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

No worries. Okay. So in the interest of time, the team has moved along. It's my pleasure to welcome the team from Nextdoor here to the conference on day 4. We've got Nirav Tolia, CEO; Matt Anderson, CFO. Guys, thanks so much for being part of the conference.

It's our pleasure.

Thank you for having us.

All right. So I think let's start maybe big picture first. For those less familiar with Nextdoor, some as clients, some as a business, why don't you start a little bit about a brief overview of the platform. And you're recently back to the company. So you've got some things maybe you want to talk about long term key strategic initiatives as well.

Sure. You introduced me as CEO, but the title that these days is a little bit more in vogue is founder -- cofounder of the company. So Nextdoor was created 14 years ago, the summer of 2010, and the idea back then was that with the emergence of social networks, while there was a social network for friends, there was a social network for business that was LinkedIn, of course, there was a social network for interest, that's Twitter, there was no social network for what we believed is one of the most important communities of them all, and that is your local community. And so that is how Nextdoor was created. And that original vision of giving you an indispensable tool that you rely on every day to make your local life better. That is still the broad vision for Nextdoor. We have 95 million verified neighbors now in 11 countries that are using the product, 99% of neighborhoods in America. And so made a lot of progress, but I think still a lot of potential that's untapped.

So building on that untapped potential, last quarter, you teased out your NEXT initiative to transform the platform. Just talk through a little bit of your vision around NEXT and what you're planning to achieve in the next couple of years.

Sure. So I was the CEO of the company for the first 9 years or so. And then over the last 5.5 years, Sarah Friar, who previously had been the CFO at Square, now Block, came on and took the company from kind of a private company start-up to a public company that has scaled nicely and was doing hundreds of millions of dollars of revenue, and I mentioned the user growth as well. However, we did feel that the potential of this concept to be this essential tool for your local life was something that we weren't realizing with the existing product. And so the reason that I came back 6 months ago and the reason that we're very excited about the future is we believe there's an opportunity to take our existing user base, to take our leadership position in local, and create a transformative new product that builds on our existing success, and I will give you some specific examples of where we believe we are very, very good today, but expand those use cases to things that will make us, we believe, even more valuable for consumers and that will obviously unlock lots of business opportunities. And we call that NEXT. It's kind of a little play on words with Nextdoor. But the NEXT Nextdoor at a high level is all about taking Nextdoor today, which is very good at infrequent, but very important use cases, finding a service provider, asking for help, finding a lost dog, ensuring that you're up on anything that's happening in the neighborhood, whether it's critical like some safety concern, whether it's crime or whether it's inclement weather and starting to expand the aperture towards more frequent and almost daily use cases as well. And so can you move from a very intent-driven weekly or monthly kind of active user base to something that feels a lot more like discovery that you would find on X or you would find on Instagram that then translates into more frequent daily usage, that's the challenge that we've been tackling.

Okay. We're at a technology conference, you can't help but talk about artificial intelligence at a technology conference. You've talked a little bit about it since coming back to the company. So I think I want to do a couple of things here. Can you provide an overview of what you're doing with respect to AI and machine learning, maybe give us some of the early learnings from newer products like the AI assistant and talk a little bit about both consumer-facing and advertising facing how AI might change the platform in the years ahead?

