Good day and thank you for standing by. Welcome to the NerdWallet Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Caitlin MacNamee, Investor Relations.

Thank you, operator. Welcome to the NerdWallet Q3 2023 earnings call. Joining us today are Co-Founder and Chief Executive Officer, Tim Chen; and Chief Financial Officer, Lauren StClair. Our press release and shareholder letter are available on our Investor Relations website, 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 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, except where we are unable without reasonable efforts to calculate certain reconciling items with confidence. With that, I will now turn it over to Tim Chen, our Co-Founder and CEO of NerdWallet. Tim?

Thanks, Caitlin. NerdWallets is rapidly approaching our second anniversary as a public company. In each quarter, I've enjoyed the opportunity to reflect on our progress with the goal of providing you, our shareholders, with the same clarity and confidence our Nerd strive to offer our consumers. I am pleased to report our strong audience growth in Q3 with monthly unique users up 22% year-over-year and record traffic to travel content and personal loans. As we noted last quarter, we are taking share in a large and growing market independent of macroeconomic factors. Our primary addressable market, which is U.S. financial services digital advertising, is expanding with a 2022, three-year CAGR of approximately 23%. Meanwhile, NerdWallet's share in this growing market has also increased with a three-year CAGR of 33%. We've consistently said that over 70% of our traffic comes organically or unpaid to our site and that remains true today. But we recognize that our investment in sales and marketing has been roughly 70% of revenue in recent periods, so we wanted to walk you through our short- and long-term decision-making on those investments as well as how they'll scale over time. I'd also point you to our shareholder letter as well as the historical financial data spreadsheet that we've posted to our IR website today for a double click of sales and marketing expense allocation. Our trailing 12-month sales and marketing comprises roughly 50% expenses that are fixed in nature. The remaining half is performance marketing, which is variable in nature. Given there is little cost associated with serving an incremental organic visitor, there should be meaningful margin leverage as organic traffic scales. Conversely paid visitors have lower incremental margins. Out of the 50% of trailing 12-month sales and marketing expenses that we consider relatively fixed in nature, over…

Thanks, Tim. We're proud of the quarter that we achieved, delivering Q3 revenue of $153 million, up 7% year-over-year and above the high end of our guidance. We saw stabilizing performance in some of our more challenged verticals, such as credit cards, as well as positive momentum in our loans verticals. Let's take a deeper look at the revenue performance during the quarter within each category. Credit cards delivered Q3 revenue of $54 million declining 6% year-over-year. As we mentioned last quarter, issuers pulled back primarily in balance sheet intensive areas such as balance transfer cards, and that dynamic persisted in Q3. Consumer demand remained healthy, and we've continued to deliver high quality matches to of financial institutions, and we believe the strength we've seen in matches indicates we are still taking share of the overall market. Issuer behavior has remained consistent, and while we believe that current conservative trends will continue during Q4, we will be lapping a tougher comparison period as we were still seeing pricing recovery through the end of 2022. As we look beyond the near-term, past cycles would indicate that we should see a period of above trend growth when card issuers regain confidence and begin taking advantage of our high levels of consumer engagement. Loans generated Q3 revenue of $33 million growing 16% year-over-year, the first quarter of overall loans growth since Q1 2022. This growth acceleration was in the face of almost a full quarter of organic growth comparison as we surpassed the one year anniversary of our OTB acquisition during mid July. This is most prominent in personal loans, which saw another quarter of accelerating growth in Q3, achieved through continued integration and optimization of OTB's technology as well as our improved ability to align consumer demand more effectively with financial service…

[Operator Instructions] Our first question comes from the line of Jed Kelly with Oppenheimer.

Two if I may. Just circling back to the shareholder letter, it seems from some of the commentary you're kind of focusing on some of the called subprime consumers where NerdWallet historically has been more of prime or super prime. So can you just talk about that strategy? And then, Lauren, you just mentioned raising your operating income expectation, margin expectations to high single digits. Can you talk about some of the confidence that gave you to do this just in this uncertain environment?

Hey, Jed, I'll take the first one. Yes, historically NerdWallet has really served a broad swath of consumers. Our monetization has been disproportionately oriented towards prime consumers due kind of to the nature of the products they qualify for and the LTV of those products, to the issuers, lenders, insurers, et cetera We think that this is just a natural evolution in serving our broader consumer base better. Helping a group of consumers, understand what they qualify for and helping them build credit, just kind of a natural extension of our mission, and so, very excited to dive deeper into that through both products like NerdUp, but also more matching oriented credit card flows.

