Hello, everyone. Thank you for attending today's Nextdoor Second Quarter 2023 Earnings Call. My name is Sierra, 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 of Nextdoor. Please proceed.

Thank you, Sierra. Good afternoon, and thank you for joining us today to review Nextdoor's second quarter 2023 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 Q2 2023 Shareholder Letter released today. With that, I'd like to turn the call over to Sarah.

Thank you, Matt. Q2 with a strong quarter for us, as we delivered year-over-year growth across our key metrics of weekly active users or WAU, and revenue as well as adjusted EBITDA margin improvement. Starting with neighbors, WAU was 13% year-over-year to 41.6 million globally. While WAU declined slightly sequentially, we added 1.6 million WAU in the first half of the year. We also saw strength and underlying engagement trends, most notably sessions that which has increased 24%, since the end of 2022. We are successfully executing on our 2023 product initiatives to increase the number of neighbors and organizations on the platform, deepen engagement by driving content creation and personalization and enable sustainable advertiser and revenue growth, through ad platform development. We continue to bring new neighbors and organizations to Nextdoor through invites, content sharing and brand awareness initiatives. In Q2, we launched our Seventh Annual Neighborhood Faves Campaign, where neighbors voted for their favorite local businesses. This brand building campaign benefits businesses. Winners receive almost five times more clicks on their Nextdoor ads, and six times more recommendations on their business pages. It also benefits neighbors, 94% of them value recommendations from other neighbors. During the campaign neighbors voted for almost 2.5 million businesses on the platform, creating a virtuous cycle of support and interaction between neighbors and businesses. With over 60 million business faves and recommendations, and nearly 4.1 million claims business pages on the platform relative to just over 2 million when we went public less than two years ago, we created strong presence for local businesses, and deliver value by providing reach to a high intent audience of real people in neighborhoods everywhere. Last month, we had the opportunity to celebrate the 2023 neighborhood faves winners, with beloved local businesses like Cluny Cafe, Brooklyn Blooms…

Thank you, Sara. Q2 revenue of $57 million grew 4% year-over-year, and demonstrated increasing momentum throughout the quarter. We saw several areas of revenue growth in Q2. Consistent with the past few quarters mid-market, advertisers continue to be an area of strength. We added 17%, more mid-market logos quarter-over-quarter. In small and medium sized businesses or SMBs returns to revenue growth. We are continuing to see the benefits of our strategies and deepen our relationships with advertising agencies, who can help us unlock spend from new customers and increase revenue diversity. In Q2 77% of new global enterprise accounts came through agency partnerships. International revenue grew by 28% year-over-year, and we added 79% more new logos internationally this quarter then in Q2 2022. Growth in the financial services and real estate verticals overall remains muted. But this was offset by strength in other verticals including healthcare and travel. And many of our larger advertisers continue to increase spend. For example, LEAP Home [ph] doubled spend from Q1 to Q2 of this year as a result of strong performance on the platform. Q2 ARPU of $1.37 declined 7% year-over-year, reflecting another quarter of growing year-over-year WAU and impressions, both of which outpaced revenue growth in the period. Q2 adjusted EBITDA loss was $19 million, representing a negative 33% margin. This is a four point year-over-year improvement and a 11 point sequential improvement and margin, reflecting a combination of revenue growth and expense management, while also ensuring we are resourced to deliver on our long-term growth objectives. Notably, we grew cost of revenue just 2% year-over-year, as platform hosting cost efficiencies drove operating leverage. Our Q2 operating cash burn of $12 million was better than the adjusted EBITDA loss, reflecting another quarter of benefit from interest income. We ended Q2 with $552 million in cash, cash equivalents and marketable securities. We will continue to evaluate our capital allocation opportunities looking forward. I'll close with our outlook. We expect Q3 2023 revenue growth to be in line with our Q2 growth rate at approximately 4% growth. Based on progress today, we expect Q4 year-over-year revenue growth to accelerate implying mid-single digit year-over-year growth for the full year of 2023. Turning to adjusted EBITDA, we expect Q3 adjusted EBITDA loss to be minus $21 million to minus $20 million. We continue to expect to return to adjusted EBITDA margin improvement for the full year 2023. We will hold sequential operating expense growth to low single digits in the second half of this year. We've made substantial progress across key business metrics year-to-date, and remain focused on growing WAU and revenue through our 2023 product priorities. Thank you for joining our earnings call today. With that I'll turn it over to the operator for Q&A.

