an orderly transition. In the meantime, thank you, Lauren.

Thanks, Tim. It’s been an incredible journey. Since I will be here for a little while longer, we’ll have time for goodbyes at the next earnings call. For now, we’re focused on closing the year out strong. To that end, let’s get into our Q3 results. We ended the quarter above our revenue guidance range, delivering Q3 revenue of $191 million, up 25% year-over-year. Our revenue growth was primarily driven by the resurgence in our insurance vertical and SMB, though we continue to face a cyclically depressed lending environment. Let’s take a deeper look at the revenue performance during the quarter within each category. Credit cards delivered Q3 revenue of $45 million, declining 16% year-over-year. Growth decelerated versus Q2, as underwriting tightened along with pronounced pressures in organic search traffic within the credit cards sector. While we’ve seen a recovery in other verticals, we still have room to improve in certain areas of credit cards. Conversely, on the issuer side, we believe we are seeing early signals of issuer appetite returning and have made headway in improving aspects of the organic search experience that we believe will provide tailwinds to our credit cards vertical in the long run. Loans generated Q3 revenue of $24 million, declining 28% year-over-year. Our personal loans vertical declined 49% year-over-year and down 8% sequentially as the end market remains challenging. Despite recent rate cuts, we still believe there is a backlog of consumer demand for personal loans as high loan rates dampen consumer appetite to refinance credit card debt, while elevated delinquency rates have kept underwriting standards tight. Partially offsetting the decline in personal loans was growth in mortgages. Q3 saw accelerating mortgage revenue growth as we begin to see benefits from rate reductions in this vertical. However, with the vast majority of household mortgages reported at under 5% rates, we do not expect to see significant acceleration in growth beyond these levels in the near term. The growth in mortgages is still primarily driven by strength in home equity products as consumers access record levels of equity in their homes. We believe that we remain in a prime position to take advantage of the increasing loan demand as it surfaces. As Tim mentioned, we expect to see approximately a 1 to 2 percentage point benefit to our Q4 revenue growth from the recent acquisition of Next Door Lending, and the revenue going forward will be reported as part of our loans revenue category. SMB products delivered Q3 revenue of $28 million, growing 12% year-over-year. We continue to see pressure in SMB loan originations, with rates remaining elevated and underwriting remaining tight. However, this was more than offset by growth in our renewals portfolio, showcasing the benefit of our vertical integration strategy and the recurring nature of the vertical when we pursue a higher touch experience. We also delivered growth with our other product offerings. While we do not expect to see a materially accelerating growth profile in the near-term, we believe there is substantial long-term opportunity to grow both the loans and other products businesses. Finally, our Emerging verticals, formerly named our Other verticals revenue product category, finished Q3 with revenue of $94 million, growing 129% year-over-year. As a reminder, after regrouping SMB products revenue, Emerging verticals consist of areas such as banking, insurance, investing, and international. Insurance revenue grew 916% year-over-year in Q3, more than offsetting pressure in banking. We entered the quarter seeing consistently improving demand from both consumers and partners, and we believe that the end market will remain robust as long as inflation stays stable. Growth was also aided by our ability to improve the product experience by collecting more information upfront to better route customers to relevant products. Partially offsetting this growth, banking revenue declined 26% year-over-year, as we saw demand continue to decline alongside interest rates. Moving on to investments and profitability. During Q3, we delivered $22.9 million of non-GAAP operating income, above our Q3 guidance. Despite incremental in-period cost savings during Q3, the non-GAAP profitability outperformance was not as large as revenue due to our success in scaling performance marketing. The significant year-over-year margin increase was driven by the partial quarter impact of our cost actions we announced at the end of July, as well as a reduction in our brand investment within the quarter as campaign timing shifted to October. We believe continuing to invest in brand advertising even through cyclical troughs will benefit the brand in the long run, and we will be data-driven on the levels at which we spend during shorter timeframes. We also earned over $37 million in adjusted EBITDA. In the third