And to the second part of your question, Jed, as we mentioned in the prepared remarks, we now believe that we can get to mid to high single digits on our non-GAAP operating income margin. Given the high incremental margins we have as a result of our organic traffic, we're confident that we can get to this margin in a mix macro environment. Similar to what you saw us do actually in the second half of 2020. And if we think about sort of longer term, I know we've talked a lot about 70% of our traffic coming through organic channels, which gives us higher incremental margins. And over the long-term, we expect our margins that will return to and eventually surpass 2019 levels for the adjusted EBITDA. And we'll get leverage on the portion of our cost base that is relatively fixed in nature. So, one, we've talked in the past about hitting a logical ceiling on our brand spend. Two, we no longer have the step change in G&A expenses as a result of becoming public. Three, we continue to gain leverage in areas such as R&D and the organic and other portion of our sales and marketing. So, we're proud to have delivered consistent margin accretion on an annual basis since our IPO in late '21, even in difficult macro environments and we expect this trend to continue into 2024.

Our next question comes from the line of Youssef Squali with Truist.

Two questions for me, please, as well. So maybe, Tim, can you maybe just tell us, in your conversations with card issuers, there aren't that many basically, have doesn't kind of control the market. What are you hearing from them? What are the kind of the signals that they're kind of waiting to see before they can kind of reaccelerate the spend? I think you talked about maybe particular cards or balance transfers that we're not as much in favor. So maybe just kind of fill us in on some color there. And then, with regards to AI, can you maybe just help us understand how you guys are leveraging AI both in terms of as a cost litigant for your internal operations and maybe content creation, but also, in terms of improving marketing efficiency, particularly on the variable, the pro forma's market inside of things? Thank you.

So on the insurer side, we continue to see headwinds. We're seeing a pretty similar environment to last quarter with some marginal puts and takes in terms of positives and negatives from the issuers. The general sentiment is credit quality is doing okay. It's normalizing towards pre-pandemic levels kind of as expected. But banks have some unknown unknowns they're worried about and continue to be conservative in terms of managing their balance sheet. So for example, Basel III end game is looking pretty onerous as currently proposed in terms of increased capital ratio requirements, and there's just some uncertainty about what higher for longer rates could break in the financial system. So on balance, it's looking pretty similar to last quarter. Big picture, we think we're under earning in cards, but at the same time it's hard to predict the exact timing of when the issuers go back to more normalized customer acquisition patterns. And as we take a step back, we really think about being single-digit market share in the overall card originations and seeing ample opportunity to grow that by doing things like registering users, reintegrating them, and increasing conversion rates. And, yes, on the AI question, you raised two pretty important drivers there. I'd say on the efficiency side, that's certainly something that we're looking at across every function of our business. I'm sure every business out there is looking at different ways to use AI to increase productivity. And so it's pretty broad reaching. There's a lot of experimentation and learning going on. And then in terms of actually delivering better user experiences, that's pretty exciting for us as well. It's actually helping us to both register and engage more users. We recently incorporated registration prompts into our Nerd AI chatbot to funnel consumers to membership offerings related to their questions. These embedded registration prompts allow for more personalized and tailored guidance while creating unique revenue and engagement opportunities for us. The Nerd AI chatbot is also doing a better job of getting users to the most relevant user experience on Nerd. So AI is already helping us register more users and engage more users and there's going to be more to come.

Our next question comes from the line of Justin Patterson with KeyBanc.

Tim, I wanted to go back to the letter and just talk about some of the product initiatives on, that you've called out verticalization sounds like a pretty big unlock within the credit card segment rolling up the OTB product there. That's also dovetailing with some really just healthy monthly traffic growth to the site. So would love to hear a little bit more about just how you envision, what seems like a faster cadence of just product updates on the Company, really influencing traffic growth the next few years and in turn positioning you for growth whenever market conditions do stabilize? Thank you.

Yes. So, I always would point to page two of our shareholder letter, as a reference point around our growth pillars and kind of how we think about our product initiative buckets. I'd say, for example, with user registrations, we've been prioritizing user registrations as a focus area. We're making good headway and are growing 38% year-over-year in terms of our cumulative registered users. And unsurprisingly, we see that personalization drives engagement. The key to driving personalization is first party data, and a major factor in capturing first party data is registration. So, from a product perspective, we're consistently improving registration on ramps throughout the site. I just talked about adding them into our Nerd AI experience as well as improving personalized nudges when consumers have an opportunity to make a smart money move. We're also focusing on areas of high consumer interest, like banking or taxes. Yes, you got to catch the fish while they're biting. And so, we're adding even more relevant and personalized reasons to register, and we've seen improvements in registration rates when we do this. So really still in early days of building out the ecosystem, but yes, trying to build as much velocity as we can across all three growth pillars, in our product initiatives, including things like NerdUp and is kind of how we're thinking about it.

