Nextdoor Holdings, Inc. Q4 FY2021 Earnings Call

Good afternoon. Thank you for attending today's Nextdoor Q4 2021 Earnings Call. My name is Tanya, and I will be your moderator for today's call. Operator instructions were provided. I would now like to pass the conference over to our host, Matt Anderson, Head of Investor Relations. Please go ahead.

Thank you, Tanya. I'm Matt Anderson, Head of Investor Relations. Good afternoon, and thank you for joining us today to review Nextdoor's fourth quarter 2021 financial results. With us on the call today are Sarah Friar, Chief Executive Officer; and Mike Doyle, 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 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 the most directly comparable GAAP financial measures can be found in today's earnings release. With that, I'd like to turn the call over to Sarah.

Thank you, Matt, and hello everyone. Q4 rounded out a strong 2021 for Nextdoor. We grew significant neighbor growth at scale, meaningfully increased engagement on the platform, welcomed businesses of all sizes, and delivered exceptional revenue growth. We also successfully completed our public offering, growing our cash balance to over $700 million, putting us in a position of strength to continue investing for long-term growth. In Q4, we delivered strong revenue growth of 48% year-over-year and drove 32% year-over-year growth in weekly active users, which reached 36 million. Total revenue growth for 2021 was 66% and accelerated by seven percentage points year-over-year from 49% in 2020. Our strategy centered on building an active, value-driven community is working. Growth is driven both by new neighbors joining and finding value on Nextdoor, and by current neighbors becoming increasingly more active. In Q4, WAU as a percent of total neighbors increased five percentage points year-over-year to 52%, which represents an all-time high. One of our key product initiatives in Q4 was the global launch of Connections between neighbors. When you connect with another neighbor, you both have a more engaging, personalized experience on the platform. Looking ahead, we plan to expand Connections to all neighborhood stakeholders. We'll start by enabling neighbors to connect with small and medium-sized businesses in the first half of 2022, and we'll follow with the ability to connect with large brands, public agencies, other local organizations, and service providers. This will allow neighbors to hear from organizations they care about and will enable organizations to create meaningful, authentic connections with a uniquely engaged local audience. We believe Connections will drive deeper engagement with Nextdoor because neighbors want to hear from neighbors and organizations they know and trust. We continue to drive innovation to ensure that Nextdoor is a kind, welcoming platform. This is essential both to achieving our purpose and to building a platform where all feel safe and are actively contributing. Our just-launched transparency reports, a first for Nextdoor, highlighted our unique approach to moderation. This approach is multi-faceted, combining proactive guidance through our Good Neighbor Pledge, leading-edge machine learning technology, and human review. As a reminder, less than 2% of all content on Nextdoor is actually reported for moderation. Today we have over 230,000 volunteer community moderators who in 2021 reviewed almost 87% of all reported content in under five hours from the time of the report, as well as an internal Neighborhood Operations backstop. Our moderators' high speed of engagement underscores the strength of the community on Nextdoor. Nextdoor's kindness reminder utilizes technology to detect language that may be harmful and asks neighbors to consider editing their posts or comments before they go live. In 2021, neighbors who encountered the kindness reminder edited or even withdrew their posts or comments over one-third of the time. On the international front, engagement metrics surpassed even U.S. engagement, giving us confidence in our global opportunity. Our approach for the year was to increase penetration in four key markets: Australia, Canada, the Netherlands, and the U.K. In Q4, total WAU in these focus markets grew almost 50% year-over-year, and 58%—almost three out of every five verified neighbors—returned weekly. Turning to advertisers: in Q4 we continued to make progress scaling our proprietary ad platform. Nextdoor is uniquely positioned to be the platform that advertisers can rely on to connect them to an actively engaged local audience. For advertisers, our value proposition is simple. First, we provide access to a unique audience. According to fourth quarter 2021 U.S. data from GWI, 76% of neighbors who visit Nextdoor at least once per month don't visit Snapchat, 69% don't visit TikTok, and 58% don't visit Twitter. Second, neighbors come with high intent. From our Q4 Insights Series, we see that 24% are more likely than the average social media user to click on sponsored posts. Third, we can deliver a highly localized message, and this drives results. On Nextdoor, localized messaging got 50% higher ad engagement than non-localized messaging. In Q4, we partnered with Hershey on our 2021 Treat Map which allowed neighbors to mark if they were planning to celebrate or hand out candy. The campaign was successful in generating incremental sales for Hershey and expanding its footprint into households who hadn't purchased candy in the past year—clearly not my house. The investment in our proprietary ad platform is ensuring we can better utilize the first-party data from our fully logged-in audience. Hence, we can serve ads that are relevant to the neighborhood that people live in, and our users find them engaging, useful, and actionable. In a world that is increasingly shifting towards cookieless browsing, Nextdoor's value is becoming more and more differentiated. For all advertising objectives, from brand awareness through direct response, we continue to improve our measurement and targeting capabilities. For example, the majority of our CPA-focused advertisers have now adopted our proprietary conversion pixels, which improves ad relevance and attribution. Home Chef is one such advertiser, who saw their average news feed CPA improve by 25% over the course of 2021, giving them confidence to meaningfully scale their spend on Nextdoor. Finally, we're enhancing our self-service capabilities with a Neighborhood Ad Center, or NAC. This increasingly enables us to serve a wider range of advertisers and ad agencies. NAC is only available for an initial subset of mid-market customers today, but we are focused on building the platform and the early success customers are experiencing gives us confidence for our rollout to advertisers of all sizes in 2022. We're excited by our progress and our 2022 strategy, which is designed to increase growth and engagement for all neighborhood stakeholders and deliver a richer experience for advertisers, ultimately driving sustainable long-term growth in our business. And with that, I'll turn it over to Mike for our financial highlights.

