Nextdoor Holdings, Inc. (NXDR) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome to day 3 of the live 2022 Morgan Stanley TMT Conference. It's great to see everybody in 3D and in living person. We have Sarah and Mike with us from Nextdoor. We're really thrilled to talk through the story, talk through the overall ad environments and all the excitement going on at the company. So it's great to see you. Thanks for joining us.

Thanks, Brian, for having us. Great to see everyone.

I'm going to read the disclosures. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures, or they're available at the registration desk. Some of the statements that Nextdoor will make today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that Nextdoor makes are based on assumptions as of today, and Nextdoor undertakes no obligation to update them. Please refer to Nextdoor's Form 10-K for a discussion of the risk factors that may impact actual results.

Phew.

There we go. Okay. So I want to sort of start with a high-level question just to sort of familiarize everyone in the room around Nextdoor. So Sarah, maybe talk to us about how you think about the platform from a user and advertiser perspective and how it's different than other social platforms that we are all very familiar with.

Sure. Absolutely. Maybe just a quick show of hands, how many people are on Nextdoor? Okay. So thank you, all.

Pretty good.

And for the 3 of you that didn't put your hand out, I'm coming to get you.

Appreciate your honesty.

So what is Nextdoor? Nextdoor is the place where you connect with the neighborhoods that matter to you, so you can belong, right? We have a purpose statement that is all about cultivating a kinder world where everyone is the neighborhood to rely on. Important to put those 2 things together. Why do people come to Nextdoor? Why do all those people in the room put their hands up? It's the place you come to get trusted information. It could be a trusted neighbor information. In fact, in a world where we're starting to talk about big themes like social commerce, what social commerce is all about, it's getting trusted recommendations. It might be from the great designer on Pinterest. It might be the Kardashians telling me what lip color to wear on Instagram. On Nextdoor, it's your neighbors. And in fact, we know from the Edelman Trust Index that, that was one of the only places where trust increased in 2021. And that's why we work with folks like public agencies and businesses as well. Second reason people come is to give and get help. This is a big part of what makes us different from other social media. We would say we're more of a community platform rather than a social media platform. And so what's community all about? Community is being valued in that time of need. It can be something that feels a bit lower anxiety needs, like help me find a plumber, help me find a local hiking group. But then it can start to ratchet up, like help me find my lost dog. For those of you that became puppy parents during the pandemic, you know that that's actually like losing a child. All the way up to like really times of deep anxiety, like a natural disaster, it's your neighbors who are there for you, that power of proximity. If we think about some of the horrifying events we're seeing right now on a world level, we can talk about all the macro impact. But it is, in my local community, the grandmother who put a call out for help because her 2 grandchildren are coming to stay with her from Ukraine and she didn't have anything for them. And she actually had to put a second post up saying, enough, like I have more bikes and toys and clothes and everything. I love you. You've given me back faith in my community. But please send other things to these places. So a great kind of give and get help. And then the third reason people come, which, again, differentiates us, they come to connect online to create social capital, but to take it off-line. And there is an expectation on Nextdoor that when you're connecting, a real-life event will also happen. So I might belong to a running group on another platform, and we might talk about the shoes we wear, the training we're doing, the food we're eating. On Nextdoor, I expect to go running with those people. I join a cooking group. I'm going to show up in someone's kitchen probably to cook together. And when you shift gears over to advertising, that creates a whole new opportunity because we know place, we know where you live. And for an advertiser, that can really be an interesting way to think about getting my message out and creating really high performance advertising.

Got it. Okay. That's good context. Pandemic puppy parents, try to say that 10 times fast. One of the areas of innovation though that we've written about and seems pretty exciting is all of the advertising innovation that you talked about, to reach those puppy parents. So maybe talk to us about where are you now from an ad tech perspective? And what are 1 or 2 key products that are either in beta or are coming that sort of excite you most to really drive the monetization on the advertising side in '22 and '23?

