Good afternoon. Thank you for attending today's Nextdoor Q3 2022 Earnings Call. My name is Frances, and I'll be your moderator today. [Operator Instructions] I would now like to pass the conference over to our host, Matt Anderson, Head of Investor Relations with Nextdoor.

Thank you, Frances. Good afternoon, and thank you for joining us today to review Nextdoor's third quarter 2022 financial results. With us on the call today are Sarah Friar, Chief Executive Officer; and Mike Doyle, Chief Financial Officer. 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 a 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. A reconciliation of these measures to their most directly comparable GAAP financial measures can be found in the Q3 2022 Shareholder Letter released today. With that, I'd like to turn the call over to Sarah.

Thank you, Matt, and hello, everyone. Q3 was another challenging quarter for many neighbors and customers, and more verticals and industry participants are beginning to feel the effect of volatile advertising demand. In this environment, we are focused on the areas we can control, including product development, providing increasing value through utility and community for neighbors and helping advertisers reach their goals. On the neighbor front, our platform remains highly engaged. We grew weekly active users, WAU, by 17% year-over-year and 4% sequentially. This strong growth was driven primarily by U.S. neighbors with over 1 million net new WAU added quarter-over-quarter, and 90% of new neighbors to the platform came organically in Q3. We've successfully held onto and built upon the boost and reach that we generated from the pandemic, seeing a 41% growth in overall WAU and a 32% growth in U.S. WAU since Q3 2020, comparing favorably to peers. We're beginning to see the benefits of this year's investments in machine learning and AI as evidenced by smarter notifications, which are getting more sophisticated and driving greater engagement each quarter. This focus on ML and AI will continue into 2023 and beyond. We are only getting started on harnessing our neighbor data set, which when used appropriately, has the power to transform the neighbor experience through greater personalization. We expect this investment to also benefit customer performance through improved targeting of Nextdoor's high-intent audience. Notably, we had another strong quarter of sessions growth, which both exceeded sequential WAU growth and also accelerated for the third straight quarter. Strong sessions growth indicates increasingly frequent engagement and ultimately leads to more impressions supply. Our efforts are focused directly on WAU and revenue growth. In the third quarter, neighbor initiatives included building out a native Maps feature within the Discover surface,…

Thank you, Sarah, and good afternoon, everyone. As Sarah noted, in Q3, WAU grew to over $38 million. This growth is a reflection of our strategy to build Active Valued Community across over 300,000 neighborhoods around the world. In particular, we are proud of the way we delivered on an unparalleled combination of utility and community to both neighbors and organizations in the quarter, from helping Charlotte County disseminate Hurricane Ian updates to neighbors in Florida to helping the California Office of the Governor and advertiser Flex Alert prevent power outages that would have impacted millions of people during the late summer heat wave. Turning to revenue. Q3 revenue was $54 million, an increase of 2% year-over-year. In the quarter, we saw softness in advertising spend. We also saw areas of resilience from certain verticals, including health care, government and tech and telco. Spend from our mid-market customers continued to grow, and we saw a healthy mix of spend across both top and bottom of the funnel objectives. Consistent with recent quarters, the majority of advertisers spend in Q3 was on direct response campaigns, though we also had several strong brand partnerships such as Neighborhood Favorites sponsored by American Express. Q3 ARPU declined 12% year-over-year to $1.41, the result of stronger WAU growth and relatively less monetized international markets and lower levels of monetization from SMB customers. This was partially offset by growth in CPMs or delivered revenue per impression. Adjusted EBITDA for Q3 was a loss of $18 million, representing a negative 34% margin. The year-over-year margin change is primarily a reflection of near-term deleveraging as revenue growth remains relatively less predictable. We ended the quarter with $604 million in cash, cash equivalents and marketable securities. We authorized a share repurchase program at the end of May and have…

[Operator Instructions] Our first question comes from the line of Mark Mahaney with Evercore.

