Good day, and thank you for standing by. Welcome to the NerdWallet Inc Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be 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. Please go ahead.

Thank you, operator. Welcome to the NerdWallet Q2 2024 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 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. Tim?

Thanks, Caitlin. Over the past several years, I've spoken to you frequently about NerdWallet's long-term orientation. Our business is cyclical, and headwinds and tailwinds will offset each other over time. So our priority is growing from cycle to cycle, which we've done through a pandemic, a regional banking crisis, a prolonged 0 interest rate period and a series of rate hikes. A large part of our ability to grow consistently through such a varied set of cycles has been our diversification since macroeconomic conditions pressuring one area of our business will tend to lift another area of our business. In Q2, we hit an air pocket in the cycle. The banking market started to decelerate as consumer demand for products like high interest savings accounts waned, but the absence of rate cuts and elevated delinquency rates mean we have not yet seen a corresponding uptick in our loans business. We expect a tailwind in loans and credit cards when widely anticipated rate cuts materialize and as delinquency rates stabilize then improve. However, this quarter, we saw a significant uptick in our insurance business, which grew revenue 196% year-over-year as carriers came back online and consumer demand increased. Because Entrance is legally mandated, it is not subject to the same credit cycle drivers as our other verticals, and our results in the category this quarter further highlight the benefit of our diversification. Through this transition period, we've shown our businesses durability. We ended Q2 in line with our expectations for revenue growing 5% year-over-year despite headwinds and monthly unique users, while down quarter-over-quarter, still grew 7% year-over-year. With that said, we fell short of our goal for non-GAAP operating income due to a higher mix of paid marketing based revenue. We attribute this to 2 factors. First, in Q2, we saw…

Thanks, Tim. We ended the quarter within our revenue guidance range, delivering Q2 revenue of $151 million, up 5% year-over-year. While we remain in a cyclically depressed lending environment, and are seeing continued slowdown in areas such as banking. We believe that our return to revenue growth in our second quarter results showcase signs of a recovery. We expect to maintain this growth path as the lending environment improves and as we see continued strength in insurance. Let's take a deeper look at the revenue performance during the quarter within each category. Credit cards delivered Q2 revenue of $46 million, declining 10% year-over-year. We're still facing conservatism in balance sheet-intensive areas such as balance transfer cards. And while we continue to believe that these dynamics are temporal rather than structural, they weighed on our year-over-year results. We saw our seasonal cadence of a quarter-over-quarter decline from Q1 to Q2, but as Tim mentioned, we are also facing broader pressures in organic search traffic. We believe we will see an eventual recovery as issuer appetite returns and consumer underwriting sensitive metrics remain healthy. Loans generated Q2 revenue of $22 million, declining 6% year-over-year. Our personal loans vertical declined 17% year-over-year a growth deceleration versus Q1 levels as we start to lap tougher comparisons from 2023, though we did see moderate sequential improvement quarter-over-quarter. As we mentioned previously, while we do not expect to fully recover from the pullback that began at the end of last year, we are starting to see early signs of improvement despite remaining in a tight lending environment. We still believe that there is a backlog of consumer demand and personal loans as high loan rates have reduced the incentive for consumers to refinance credit card debt, and elevated delinquency rates have kept underwriting standards type. Partially…

[Operator Instructions]. Our first question comes from Ralph Schackart with William Blair. Your line is now open.

Just wanted to touch on the search traffic commentary and as well as organic. I think in the prepared remarks on the call, you had said some of that organic traffic had returned. Just want to get a sense of how much of that organic traffic has returned since the quarter? And then I have a follow-up, please.

Yes, I'll take that. So during Q2, yes, like we said, major algorithm update and created meaningful headwinds on our [Indiscernible] and to a lesser extent, our traffic. So I'd characterize it as saying it's stabilized and started getting a little better. Generally speaking, we think search is working well when it matches user intent and surfaces the best answers. And by that standard, we and a lot of industry observers felt like things went a bit haywire last quarter. So for example, let's say, you're searching for a small business loan. You ideally, I think, want to comparison shop relevant choices, leveraging a brand new trust. And so if you see a government website explaining what a small business loan is, that doesn't help neither does it nonprofit website, showcasing local grants nor is it helpful to see a regional bank that doesn't do small business loans, right? So we think it's inevitable, some of these kinks get worked out because there are strong commercial incentives for search engines to get it right. they want happy customers who keep coming back so they can sell more search ads. So that being said, given recent volatility, we baked in some extra conservatism going forward. And we've taken out about $30 million in annualized costs, which feels appropriate, but this would turn into a tailwind if things get better. And so our past experience tells us that a period of testing like this tends to be followed by a long period of normalization. And in the long run, matching user intent and high-quality content is really a win-win. So I mean, we took a $2.7 million hit on Q2 NGOI versus the midpoint of our prior guidance, which is definitely not how we want to show up as stewards of your capital. However, relative to the magnitude of the headwinds we saw, it does highlight the progress we've made I think really over the past 5 years in building a brand in registering users, those things have insulated us from a worse outcome. And so looking forward, the investments we're making behind registered user experiences like NerdWallet+, and in vertical integration will further diversify our business from any particular channel and deepen our direct relationship with our users.