Yes. So our monetization model is ad based, But that can go from a large brand advertiser like Home Depot, all the way down to the tiniest small business in your local community. Maybe the person that has started the side hustle during the pandemic. We have done a lot of innovation in the last year to get everyone on to our proprietary ad stack. And we're kind of going through that motion right now. We're not all the way there. But the advertisers who've made the shift are seeing a very nice uplift in performance for them. Why is that? What's important about that? Well, number one, first of all, on the back end, we want people to be able to make use of our proprietary ad stack, right? We are a fully logged in platform. So where you are all hearing from other platforms about the impact of iOS 15, ATT, ATT, privacy and so on, and there's more coming, remember, for Nextdoor, we're not dropping cookies to follow you around the web to figure out who Brian is. We actually know who you are because you signed up your real name, your real address. And you actually give us a lot of information on the way in the door about your interests, the groups you joined, so we know a lot about you that we don't have to inference. The second thing that allows us to do beyond attribution is now we can do measurements in a much more sophisticated way. So previously, when we ran a lot of our ads on Google's Ad Manager, we would have to utilize the tools Google has, the ML they had, which is optimized for them. It's not optimized for our data. So we're only starting to scratch the surface. And I think that's why today, we are a very nice blend of brand advertising and direct response advertising. But what we're seeing particularly with DR is the performance is really picking up, and that's exciting. And you see that in things like our ARPU growing. And then the final part of our platform where we're innovating is how people will buy because we want that to be totally harmonized. If you look back Nextdoor a year ago, 18 months ago, we had a way in the door for large brands that was direct stalls. And they had a lot of ad ops to get them going with a campaign. And then for SMBs, we had kind of a second stack built. Today, that's now all harmonized, what we call our Nextdoor Ad Center. And the big positive will be much more self-serve. Again, we're just starting so it's more mid-market clients that are making use of self-serve today. but we're excited through this year to open that up to both SMBs because, of course, we want them to self-serve. We're not going to touch them with people. But even large brands, particularly in that high-performance space, they are changing creative multiple times even in a day. And they don't want to have to go through Nextdoor to do that. They want to be able to self-serve to do that. And so we know that this is an opening for us with larger brands and even ad agencies. So we're pretty excited about the investments we've made, the output that we're starting to see. I mean our revenue last year grew 59% year-over-year, and then what the future now holds.

Yes. No. Mike, it's a good question to cover a segue for you. So you've laid out a 2022 guidance target. There's a lot of ways you can cut the revenue: branded versus SMB, performance, large and small advertisers, self-serve, non-self-serve. As you think about the guidance for the year, how do you cut the advertising down? How should we think about the mix of all those factors, advertiser growth, spend per advertiser, et cetera?

Yes. So the most important thing, underlying our outlook for 2022 is really driving engagement on the platform. So less about initiatives to bring any particular segment of advertiser or a type of ad unit onto the platform, but really about 2 things. So one, how do we drive more engagement? So there's more of the unique valuable supply that we know advertisers are hungry for. And then how do we bring more advertisers onto the platform and teach them how to leverage that inventory? So better targeting, taking advantage of the new analytics tool, so third-party measurement integrations that are all part of the proprietary ad platform. And we are really just getting started in each of the advertiser segments. So if you think about the number of advertisers that are active on the platform, we might have 200, 250 enterprises, large brands active at any one time. And we're talking about tens of thousands of mid-market and SMBs. So enormous TAM to bring new advertisers onto the platform and trial what we can do for them with hyperlocal messaging. And now with our proprietary ad platform, really a much better experience and one where they can be very surgical with their spend and know exactly what the return looks like and be able to dial up and dial down based on their campaign objectives. So that's really the underpinning. There's lots of other things that can help improve monetization. So there's optimization initiatives that we're doing. Making sure we own the advertiser relationship directly, so that education process is an obvious one. Making sure we're filling the supply that we have and really just understanding the verticals where we know the platform sings really well. Early on, that was the things like home services, home security, retail, financial services. And increasingly, there are many more verticals that are working well. Travel and entertainment is one that's really roaring back to life and where we haven't -- we just hadn't gotten there yet. And so now we have specialized teams understand those industries to understand the buying calendars and can really bring the benefits of the platform to life for them.