quarter, we earned GAAP operating income of $6.6 million and net income of $0.1 million, which includes $7.8 million of restructuring expenses and a $7.7 million income tax provision. Similar to what we’ve mentioned in previous quarters, we expect to be a cash taxpayer for the foreseeable future. Please refer to today’s earnings press release for a full reconciliation of our GAAP to non-GAAP measures. Consumers continue to turn to NerdWallet for their money questions. We provided trustworthy guidance to an average of 22 million monthly unique users in Q3, down 7% year-over-year. The broad organic traffic challenges we have been experiencing is the primary driver of the decline. We are seeing the largest pressure on our year-over-year growth occurring in our loan traffic, which is typically non-monetizing in the near-term, though important for brand engagement and long-term relationships with consumers. We expect to continue to see MUUs decline year-over-year in the short-term as we await normalization from these new levels and are comparing to a second half of 2023 that saw MUUs grow over 20% year-over-year. Despite near-term challenges, MUUs this quarter had a 2-year compounded annual growth rate of 7%, showcasing our ability to drive increasing consumer demand through the NerdWallet brand. Regarding our financial outlook, as shown in our Q3 results, we expect to continue delivering significantly improved levels of revenue growth, despite many of our verticals facing cyclical headwinds. We expect to deliver fourth quarter revenue in the range of $164 million to $172 million, which, at the midpoint, would represent a 26% increase compared to the prior year. Typically, we would expect to see a seasonal decline of roughly low double-digits in revenue from Q3 to Q4, and this outlook reflects that. The primary driver of year-over-year revenue growth in the fourth quarter is still expected to come from insurance, and while we expect to continue facing tight lending conditions across both credit cards and loans, we will have slightly easier year-over-year comparisons and personal loans in Q4. Moving to profitability, we expect Q4 non-GAAP operating income in the range of $8 to $11 million. Our non-GAAP operating income outlook assumes a full quarter of our expected cost reductions as a result of the actions we announced in July. For Q3 brand expenses, we reported a decrease year-over-year, and for Q4 brand expenses, we expect an increase year-over-year. Our Q3 results and Q4 outlook are consistent with this guidance as Q3 brand expenses were down approximately $7.5 million year-over-year, and Q4 is expected to increase slightly year-over-year. As we look at the second half in aggregate, at the midpoint of our Q4 guidance, we expect to improve non-GAAP operating income margin by over one point year-over-year. Our Q4 guidance suggests a full-year 2024 non-GAAP operating income margin of approximately 5.8% to 6.2% of revenue, with an adjusted EBITDA margin in the range of 14.75% to 15% of revenue. The main driver of our expectations being near the bottom of our prior range is we see a larger portion of our revenue growth coming from paid marketing. We view paid marketing as a means to an end and will continue to spend in a disciplined manner, aiming to break even within the quarter in which we spend and expect paid marketing to remain a larger component of our monetizing traffic in the future. Should there be further federal funds rate reductions, we expect a recovery in interest rate-sensitive areas of our business to emerge from both unpaid and paid channels, aiding in overall margin improvements. This gives us confidence that there is still a path to achieving the medium- and long-term targets we issued in March. While we are not providing guidance for any 2025 expectations at this time, we expect to deliver margin improvements next year as we scale revenue and maintain cost discipline across our business. I would like to take a moment to discuss capital allocation. Our philosophy remains unchanged. We will continue to be acquisitive when the timing, opportunity, and pricing are right. We also plan to repurchase shares opportunistically. We seek to allocate capital towards uses that drive the highest risk-adjusted returns. During Q3, we repurchased 5.8 million shares at an average price of $12.29 per share. Subsequent to the end of the third quarter, we have exhausted the $15 million share repurchase authorization, and the board has approved a new authorization for $25 million. We also opportunistically entered the mortgage brokerage market during a cyclical trough with the acquisition of Next Door Lending. We are making progress in ensuring we meet our commitments to you, our shareholders, and remain proud of the way our team has rallied in an evolving landscape amidst organizational changes, working diligently to improve the factors within our control. With that, we are ready for questions.