Sure. And let me say 3 things. The first is when I was gone from Nextdoor, and I wasn't really gone because I was on the Board and obviously as a cofounder and the largest individual shareholder, the company is extremely important to me, both personally and professionally, but I stepped away from the operating role as CEO and became an investor, and the last couple of years, in particular, I've been looking mostly at AI opportunities like most investors in technology. And so this is a space where I feel like I have some expertise even outside of Nextdoor. And so it was wonderful to come back in and realize that with Nextdoor, we had already done some things. You mentioned the AI assistant. And I'll just give some specifics on the consumer side and then the advertiser side. On the consumer side, we've taken AI, and we have enabled for our users the ability to use that AI to create better content. In some cases, that's because they come to the service and they're agitated about something, and we have something called the kindness reminder that will read the thing they're about to post and then suggest that they use a different set of words that may be less inflammatory or a little bit more neighborly and that's been very successful. On the consumer side, we've used AI to make it easier to create advertising, so reduced friction. And then more recently, and Matt will probably expand upon this when you start to get into some of the revenue questions and what we're doing on the technology side from an ad stack perspective. But we've used ML primarily to drive better performance of advertising. And we have some specifics in terms of where performance has gone that we're very excited about. And that's super early. I mean, if you look at the big platforms like the Meta's and the Alphabet's of the world and what they've been able to do with ML to drive performance, if they're somewhere in the third, fourth or fifth inning, we're barely in the top of the first, and we're very encouraged with what we can do. Let me actually end this little piece on AI with what I think is most important to understand about Nextdoor and its opportunity in AI. When I was looking at AI opportunities as an investor, I developed the thesis that to truly be an AI company, you need 3 things. You obviously need the technology. So you need to hire great people who understand AI machine learning and who can build the kinds of transformative technologies that can take advantage of this opportunity. You also need the content though, and we've seen this increasingly in the consumer space with some of the licensing deals and where the trends are now moving. Remember, Nextdoor has completely proprietary content. We don't rely on anyone else for what comes into the system. We're a membership platform. So we know exactly who's created that content, not just who they are but where they live and that gives us a great advantage. Finally, there is a third piece, which is you need an audience or distribution that you can then take the technology and the content and then train your LLM's against. And so the fact that we have 95 million verified neighbors. If you think about the 3 big things that are necessary, the technology, the content and the audience, we have all 3. That means that for us, AI shouldn't just be a vertical kind of initiative. It should be horizontal. It should touch everything we do whether it's a consumer experience, the advertiser experience or even what we do internally to make all of our systems more efficient.

Okay, very clear. Matt, I do want to bring you into the conversation. Maybe start high level, a little bit of a snapshot of what the advertiser base of the business looks like now and how to think a little bit about some of those cohorts and verticals and how they act and behave on the platform.

Yes. So I'll start by saying that Nextdoor is and should be relevant for advertisers of all sizes across all verticals. Now as you know from these past discussions, we do have verticals that are endemic. We talk about things like com services. But that first point is why we're actually shifting the conversation towards things like self-serve because in our last earnings, we talked about 50% of our revenue coming through self-serve. Why is that? Because that is relevant for advertisers of all sizes, the local SMBs all the way to the large global enterprise who needs hands-on keyboard capabilities. And so that's the first thing. The second is, for those coming self-serve, they are necessarily serving our Nextdoor Ad Server, which means it's starting to bring to bear the things that Nirav talked about. So building ML into our ad-serving models, so we can actually put the right user in front of the right ad. And so when we start talking about things like improved cost per click, driving performance, that's how that's happening. And it's those advertisers coming in through self-serve that are benefiting. Now who are those advertisers? Today, they're largely mid-market advertisers. So you could think of them as those spending between $5,000 to $25,000 a month, large regional brands, this is really the sweet spot, and we look at things like I mentioned a moment ago, the cost per click, new logo additions, new agencies we're building relationships with, improved revenue retention, it's starting with this group because they're coming in and experiencing that for the first time, and ultimately, all of the dynamics I discussed are highly relevant, arguably even more relevant for large enterprises. And so that's where we'll continue to push towards continuing that transition to those larger mid-market enterprise advertisers. So that's really a different lens on who's coming to us, who's benefiting from the platform today. I will kind of layer on to that, how do we think about growth in the future. So one, is continuing those things we talked about. Two, it is actually driving awareness and building those agency relationships I mentioned a moment ago. There's still a lot of opportunity there, both in the mid-market and the enterprise. So we're going to continue to evolve our go-to-market to do that more effectively. In terms of verticals, we have big 4 verticals today, which is when we talk about home services, we have retail and QSR like foot traffic oriented-verticals. We've got financial services, telco, but there is a portfolio of emerging verticals for whom unlocking capabilities, in many cases, table stakes in the ad stack is important. So we think there's a continual opportunity there. And then really also thinking over the medium and longer term, our SMB customers, how do we start to bring better capabilities to those groups. And so this is an area where if we can help them write better ad copy with AI, this is the type of advertisers that benefits really significantly from that. So there's all those different dynamics we think that can continue to drive advertiser growth and advertiser retention across all those different advertiser types.