Okay. That's helpful. To your point on everything starts with engagement, I know there's always a lot of adjustments that platforms make around incrementality of changes of how you target data you use, the way you change the organic content people see. Give us some examples of changes you've made over the course of the last year that have driven improvements in engagement. And then sort of as you look ahead, where are there still sort of low-hanging fruit opportunities to further drive engagement growth?

Yes. So we were quite excited in Q4 to show 32% year-over-year growth in WAU, weekly active users. That's now up to 36 million. I think the other thing that should give you a lot of confidence that Nextdoor is already a very engaged platform is of our total verified members, 52% come back every single week. And when they come back, they come back on average 4x a week. So that actually makes us a more engaged platform than a lot of kind of consumer platforms that you think of as there all the time: Spotify, Twitter, Pinterest, just to give some examples. What are we doing to drive more engagement? If you looked at our product road map, #1 on the platform, on the road map is notifications. This is much more kind of, I don't want to call it fixing the fundamentals, but strengthening the fundamentals, right? We're a high utility local platform. People want to know when something that's happened around them is interesting to them. This is a place where when we put ML to work, we can do a much better job of the right notification at the right time to the right neighbor or to the right stakeholder even. What's the right notification? Sometimes it's an email about a trending post. Sometimes, it's a daily digest. But sometimes, it's an in-app badge. And it depends, like a hyper-engaged user actually doesn't want more e-mail, so we've actually brought down the e-mail notifications they see, because they're in the app all the time. So it's a perfect time to tell them, hey, something has happened here in your notification. In terms of at the right time, again, scratching the surface on this and being much more fine-grained about -- Brian and Sarah, both research analysts at some stage of their lives, so they still get up at 5:00 a.m., or whatever.

Yes.

So you can send them something early. Whereas in the audience, there is a banker, don't go near him until at least 9 p.m. at night, right? So we can be much more fine-grained about when. And then, of course, the right notification. That goes back to knowing who you are and what you're interested in, actually helps send the right piece of information to you. Second thing on the product road map is new. It's called Connections. This only rolled out in Q4, so it didn't really hit our numbers at all, and it will really blend in through the year. So that WAU growth I talked about was not impacted by Connections. Connection comes from the insight that people you know talking about things you care about is, of course, number 1. But people you know talking about things you don't care about is actually more important to us as humans than people we don't know talking about things we care about. So we index to people and relationships over pure content. And so Nextdoor never had a signal of who you know. Other social platforms are very good at this. We had never kind of pulled on that signal. So Connections is now finally the way to get you to say, oh, I know this person in my neighborhood, I want to connect to them. Or wow, I'm really interested in what this person is talking about. There's been a whole conversation about homelessness in my neighborhood, really important. And I can see some of the people who are very thoughtful. I don't always agree with them, but now I can connect to them. So when they speak, I get a notification or it rises in my feed. And that helps us personalize the feed, which, again, drives more engagement. So that's number 2. And then the third thing that we did, third and really big thing, is a whole new evolution of our feed itself to really kind of clean it up. When you go talk to any of our product people, they'll use 3 words: active, value, community. The word active is really important because we want you to make a post. We want you to comment. We want you to react, because frankly, that's how you're going to ladder up to our purpose of how do you create a neighborhood that you can rely on. But first and foremost, it also drives engagement. So we've done a lot of work on that very cleaned up news feed. Today, it's out to probably now about 25% of our 70 million verified neighbors, because we're always testing and iterating. When you have a big system, you need to make sure you understand what all the moving parts are about to do. But we're very optimistic on that third piece. And so we think these are big parts of what drive engagement. Of course, top of the funnel, growth. International is a big part of that as well. We're in 11 countries today. Going deeper in some of our more European countries for 2022, because we saw a very good outcome of going deep in Australia, Canada, the U.K. and the Netherlands in 2021. We now know that when we go after something, we can move the needle in terms of growth and engagement.

Of those big 3, are any of those rolled out internationally at all, or how do you think about that?

We launched globally. So that has also been a big change in the last kind of 3 years. Everything we build now goes global, with maybe sometimes some localization based on what our country managers tell us they need. But largely, those big kind of infrastructural components, those have to be global in nature.

