Everyone. Welcome to our next track, talking through the online advertising space. We are thrilled today to have the CEO and the CFO of Nextdoor, Sarah Friar and Mike Doyle, both with us. Thank you so much for joining us
Thanks for having us.
Thank you.
Let me do the disclosures. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures. They are also available at the registration desk. Some of the statements that Nextdoor will make today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that Nextdoor makes are based on assumptions as of today, and Nextdoor undertakes no obligation to update them. Please refer to Nextdoor's Form 10-K for a discussion of the risk factors that may impact actual results. Good to see you guys again.
It's good to see you too.
Yeah.
Thanks for joining. There's always a lot going on, both from a macro perspective and at Nextdoor specifically. Maybe we start, Sarah, with you with sort of a big picture question about, you know, you've now been meeting with a lot of investors over the course of the last year plus about Nextdoor as a platform, how you differentiate for your users and advertisers. Maybe what do you sort of think are the one or two most misunderstood aspects or underappreciated aspects of the platform, both for users as well as advertisers?
Sure. I mean, I'll just start with our scale. We're almost 80 million verified neighbors now on the platform. We're a hyper-engaged platform. Of that 80 million, about 44 million come back every week. They're weekly active users. That continued to grow at a really nice clip in Q4, 11% year-over-year. You look at it for 2022, it was almost a 27% type growth rate. When you go from weekly actives, WAU to DAUs, the best way to say it is on average, our weekly actives come back four times a week, so over 50%. The fastest growth we've seen has actually been in our most engaged users. We call them four-by-fours, people who come four times a week, four weeks in a row.
I think the first thing that maybe is misunderstood is just that sort of scale with that sort of engagement, it's a very potent platform as we begin to do more and more from a monetization perspective. Second thing I would go to in terms of why do people come to Nextdoor, I'll kind of switch to like, as the consumer. First we see a lot of recommendations. It's either people coming to get a recommendation, "I need a plumber. I need a dog walker. Who in the neighborhood is available? Who do you recommend?" Or people who wanna say, "I had the most amazing experience last night at Brian's restaurant," and they wanna give that recommendation. That starts to create a really second potent loop for us from an investor standpoint.
Today we have 3.6 million businesses who claim the page on the platform, so they've actually gone to the next step with us. They get a lot of organic value 'cause they see all those recommendations happening, but that's also the beginning of the loop where they can advertise on us. That drives monetization. Second reason that consumers come is trusted information. We've spent a lot of time investing in areas like public agency so that whether it's maybe it's ahead of something bad happening, like California, remember to clear out the brush so that when wildfire season comes, you're in a safer place, all the way to in moments of high emergency, Hurricane Ian, so that in the neighborhood you know if you're safe, if you should be evacuating and so on.
That makes Nextdoor very useful in real time ways. Finally, they come to build community that is often started online, but then is taken offline. That's important for neighbors and for community. It's why we exist. It's our purpose. It's also great for a certain group of advertisers. You know, in short form, I often say anything that you can Amazon Prime or Google search for, that's where the place piece really comes to bear. We'll talk more a little, I'm sure, about our ad tech stack itself.
If you think about how much has to happen in real life, getting a haircut, going to the doctor's, buying something at the local grocery store, that is both great for our consumers 'cause that creates our neighbors, 'cause it creates that community, but it's also great for how we monetize.
Got it. Okay. Definitely want to talk about that. Maybe we'll talk about Brian's restaurant as well, Chicken Cacciatore. Maybe a jump on macro first.
Yeah.
You know, it's been a volatile macro environment over the course of the last year plus. As you sort of sit here heading into planning out 2023, are there certain ad verticals where you'd say are particularly strong or weak or anything you'd call out from a macro perspective about advertiser discussions for the year?
Yeah, I can take that one.
Okay.
I mean, certainly what we've seen is advertisers are nimble, and so they're finding ways to accomplish what they're wanting to use a platform like Nextdoor for. We see that in their shift from being more brand-focused to direct response or performance focused, and we're able to help them to exchange or convert those budgets, and really make sure they're getting the ROI in a tough environment that they're after. We also see, you know, difference by verticals. There are several verticals that have been very strong historically on the Nextdoor platform, things like home services, home security, financial services, real estate, retail, that, you know, different headwinds and macro factors are impacting them.
Really we've worked hard to diversify the verticals on the platform, and we see some strong support and tailwinds in new verticals for us, things like tech and telco, healthcare, Government services, travel. Really as we diversify our spend or our mix of revenue across verticals and also then bring on more advertisers, it really helps to soften any impact that we see on the macro side.
Importantly, we see, you know, advertisers also want diversity of their channel spend. They're, you know, they're really wanting to use a platform like Nextdoor to make sure that they can reach different users, different customers and neighbors on our platform, and have a different message, a very hyperlocal message, which is something that is differentiated and unique on our platform. That's that's really been demonstrated by our ability to retain them even in a tough market. While we're seeing a reduction in maybe ad spend per advertiser or per campaign, we've actually seen an improvement in retention.
We shared on our last call that we've been able to retain 90% of our top 50 advertisers, so even in a tough macro.
Got it. Okay. Part of the process of bringing the advertisers on and retaining them has to do with the tools for advertisers…
Mm-hmm.
Sort of the platform.
Yeah.
Maybe can you sort of give us an update on where you've made the most progress?
Yeah
in building out your tech stack and your tools? As you look into 2023, what are the areas where you're most focused on improving the overall ad platform?
Sure. I'm gonna split it into kind of front end and back end.
Mm-hmm.