Yes, maybe I'll just add a quick comment. Yes, we're very excited about the Q3 MUU growth that we saw. A lot of that strength comes from verticals, where we see high consumer intent as well as product improvements. And similar to areas where we see revenue growth, we saw growth in MUUs like banking. And we also saw consumer interest in areas like investing and traveling. And linking that back to your question around product initiatives, remember, people come to us to learn, shop, and manage, which means not all visits are going to result in a monetizing event, but part of that is to reengage users, build the trust, and continue to build that relationship, so that when they are in the market for a financial product, we'll think of NerdWallet first.

And if I can slip in a quick follow-up. NerdUp is obviously a very different product than what you've had historically. But are there any economic considerations we should be thinking about just for this affecting the model going forward? Thank you.

Yes. So, first and foremost, we think hard about the fact that trust and objectivity underpins our brand's value. So we thought really hard about this before launching NerdUp. So in terms of the economic model, it really is something to speak to, right? Traditionally, credit card issuers make money on swipe fees, annual fees, late fees, and by charging interest on revolving balances. And we're taking a pretty different approach to this business. We want to effectively give most of those economics back to the consumer in the form of no annual fees, low minimum balances, cash back rewards, and instead just focus on helping a broad base of consumers improve their credit scores. So, this really nurtures an engaged audience for us, and we hope to refer that audience back to the issuers and lenders we partner with when consumers build up their credit and qualify for unsecured products. And that's really the win-win-win that I think is, we're uniquely positioned to offer. Our consumers build that credit, card issuers get access to this pool of qualified candidates, and we've got a larger base of engaged users. And I think as we think forward about other products, we'd really be thinking the same way about any products we launch in the future.

Our next question comes from the line of Ross Sandler with Barclays.

Lauren, just one clarification question and then Tim a big picture question. On the clarification, did I hear you correctly that loans is supposed to decline year-on-year going forward after growing 43 this quarter, I know we have tough comps there, which makes sense or was that like the overall other segment is going to be declining, just any clarity there? And then, Tim, the MUU growth combined with this sharp decel and performance and the negative six year-on-year for sales and marketing of the total. You talked a little bit about that, but does that more reflect the demand environment being tough and that when that demand environment picks back up, we plan on leaning in or is there newfound efficiency or some kind of new philosophy that we might not need as much performance marketing intensity go forward because all these other things like new categories and nudges and better registrations, et cetera, are finally kicking in? Any thoughts just philosophically on that?

Let me start with the clarification. So in Q3 loans grew 16%, and we said that was the first quarter of overall loans growth since Q1 of 2022. And then maybe I'll just to clarify, I'll just reiterate our guidance and maybe explain that a little bit more and some of the drivers. So, the Q4 guidance is $136 million to $140 million, which, at the midpoint, declined 3% year-over-year. And maybe some context, from Q3 to Q4, we tend to see normal seasonality of high-single-digit decline quarter-over-quarter, which in a normal year is driven by credit cards, student loans, and mortgages. Last year, we did not see the normal seasonality, though, for three big reasons. One, there was a smaller seasonal decline in credit cards as pricing recovery continued from the lows 2020. Banking was benefiting from stronger than normal deposit demand during the rapidly rising interest rate environment. And the third dynamic is that insurance picked up from better macro dynamics as well as some of the internal product changes we've made. So this year, what we called out is that our Q3 to Q4 seasonal decline implied by our guidance is actually a little higher than usual, driven by the pressure in banking as consumer demand starts to moderate given the stabilizing interest rate environment.

Yes. In terms of the sales and marketing getting more efficient year-over-year while MUUs are still growing nicely, I mean, I'd say big picture, our consumer demand is strong. I think where we're really seeing headwinds are on the ability to monetize that demand, for some of the reasons we mentioned. I think one area particularly worth double clicking into from a sales and marketing perspective is brand marketing. We're down year-over-year in brand marketing, and I'd say, there's really two reasons. First, it's a tough macro for monetization. And so when it's tougher to monetize, we pull back a bit because we're trying to maintain discipline around payback hurdles on that brand spend. And second, we're still getting better at this. We're relatively new to this. With 2022 being our first full year of spending on brand campaigns, we've learned a few things. And that means we're going to get smarter about our creative and where we spend and when we spend. So we can get a bigger bang for our buck. I'm really excited though that despite that, we're exiting this quarter with record brand awareness levels and our highest ever quarter of MUUs, along with that 38% growth in cumulative reg. So that's all in despite lower spending.

