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spk05: Thank you for standing by. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the NerdWallet Incorporated Q2 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. Ms. McNamee, you may begin your conference. Thank you, Christy.
spk06: And welcome to the NerdWallet Q2 2022 earnings call. Joining us today are co-founder and chief executive officer, Tim Chen, and chief financial officer, Lauren St. Clair. Our press release and shareholder letter are available on our Investor Relations website at 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 our annual report on Form 10-K for the year ended December 31, 2021, and in other reports filed or to be filed with the SEC. We urge you to consider these risk factors and remind you that we undertake no obligation to update the information provided on this call to reflect subsequent events or circumstances. You should be aware that these statements should not be considered a guarantee of future performance. Furthermore, during this call, we will present both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. With that, I will now turn it over to Tim Chen, our co-founder and CEO of NerdWallet. Tim?
spk03: Thanks, Caitlin. As you know, the current macroeconomic environment has been challenging for a lot of people. The challenges that consumers and SMBs are facing are varied and complicated, and in many cases, they've actually heightened the need for trustworthy and knowledgeable financial guidance. While we know we don't have all the answers, we can provide a lot of value during this time by offering financial clarity across multiple topics. Our objective is the same as it has always been, serve as a trusted financial ecosystem that consumers and SMBs can rely on to learn about various financial topics, shop for products, connect their data, and receive data-driven nudges. By doing this, we will help our users navigate through all of the new financial decisions they're facing while continuing to deliver solid financial results. In Q2, the increased demand for financial guidance, our diversified business, and solid execution against our strategy helped us deliver better than expected revenue and adjusted EBITDA results. We also continued to help more consumers and SMBs in more ways by expanding product offerings within our lending business, growing our presence in Canada and engaging our base of registered users. NerdWallet's philosophy on product line expansion continues to be pragmatic and focused on leveraging our advantages. We believe our trusted brand and organic reach give us an unfair starting point when landing and expanding and vertically integrating. As a reminder, We define vertical integration as combining our brand and reach with best-in-class user experiences. By executing on both of these expansion strategies, we can improve customer experiences, monetization, registration, and engagement. A few great examples of this in action include the continued growth of our SMB business, our acquisition of On the Barrelhead, and the organic growth we've driven in NerdWise Canada. This past quarter, our SMB business continued its momentum with triple-digit year-over-year revenue growth. There are a few dynamics driving this growth. First, we've seen higher small business demand and increased pricing. Second, we've been efficiently scaling our team, which has helped us drive higher conversion. And third, we've been successful in landing and expanding within new SMB areas, such as payments, insurance, and accounting services, and there's still plenty of room to run here. The progress we've made since the Fundera acquisition is not only great news for SMB, we also think it underscores opportunities enabled by vertical integration more broadly. Given this success, we furthered our vertical integration efforts through our acquisition of On the Barrelhead, a loan matching platform that connects consumers and SMBs with products from its lending partners. Similar to what we've seen within our SMB business, we expect that by pairing On The Barrelhead's loan matching platform with NerdWallet's trusted brand and massive reach, we can offer more personalized and compelling recommendations to our users, leading to better customer experiences and improved monetization. On The Barrelhead will fully integrate into NerdWallet's existing brand, products and technology, And we've brought on Sam, Tim, Joe, and their exceptional team to help us achieve our vision. I mentioned it before, but I want to reiterate one important point. We're going to be very prudent about our M&A strategy, and price will remain an important consideration for us in evaluating all opportunities. At times, macroeconomic volatility will present opportunities to buy great businesses at reasonable prices This was the case with both Fundera and On the Barrelhead. We will continue to take an opportunistic approach to M&A in the future to further accelerate and enhance our capabilities. We're also very excited about our organic growth. Our strategy of landing and expanding in new verticals and geographies continues to prove successful. We launched NerdWallet Canada in July 2021, and in Q2, NerdWallet Canada's MUU growth was more than 54% quarter over quarter. We also built out our financial marketplaces through new partnerships with numerous financial institutions across credit cards and banking. Building and engaging our base of registered users continues to be a key focus area for us. It is critical to delivering personalized financial guidance. In Q2, we achieved record registrations for the second quarter in a row. But even more importantly, registered user revenue grew at a higher rate than our overall revenue at 80% year over year. We attribute this progress in part to our continued investments in building our trusted brand and in strategic improvements we've made to our CRM campaigns. I'm also continually impressed by the work of our content team who always show up for consumers and SMBs when they need us. with trustworthy and knowledgeable financial guidance. In Q2, highlights for me include a guide to coping with the recession and a resource hub for LGBTQ plus individuals and couples who face unique financial and legal considerations when planning life events. Over the past two quarters, we've delivered strong financial results despite the headwinds we're seeing in the market. If anything, the current macroeconomic environment has made gaining financial clarity even more challenging, which only makes our mission more important and our opportunity even greater. I'm confident that our diversified business commitment to building a trusted brand and the progress we're making towards becoming a financial ecosystem will continue to propel our growth and help us achieve our vision. With that, I'm going to hand it over to Lauren St. Clair, our CFO, who will discuss our Q2 results. Lauren?