Okay. Very clear. I want to stick with you, and you introduced the concept of Ads Manager, the Ad Server. Talk a little bit about what you do see as the key benefits or lift that the platform gets as those initiatives continue to scale? And how should we think about where they frankly are in terms of like adoption and migration of advertisers onto those platforms within the company?

So I'll break it into two pieces. The first is obvious and I've already started to talk about, which is advertiser value. And so internally and externally, we talk about our advertiser value equation, which is reach, which really starts to get addressed and unlocked by NEXT, return on ad spend, which is a function of both ad reach, but also really those capabilities that we talked about on the ad stack and an ease of use, which is where making self-serve more accessible, kind of improving all types of capabilities is really important. So that's our advertiser value equation. Now from our perspective, we talked about 50% of that revenue coming through self-serve. That's probably the best indication of our progress to date because we will continually be transitioning and evolving our ad stack and we continue to be focused on that. Now -- so that's really the kind of the key aspect of where we are. I'll reinforce the point, again you both mentioned, which is AI lives at the center of the ad platform, both the ads manager, which is what you see as an advertiser and the ad server, which is how we deliver the ads. So that's really going to be core to the experience, it will be continuous. But one thing I will say is, even as we improve and evolve our ad stack, we can get significant leverage from the investments we made today.

Okay. Very clear. I don't know which one of you would like to talk to about this. Maybe both want to touch upon it. But aside from a few markets like U.K., Canada, where you've had some nice notable success from what we could see, international remains still big white space, big opportunity, a lot of untapped potential there for you. How would you frame the international user opportunity over the long term, and what do you see as some of the key investments you need to make in international to execute against that market opportunity?

It's a great question. And before I even left as CEO, the first time, we had launched, I think, in 9 international markets. And so we believed after launching in the U.K. initially and the Netherlands, our first 2 markets, that unlike most local companies domestically we have an international opportunity. In fact, people typically say, "Okay, what's the Nextdoor of the U.K. going to be?" We say it's going to be Nextdoor, right? We have not been like most local companies where there's been a copycat or someone who's been inspired by our idea and has been able to grow in another market. And so when I came back, however, we felt that focus and priority was essential in upgrading our execution. And so part of what we said was as we transformed the product and as we continue to build out this new set of ad technologies we're going to focus those efforts on what we believe to be the near-term opportunity markets. That's primarily the U.S., obviously, but then also the U.K. and Canada, the English-speaking markets as well, really as a way to facilitate focus and quality of execution. We did retrench a little bit in that sense, away from the non-English-speaking markets. It's not because we don't feel like there's an opportunity there. We don't have existing user bases there. It's more that we felt like this was a sequential way to go after the opportunity. First, let's focus on where the biggest and most vibrant markets are today. And then once we roll out NEXT and once we actually get from 50% to 100% of the transition on to our own ad technologies, then we can start to focus on the external markets. And so I would say in the near term, the focus is, as you mentioned, the U.S., the U.K. and Canada. In the long term, we believe the international opportunity is just as vibrant as it's been. So just because we have upped the priority on the English-speaking markets, it doesn't mean we've forgotten about the rest. But when you're coming back to a company and you really want to ensure that people know exactly what the most important things to do are, you can't be afraid of saying for the near term, we're going to really narrow the aperture in that sense and focus on what's right in front of us.

Okay. And Matt, Anything you want to add there?

I would just layer on one point to that, which is, we are focused on points of leverage in our business. And so that focus on the U.S., the market where we're adding millions of neighbors organically each quarter, we've added 3 million U.S. WAU in the first half of this year. And so it is deliberate. It is something that we look to in terms of holding ourselves accountable. It's not just say, okay, we'll cut, it's really how do we find the points of leverage to drive growth so that we can reinvest in the aspects of the product that will make it easier to scale in those markets in the future. So there has been real progress in the U.S. today as an example.