Thank you, Sarah. And good afternoon, everyone. I'm pleased to report that we ended 2021 on a strong note. In Q4, we saw a second straight quarter of accelerating user growth, with weekly active users reaching 36 million, up 32% year-over-year, an increase from 20% year-over-year growth in Q3. Total revenue was $59 million, which was an increase of 48% year-over-year and 13% quarter-over-quarter. We saw healthy demand across advertiser sizes, objectives, geographies, and verticals; our revenue continues to be fairly evenly split between direct response and brand marketing. In Q4, we saw demand at all levels of the funnel. Throughout Q4, our advertisers came to us for creative, impactful, relevant campaigns that met the moment. In addition to the Treat Map that Sarah mentioned, we had campaigns like our Holiday Cheer Map, Thanksgiving Cookbook, and Veterans Day campaign with Veterans United. Q4 global ARPU was up 12% year-over-year to $1.65, driven by increased engagement among our neighbors. We also continued to build on our efforts from earlier in 2021 to better optimize our yield and improve our direct relationships with advertisers. While international is only a small part of our revenue today—less than 5%—we are continuing to grow and prove out our model and advertiser value proposition in non-U.S. markets. In Q4, international advertiser count grew 74% year-over-year. Adjusted EBITDA for Q4 was a loss of $8 million. The six-point year-over-year improvement in adjusted EBITDA margin shows that we can remain in investment mode while also building towards long-term profitable growth. I'll end with our outlook. Our full-year revenue guidance is $254 million to $256 million. The year-over-year growth rate of 33% at the midpoint of the range is an increase from our last full-year 2022 revenue guidance of $252 million. We expect full-year 2022 adjusted EBITDA margin to be minus 18%, consistent with our prior guidance. For Q1 2022, we are expecting revenue of $48 million, a year-over-year growth rate of 40%, and an adjusted EBITDA loss of $23 million. We are excited by the scale of our opportunity and our ability to execute against it, and we are going to continue to invest. Thank you for joining our earnings call today. With that, I'll turn it over to the operator for Q&A.

Thank you. Operator instructions were provided. The first question is from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Thank you so much for taking the questions. I hope everyone on the team is doing well. Maybe coming back to the comments on advertiser momentum as you leave '21 and move into '22: can you quantify or give us a sense of some of the momentum around advertiser diversity, advertiser budgets, or how measurement and ROI continue to evolve as we move from one calendar year to the next, in terms of measuring some of the efficacy of some of the changes that you've made, and how that means potential tailwinds to advertising revenue in '22 and beyond? Thanks so much.