I guess two questions, please. One on the WAU growth and maybe just in the U.S. that million adds this quarter. Could you peel that back a little bit? Any -- that's after the last two quarters in which WAU in the U.S. kind of modestly declined sequentially. So anything in particular do you think drove the kind of the change in the direction of WAU adds. Is this something that you've done? Just talk to that a little bit. And then the 90% that come through organic channels. Like when you talk about our game channels, what are those channels? What's most effective for you? Is it largely word of mouth that's still driving WAU growth?

Great. Thank you, Mark. It's Sarah here. So first on WAU growth, yes, we are definitely very happy to see that 17% year-over-year total WAU growth. And then to your point, the sequential growth rate, that incremental $1 million added. What's driving it is a couple of things. Number one, definitely the investment that we've made, really starting deeply this year for multiple years now in and around machine learning and AI What that's doing is allowing us to go deep within our data sets and be able to begin with notifications and personalized content and delivery. We know that when we get the right notification in front of the right neighbor at the right time, it inherently draws them back to the platform and help them get engaged. But beyond that, we also did quite a lot in terms of other elements of the platform that we've worked on through the quarter and where we launched things. First and foremost, a much more native map experience. So if you think about our Halloween Map, today, you don't just pin yourself on that map, but that pin becomes a post. Once we create a post, that kind of sets off the whole engine of Nextdoor because now you have something that's available to be reacted to, to be commented on, to send that a notification on, to bring more neighbors back to the platform on. And so it creates that beautiful flywheel. Second thing that we launched is Faves. We're just getting going here. As you know, when people come to Nextdoor, a very natural step is for them to either recommend the business or to ask for a recommendation for our business. And I think we've seen something like over 55 million recommendations on the platform to date. Now…

Thank you for your question. Our next question comes from Ron Josey with Citi.

I wanted to ask maybe a quick follow-up to Mark, Sarah. Another thing that struck to me -- struck out to me was sessions up 15% sequentially. People are using the platform more and more, notifications are better, Maps, Faves, et cetera. Can you just talk about other drivers that have led to that 15% up on sessions? Because I think we heard a dive more impressions, et cetera. And then, Mike, on the ad verticals, we talked about health care, government tech telco, some of the more resilient ones, where are we on the penetration of those verticals? Is that a newer sort of focus area for the company, and so we're just getting started? Or has the team been focused on these verticals for some time, which should help sort of stabilize revenue going forward?

Great. Okay. I'll start on the session question. So yes, sessions is a way for us to show you what that funnel looks like when you go from a new Verified Neighbor, top of funnel, for someone who comes monthly to weekly to daily. But then sessions is just how frequently people are coming back. And one of the things we have seen is that our most engaged segments are coming back, and we're seeing that engaged segments are grow almost 50% year-over-year. So again, this comes back to where you have strong product market fit, are you now building more utility, more avenues for communities that are bringing those people back more frequently. And I think as you know, we have a pretty high ratio of WAU to DAU. It's over 50%. So on average, our weekly actives come back about 4x per week. And of those people coming back, they're not coming back maybe multiple times in a day, which is why the notifications platform is so important. You did call out the right step, which is we've now seen sections growth accelerate for the third straight quarter, which is another data point about just frequency, people coming back more that builds impressions. And then ultimately, we need to go settle those impressions in order to drive our revenue growth. It's a little harder given the macro backdrop but that's why the former is the most important thing that we can do because that's an indication of the future potential for Nextdoor from a revenue standpoint.

And I'll take the second question, this is Mike, on verticals amongst -- and advertiser demand. So the three that we called out this quarter, healthcare, government, and tech and telco as areas of resilience. I have a little bit different position on the platform. So first, tech and telco is one of the larger verticals that we had called out was an early endemic fit on the platform. And just as a reminder, things like home security, home services, retail, financial services, tech and telco have been amongst our top 5 verticals for quite some time. Healthcare and governments are new pushes for us. Healthcare, we had some great adoption during the pandemic initially behind our Help Map. And then those advertisers have been retained, we have been pleased with their performance and continue to be spenders. But both areas are new earning pushes for our sales organization. I'll just add to with the expansion of our mid-market product through the self-serve advertising platform. It also helps us to increase advertiser diversity just like expansion into new verticals.