Thank you. [Operator Instructions] Our first question today comes from Youssef Squali with Truist. Please proceed.

Hi, this is Robert Zeller on for Youssef. Thanks for taking our questions. Increasing the content from nearby neighborhoods seems like a really good idea because the more relevant content a user will see the more time they will spend on the app. But I'm curious, how do you strike the balance between expanding to more content from nearby neighborhoods while also maintaining the value proposition of that close proximity and localization? Just curious, like how much more room is there to expand this without losing Nextdoor’s core value proposition? And then, and then I'll have one follow up. Thanks.

Great. Thank you, Robert. It's a great question. Something that we've discussed a lot internally. I think the punch line answer is personalization. But let me backtrack a little. Nextdoor has been on a shift of going from private to local. We used to be the private social network for your neighborhood. And we really broke that apart over the last couple of years, really moved to become much higher utility for neighbors and much higher in terms of community. So there's a balance here. One of the first moves we made as to be able to have anyone content. So that allows us to have content travel, depending on how useful it is, for example, something about lost piece from [indiscernible] or a lost pet, probably should stay hyperlocal. In the end, they're not going to go that far. But if you think about something like an emergency situation, like with all living under, sadly tornado warning, and high heat exposure, those could be examples where you actually want the content to be able to travel across multiple neighborhoods. So that was a big push on any one content. Of course, that also gives us a lot of leverage in areas like SEO as well. But I'm going to come back to personalization, because this is a place where we've been doing a lot of deep investments from an AI/ML perspective. I joined Nextdoor because of the unique datasets that we are the local knowledge graph, highly dynamic, very unique content. On top of that, you'll hear other companies talk about having to get their data tagged or labeled. Nextdoor is really interesting in that our data effectively gets labeled in real time by our neighbors. So the ability for them to say, hey, this is a post about…

Okay, great. Thank you. And yes, the follow up is just clarification. So I understand, the assistant features seems pretty straightforward for helping improve posts. I'm curious how it exactly works for the business for their purposes. It seems like a very interesting new utility for the assistant feature for business purposes. So how exactly does that work?

Yeah, so right now one of the big use cases on Nextdoor is giving and getting recommendations. And this is a place where we're seeing in particular, the AI, the assistants do very well for you. So if I'm looking for a recommendation for hair salon, or I want to give a recommendation for the amazing doughnuts that I had this morning at the local coffee shop. Those are places where we see the AI's ability to rewrite the posts in a much more engaging way already taking off. And we are seeing the majority of neighbors expect the prompt and say, yeah, I would rather post it this way. What we're learning is as we get into the long tail, where maybe there's less aggregation, like less similarity to the post, neighbors are still better at being engaging. And so, this is where now the iteration of AI began, where there will be places where we have a lot of data. And that allows us to give really good kind of offers of different ways to write a post. And then other places where there's just a long tail and the ability to stand really authentic and local, really matters. And again, it just keeps coming back to what's so unique and differentiated by Nextdoor, which is the fact that we have this local, very unique, highly demanding, highly dynamic local knowledge graph. I think where we're going, I don't think, we're going with generative AI is thinking about our ad platform because we have this insight now that says an AI can actually be very effective in writing a recommendation, which is really just a step away from writing an ad. The benefit of building our own next generation ad platform which we're through the build on is…

Okay, great. Thank you very much.

Appreciate the question.

Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed.