Eric, thank you for the question. I'm going to start by talking overall about the ads platform, which is clearly a big area of investment for us. First and foremost, as we went through 2021, we began the shift over to our own proprietary ad platform. If you recall, Nextdoor has a fully logged-in audience; we're not having to infer where you are, and we're not following you around the web with cookies. With that we have a lot of first-party data that helps advertisers target and clearly get outcomes, which keeps them pretty excited whether it's for brand awareness or all the way down to direct response. In terms of our investments here, as I talked about in my prepared remarks, first and foremost is the ad serving platform itself, what we call NAC. That's the way in. The big shift there to bring more advertiser diversity to the platform is, of course, opening up self-serve, because that will allow us to go from the smallest of micro merchants—who need to create an ad on the fly, probably with a template and who are often super busy and not very sophisticated—all the way out to some of the most sophisticated advertisers in the world, including agencies who want to be really nimble with creatives and so on. On the backend, the main investment is how we serve the right ads to the best neighbor at the best time for them. Something really differentiated about Nextdoor, of course, is that ads on Nextdoor often feel contextual, because we're a very high-utility platform: people are coming in to look for a plumber, someone to help with their gutters, or a great financial advisor. That makes Nextdoor perform well across the gamut of different advertisers. So in terms of the different cuts you might think about, there's clearly scale—we can go from small to large, and that is where we plan the funnel. We can go from brand awareness all the way down to direct response; our revenue is about evenly split. And then there's diversity in terms of the type of advertiser: home services is a home run for us; financial services; tech. We're starting to see some green shoots in areas like travel and entertainment as neighbors want to get out and about. P&G is an area we've put a lot of investment into, and we're starting to see some really good outcomes. Hershey's is a great example. Mike, do you want to take how this really dovetails into guidance and dig into the financials?

Sure. So the momentum with advertisers: what's most important is their interest in scaling up their campaigns and taking advantage of our larger engaged audience and the targeting we can offer. This ultimately helps them drive performance. We've also made significant investments in our measurement ecosystem, both capabilities on our proprietary ad platform as well as integrations with third parties, which give advertisers more confidence to increase spend by being able to see results on the other side. Over the course of 2021, we saw increased retention and more evergreen spend, which helps us to have more visibility into our 2022 book of business and allows us to build on a larger base.

Thanks so much.

Thank you. The next question is from the line of Brian Nowak with Morgan Stanley. Your line is open.

Great. Thanks for taking the questions. I'll go back to the advertising question a little bit. Can you give us a little more quantification around what you're seeing from the ad platform or the self-serve—maybe any nuggets of what the ad spending growth or ad spending trends look like for advertisers before and after they adopt these new tools? This is really to get a little more idea of the momentum that you're talking about there, Mike, that'd be helpful. Then the second one: can you just talk to us a little bit about what the U.S. or North America WAU trends look like? How quickly are those growing? And sort of what neighborhoods you're seeing the most growth in and what's driving that? Thanks.

Sure. Let me start with the advertiser question and what we're seeing there. First of all, the demonstration of results on the platform and the capabilities we are able to deliver to advertisers—both through our self-serve ad platform and our improved measurement capabilities—are demonstrated in our revenue growth. We're seeing an increased number of advertisers and greater spend per advertiser as they see the value. Regarding early indications from our proprietary ad platform, we're still very early in that migration. We're working across all different segments of advertisers—from enterprise and mid-market to SMB—to make sure they're onboarded in a way that is constructive to their campaigns and ultimately opens up increased spend. We're early in that journey, so I think we'll be able to comment more in future periods. Importantly, the overall purpose of building a proprietary ad platform is having a unified base of our inventory and getting access to the supply we have on the platform for all advertisers, so it can be best optimized across campaigns—down to a single neighborhood or much broader. That investment is relevant for all advertiser segments and reflects the feedback we've had over time about what they want from our platform. Second question was about WAU trends. As we've talked about, WAU reached 36 million in the period with 32% year-over-year growth, which is something we're proud of. Our product roadmap is focused on driving engagement. We focus on weekly active users because there's a huge opportunity to bring more people to our platform and convert them into WAUs, increase their session frequency, drive utility, and improve the number of times they're coming back to the platform, as well as the content they're creating and engaging with when they're on the platform.