spk07: Thanks, Tim. We had a strong first half of 2022 that showed once again how our years-long diversification efforts put us in a position of strength when we see headwinds in any particular portion of the macro environment. We delivered Q2 revenue of $125 million up 37% year-over-year and above the high end of our guidance. And while we have predominantly surpassed quarters that were impacted the most by COVID-19 lows, we continue to look at our pre-COVID revenue CAGR from 2019, which at roughly 30% during Q2 is consistent with our historical growth. Let's take a deeper look at the revenue performance during the quarter within each category. Credit cards delivered Q2 revenue of $55 million, growing 82% year-over-year. Our credit cards vertical has been a great example of our ability to recover from a difficult macroeconomic environment, and we have consistently delivered on meeting both our consumer and partner needs while providing quality user experience improvements. This is especially critical in a time where we see higher consumer engagement and we've focused on driving enhancements such as optimizing the comparison experience, making it easier for consumers to get the most relevant products. Credit cards had another quarter of strong growth due primarily to the high intent nature of our audience and our deep alignment with partners to deliver quality matches. Loans generated Q2 revenue of $24 million, declining 26% year-over-year. Mortgages have seen increasing headwinds as we moved into the second quarter, where we're now seeing year-over-year declines in both refinance and purchase revenue. But despite a very challenging interest rate environment, We're proud of our ability to drive another quarter of strong growth in personal loans as our user experience delivered on key conversion wins combined with leveraging higher consumer interest. While we expect that this tougher interest rate environment will continue through the second half of 2022, the addition of the recently acquired on-the-barrelhead business should allow us to grow our overall loans portfolio this year. Finally, our other verticals delivered Q2 revenue of $47 million, growing 58% year over year. This quarter, we saw impressive triple-digit growth in both SMB products as well as banking. As Tim mentioned, We are increasingly encouraged by the success we've seen in SMB as we have shown our ability to run our integration playbook and direct our strong organic traffic through Fundera's efficient and reoccurring funnel. Banking saw benefits from increasing customer interest combined with a rising interest rate environment, which partially offset the corresponding interest rate headwinds for mortgages. Growth in other verticals was partially offset by headwinds we faced in other areas, such as insurance, where we've seen consistent carrier profitability pressure, a trend that we expect to continue for the remainder of 2022. Moving on to investments and profitability. We earned $12.7 million of adjusted EBITDA at a 10% margin this quarter, as we continued our brand campaign and investments in product development. We had a GAAP net loss of $9.3 million, which includes $2.2 million of one-time expense related to our recent acquisition. Please refer to today's earnings press release for a full reconciliation of our GAAP to non-GAAP measures. We ended the quarter with a strong balance sheet and $126 million cash on hand. During Q2, we had a cash outflow of approximately $31 million related to the contingent consideration of previous acquisitions. And as a reminder, the remaining payments are expected to be made in the second quarter of 2023. Subsequent to the end of the quarter, We financed the cash portion of our acquisition of On the Barrelhead with borrowings from our existing credit facility. Consumers continue to turn to the nerds for their money questions. We provided trustworthy guidance to 20 million average monthly unique users in Q2, up 2% year over year. We see strong engagement across many of our verticals, such as SMB products and banking, as well as from newer channels we continue testing as part of our brand efforts. There are some areas where we saw traffic headwinds in Q2, specifically in mortgages, where the rising interest rates have driven lower consumer demand consistently throughout the year, investing, while not facing as large of a headwind as Q1 when we were lapping the meme stock phenomenon, current market volatility has lowered consumer engagement. and taxes, where we're comping an extended tax season due to the delayed filing date last