Okay. On the advertiser side, the go-to-market with advertisers, the offerings for advertisers, they continue to improve and grow. Maybe talk to me about 1 year, 1.5 years ago, the onboarding process for an advertiser and sort of what that first 6 to 12 months looked like. And how do you see that looking now? If I'm an advertiser joining, what my spend looks like the first 6 to 12 months.

Maybe I'll take what it looks like. And then Mike, you should talk about like how they test and iterate. I would actually break it down into SMBs and then large enterprises. For SMBs, the whole kind of door to Nextdoor is changing and really getting a lot better. So today, we're now really -- the atomic unit is becoming a concept of a page. It's not new users. This is how other social media platforms work. So a neighbor has a page, a public agency has a page, a small business has a page, a large enterprise has a page. But by building it all into that singular atomic unit, everything I just talked about, so notifications, connections, even the feed, actually all hangs off the same page. So for a business, previously, you were almost off like a small business, off on your own kind of little Nextdoor island. And things worked a little differently. And so if you were a neighbor, which is often how we get a small business -- remember, we have over 20 million businesses on the platform, 55 million recommendations to date, 2.8 million pages have been claimed now. The experience often felt different, and future state, it will just feel the same. How you get verified? How you post? How you get reacted to? So it becomes not just about SMBs doing ads, it's important, but they're an important part of the community as well. And in fact, what they know is when they act more like community players than trying to sell you something, that's actually when their business tends to do a lot better, right? If you're the landscaper on Nextdoor, reminding neighbors that now is the time to plant bulbs or now is the time to fertilize your graft because the snow is leaving, that's actually really good content -- and then that moment where they need the landscaper, you are in front of mind, front of brain, and the fact that people have reacted to all your comments and posts, you rise up the pecking order of showing up on the platform. So their entree is really changing and changing quite quickly. On the large advertiser side, I mean, really, their entree is changing because we are getting better at just the ability to self-serve, as I talked about. But then once they're on Nextdoor, right, the things they have come to expect in terms of measurement, attribution, targeting, right, all of that has now kind of come to be. And again, we're a young platform. We've really only been monetizing for 4, 5-ish years. And so a big shift for someone who might have tried us 2 years ago to someone coming back today.

Yes. And I'll just add, I think, I mean, depending on the campaign objectives of the advertiser is where we can really focus on the functionality that we've built into our proprietary ad platform. Underlying all of that, of course, is the value of our first-party data. And that's what really is appealing to with so many advertisers being able to create a hyperlocal message and target the neighbors on the platform that they think is going to be the most relevant for their business. So thinking about a campaign we mentioned on our last earnings call was Home Chef. And so they were looking for cooking enthusiasts, where many people joined a cooking group on the platform or maybe indicated a cooking interest, so we have that information. They were also interested in new movers. So they have great conversion when people move, change house, which we also have that information. So combining those 2 target groups and then helping them to personalize the message into the new speed really drove the results they were after. And results have been upsizing spend and the campaign. And that's what really helps us to drive retention. And when we think about scaling our advertising business, that's really an important piece. So in the early years of monetization, it was all about trial. Come see what it is like to create a contextual message and a hyperlocal message. But really upsizing those campaigns and making sure that we have an evergreen level of spend entering into each quarter allows us to then be creative and who we're targeting and bringing onto the platform for that first trial. And really, that's what's going to drive the growth of the revenue. So that's all about large brands. But that same thing is true now with local businesses. And one of the real benefits is by allowing them to have equal access to that inventory and be able to learn from what they're seeing work on the platform, so whether they can -- we can teach them through case studies, we can help them to refine the creative. And then obviously, give them the tools they need what's currently working, where they're getting reaction and the actions that they're after on the platform.