Thanks so much for taking the questions. Maybe two, if I could. One, just drawn to the comment you made about agency relationships and the nature of that being a driver of advertiser momentum in the quarter. Can you talk a little bit about some of the investments you've made to date, and how you're thinking about the execution piece in terms of building agency relationships through this year, and then more importantly, as a backdrop for budget decisions into next year that could possibly step up either advertiser count or your advertising revenue base, going into 2024? Thanks so much, Sarah.

Eric, this is Michael. I'll take the question. So much like we have built out our approach in industry verticals, we've made a significant investment in building a team to deepen our relationships with advertising agencies. First and foremost, it's to help to build awareness of the Nextdoor platform. And then to leverage the agency relationships with their client base, to help them to learn how to best take advantage of our platform. We have a variety of ways we do this, including some advanced relationships where we have preferential treatment of a client base with an agency to just allowing us to get more introductions through the advertiser client base. This has helped us really to make that person introduction to get the trial budgets and then to deepen the spend on the platform. We mentioned 77% of our new enterprise accounts in Q2 had an agency partnership component. And we will work together with the agencies to make sure that we're delivering the performance and meeting the expectations of their client base. This is an area that we're continuing to invest in. And it works alongside with our direct relationships with the with the advertisers.

Great, thanks for the color, Mike.

Thanks Eric.

Thanks, Eric. Our next question comes from Ron Josey with Citi. Please proceed.

Great. Thanks for taking the question. I've got two. Sarah wanted to dig in a little bit more about adding and improving contextually relevant ads for, for sale and free on Nextdoor. So, talk to us a little bit more about if you could the size of the classified business in terms of traffic or sessions and then specifically how big monetization might improve the user experience and how it's integrated. That's the first question. The second question is just on WAU, I think that declined sequentially. Any additional insights there would be helpful. Thank you.

Yeah, thanks, Ron. So, first of all on presale and free, I think it start just by breaking down, if you look at why people come to Nextdoor, number one is giving their recommendations, I just talked about. But the second reason is the marketplace that we have that we call presale and free. It's actually quite large. We see over a billion dollars per month put on pre-sale and free. And one of the things why we win there why people come to Nextdoor number one is it's hyperlocal. So, if you're trying to get rid of, I don't know something in your garage or a table, not going to FedEx this, you need someone that can probably show up at your house. Number two, it's high trust that someone's probably going to show up at your house. And then the third reason is this investment and community that we see through that platform are awesome, someone like say, a mom might give away a bike that a kid has grown out of, personally because she or maybe a dad, he wants to give back to the community as well. And in fact, I think it's something like about 20%-ish of all the items in the catalog are actually offered for free. So it's an incredible value proposition for our local community. I love that you picked up on the piece where we obviously put ads onto that surface. And historically, we've more just put our ads that we're getting broadly speaking from any clients that is buying ads on the platform. What we did in Q2 is to integrate it in with Microsoft's Bing ads platform, where now we can do a much more contextual ad. And so when someone searches for a bike, for example, we also…

Can you still hear me?

Yeah, we can hear you.

Okay, hey, no, Sarah, that was super helpful on the classified and exciting. I was just wondering on the WAU, it looks like it declined sequentially. Anything to call out there specifically?

No, I would say overall, look we looked at it and comes up the first half and felt we've had a lot of outperformances in Q1, and probably just settle down a little in Q2. I'm going to go back to the year-over-year growth of 13%, year-over-year, just under $42 million in total WAU. I think a couple of things I really want to call out for you. Number one, a lot of our WAU growth is coming from top of funnel verified neighbor growth. And what we're proud of in the quarter as we have cut our own costs to make sure we're staying mindful of margin progressions is that over 90% of all verified neighbors came to the platform organically. So that is a great signal that on Nextdoor, we have strong product market fits. The second thing is as people come and verified neighbors, they're engaged, in a best-in-class line. So verified neighbor to WAU ratio has stayed up just a little over 50%. But also, while the down ratios have also say that over 50%. So that's a strong, strong signal for us what that means for overall growth. And we add about 2 million new verified neighbors a quarter right now. And that's with no halo effect from any paid marketing, etc. Going down the funnel from just WAU to session, and why that's important is because sessions are going to get you some impressions and impressions are what's going to get you to revenue. Session growth was a key factor in WAU growth. And that has also been true for the last couple of quarters. And that's because we're driving, as people come to the platform, we're driving them to go deeper on the platform. And that's because we're putting more content in front…

Thank you, Sarah. Appreciate it.