Just a follow-up on the cost savings. I think you called out about $30 million annually. Just curious about how much of this annualized savings do you expect to flow through the income statement versus opportunities to maybe reinvesting with us.

Yes. I guess I'd characterize it as like we took down annual guidance for NGOI. So I mean it's roughly offsetting some of the impact from search as well as the falloff in banking that we talked about.

Yes. And I'll just add that despite some of the savings that we have, we still will have the same discipline in terms of how we think about investing all of our capital and we'll continue to do that in a disciplined way, but it doesn't change how we think about investing for the long term.

Our next question comes from Justin Patterson with KeyBanc. Your line is now open.

I guess following up on Ralph's search question. AI overviews as another thing that rolled out during the period. Could you see any headwinds from that? Or just any initial learnings around that product? And then I've got one follow-up.

Yes, not much of an impact. I think if anything, Well, when we think about this in 2 ways, right? So first is Google's share. And so in recent months, we haven't seen a share shift from Google's alternative platforms in terms of where people start their search. If anything, there are some signs that Google is actually gaining share sell-side analysts recently reported that Google search market share increased month-over-month in June. And ChatGPT web visits actually fell 12% month-over-month. And so I think from that perspective, the AI overviews you mentioned are kind of interesting, right? So Google has embedded this into a lot of their search results. And so there's not maybe as great of a reason to open up a separate app for an AI answer, especially when you consider that Google Search is embedded in Chrome. It's -- they've got Android and they have that special relationship with Apple. So we don't think that's likely to have much of an impact, and we're not seeing it right now.

And then I just wanted to come back to something you're closing with just around marketing. Should we be thinking about this as just a prairie mix shift toward more paid marketing over the near term? Or is this more kind of like a higher for longer paid marketing is not something that should be like a bigger piece of the business going forward?

Justin, I'll take this one. So despite some of the recent challenges we've called out in organic search traffic, we still see that over 70% of our traffic comes through organic channels. and that's allowed us to reinvest in more acquisition channels like brand and performance marketing. Our approach on how we operate performance marketing, though has not changed. We do so in a disciplined way, aiming to be in-quarter profitable and adding incremental non-GAAP OI dollars. We also remind everyone to keep in mind that we look at performance marketing as a variable expense, and we can dial it up or down depending on our returns. And we also view it as a means to an end as part of our registration and engagement initiatives. We see increased spend as a positive as performance marketing as a flexible lever to add incremental non-GAAP OI dollars, getting more folks the opportunity to register and to continue to take share. In Q2, we leaned in a bit more due to the strength we saw in areas such as insurance, and where we see opportunities in the future, you can expect us to invest more heavily. And in verticals where we're seeing conservatism with partners, you'll see us pull back, which we can do in pretty short order.

Yes. I'd probably tag on, too, right? Like our improvements in improving personalization has led to conversion improvements, for example, in our insurance vertical rate. And what that does is it opens up paid channels in a bigger way. So we think that there -- this is incremental, right? We're basically getting better at serving consumers and therefore, we're becoming more competitive and paid as well.

And our next question comes from Michael Infante with Morgan Stanley. Your line is now open.

Tim, I just wanted to follow up on some of the commentary just on the credit cards and the loans verticals, obviously, still seeing some stress there generally. But I think in terms of tracking some of the card issuers and lenders that you partner with, it looks like the second derivative at least on the delinquency side, is starting to improve, and we're arguably very close to peak losses. So just curious how you're thinking about sort of how that sets up for you from a backdrop perspective in 4Q and beyond?