Yeah, I'll dive on the WAU question. If you ask about North America, U.S. in particular: overall WAU growth was 32% year-over-year up to 36 million. In the U.S., WAU growth comprised the largest portion of our base, at roughly 30% year-over-year. So it's still a really healthy clip. When you're in one in three households, what you're seeing is there's not a particular neighborhood driving growth—it's really growth across the board. One of the strong parts of the Nextdoor story is how many of our new neighbors come to us organically; that remains best-in-class and continues to be the case. In fact, when we looked at 2022, we're shifting a little more of our paid marketing spend into international because we feel really good about what the product pipeline is doing to build growth and engagement in the U.S. In particular, in that product pipeline there are a couple of areas I'd mention. Number one is Connections. We launched it late in Q4, so it's not really impacting results yet on a backward-looking basis, but we believe it will have significant impact on growth and engagement as we move forward. Second is the ad platform, which is great for advertisers and for driving monetization; it's also great for neighbors, because the right ad at the right time is contextual and makes Nextdoor a very engaging, highly utilitarian platform. The better we get at that, the better the experience for neighbors. Finally, we have put a lot of emphasis and investment into the evolution of the feed itself. We want to make it super easy to post so you can be an active part of an active, value-driven community. We want it to feel personalized so you feel like you belong. We think those are some of the reasons why current neighbors are getting more engaged. One data point to note: current neighbors in the last year have actually gotten more engaged. So we're seeing that nice upward trend.

Great. Thank you both.

Thank you.

Thank you, Mr. Nowak. The next question is from Brian Fitzgerald with Wells Fargo. Your line is open.

Thanks, guys. In the letter, you noted some benefit from improved advertising fill rates. Just wondering if you could talk a little bit about where you are in terms of fill rates today and any sense for how budgets could expand as you continue to improve fulfillment. Maybe in a similar vein, the engagement metrics showed a really nice uptick—wondering if you could talk a little bit about the key factors there and where you think those can go over time as well. And then one last one: we've heard from some other companies over the quarter that the housing market is really tight. Are you seeing any dynamics related to a tight housing market that are driving upticks in services related to new houses or changes in housing that impact your platform?

Okay, maybe I'll start on engagement and the housing market movers, and then I'll pass to Mike on advertiser fill rates. On overall engagement: yes, we're up about 32% year-over-year on WAU, and the second consecutive quarter of accelerating growth is encouraging. We continue to grow across the funnel. Verified neighbors grew about 20% year-over-year in the same period, so new neighbors are coming in steadily. Importantly, those neighbors are becoming more active. If you look at WAU as a percent of total neighbors, it's 52% globally, up five percentage points year-over-year, underscoring that new neighbors are becoming active. Another point: based on cohort analysis, after three months, 75% of new neighbors are coming back; after six months, 65%; and after two years, more than half of new neighbors are still actively engaging. This is world-class retention. A weekly active user comes back on average four times per week, so once we get someone to WAU, their propensity to become more frequently active is very high. On DAU cohorts, cohorts from 3-, 6-, 12-, and 24-month periods have all seen DAU rise, which we view as a great outcome of our product investments. Innovations like Connections, improvements to the feed, and our ad platform making ads more contextual are all driving that WAU uptick. On the housing market: what tends to benefit us is new movers. That's a huge use case for Nextdoor—when you first move into a neighborhood, we are the way you find your footing, you find the service providers you need, and you find community. We know people often spend a large portion of their household improvement budget in the first 12 months after moving. We're the perfect platform to discover local service providers and community groups. Beyond movers, we're also a place to find real-life community—running groups, new parents groups, veterans groups—Nextdoor is built around proximity, and that's a powerful, unique value proposition for connecting people in life.