Okay. Bringing it all together for us, Matt, we've talked a little bit about the NEXT initiative, AI, growing and scaling the ads business, international, so you're still in the early innings of a lot of addressable market opportunity. How do you guys, as a team, or Matt, from your role, how do you think about balancing investments against long-term growth while continuing to deliver against scaling profitability and some of the profitability and margin trajectories you've talked about achieving over the medium to long term as business.

Yes. So there's two important points to start. One is, we believe today that we have an opportunity and responsibility to generate more leverage from our model. And so you've seen that in the form of 20 points of margin -- 20-plus points of margin improvement in Q2 and a commitment to deliver at least that for the full year. So we know just today, there's room to be -- to do more with less, as we say. That said, we are a growth business. Everything we are doing, including costs we are reducing, we talk internally about, there's the absolute cost and then there's the allocation of costs. It's really that latter part where we are shifting our focus to those points of leverage I mentioned, which is, how do we reinvest what we used to spend on neighbor marketing to build a better product that's more durable where retention continues to improve, where we drive more usage from those verified neighbors. And so for us, everything is about that allocation piece towards the product, which we think can drive durable growth and ultimately scale because the best version of this model requires more scale than we have today, and so we're highly, highly focused on driving towards that. Now what are intangible ways are doing that today? So there's things like reducing our platform costs. So we improved our gross margins 2 points year-over-year in Q2, which is pretty significant. And that's a relentless focus on thinking about unit costs, thinking about platform costs, how we plug that into new AI investments. That's the first piece. There's areas like leverage on sales and marketing. That has been and will continue to be a source of leverage for our platform. And then it really gets into doing more with less, looking carefully at our teams. I mean we've significantly reduced team size and productivity across all functions. And so those are things that are happening today to do more with less. But what I wouldn't want anybody to not take away -- what I want everyone to take away from this rather is that we are focused on the ways that we point towards growth. That is how this business becomes its best future [ state. ]

Okay. So maybe -- did you want to add something?

Yes. I just want to add culturally when you come back to a company and there's leadership change, there's always a lot of speculation and even some recommendations that you just want to get rid of what was going on before and do some transformative thing that is completely different. You don't need to worry about the short-term effects of that. I think we believe culturally that you need to both develop and that really means invest and think about a longer time horizon and deliver. And so when Matt talks about significantly reducing the spend on resources across the board, this is a company that has hundreds of millions of dollars in cash, so that was not a decision that was motivated by feeling like we were going to run out of money or that we didn't have enough resources to do what we wanted to do. That was motivated by this idea that we do believe culturally that we should be thinking about doing more with less. And we believe the constraints and necessity is the mother of invention. Now the difficult thing is, as we deliver on the existing investments that we've made and on our ongoing investment, and you saw the numbers last quarter, 8% growth in users, 11% growth in revenue, 20 points of margin improvement, those still aren't at levels that we ultimately feel like define Nextdoor as a growth business. And so we have to simultaneously develop those growth mechanisms, and that's through investment and deliver. The difficult thing is on the developed side, innovation is not a linear path. And so I talked to my CFO here on the left, and he says, "Okay, you're building this thing called NEXT and it's going to be transformative and you're going to make some bets. And yes, I understand that some are going to pay off and some aren't, how are we thinking about pulling that into the model, right?" That's where it starts to get a little tricky, but that is the challenge of building a great company. You need to simultaneously think about investing in the future. So that you can continue to be a true growth business, which is what technology and software businesses can do, but you also have to do the short-term delivery. So this, to me, is not a question of or. Most people pose it as, are you going to cut cost and think really critically about your execution? Or are you going to invest in the future? You have to develop the muscles to do both.

Okay. I want to build on that answer and feel free again to take this however you want. Matt was framing up an answer on investing for the long term, you talked a lot about striking that right balance. When you take investments in the business, we widen out the question to broader capital allocation. So $1 could go into the business to accelerate growth, $1 of capital could go towards M&A and maybe speeding up some of your go-to-market organically or -- and you've done this as a company, return some capital to shareholders. How do you think about your priorities there, how your philosophy might be shifting or changing, we'd love to know the level set around that topic more broadly so.