Yes. Can I add one more to pipeline. You're at a very unique moment in the industry where a lot of people for a long time could just get by doing what they were doing, because you had platforms that have risen and have gotten very big, right? You have this uber trend of the shift to digital advertising. So it's like a tide that raises all of us. But if you're an ad agency or you're a large brand, you are like, well, I kind of got my Tier 3 folks that I work with and it's all working for me. And that's really being dislocated, particularly in the performance side. And so it's actually a really unique time, I think, for a company like Nextdoor to be rising, because suddenly, we're the new kid on the block. We have something really different, that is this community sell, because you want to show up authentically. But it's also like, wow, their performance, right? If you think about a platform like Twitter, it has always struggled a little what's going from brands to direct response. And so I think it is our time. And you're always a little bit better lucky than good. But I'm so glad we're at this point where we can now say it's our stack that you're joining, not where maybe we were a year ago, at exactly the point in time when you've had an industry dislocation. And we've gone public, so that gives us a lot of awareness out there and credibility. And we have the ability to keep on that thing.

Actually, it dovetails on the next question around differentiation versus the larger platforms for SMBs. Because you're a landscaping company, my plumbing company, whatever we're doing, if I'm already spending a lot on Google or maps or I'm spending a lot on Facebook, how do you differentiate and say, this is why we can prove to you that you need to continue to grow your spend on our platform even versus the other digital platforms?

Yes. I mean, first of all, I would note that most of the small businesses are not digital, right? Many of them are still kind of poking around with notice boards in their community or the local paper, and all of that is shrinking on them. So I actually think a big part of our opportunity right now is how do we help them digify or whatever the right term is. Like that is massive opportunity. They should have all the tools at their disposal that big brands have just come to expect. Second thing is, for a lot of them, they don't feel like marketers. They're like, I don't -- seems really newfangled. I don't know how to do a post and create a reel and stuff. And so helping them feel comfortable. What happens with Nextdoor is you often start as a neighbor. And you just see this magic happening. People are looking for a recommendation, that's my business. Like all the time, I see comments of like I do that or my husband's business or my wife's business. So you already have started as a neighbor and you know how the platform works. And then you get to the tools. Let's say, here's performance. Small businesses, again, tend to be relatively unsophisticated. They don't actually know like what does having 10,000 impressions mean? Like I don't know. But I think bigger is better. I don't know. And so where we're going is how do we explain to a business that a business like yours did this and did x a month better in terms of engagement. So like one of the highest resonance we've heard recently is like, just create a template and tell me what I should do. I want to do something, and it doesn't quite work, but you see someone like me do something else, tell me that as well. And so I think this is a place we can be incredibly potent. And then finally, on the closing the loop, it's often as simple as like I need that lead. Like if I can get 2 or 3 leads as a plumbing business, that's actually what I really care most about. And Nextdoor helps me close that loop, because people actually say, oh, I found you on Nextdoor. It's not sophisticated. It's not a dashboard. But it's as simple as like, oh, yes, I heard about you on Nextdoor. That's how I ended up doing business with you. And we need to make sure that, that then makes the business come back, to say this platform performs for me, but also to make the neighbor make the recommendation, because then that becomes a really great flywheel of an active value community.

Am I getting more landscaping business or less? And if I'm getting more, where is it coming from?

Yes.

I would just add also the benefit in our community is that we've already built the marketplace 2 sided. We have neighbors and we have businesses. And because many of those businesses, maybe their core competency is not marketing, we create instant distribution for them. And so they can immediately get their message out, build the reputation, establish some awareness with the local community who are most likely to frequent and support their business and want to interact and have a conversation, sort of have a more indirect method of selling and promoting their business.

Let me ask one about investment, Mike. Talk about the way to think about investment philosophy for 2022. And how much of that is headcount-driven? And what are the KPIs that you focus most on through all the headcount you're trying to add just to ensure that the bodies you're adding are going to generate return for your shareholders?

Yes. So I mean, we are very much in investment mode, and that's a consistent message for us. We have so much in the product road map that we're excited about. And so that really is about scaling the team. And for us, it's product and it's engineering. That's we're about 600 employees today. That's more than half of the employees are focused on building the product, and that will continue in the future. And so we have, I think, many years here of successive -- successive years of investment. When you think about the actual -- the results of the initiatives they're working on, and so we've talked about notifications, feed evolution, connections, certainly, our proprietary ad platform. So making advancements there more quickly and seeing the immediate impact on the metrics. So you mentioned, where are we tracking? We're very much focused on weekly active users. We know that when we can move a verified neighbor to a monthly active user, to a weekly active user, the platform works really well on driving that increased frequency of use. Our average weekly active user comes back to the platform 4 times a week. And so it's really where our product road map is focused on how do we bring that MAU into a WAU. And so that thing, we look at very closely. And then once they are, WAU, it's driving frequency of use. So things like session growth is an important one for us, and that ultimately creates supply, so the impressions that we know we can monetize. So those are things that are very much top of mind.