Our next question comes from the line of Eric Sheridan with Goldman Sachs.

Hopeful as well with the team. Maybe just first following up on Ron's question and coming at it from a little bit of a different angle. When you think about the ad environment you're going to be facing in 2023, how do you think about elements of your existing advertiser base and how their own advertising might change cyclical versus noncyclical and what might be an environment that has headwinds versus just repositioning the company against -- for lack of a better term, sort of inorganic growth. I mean you seem still well early enough in the monetization part of the platform phase that maybe you could be a little bit more immune to some of the cyclical natures of an advertising recession given there probably is a fair bit of vertical and advertiser and geographic expansion to mine to possibly mute some of the effects of that. So I want to understand a little bit better what the engagement's like with advertisers and how you're lining investments up against that looking out to next year? And then maybe one quick follow-up. The message was clear all this year that you were staying in investment mode irrespective of what happened on sort of the revenue environment, how should we be thinking about lapping the investments that we're seeing this year and elements of yield or output on those investments, especially around bottom of the funnel advertising and platform growth that could cause leverage in the operating model in '23.

This is Mike. Let me take the first question. We'll give us optimism about our ability to attract and retain new advertisers. I think first and foremost, as we called out in prior calls, we're able to perform across the marketing funnel. And in difficult declining like we're currently in, we've been able to help our advertisers to pivot or modify their campaigns to be able to continue to spend and attract the demand that thereafter, shifting from things like brand campaign to brand awareness to direct response. And that's something that we continue to do and it's also a benefit of our managed advertiser model. So we have those direct relationships and conversations with our large enterprise customers. And we'll continue to lean in there. Additionally, is with the expansion of our mid-market product, is being able to attract advertisers of different scale -- and different scale economically. And so whether they're large enterprises with a high-touch model behind our managed business or smaller spending in the mid-market that helps us to attract and retain demand. And then third thing I'll call out is what we have seen is great progress in retention of advertisers. And so while we've had revenue headwinds they've largely come from advertisers reducing spend or campaign size in reaction to challenges in their own business. But where I think what gives us optimism longer term is our ability to retain those advertisers and having delivered for them the performance thereafter on the platform.

And then in terms of the second question, I'll let Mike dive in specifics. But just broad-based how we think about it. We know we're building a very unique platform with Nextdoor, right. We are the only neighborhood platform, the only one doing local at scale. On top of that, we have real neighbors at real addresses. We have this power of proximity, and we have this great kind of community also high-intent audience feel. So for advertisers, it's a very potent combination done well. As we think about what that means for investment next year, we do absolutely want to keep investing on both sides of our network, both to grow new neighbors to the platform and keep engaging them and then also to keep building out our ad tech stack. On the former, we are at an all-time high in terms of organic neighbors coming to the platform, 90%, as I said earlier. That's giving us a lot of leverage on marketing. And then from an ad tech stack, we're slowly moving to not flow like hopefully quickly moving through the bill to our own proprietary platform. And we're seeing the benefit when we do that. The fact that mid-market was a real highlight for us is a build that we've done through 2022. The fact that we are starting to see more self-servability should be a big unlock in 2023. And of course, that incremental revenue when we drive it should drive a lot of leverage through the model. At the same time, we have $600 million plus of cash sitting on the balance sheet. So we want to make sure we are investing appropriately against that big opportunity. So it's definitely a balance for us as we think about how we go into 2023. And how we balance the upside potential on revenue, assuming the macro environment begins to settle down. and how we keep investing against our opportunity while being mindful of the pretty tough economic conditions that I think everyone is waiting through at the moment.