Hi Brian. I want to talk about the three levers we use to drive monetization. First is driving deeper engagement, which creates incremental supply so we can attract more advertisers, larger budgets, and larger targeted audiences for those advertisers. Second is supply optimization—which is where fill rates come into play. This includes direct-sold campaigns and making sure we're serving the right ad at the right time to improve yields, which benefits CPMs and advertiser performance. Third is direct monetization of differentiated surfaces, such as maps, groups, and classifieds, where there's an opportunity to drive value without requiring incremental expansion of general supply. On fill rates specifically, we had tremendous success in 2021 driving fill rates higher. Q4 is seasonally our strongest quarter with tremendous demand, and we saw increasing fill rates year-over-year across 2021. Importantly, with the verticalization of our salesforce and getting closer to advertisers in specific industries, we're increasing the mix of direct-sold campaigns and reducing reliance on backfill partners to fulfill unsold supply. We still have partnerships, but it's key for us to drive that percentage higher so we can capture higher yields through direct relationships. We'll continue to focus on all three categories of leverage in 2022, with the largest opportunity being driving higher engagement.

Thanks, guys.

Thanks.

Thank you, Mr. Fitzgerald. There are no additional questions waiting at this time. I will now turn the call back to Matt Anderson. Excuse me, there is an additional question from Mark Mahaney with Evercore. Your line is open.

Okay, thanks. I wanted to ask about relative engagement levels of international versus the U.S. Do those trends look relatively similar? Have the international markets tended to follow the pattern you saw in the U.S., and then I have a follow-on please.

Great, thanks Mark. We actually see even better engagement outside the U.S. right now, although engagement in the U.S. is already best-in-class. In the four markets we focused on in 2021—Canada, Australia, Netherlands, and the U.K.—we saw almost 50% year-over-year growth. In those markets, 58% of verified neighbors are returning weekly, and our average weekly users come back up to four times a week. In the U.K. specifically, engagement is even a bit higher. Another data point: in the U.K. we are now active in one in five households, and in London that is one in four. London is such a big advertiser market that density there is important so we can do the precise targeting advertisers need. We're upbeat about international as a growth lever for multiple years to come. In 2022, we'll focus more deeply in Western Europe—France, Italy, Spain, and Sweden are very large ad markets. If we can get neighbors on board, there's significant monetization potential. International revenue today is still only about 5% or less of total, so while it's more of a future growth lever in 2022 and into 2023 and beyond, we plan to tip our investments more strongly outside the U.S. in 2022 because we're confident in the organic growth we're seeing in the U.S. and because network effects will support sustained growth without as much paid marketing.

Okay, thanks, Sarah. Then I want to ask you about Connections. You launched this—do you have any commentary on what impact that's had on engagement in communities so far? How widely adopted do you think it will be for enabling neighbors to connect with small and midsize businesses?

Connections rolled out in Q4 globally, but really towards the end of the quarter, so you won't see any meaningful impact from it in the results we just reported. We expect it to start impacting engagement as we move into 2022. Why that matters: people engage more with content from those they know, care about, and trust. As neighbors connect with other neighbors, they get a more personalized feed and our notification platform becomes more intelligent, creating a strong flywheel. We want Connections not just for neighbor-to-neighbor ties but to enable neighbor-to-business connections—small businesses, midsize businesses, large brands, public agencies, and other neighborhood organizations. For businesses, Connections provides a way for neighbors to indicate they care about and trust a business, opening a more direct line of communication. It's not strictly one-to-one; it's more of a one-to-many relationship that helps businesses build community around their brand. Anecdotally, many neighbors are also business owners, and when they create community around their business posts—sharing local, authentic updates—those posts often perform much better than purely commercial content. We expect small and midsize businesses to broadly adopt Connections as it becomes available, because it creates meaningful engagement and relevance with local audiences.

Sarah, are you still there? We experienced a brief technical difficulty and lost connection.

One moment, we will reconnect the speaker. Operator instructions were provided. It looks like the speakers are rejoining this call. Please hold while speakers are reconnected. The speakers have rejoined the conference. You may proceed with the Q&A session.

Hey, Brian, it was good to hear your voice earlier. Hope you are doing well.

Excuse me, one moment. There are some difficulties; please remain on hold while your speakers are connected. The speakers have rejoined the conference call. You may proceed with the Q&A session. That concludes the Nextdoor Q4 2021 earnings call. Thank you for your participation. You may now disconnect your lines.