Yes. So we've talked a lot about the first bucket that we think about, which is, how do we invest in the operations of the business. And so that is really everything that we've discussed today. The second is, around things like buybacks, as you referenced. So with that conversation, it started with, what are the highest return activities we think we can do? Where we see compelling opportunities. And there were points in time earlier in this year, as we looked ahead to the road map and opportunities and the business model dynamics we talked about and said, there's an opportunity to really see an attractive return based on what the outside role can see about our business and what we think we can deliver. And then there's also an element of signaling our conviction in the work that we're doing. And so buybacks have been a part of that capital allocation equation today. So we disclosed our buybacks in Q2. We bought back almost 5% of our fully diluted shares in the quarter. And that -- and we have been buyers in Q3. So that's a core aspect of it. And then there are things like you mentioned, inorganic. For us, the key word here is focus. So we're really thinking about ways that we can get to the core of improving that core user and advertiser value equation. And so in the near term, things like M&A are less of a focus for us today. But as we look over a longer time horizon, that certainly can come back into the equation as we've continued to deliver on things like NEXT.

Okay. We only have a few minutes left, but I want to -- we try to end these conversations with a bit of a forward eye. So I'll ask you as both the founder and the CEO, a couple of questions. So number one, when you look out over the next 3 to 5 years, what excites you the most about the opportunity that sits in front of you with respect to Nextdoor? And then hopefully, this is my pitch, we'll be sitting here having this conversation a year from now, we're having a conversation a year from now, what do you think investors are not yet focused on with respect to how your business or the advertising landscape might change that you think people should be thinking about, it should be more front of mind.

Sure. And as a founder, a 5-year time horizon is something that I'm not familiar with. And so I would say, 3 years is probably the furthest out that I think about Nextdoor. And really, we're thinking about showing meaningful progress in the next 6 to 18 months. I mean we want the urgency of delivery in what we would consider a near and medium term. But now let me dream for a second because that's really the question that you asked. We believe that local is a massive opportunity. We think it's not just massive, it's one of the only remaining massive consumer opportunities that isn't already dominated by the $1 trillion market caps. And so as we look at that and we think about the fact that we have built a membership-centric platform that does not rely on any one for distribution, that knows exactly who its members are, and where they live, and that grows organically. We think we're extremely well positioned because local, we believe, like every other consumer space, will ultimately move from being fragmented like it is today to being consolidated. And so the dream for Nextdoor, if we move beyond the consumer value proposition to the investor value proposition or the business proposition, is we do believe that there is a massive opportunity in local and that we are best positioned infrastructurally with how we've built the company to capture that opportunity. Now the current product is not going to get it done. That's actually why we have NEXT and why we think about doing things that are transformational, right? But with great execution, with really innovative product development, we think that we have the best opportunity of a number of players that are trying to figure out how is local going to be captured. Ultimately, the way you get there is by delivering value on a quarter-by-quarter basis. And so it comes back to what I talked about before, which is you build the credibility by delivering every single quarter. But then when you look back 2 quarters, 3 quarters, 4 quarters, you start to see something that looks a little bit more transformative. And that is something that I believe starts culturally. And then if you build that culture it reflects itself in the results. And so that's the thing that we are obsessed with, and I've talked about this in a couple of shareholder letters, there's a great book called Founders Mentality. And I know these days in Silicon Valley founder mode is kind of the topic du jour. But going back 4, 5 months ago, we talked about in our shareholder letter this idea of Founder's Mentality, which is not just the province of founders, and it's not just the province of newly created companies, it's really a mindset, which is, can you have a really strong mission and that mission for us is to be the indispensable company in local. Can you be so obsessed with the frontline and the details that you do amazing execution, and finally, can you do all of that with the mindset of an owner. So when you talk about how do we think about investments, ultimately, it's about accountability, right? That's how we think about investing. I mean, we will obsess over the fact that we do need to drive ROI when we do these things because we have shareholders, we have responsibilities, we have fiduciary commitments, right? But the reason we're here and the reason that we wake up in the morning every day is because we think there's a massive, massive opportunity on the other side and that's exciting.

Okay. Well, I think we're going to leave it there. First of all, thanks for the opportunity to have the conversation. And for folks in the audience, please join me in thanking Nextdoor for being part of the conference this year.

Thank you.