And we're hiring. So any great people, we're in the market right now.

I know we're going to clock time for one question for Sarah or Mike. Yes, good.

Yes. I became a Nextdoor user about 2 months ago. And I noticed there are already a lot of ads on there. I wonder if there's really how much more room to add more. And then also, I was wondering if there's a way to give people out there more reasons to go on to Nextdoor. More uses, like, for example, if there was local news or calendar of events in your local area. Those are things that I personally would like to see. So I wonder about additional reasons that you can give people to go on there and go on there more frequently.

Yes. I mean, for sure, on the driving, content type is something that we are very focused on as part of feed evolution. So to your point, if we can see that you are creating an event, we can see that you're trying to activate a fundraiser, we can see that you're trying to post something that's local news, but with your editorial on top, we want to make that easier and easier. Previously, we'd kind of try to do it by having sections called like events and so on. That's not a great like intuitive use case. And so kind of watch the space because we know that all of this is really important to local. And so for sure, that's part of how we think about the feed evolving. Like we should know the minute you start typing, it looks like you're creating an event. Let us help you, and then you could have a slightly different post flow that makes that very easy and then also makes it easy to find, right? One surface we didn't talk about is Discover, but that should be a very natural place to go discover what's going on around you, using map as an interface. And then on the former on I think ad load is really the question you're asking. I mean, a couple of things. We do watch this very closely. We don't feel like we're in any way kind of at the edge of what we could put there, because in a utility-based platform, a great ad zone while is actually content, right? In that moment where I need the landscaper, if I see the ad, that's actually -- great ads done on Nextdoor actually feel like a neighbor posted it. And so I think we have a lot of opportunity on that front. But then beyond that, how do we get into supply that's not just impression-based? So things like our map interfaces. Historically, we've done these as very seasonal. Like treat map in Halloween, the holiday cheer map for the Holiday life. We really are getting to a place where it's an always-on map that then can have different overlays based on your interests. But that's an example of something that's therefore not as impression-based. It can be much more pin-based or however the advertiser wants to take that sort of native installations.

Great. One more.

Just on engagement actually. Just curious as to whether, I guess, the type of activities that take someone from coming on once a week to daily, are they infectious locally? Do neighborhoods tend to do that in tandem? Or how does that evolve?

Yes. It's interesting. I mean, Nextdoor always has a cold start problem. You've got to get enough people on to create enough activity. It's a very hard problem, by the way, which brings a really good barrier to entry, which is why there's no Nextdoor 2. But it has also a very strong network effect to it. once you get a neighborhood to a certain level of what we call penetration, so usually when you get up to about 20% of the neighborhood is now on the platform, you'll see WAU at a level that's now appropriate. And then it's not a linear curve, it's an exponential curve, which is the network effect happening. What we've gotten better about is instead of being so -- that's why I started by saying, right, Nextdoor is a place where you connect to the neighborhoods that matter to you so you can belong. Nextdoor 3 years ago was the private social network for your neighborhood. It was very singular. When you posted into a neighborhood, it stayed there. We've now opened that content. So even when you post, it's labeled anyone. So we let content travel based on interest, right? When wildfires happen in California, that's not just the community that cares about the post. That will actually go probably all over the state and maybe even out of state because people move from like saving themselves and their pets, to wanting to help. But a post about say, I lost my keys on my run probably shouldn't go any distance because it's really only useful in a pretty small kind of area. So it's a complete flip of instead of thinking about things in a neighborhood context, you think about it based on interest. And that's where ML can kind of kick in, and it's really more the algorithm that decides what you see, when you see it and how far it travels. But it really opens up the platform from an engagement perspective. Thank you. It's a great question.

All right. Sarah, thank you.

Thank you very much. Thank you. Thank you, everyone. Thanks.