year. We expect to see this metric grow in the second half of the year as we integrate our recent acquisition and intend to provide qualitative commentary on the impact. On to our financial outlook. The first half of the year positions us well for the remainder of 2022, and in the third quarter, We expect revenue in the range of $135 million to $141 million, which at the midpoint represents 40% growth year over year. This outlook includes the impact from our recently completed acquisition of On the Barrelhead. As we expect to achieve deep integration with both our technology as well as financial services partners, Our ability to disclose the exact contribution of the acquisition on our business will be limited, but we expect that the acquisition will be accretive to both revenue and adjusted EBITDA during the second half of the year. Last quarter, we said we expected to return to our normal pre-COVID quarterly revenue cadence, which would imply that Q4 would be lower than Q3. However, As we continue the integration of the recent acquisition, we now expect that Q4 revenue will be roughly similar to Q3. We expect Q3 adjusted EBITDA in the range of $8 million to $10 million as we are running brand campaigns throughout Q3 for the first time. As a reminder, We expect Q4 to have minimal brand spend, and as a result, higher margins compared to the first three quarters. We are also reconfirming that, inclusive of our recently completed acquisition, we expect year-over-year increase in our 2022 annual adjusted EBITDA margin. We are excited to have recently welcomed the On the Barrelhead team to NerdWallet and in conjunction with always evaluating inorganic growth opportunities as they arise, we remain disciplined in how we allocate capital. Our tenets for capital allocation remain the same and include organic investments that provide long-term, sustainable growth as well as possible future inorganic growth opportunities. We remain dedicated to our mission of providing clarity for all of life's financial decisions. And while we know that we may face certain headwinds during the second half of the year, we are confident that our diversification and strong brand will help us remain top of mind for consumers and a valuable partner for financial institutions. Operator, we're now ready for questions.
spk05: At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that's star one. And your first question comes from the line of Ralph Skaggart with William Blair.
spk10: Good afternoon. Thanks for taking the question. Tim, as you think about the relative headwinds and tailwinds for your products, Maybe just give us a sense how you're thinking about the overall portfolio products that you have today. How does that position you as we potentially go through the macro tunnel here and increasing interest rate environment? Just maybe kind of the overall ability of the combination of the portfolio products to continue to grow and potentially increasing challenging environment. And then I have a follow-up.
spk03: Yeah, so we have confidence that our model sets us up to weather future uncertainty pretty well. So, you know, first off, we're still earlier in our growth curve, hence our year-over-year growth rates. So there's strong secular tailwinds behind us. And then second, as you alluded to, you know, we have a diversified business. In fact, many parts of our business offset each other. This is why we've been growing through cycles. So, for example, during the pandemic, cards, personal loans, and SMBs were weak and now they're strong. And now mortgages and insurance are facing headwinds, whereas they were strong during the pandemic. But in spite of that, you know, we grew in 2020 and we're growing again in 2022 with a three-year compounded annual growth rate of roughly 30%. And as we look forward, we think we're currently under earning in mortgages and insurance. And in terms of cards, You know, we think any future downturn is likely driven by unemployment, which is exactly what we saw during the financial crisis and in early 2020. We're not currently expecting that, so we feel pretty good about the outlook there. And then just in terms of the broader model we have, you know, we have a pretty nimble cost structure. Being able to pull back quickly in areas like brand really insulates us. So, for example, in the second half of 2020, We had over 10% adjusted EBITDA margins despite revenue being down almost 10% year-over-year as we scaled back on brand spend. And so we have factored all this into our guide for Q3 and our commentary on Q4 and feel pretty balanced.