You're welcome. Thank you.

Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed.

Thanks. A couple on the advertising side. Quick one, can you remind us what is the expected timeline for the full migration of existing advertisers to the ads manager? Where do you stand today in terms of ad and are you seeing any dynamics of accelerating transition as you kind of get more and more adept at doing that, advertisers get more and more adept at using tools. And then I have a follow-up?

Sure, great. Okay, first of all, on connector ads manager, remember that's the actual interface, that you now hit standalone app and it's all about reducing advertiser efforts. So how do we make it super easy to come to Nextdoor, create an ad and get it out to then what needs to do for you growing your business. The good news is in the quarter, we're now at a point where we businesses of any size, including ad agencies, can now self-serve on the platform. That was our big goal to get to that point where everyone could self-serve. And now over the next couple of quarters, it started migrating our existing customer base. So net new customers can filter to their hearts content. And now we're moving net news from -- sorry migrating our current base, make sure I get that straight. So that should be done over the next couple of quarters. What they're seeing is, it's a more powerful tool. We're able to give them better performance metrics, better reporting. They like the simplification. In my prepared remarks that talks about DM, the solar component of Arizona as good example of a mid-market clients. They like it, because they can just be very precise in their targeting. They know exactly which neighborhoods, they currently have a lot of penetration, and frankly, where they need to go sell. And they really view that as differentiated on Nextdoor. They can't do that as well on other platforms. So that's Nextdoor ads manager. The other piece, which is the back end Nextdoor ad server, that's our back-end piece, which is about advertiser outcomes. So how do we make sure the ads perform better? There in terms of progress in Q2, we've not delivered 100% of U.S. SMB demands on it.…

Got it. And then just prior calls, you've shared the retention levels for your top 50 advertisers. Any update on that, the latest advertiser numbers or revenue retention rates?

I mean overall, if you look at Q2 in terms of retention trends, we saw stable to improving advertiser retention trends through the quarter. In particular what we would call kind of managed advertisers. So folks that our sales team is touching directly self-serve was more stable, I would say. Retention amongst the largest advertisers still really high, not a ton of change from the numbers that we've given you before. So that is good. And the final thing I'd say in terms of what makes us a little bit more upbeat, there are verticals like financial services, home services, but I think they're still under a lot of strain. They're not really spending, but we know that we really perform for them. So the fact that we can now get back to growth with a lot of newer verticals that we weren't really servicing a year ago looks like healthcare government and so on, makes me excited for the latent capacity that is hopefully there as these other verticals begin to see some return to normal. So overall, yeah, feeling good on from an advertiser retention standpoint as well.

Awesome. Thanks, Sarah. Really appreciate it.

Thank you. Our next question comes from Mark Mahaney with Evercore. Please proceed.

Thanks. I just have two quick questions. Did you already comment on just the overall advertising environment? How you would describe it since the beginning of the years, stable, soft starting to recover, anything like that? And then could you also secondly, just call out particular verticals? Is there any change in kind of the verticals, strength and weakness that you've seen over the last year or two? Thank you.