Certainly. Our first question comes from the line of Michael Infante from Morgan Stanley. Your question, please.

Hey, guys. Thanks for taking my question. Tim, I just wanted to follow up on some of your organic traffic comments. If I think about how your share of a particular query has evolved over time, how are you sort of thinking about some key initiatives to mitigate the impact of the things we’re seeing in terms of AI overviews, Reddit, etc.? I know you’re in the process of shifting your revenue mix towards the existing installed base over time, but I’m curious about your views on how you anticipate some of the medium-term dynamics to play out. Thanks.

Thanks for the question. Just a reminder for everyone, we’ve historically talked about learn and shop traffic regarding organic search visibility. I'll provide a bit more color there and then dive into the rest of your question. Our learn bucket is not as commercial and includes things like, 'How much should I save for retirement?' Our shop traffic is highly commercial and includes things like 'Best mortgage rate comparison.' During our Q2 call, our search visibility was broadly stabilizing and actually starting to rebound. Soon after our Q2 call, things took a turn for the worse. Our shopping traffic worsened in August and September, but then rebounded in October, even exceeding the levels we observed during the Q2 call. We believe some user experience improvements we implemented were net positive. However, certain areas, such as credit cards and personal loans, still lag behind. Overall, we achieved a good position on shopping pages and have identified areas for improvement. On the other hand, our education-oriented traffic, which is less commercial, has seen progressive declines and has recently stabilized at a lower level. The renewed push by search engines to incorporate their own answers directly into search results, like the AI overviews mentioned, is affecting us. History shows us that there are waves of changes, and often, subsequent growth follows a re-baselining after major shifts. We're in the middle of one such wave, and as long as we focus on delivering consumer value, we’ll navigate through it. This headwind is influencing our outlook for MUU deceleration in Q4, as we will feel a full quarter impact from these challenges. However, we believe that an improving search experience in the long run is beneficial for the ecosystem. Despite experiencing challenging Q3 headwinds in organic search, being able to report a 12% non-GAAP operating income margin in Q3 demonstrates the progress we’ve made in building a brand and fostering direct relationships with our users, along with increasing our competitiveness in other channels. Moreover, we believe NerdWallet is registering more users over time, particularly as people are shopping, and we’re also improving our re-engagement strategies. Our third growth pillar centers around registration and data-driven engagement, as exemplified by Next Door Lending and Fundera. These efforts naturally establish deep, reoccurring relationships with consumers over time, as illustrated by Fundera's renewals performing well this quarter despite a harsh loan origination market. These two growth pillars should support our continued growth.

I appreciate that, Tim. I wanted to follow up on the impressive growth in insurance. Are you expecting this momentum to persist into Q4 and potentially into the first half of 2025? I'm trying to reconcile some of your comments on organic traffic and MUU deceleration, which you said is being offset by insurance strength and more interest rate-sensitive verticals.

Short answer is yes. I’d say our insurance revenue is up 10x year-over-year, and it's benefitted from the carriers resetting their pricing to achieve profitability. There’s a significant super cycle occurring, and I believe we are gaining share due to product improvements that enhance our matching of customers with relevant products. We continue to feel the advantages from this roll-in in Q3. The cyclical nature also works in our favor; as premiums rise, the carriers are eager for new customers, and consumers are re-shopping based on increasing prices. However, we must recognize that the end market is also expanding due to factors like the heightened actuarial risk stemming from climate change, impacting overall premiums. We also aim for diversification; currently, our insurance category largely revolves around auto, which is predominantly digital. We intend to diversify into home and life insurance, along with expanding our insurance assistant product in NerdWallet+, which will monitor policies and alert members to better deals.

Thank you. Our next question comes from Justin Patterson from KeyBanc. Please go ahead with your question.

Thank you very much. I have two questions if I can. First, regarding performance marketing, could you elaborate on the guardrails you have in place, how much of that is incremental and how you plan to manage this going forward? Secondly, I’d love to hear how new products like NerdWallet+, NerdUp, and Nerd AI are resonating.

Thanks, Justin. I’ll address the first question on performance marketing, then Tim can discuss the new products. Despite recent challenges, we still see over 70% of our traffic coming through organic or unpaid channels, which allows us to reinvest in more acquisition channels like brand and performance marketing. Our approach to performance marketing remains disciplined, aiming to be profitable in the quarter while adding incremental non-GAAP operating income. It's perceived as a variable expense that we adjust based on returns. We see increased spending positively, as performance marketing serves as a flexible lever for generating more non-GAAP operating income, registering more individuals, and taking a larger market share.

Regarding newer products, our third growth pillar focuses on registration and data-driven engagement. Products such as NerdWallet+, NerdUp, and NerdWallet Advisors fall into this category. Overall, it is still in early stages, but cohort data looks promising. Users are engaging beyond the typical five times the lifetime value we see with a regular registered user. Our emphasis remains on consistently iterating and improving these products to drive more user engagement.