Yes. And I'll just add, I think the investment we've made over the last 12 months has really resulted in us driving WAU and driving engagement. And so thinking about where that -- how that provides leverage to the model is giving us a larger unique audience for our advertisers and more supply thereafter. And that's ultimately where leverage will come is in top line growth in our model. And we've also had a very tight focus on controlling our costs, which will also help leverage into 2023. We've had a flat headcount growth in Q3 and expect the same in Q4. And so then continuing to provide experience leverage from the growth in audience and engagement with control on the cost side of the P&L is where we should see leverage in '23.

Our next question comes from Brian Nowak with Morgan Stanley.

I have two. First one, can you just give us an update on overall advertiser growth and sort of the progress you've made on bringing new advertisers on board as suppose increasing spend per advertiser. And just how you think about 2023 increasing the advertiser base and what could potentially be a more challenging macro backdrop. And the second one to kind of to go back to the point on investment and sort of cash balance. If we look at the Q, there's quite a bit of unrecognized stock comp to come through the next 2.5 years of $174 million, definitely higher than we have. How are you thinking about sort of managing through the stock-based comp dilution that could flow through for the Q?

Yes. So let me take the first question on number of advertisers. And so when you think about the three segments of which we're attracting advertisers is enterprise, mid-market and SMBs. The biggest part of revenue, the majority of revenue comes from enterprise and mid-market. And there, we have between -- a little less than 1,000 advertisers active on the platform. It's a big push to bring new logos onto the platform, and this helps to drive demand where we're seeing some headwind in spend per advertiser, which I think was the second part of that first question is. Where we see great result is in retention of advertisers, and that gives us the opportunity to increase spend in the future when their businesses and their marketing budgets allow. But we -- but there is some headwind in spend per advertiser. And then on the SMB side, we have around 35,000 to 40,000 active SMBs at any one time with our paid advertising products. And we're excited about our -- the potential there to drive penetration more deeply given we have more than 3.5 million businesses that have claimed their profile page on the platform, and that is an active and engaged base to which took to market our SMB products. Your second question was on stock-based compensation and leverage there. So really, our stock-based compensation is driven by a couple of things. One is in growth of the team. And we did expand our team size in the first half of the year. But as I just have mentioned, we've held headcount flat in Q3 and anticipate doing the same in Q4. The second part is also about the competition of that growth and team in the first half and relative seniority of those new additions. And so we were adding some new critical and senior roles to the team that has that impact there. And then the third piece is just as a public company. And so our stock awards, particularly initially out of the gate as a public company were higher cost in nature versus the ones that we had as a private company. And then finally, I will just add that our buyback. And so we have put to work $77 million of our cash and acquiring shares in the market under our share repurchase program, which helps on dilution, taking shares out of the market.

Our next question comes from Youssef Squali with Truist Securities.

Let me try a couple. One, and I apologize if I -- if this was answered, I just joined. But can you maybe -- this is maybe for Mike. Can you maybe just give us the growth by different segments, SMB, mid-market and enterprise during the quarter relative to maybe the prior quarter, self-serve versus not? And just maybe to Eric's question about 2023, I know you're not guiding to 2023 yet, but what base case scenario are you baking into your plans for next year as you kind of your budget your -- the cost side of the business, et cetera. Really just trying to get a sense of -- as we think through your path to breakeven and ultimately profitability, et cetera, do you -- has that path been extended since, say, 12 months ago? Has it shortened? I know there are a lot of moving parts and there is uncertainty, but as you plan for next year, how are you thinking about it?

