Nextdoor Holdings, Inc.

Good afternoon. My name is Jordan and I'll be your conference operator today. At this time, I'd like to welcome everyone to Nextdoor's third quarter 2023 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'd like to ask a question during this time, simply press star one followed on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. You may now begin your conference.

Thank you, Jordan. I'm John C. Williams, Head of Investor Relations. Good afternoon, and thank you for joining us to review Nextdoor's third quarter 2023 financial results. With us on the call today are Sarah Fryer, Chief Executive Officer, Mike Doyle, Chief Financial Officer, and Matt Anderson, Head of Finance and Strategy. 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 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. Reconciliation of these measures to their most directly comparable GAAP financial measures can be found in the Q3 2023 shareholder letter released today. With that, I'd like to turn the call over to Sarah.

Thank you, John Key. We're thrilled to have you on the team. Q3 was another quarter of progress at Nextdoor as we delivered year-over-year growth in revenue, verified neighbors, weekly active users, and session depth. New neighbors are finding value on the platform, and those coming to Nextdoor are engaging more. In Q3, we added more new organic verified neighbors than in any quarter in our history, bringing our quarter end count to approximately 85 million neighbors globally. WOW increased by 2.1 million or 6% year over year to 40.4 million globally and is up nearly 50% over the last three years. While we saw a slight sequential decline in Q3, we have seen a rebound quarter to date. On engagement, we're pleased to note that we've seen strong momentum with session depth increasing approximately 30% year over year. But despite our strong progress driving new neighbors to the platform and increasing depth of engagement, it's impossible to ignore the macro challenges that continue to weigh on budgets and advertising verticals that are important for next door. Earlier today, we announced a significant cost reduction plan that includes a reduction in our workforce by approximately 25%. This reduction in force was a tough decision to make, but it needed change in how we operate. Let me share some context. Two years ago, when we listed on the NYSE, we were generating differentiated revenue growth of over 50% quarter after quarter, well ahead of industry peers. In order to keep up with this growth, we scaled our team. Starting in Q2 of 22 and continuing into this year, we began to face increasingly challenging macroeconomic headwinds, driving reduced advertiser budgets. This has particularly impacted advertisers with high levels of home-related spending, one of the key advertiser categories on Nextdoor. We've fought hard to maintain our employee base with the belief that the macro environment would begin to recover by the end of this year. We decided to bridge the downturn by using our strong balance sheet, but the recovery we expected hasn't yet materialized, so we must adapt our investments to better align with market realities. and focus our work on our highest priorities, including ensuring that we continue to invest in areas such as our new ad tech stack. What does this mean for our business? First and foremost, it accelerates our path to free cash flow break even by the end of 2025. It right-sizes the business and aligns our workforce and other expenses with our near-term revenue expectations. It maintains our very strong balance sheet and allows us to continue to deploy capital thoughtfully and with a long-term lens. Now let's shift gears and discuss the key drivers of Nexter's revenue growth and profitability. First, we continued scaling new channels to grow our base of verified neighbors. This was a Q3 highlight as the number of new neighbors coming to the platform organically accelerated 32% quarter over quarter. This was driven in large part by our digital invite strategy. We also made significant efforts to verify previously unverified neighbors and deliver more personalized and hence better performing email-based neighbor invitations. Second, we are delivering more relevant local content to neighbors. Neighbors are finding value and engaging more as they visit Nextdoor, which drives sustained growth in ad impressions. As I mentioned earlier, session depth the number of ad impression opportunities during each user session grew approximately 30% year over year, an acceleration driven entirely by increases in consumption of user-generated content, not ad load. We're using AI at Nextdoor today and in a very real way to improve our local knowledge graph and personalize relevant local content, whether it's seeing how neighbors engage with invitations, notifications, or how often they comment or react AI helps us increase the relevance and timeliness of content and drive increased engagement during each session. We're also using AI to drive content creation. Our post assistant suggests post content that fosters positivity and community engagement. Whether it's helping neighbors find a service or helping business owners promote their services, the post assistant has a roughly 70% suggestion acceptance rate. Third, we are delivering advertiser value and reducing advertiser effort. The Nextdoor ad server is transformative for the company. It's the foundation for delivering advertiser performance and for increasing ARPU growth through improved revenue yields. In Q3, we delivered in two key areas. First, we delivered more sophisticated pacing methods to better deliver ads over the course of a day and the course of a campaign. Second, we built the core components required for performance optimization so that we can begin experimenting with this capability later in Q4. In Q3, we saw immediate favorable results. Starting in July, 100% of ads from U.S. SMB advertisers were served via our next-door ad server, which drove accelerated SMB customer and revenue growth. Our work in Q3 also prepares us to serve substantially all Nextdoor ads manager demand on the Nextdoor ad server by the end of Q4. Given a subset of mid-market advertisers are already using the Nextdoor ads manager, this effectively serves as the first phase of our migration of mid-market customers. In Q3, we also encountered some challenges on our adapting and improving. From a neighbor perspective, our efforts to improve the long-term user experience through an evolved notification strategy had a negative near-term effect on WOW. While the short-term impact of these changes certainly weighed on Q3 WOW, the changes represent a deliberate step that we believe will reduce negativity, improve the timeliness, proximity, and relevance of notifications, and ultimately sustain our high levels of long-term user retention. From an advertiser perspective, compared to improving momentum through Q2 and strength in July, we saw uneven demand trends in August and September. Weaker growth among U.S. enterprise advertisers, particularly those with higher exposure to home-related spending, offset much of the momentum we saw among international and SMB customers. We believe these enterprise demand trends will likely persist for at least the coming quarters. This more muted near-term growth trajectory reflects neither our desired progress nor the strength of the long-term drivers of our business. And with that in mind, our focus is squarely on performance through 2024. Performance for neighbors seeking relevant and timely local content and connection. Performance for advertisers seeking unique brand activations with a community or local orientation to those seeking reach and ROI. and performance for shareholders, seeking a clear path to free cash flow generation. To get there, we aim to, number one, add more verified neighbors in 2024 than we did in 2023, two, deliver improved formats, targeting, and tools for advertisers, and improve yield on our ad inventory with sustained benefits coming from the introduction of video ads and lead generation campaigns on Nextdoor ad server, and the migration of ads delivery for Nextdoor ads manager campaigns to Nextdoor ad server. And three, accelerate the path to quarterly free cash flow break even by the end of 2025. Before turning over to Mike, I want to acknowledge his significant contributions to Nextdoor over the five plus years as our CFO. In that time, Mike has led multiple rounds of funding, including our public offering on the NYSE, and built an excellent finance function. While he'll be stepping down as CFO effective today, we are grateful that he is staying on through December 1st to assist with the transition. Mike will always be a neighbor, and I'm enormously grateful for his partnership and the contributions in making Nextdoor what it is today, and we wish him all the best in his future endeavors. deep and talented bench, and I'm very happy to introduce Matt Anderson as Nextdoor's next CFO. As many of you know, Matt has served as our head of finance and strategy since he joined in 2019. He has made numerous contributions over that time, including leading our investor relations function. I also had the privilege of working closely with Matt during his nearly six years in the finance organization when I was CFO at Block. and I know that he is a terrific finance leader and has the experience to be a great CFO. Earlier in October, we welcomed Dana Evan to the Nextdoor's Board of Directors. Her expertise and proven leadership in finance, operations, and strategy are bringing valuable perspective to the Nextdoor board and to the role as chair of the Audit and Risk Committee. Her strong track record as a public company CFO will be enormously valuable, and I'm thrilled to have Dana on our board and Matt on our leadership team. So with that, I'll turn it over to Mike.