spk11: Great. That's really helpful.
spk10: Let me just follow up on M&A. You talked about being disciplined, particularly in this environment. which is quite understandable, but also guessing valuations have softened with some companies you've been potentially looking at. So how do you sort of balance those two out right now as you sort of think about, you know, growth and positioning yourself going forward?
spk03: Yeah, so certainly, yeah, we think about the relative value of cash and our equity versus the prices we're seeing out there in the market. Just to reiterate, you know, we've got a pretty – unique situation that we're typically chasing, which is, you know, we've got a really strong brand and reach and we have at times seen opportunities to really improve our product experience and monetization at the same time by, you know, integrating with some, you know, businesses like digital concierges and, you know, just better matching technology and things like that. So that's going to continue to be what we're looking for going into the future.
spk08: Great. Thanks, Tim.
spk04: Your next question comes from the line of Ross Sandler with Barclays.
spk01: Hey, team. Just two for me. Could you talk about the on-barrel head? What do these guys do? What's their core competency? I think you said loan matching, but could you elaborate a little bit more on that? And then, you know, the release, what do you guys do? acquired them, so they did $38 million last year and $5 million in net income. I would guess that that's also probably facing the same pressure year on year as your loans business, but is that the right way to look at it? And then for these guys, how much of their traffic is going to their website or their app organically versus via email, which I read that that was a pretty big part of their business. So that's all the acquisition questions. And then for sales and marketing, it looked like really good leverage on both brand and performance. And do you expect those to kind of stay in the same neighborhood as a percent of revenue based on the kind of new macro environment we're in? I think you had talked about brand topping out at like 150 annually previously. It looks like maybe more like 100. based on the current macro. So just any color on how we should think about those two, brand and performance marketing. Thanks a lot.
spk03: Yeah, I'll kick it off. So On The Barrelhead is great at loan matching. I mean, it's a technology-oriented company. They've continually iterated and applied data science and partner integration in a way that is a couple of years ahead of where we are. So, you know, we're very excited about what that can bring to our business. Um, in terms of the headwinds they're facing, you know, um, they're, they're also in the loans business and so they're seeing pretty similar things to what we're seeing, which would be headwinds and mortgages, but personal loans remains quite strong. Um, so, uh, you know, their, their, their business is actually, um, doing, doing pretty well. And then in terms of, um, their, Traffic acquisition sources, we think of them more as a technology play than an audience play. They tend to be in various different channels and pretty diversified there.
spk07: Yeah, and let me take the question on sales and marketing spend. So first of all, as a reminder for everyone, 70% of our traffic comes through organic channels. And because of that, we've been able to diversify into other areas like performance marketing and even brand. And as we've said before, we're incredibly lucky to have the unique ability to reinvest some of our earnings into our trusted brand, given that all of our verticals sit under one brand as opposed to under a confederation of brands. With that being said, long-term growth and profitability are both incredibly important to us. So we're making disciplined investment decisions today while maintaining our commitment to improve full year margins both in 22 and over the longer term. We feel really good about the brand spend this year. Tim's talked about, you know, aided awareness being really high. And when we think about performance marketing, as we've also said in the past, we see this as really a variable expense that we can ratchet up or dial back as needed. In certain areas where we see things like pricing improvements or conversion improvements, it allows us to lean in at still very good ROIs. And so we'll continue to lean in when we see the need and we'll also pull back if needed. In terms of further macroeconomic uncertainty, the other great part of the business is that we can pull back if needed. You saw this in 2020, we were able to pull back on both brand and performance marketing. And so, again, we feel really good about the investments we made in Q2 and what we're making in Q3, and we'll also be incredibly disciplined, and if needed, we have the ability to pull back.
spk05: Your next question comes from the line of Justin Patterson with KeyBank. Your line is open.