This is Mike. Let me take those one at a time. So I think, first, your first question was on segment growth. We haven't provided that level of detail. But what I -- what we're pleased with is the rapid growth we're seeing in the mid-market group of advertisers where we have the ability to improve diversity of advertiser spend, which helps to derisk revenue and also improves ad performance. And we're continuing to see that in the current quarter, and I think there's a huge amount of runway in front of us. So we'll comment on that in future periods, but all 3 enterprise, mid-market and SMB customer segments have huge potential in front of us, and we have a lot of penetration to drive with our go-to-market. So that's one. So I think the second one was on our path to breakeven. And so we're not providing guidance yet on '23 and beyond, but I think what we have commented on and feel strongly about is the leverage in our business really comes from scale of revenue. And so in the climate that we're currently in, where we're focused is on things that we can control, which is on neighbor growth, the acquisition of new active engaged businesses on the platform and overall engagement. And so with that larger unique audience, with that increase in supply, we feel great about our ability to deliver value to advertisers with a well-tested model and one that has attractive long-term margins. That said, we also espouse and feel strongly about the need to show financial discipline and demonstrate leverage in the model. It's something we have been able to do for the last several years. And in the current climate, it's not going to happen in 2022, but it's something that we plan to continue to demonstrate is putting that's showing that gradual leverage on a path to breakeven and eventually the profitability and the long-term margins we see from our peers.

Our next question comes from Brian Fitzgerald with Wells Fargo.

We were hoping you could speak a bit to the Oracle partnership and some of the others on the attribution and measurement side? First, at a high level and then maybe more specifically should those appeal predominantly to SMBs in the self-service space or more to the mid-market and enterprise? Or maybe some SMBs aren't as well suited to leverage the caliber of the insights of those relationships.

Great. Thanks, Brian, for that. First of all, from an ad cost perspective, I'm actually going to take your question to just remind everyone kind of I think it was front end, which is the campaign management piece. That's where we're heavily focused right now on self-serve and then ultimately ad formats and so on. There is the back end, which is our ad manager where we're now moving more of our ad campaigns over advertisers over, that way we can take full advantage of our proprietary data set. And then in the middle, and I don't know if that's quite the way to visualize it is how do we API out of our ad platform to work with third parties. And one group of third parties is clearly on the measurement side. So that's where we do work with Oracle, Lucid, Foursquare and so on and where we've been able to show some really good outcomes from advertisers generally speaking, in terms of showing that Nextdoor can outperform benchmarks. So some of the examples that we gave in the quarter, we talked about Shipt, for example, about local grocer who's definitely seen better performance in terms of lead generation and ultimately conversion on their website. We have also seen in prior quarters, we've talked about folks like Albertsons and so on, where we can show our ability to drive online to off-line purchasing behavior well ahead of other benchmarks. So it's again, how do we lean into the elements of Nextdoor that make it truly unique. I'll give you one other example, which is working with Lucid, we were able to show the effectiveness of our solutions to an insurance company that ran a national brand awareness campaign to help them understand through a brandless study that we were…

[Operator Instructions] There are no questions waiting at this time. So I'll pass the conference back over to Sarah Friar, Nextdoor's CEO.

Great. Thank you, Frances, and thank you, everyone, who joined the call. We really appreciate your questions. While we delivered on our Q3 revenue and beat on EBITDA expectations and definitely build momentum in areas such as the mid-market, we know we have work to do to continue to grow Nextdoor through a global macro environment that continues to be very challenging. Nextdoor is a unique platform. As I said, over and over on the call, we are local. We have organic-driven growth and engagement. We're not behove to others to drive that. We have real neighbors at real addresses. We really have an incredibly high intent audience. So with that we're laser focused on what we can control. First, we need to beat the drum on the importance of local for neighbors, businesses and agencies, make sure that everyone recognizes that Nextdoor equals neighborhood and in building that brand awareness really provide the utility and community that our customers demand. Second, we want to continue to invest in our platform development initiatives, things like Maps, things like our ML, AI platform, things like Faves and Connections, and of course, Vitality, a place where I think Nextdoor's leading edge. And then third and finally, we want to continue to iterate on our monetization capabilities that three tiers of the ad platform that I was just describing to you. And while we're seeing near-term revenue and EBITDA variability, we are focused on getting back to higher growth and margin improvement while also investing in the long-term opportunity that's afforded to us by the strength of our balance sheet. So with that, thanks so much for tuning in today, and we look forward to talking to you in about three months. Take care now. Bye, bye.

That concludes the Nextdoor Q3 2022 Earnings Call. Thank you for your participation. You may now disconnect.