Why I don't take the first and then Mike definitely should jump in on the second. So overall market -- we've seen a [indiscernible] in the ad market, don't get too carried away. But it definitely Q2 felt like a better quarter, where each month actually got better from a year-over-year growth perspective. And that's continued in the first month of the new quarter. Generally, I would say probably advertisers just a little bit more optimistic. I don't think the recession has manifested to the same degree that people may have feared. I think secondly, when I talk to marketers, they're ready to do more full funnel advertising again. Now they clearly need to get the dollars to do that. But they want to be able to do a better mix of brands all the way down to performance marketing. They've been in this kind of trap of performance marketing only if they're spending at all. They're kind of recognizing full funnel, they need to in the end to come back to that if they're going to be able to create the sort of brand recognition, the feel the emotional call that a consumer feels to a brand. And then if they think about we were in comments here, means seems we've heard [indiscernible] really kind of resonated for Nextdoor, a lot of conversation about showing up authentically, showing up around community around local, really kind of struck a chord. And I think Nextdoor's ability to show up and say we're about real people. We know a lot about where you live, the targeting is high, about a high intent audience that's in a mode of spending, like they're looking for a plumber or they're looking for a dog groomer. And then finally, the fact that we can do this very customized local ad scale messaging is also very unique and interesting. And so, the incrementality is quite high relative to other platforms. So I think that's the other reason why agencies are starting to get a lot more work, because as Mike talked about earlier, Michael, I'll let you take the vertical on the scale of business conversation.

Yeah, if I could just add, I mean, as Sarah mentioned, we've seen some recovery in the ad market. There is some choppiness as well, but we've seen -- continue to strengthen in our mid-market businesses as we added a record number of new logos. We also saw the SMB business return to growth, and we're continuing to see momentum there, which is something new to add to the discussion this quarter. And there's still some pressure on average spend per advertiser, but really are pleased with our ability to retain and acquire advertisers. I think that speaks to advertisers being willing to be out there and be spending to drive demand into their own business businesses. We manage our group of advertisers as a portfolio, and part of our investments in the advertising agency channel has been really to improve diversification there. And it is yielding results. And so, we just talked about the verticals that are performing in a very strong way for us, home services, healthcare, tech and telco, travel, pets has been really an area of fast growth for us as well. And that allows us then to work with advertisers to help them in their path back to spending in areas like financial services and in real estate. And then I think the other aspect of that is just being -- having the platform capabilities in multiple areas, things like brand awareness versus performance, advertising and working with our advertiser partners to drive spend in ways that they need to based on the performance in their own underlying businesses.

Okay, thank you, Mike. Thank you, Sarah.

Thanks, Mark.

Thank you all for your questions. There are currently no questions waiting in queue. [Operator Instructions] There are no more questions waiting at this time. So I'll pass the conference back over to Sarah Friar, CEO for any closing remarks.

Sierra, thank you so much. Thanks, everyone for joining. As I said at the top of the call, we're really pleased with our return to growth year-over-year growth across all of our key metrics WAU growing 13%, revenue growing 4%, and see EBITDA margin improvement of 4 points. If I look at what are the levers for future growth, the fact that 90% of users joined us organically in Q2, is really good indication that there's real value on Nextdoor. And that's all without any halo effects of paid marketing. The fact that session growth continues to show strength, it's outpacing WAU growth. That's a direct link back to revenue. And the fact that session depth is up as well. As Mike mentioned, we felt strengths in areas like mid-market sales, International, and of course, our ad agency partnership, and the big push from neighborhood faves. A really important one, the fact we now have 4.1 million claims pages that's fertile ground for upselling. I talked a little bit about the verticals like [indiscernible] real estate that we think will improve over time. We perform really well for them. So, there's been latent capacity there. And then of course, our opportunity on AI, Nextdoor is the local knowledge graph with labeled data, high intent audience, real people and neighborhoods everywhere. So we are laser focused on growing WAU and revenue. And I want to say a huge thank you to the team because this was a great quarter for momentum in terms of the product build. We're on track towards revenue growth and margin improvement for the full year while also investing in the long-term opportunity for the business. So thanks for your time. We look forward to any follow up questions and we'll talk to you in 90 days. Thanks a lot.

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your lines.