spk11: Great. Thank you very much. Two if I can. Tim, in one of the earlier responses, you mentioned you believe you're under-earning in some categories. What are the levers to improve upon that? And then as a variant of that question, credit card revenue really continues to increase nicely. As you talk to just your various partners in there, what are really the key incremental drivers to capture more share of partner budgets? Thank you.
spk03: Yeah, so I spoke of under-earning in areas like mortgage and insurance. In mortgages, we're facing everything from rising rates, reducing affordability, to low inventories driven by labor shortages and all sorts of other things. So as those things normalize, we'd expect a bit of a pickup. There's maybe even a bit of a counter cyclical tailwind there if the macro gets more diminished. Insurance is driven by similar factors. Inflation is having an impact on the cost of repairing a car or replacing a car. And so that's really causing carriers to struggle with profitability. as they have to go through state-by-state regulations to raise prices, and it kind of diminishes their appetite to write new policies. So that is also a temporal issue that we fully expect to reverse. And I didn't mention student loans as well, forbearance being extended. Again, we're not expecting a ton from that in the rest of 2022 and beyond. But yeah, at some point, that could turn as well. So in terms of credit cards, they've the conversations with partners go both in terms of direct response, right? Like, you know, what kind of value and quality are we delivering to partners, but also how are we doing as a brand partner? You know, NerdWallet has a trusted brand and they really want our stamp of approval. And so maybe there's a talk of, you know, what that means for pricing as well. You know, budgets are relatively healthy. I really think that the main lever to think about in terms of cards is unemployment. That's what it's been in the past, and it's a pretty tight market, especially in the high FICO segment where you have multiple job openings per job applicant. So I think that's probably what some of the credit card partners are seeing, and that's probably what's driving some of their optimism right now. And that combined with, you know, pretty healthy consumer balance sheet relative to, and then even delinquency rates versus what we saw going into the pandemic, that's probably feeling some optimism as well.
spk08: Thank you.
spk04: Next question comes on the line of James Fawcett with Morgan Stanley.
spk05: Your line is open.
spk00: Hey, it's Michael in Fontana for James. Thanks for taking my question. Tim, I just wanted to go back to some of the credit card commentary you were just making. I guess the one thing that we struggle with is just if we look at sort of credit card balances, they're still fairly low. So there really is room for those to move higher. So it's a question of just, you know, over the medium term, how much do your partners really need to lean in on new customer acquisition? So I guess just how would you respond to that? I know you're sort of quoting unemployment as the main driver here, but what would you sort of say in response to that?
spk03: Yeah, so if you think about it from our partner perspective, they have a pretty good sense of LTV of a customer and they have a pretty clear idea of customer acquisition costs through NerdWallet, right? So it tends to be, you know, a pretty easy calculus for them. And so we don't really typically see constraints driven by bigger macro factors like that.
spk02: It tends to be the more the better.
spk00: Got it. That makes sense. And maybe jumping back to Ross's question from earlier, I guess, as you think about on the barrelhead and recognizing you may not be able to fully comment here, but I guess just how should we think about of that business from a mortgage perspective? Like what's the split between mortgage versus personal loans or maybe other categories?
spk08: Yeah, we haven't broken that out.
spk09: They have a couple of properties across mortgages, personal loans, and even small business. And yeah, the mix has shifted over time as the macro has shifted, but we haven't broken that out.
spk03: great thanks Tim again if you would like to ask a question please press star then the number one on telephone keypad and there are no further questions at this time are there any closing comments yeah so thank you for all the questions today and as always a huge thank you to the nerds for another great quarter our diversification continues to be a significant advantage for us we're currently facing a you know, really tough market conditions in mortgages and insurance that are still managing to grow through those headwinds. Our brand awareness and preference metrics remained at all-time highs, and we had another quarter of record registrations. And we continued to leverage the unfair advantage we have with our brand and reach, implementing our vertical integration playbook and SMB, and furthered these efforts through our acquisition of On the Barrelhead. So all of this progress moves us closer to becoming the trusted financial ecosystem and helps us achieve our vision, a world where everyone makes financial decisions with confidence.
spk02: Thanks for joining us and enjoy the rest of your day.
spk05: This concludes today's conference call. You may now disconnect.
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