Yes. I think that's spot on, right? So just as some context, right? Credit card revenue peaked in Q1 of '23 alongside the regional banking crisis and yes. Since then, the delinquencies has gone up and then they've plateaued and then are on the way down in some cases. So that means since Q1 '23 underwriting has tightened a lot. And then also, I'd call out again, the bigger balance transfer players are still a bit balance sheet constrained post SVB, and so their appetite is still constrained. It's unusual to see, for example, caps on acquiring high FICO borrowers such as your typical balance transfer credit card customer, However, that seems to be easing, right? As the regulatory ratio requirements seem to be trending better than some of the worst-case scenarios. So what we're seeing day to day is in our conversations, we're seeing budgets start to improve, which sure beats shrinking budgets, but we're still not fully back. And I think the hard thing to call really is just the timing. But yes, certainly declining delinquencies and increasing budgets are good leading indicators.

And then for my follow-up, I just had A couple of questions on the NerdWallet+ membership. I was looking at sort of some of the rewards payouts and it looks like the reward for opening a credit card is roughly 2x out of debit. So I was curious, is there any read there just in terms of maybe the bounty or the pricing that's being paid for opening up a credit card versus another product. And sort of as we sort of play this out over the medium term, do you intend to sort of roll out some of that rewards functionality across the full breadth of solutions that you have on the platform?

Yes. So the way to think about this, right? Our third growth pillar is registration and data-driven engagement. So NerdWallet+ is a paid membership that gives you rewards for being smart with your money. And we think it's a great deal for consumers. So yes, right now, we're charging members an annual fee of $49 and they can earn back up to $350, whether through rewards for making smarter decisions about their finances or better deals on exclusive financial products and tools. So in terms of some of those rewards, yes, sure, there's probably a correlation between what we can give back to users and some -- maybe some of like what the going rates are on those products. But as we think about bringing more users to us directly, this is an area where we'll be investing more to achieve our long-term vision.

And our next question comes from Jed Kelly with Oppenheimer & Co. Your line is now open.

It sounds like some of the paid marketing is being driven by investing in an insurance up cycle. So can you just talk about how you can fully take advantage of this up cycle while maintaining your site integrity. And then just on the cost reduction, was it targeted to one product or was it broad-based?

Sure. So yes, a quick reminder for those people newer to the story, this insurance hard market has been going on for a few years now. But yes, we've been investing in product improvements along the way. So I mentioned this earlier, but the biggest one was improving personalization which has led to conversion improvements, which in turn has opened up our ability to do paid channels in a bigger way. So for perspective, we think we've been gaining share. Our Q2 revenue was nearly 3x our 2021 peak quarter in insurance before the hard market. So that's a much larger cycle-to-cycle improvement than what others are seeing. And in terms of the market coming back, yes, we're lapping some pretty easy comps there. We think we're really doing this, to your point, without compromising our site integrity in terms of like selling leads a bunch of times. So we think that's the right long-term move. And yes, that's -- I think that's some of where the momentum is coming from. And just a quick note on insurance, too. I mean looking forward, Medicare is a big opportunity. Also homeowners insurance remains an area where we think we have substantial room to grow as the housing market recovers. And big picture, we're still tiny in this market. So a lot of things to do beyond autos.

Yes. And the second part of the question, I just want to make sure you got that right, Jed. It was the $30 million in cost reductions, I think the question was whether that was in one particular area of the business.

Yes. Was that being targeted to a certain product segment or was that broad based?

No, that was more broad-based.

And was the reduction assumed in your medium-term outlook that you gave last March?