Thank you. Our next question comes from the line of Peter Christiansen from Citi. Your question, please.

Thank you for the question, and best of luck to Lauren. Looking back, you mentioned 2021 as the previous cycle for the insurance side. Given that you're highly indexed to auto, which has a typical six-month renewal period, how does that suggest strength in non-auto segments? Can you discuss how much it contributed to the search revenue this quarter?

For all intents and purposes, the strength mainly came from the auto segment, which is indeed our largest market. I would focus primarily on that segment. However, I believe home insurance recovery will take longer, as premiums are being adjusted slowly through the system, and it's a smaller market for us. We are investing in home and life insurance even though these segments remain relatively nascent for us.

Regarding the insurance vertical's strength, did you see a significant contribution to user growth stemming from insurance during this quarter?

We are concentrating on increasing personalization in our insurance shopping experience. This strategy naturally leads to increased registrations as we learn more about our consumers. Strength in the auto business does indeed drive more registrations for us. The more we understand about our users, the more effectively we can assist them, allowing us to deepen our relationships through helpful interactions.

That makes sense. There's certainly an opportunity to cross-sell into other verticals. Lastly, on banking, you have mentioned weaknesses in balance transfers recently. Are these trends still prevalent, and could they signal an overall lending segment timing perspective?

Underwriting remains tight across most credit card categories. However, we are seeing signs of a more normal balance sheet appetite from issuers, who are now willing to accept qualified borrowers. This is a positive macro indication. Still, in our credit card business, certain aspects of organic search haven't rebounded, which affects our ability to capitalize on improvements in issuer appetite. However, we believe there is substantial room for growth as we currently hold single-digit market shares in cards. When it comes to the banking sector, our ability to forecast trajectory is somewhat weak, given we haven’t faced this interest rate cycle before. To provide context, the Fed funds rate target climbed about 450 basis points between March 2022 and March 2023, leading to increased deposit shopping. Considering the declines in year-over-year performance and fluctuations according to market conditions, consumer behavior during this time will be critical. We believe if rates stay above zero, a higher new normal in banking could emerge.

Thank you. Our next question comes from Ralph Schackart from William Blair. Please go ahead with your question.

Thank you for taking the question. In your prepared remarks, you discussed issues that emerged within the credit card segments. Could you provide further details on that? Did such issues arise in Q3, and have they extended into the present? Any additional context would be helpful.

What we previously expressed was that issuers were occasionally declining qualified borrowers. Our perspective is that they may have shifted towards a more conservative balance sheet approach following the events surrounding SVB, which tightened capital market conditions. We believe this trend is reversing and things are starting to normalize.

For Lauren, last quarter, in Q3, you anticipated a higher level of conservatism concerning organic traffic. Can you explain the conservatism applied in Q4? Did it shift relative to Q3?

I’ll take the opportunity to discuss our revenue guidance. The Q4 revenue guidance is $164 million to $172 million, which at the midpoint shows a 26% year-over-year growth rate but reflects a low double-digit sequential decline from Q3 to Q4 due to seasonality in areas such as credit cards, student loans, and mortgages. Our guidance assumes standard seasonality across our business and most verticals, although we expect worse than seasonal Q3 to Q4 in credit cards due to a full quarter of commercial search traffic pressure, offset by a better than seasonal Q4 for insurance thanks to our success in scaling and taking market share. Despite organic search traffic challenges, we are pleased to continue driving revenue growth. We do not expect significant effects from rate decreases in the short term but are confident in our readiness to leverage a lower rate environment if conditions improve. Our conservatism for Q3 and Q4 remains consistent, accounting for the organic search trends but offset by the noted strength in insurance.

That was very helpful. Thank you.

This concludes the question-and-answer session of today’s program. I’d like to hand the program back to management for any further remarks.

Thanks for your questions. Our results this quarter reflect not only NerdWallet’s diversification and resilience but also the commitment of the Nerds. Following a tough decision coming out of Q2, I’m incredibly proud of how our team has risen to the occasion. The Nerds have remained committed to relentlessly improving our business on behalf of consumers, partners, and shareholders. Thank you, Nerds. We look forward to seeing you next quarter.

Thank you, ladies and gentlemen, for your participation in today’s conference. This concludes the program. You may now disconnect. Good day.