Our next question comes from the line of Ralph Schackart with William Blair.

First question, maybe if you could provide some color, if you could please, on what you're seeing in terms of lead volumes versus pricing, maybe some perspective across some of the different products or verticals? And then just a follow-up to that, on the call, you talked about integrating OTB technology into loans. Just more color on sort of what's driving that performance or what you expect that technology do or just any more color more specifically how it's helping drive loans? Thank you.

Yes. I'll speak probably about pricing. I mean, our ability to monetize is most impaired right now in insurance. And I'd say some parts of cards that are more balance sheet intensive. So, those are kind of the primary areas to think about. I mean, of course, we've got headwinds in other areas driven by increasing rates, but that's more a consumer demand impact rather than an ability to monetize impact. And with the OTB performance, yes, that, so as we fully integrate OTB, we're getting better and better at, asking, essentially asking people questions and then registering them and then matching them to the right loan product. So, you can imagine that this could apply to a lot of different verticals, not just within personal loans. We're certainly seeing the benefit in personal loans first. But this quarter, we launched that product in credit cards that uses that same technology platform to really match people better. And I'd say the biggest impacts there are more in the near prime, subprime area, where people are unsure, if they qualify and what products they qualify for.

[Operator Instructions] Our next question comes from the line of Pete Christiansen with Citi.

Tim, I was just wondering if you could talk about the impressive share gains that you've had in traffic this quarter. Is that actually influencing any behavior of your partners in terms of more campaign activity, more offers, just more deeper penetration in the platform overall? And then my second question is around the personal loan category. Are you seeing a wide breadth of activity across certain issuers or is it more concentrated? Just any color there would be helpful.

Sure, in terms of the share gains, like it certainly makes it easier to have conversations around integrating. It takes worth on both sides in some cases to do things like pre qualified matching, et cetera. So, the more the larger our scale and the longer our history of sending over highly qualified referrals that perform well over time, the more incentive, financial institutions have to work with us on some of these initiatives. On the personal loan side, for us, I think it's more a reflection of NerdWallet driven activities rather than the macro. The macro is really tough right now. I think it's not that different than the past couple of quarters. We see some of the initiatives. We're doing really, having a positive benefit there year-over-year, so I can't speak to the macro implication of that.

That concludes today's question. We do have a question from the line of James Faucette with Morgan Stanley.

It's Michael on for James. I just wanted to ask a quick follow-up question on the modernization of NerdUp. Maybe just unpack how you're thinking about the unit economics there? It wasn't entirely clear to me. And then as my follow-up there, Tim, I appreciate the comments on just the composition of your sales and marketing investments and the incremental margins there. Do you think the 50-50 mix between fixed and variable cost might change as you sort of hit that natural ceiling on brand spend? Just trying to parse out how incremental margins might evolve over time? Thanks.

Sure. On NerdUp, I'd describe it simplistically as on the credit card product itself, don't make a ton of money because we're essentially paying rewards, offering no annual fees, et cetera. Now, if people's credit improves and they now qualify for a unsecured credit card, we do have our normal referral channels that we can refer them through and, we could potentially make money there. So that's more of our traditional business model. So that's kind of the exciting win-win. On the sales and marketing mix between fixed and variable, I'd say a bit of it depends. The way we look at it, you've got positive incremental margins on both the paid and organic side. The paid side is kind of more dependent on, how competitive we are in some of these paid channels versus others. We certainly think long-term about this. If you can have a great registered user experience and generate long higher LTVs, then you get more and more competitive. So that could definitely be a durable advantage. Even investments in brand can help you convert. People are familiar with you and trust your brand. That can really give you an advantage there that's structural. And then, of course, the organic side is kind of a separate thread, right? It's going to grow at its own rate based on some of the investments we make, both in our core products as well as registration and reengagement. So, we'd love to see growth on both sides. It's all positive incrementally, but the exact mix is going to depend on idiosyncratic factors.

That concludes today's question and answer session. I'd like to turn the call back to management for closing remarks.

All right, thanks all for your questions today. Feel really energized about the opportunities ahead. So, we've got continued strength of our reach and brand and our focus on relentlessly improving consumer experiences. And that really positions us to capture even more mindshare and feel our business for long term growth. I wanted to give a huge thanks to the Nerd for their hard work this quarter to help more people pull in more ways. And at the same time, we remain dedicated to creating value for our wider community reflected in the ESG report we published yesterday, which is available through our IR website. I encourage you to read our report to learn more about NerdWallet's commitments. And with that, we'll see you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.