No. Let me -- maybe I'll just go over guidance right now. Maybe that would help a little bit. So first, let me start with Q3, and then I'll give a little bit of color on what to expect for the cadence for the rest of the year. So for revenue, the Q3 guide was $172 million to $180 million, which at the midpoint would be growing 15% year-over-year. And so for some context, we're expecting something more like our normal seasonality during the second half of this year, which means that we expect Q3 to be larger than Q2. And this year, our guidance assumes insurance continues to scale and no material changes in partner behavior in areas like credit cards and loans. Overall, we're happy that we've been able to continue to drive a return to revenue growth despite the recent organic search traffic pressures. And based on the Q3 guide, we're now more confident in our ability to deliver consistent double-digit rates of growth of revenue during the second half of this year. From a profitability perspective, non-GAAP OI, we've guided for Q3 $17 million to $21 million, which implies we'll deliver a 4 points of margin accretion versus prior year. as the recent actions to reduce our cost base as well as lower brand investment are expected to help offset the organic search traffic driven margin challenges that we're facing. For the full year, the organic search traffic pressures we are experiencing are causing us to reduce our near-term margin expectations. Though the recent cost actions will set us up to be efficient while continuing to invest in our long-term vision, and we expect to deliver approximately 5.75% to 7% non-GAAP OI margin and 14.75% to 15.75% of adjusted EBITDA margin. I'll -- we're not guiding to Q4, but I just want to give a little color on the cadence. So the full year margin guidance that I just mentioned assumes a few things. That one, we continue our normal seasonal or revenue seasonality of a sequential decline in revenue from Q3 to Q4. We've also talked about we're baking in a more conservative outlook for organic revenue throughout the year. And the third piece is that while we're pulling back on brand year-over-year during Q3, during the fourth quarter, we expect to invest more brand dollars versus prior years as our second half campaign is expected to span into October.

Yes. And maybe I'd tack on there, Jud. Yes, like we certainly do always have efficiency investments we're thinking about internally, right? It's -- sometimes it's invest now to save money later. But relative to what we talked about in March, I think this -- we got a little bit more aggressive than that with the recent action.

[Operator Instructions]. Our next question comes from Pete Christiansen with Citi. Your line is now open.

Tim, if you look at some of your peers, it seems like there's a similar traffic pattern as you get into May and June, so it doesn't look like you're losing traffic share, at least competitively. So I guess I'm curious to hear your opinion on whether there's category fatigue, meaning that hey, consumers have been coming to these sites for some time. Maybe they're not making matches, given the tight credit environment that we're in right now, do you see any of that impacting your organic traffic? And I'm not sure if you've faced this issue in the past.

Yes. Thanks for the question. I don't think that -- we don't think about that as like the major driver. I mean, obviously, we I mentioned the example of searching for small business loans. I think that things are a little bit haywire in some of the search results right now. So that has a bit of an impact on us. But I think in general, consumer trends are -- seem to be pretty healthy.

And do you think there's any pent-up demand given. I know there was some talk about it in your prepared remarks, but any pent-up demand given potential Fed pivot here or consumers just waiting for that as a catalyst to move on making financial decisions. Any sense there, that would be helpful.

Yes, I would say so. So if I use personal loans as an example, it's a tough lending environment. Personal loans is down year-over-year for us. But yes, with the higher delinquency rates, obviously underwriting is pretty tight. But the other thing to think about is that rates are high right now, right? So the #1 use case for personal loans is refinancing credit card debt. So you see kind of a spread of like credit card interest rates averaging something like 21% right now versus maybe 14%, 15% on a personal loan. So that makes refinancing mathematically attractive, but what you have to remember then is a lot of folks in this situation are optimizing for monthly cash flow, not interest expense, right? So consumers are more likely to stick with their interest-only credit card payments then take on the principal and interest payments required for a personal loan. So I think things like that are factors that will drive a tailwind as rates come down. And then obviously, things like mortgage refi are very rate sensitive as well.

Last one for me. On the restructuring, can you just give us a broad sense of kind of what areas that you trend and should the tide turn your ability to flex back up quickly and hopefully, as we see some normalization.

Yes. I'll give some thoughts and then Tim, if you want to add any more. So the restructuring that we took, as we just mentioned, was broad-based, but we're constantly looking to be more efficient in how we operate. And we're going to continue to invest in areas of the business. Tim talked about our data-driven approach and reengaging with users through products like NerdWallet+, and things like that. So we'll continue to look at those pieces. We've also talked about how we can lean in very quickly to areas like performance marketing when we're seeing really good returns and the expectation is we'll continue to lean in there, especially in areas like insurance in the short term. And over the mid- to long term, we know that as the lending environment eases that will also have tailwinds there, and we can reinvest behind those.

And the only thing I'd add is I think as we scale back up, right, I think of it more in terms of incremental investments in growth areas rather than additional investment needed to support our core areas.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Tim Chen and management for closing remarks.

All right. Thanks all for your questions. Before we end the call, I'll reiterate that throughout the past 15 years, NerdWallet has weathered a number of cycles, but we've always emerged stronger on the other side, thanks to our focus on long-term growth and releveless improvement. While we recently made some tough decisions, I feel strongly that we have the focus and capabilities to achieve our vision for consumers and the business. I look forward to sharing our progress with you again next quarter.

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