Think about the front end, the campaign management software. Where you come into the platform, you build the ad, create the ad, post the ad, pay for the ad. Then the back end, which I think of as the brains of the operation, so how the ad gets served to fulfill your wildest dreams as an advertiser. On the front end, we started work at last year to build out our own campaign manager, we call it NAC, Neighborhood Ad Center, and Q2 of last year, we launched it for small businesses. That's really because we wanted to get them off what was a more static way to buy presence on Nextdoor through a local deal or a local sponsorship and get them into an auction format.
Effectively, there's no reason why a local plumber might not outbid a large advertiser because they're really focused on a given area, maybe a given sort of targeting. We've successfully transferred those SMBs over onto that self-serve platform. The work that's continuing now into 2023 is how do we harmonize that for all advertisers of any size. Today, SMBs can buy self-serve, mid-market can somewhat buy self-serve. Our revenue is about probably 40% self-serve, 60% still more custom white glove. Enterprises cannot, ad agencies cannot. They all want to, there's a lot of work to do to kind of finish out that self-serve approach.
If I go to the back-end to the ad manager, today we're still largely sitting on top of Google Ad Manager, and that was a decision we made 4 years ago because we said we're a super small company at that stage, 200 people, 100 people in product dev. We need to focus on building it. If we build it, we can monetize it. It's really only in the last year that we've now turned our focus into getting people over onto our own proprietary back-end serving technology. Where that will really let, I think, our monetization take off is we then will have the ability to apply ML to our own proprietary data. We can't do that today in GAM. We don't put our information over into someone else's platform. The way that we target and so on is relatively static.
It's, you know, has many more steps to it than it should, and that means it's harder for us to really get the best out of the platform. We're in early alpha with a lot of that. We have a couple of larger enterprises today trialing NAM. The great news is we do see a step function in performance. However, it's certainly still gonna take us, I think, most of this year, probably into next, to get the whole way where we're sitting on the stage with you, Brian, and we're like, "Everyone is now on our ad tech stack.
Got it.
We're excited to get there, and we continue to invest against that.
Maybe that's a good way to sort of segue to the AI capabilities.
Mm-hmm
... you see on the platform. Maybe when you-
Yeah
... when you do get it all on your own tech stack. Maybe talk to us about sort of opportunities you see on the advertising side or the generative content side.
Yeah
to really drive more performance for advertisers or for users.
Yeah
new AI tools.
Yeah. I mean, definitely the topic du jour right now is AI.
Yeah. Yeah.
What Nextdoor has is we have the preeminent, perhaps the largest corpus of the, a local knowledge network, right? When you think about what generative AI is, there's the model part, but the AI that's learning how to think more and more like a neural network, like a brain, but you have to feed it with something. Today, if you look at GPT-3, right, so it's the one that most people are talking about, it's largely trained on the corpus of the Internet that existed a year ago. Nextdoor data is not available for that corpus. Our ability to take that local knowledge graph and push it through even something like GPT, we can do that. It still is our knowledge graph. It doesn't go into the main body. It sits as ours.
Now we can train models to really iterate on what we're looking to do. Examples could be on the content creation side, I get really excited about this. Like, even beyond search at the moment, I think there's more on how you're generating new content. You could think about, you know, someone posting to Nextdoor saying, "I'm looking for a great restaurant," and a generative AI could really quickly give you, "Here's in the last three weeks, here's a quick digest of everything that was talked about to do with restaurants on Nextdoor." If you say, "I wanna keep it short like a Nextdoor post," it can keep it really short and pithy.
You can think about a daily digest that could be created that says, "What went on in my neighborhood today?" Have generative AI create it because we have 300,000 neighborhoods.
Right.
We've tried to do this with, like.
Right
... creating content. That is not a very scalable approach to life.
Hard to scale, yeah.
Yeah. versus imagine just how engaging that could be. We put it in the app, like we want you to come and find that. You could also imagine things like our Kindness Reminder, right? We have done a lot of investment in vitality. One of the things we know is to slow you down. If you're going to post something that we know is going to be reported, we actually tell you. We say, "It's high likelihood this could be reported. Would you like to edit it?" Instead of asking you to edit it, why don't we just offer you a different way to be more constructive as you get into whatever you're contentious about in your neighborhood? We want those conversations going on, right? That's how hard things get solved. There's ways to be constructive in that conversation.
On the ad side, you know, small businesses, God bless them, love them to death, they're not usually the best advertisers, right? Often they don't have an ad group, there's no CMO like, "Hey, could you work a little better on that content creation?" Like, that's just not how they roll. Is there a way to help them create the best copy in an ad, right? Nextdoor is a very high text usage platform.
Right.
A lot of advertisers love that-
Right
'cause they actually can tell you something about their product. For small businesses, could we really help them create the best possible text? You know, asking something like a ChatGPT to create the best possible ad to get someone to come to my restaurant tonight.
Mm-hmm.
Right? You could imagine that being very automated. I think there's lots of exciting things, but where I started from is important because not a lot of platforms have the diversity of content that we have, and only we have the uniqueness of that content.
Right.
That local knowledge graph-
Yep
... is kind of incredible. One final thing, it's labeled. That's the other thing everyone will talk about in AI, like, is your data labeled?
Right.
They're all hiring a lot of people to go label data. Our data is inherently labeled because we know it was a recommendation because you put hashtag recommendation or something on it. We know it's harmful content because you reported it. Effectively, the 80 million people on the platform are labeling data for us in everything they create. When we go talk to, like, our head of AI is kind of beside himself at the minute because of what's available.
Right. Yeah. You know, the uniqueness of the data sets as well is something else that is supposed to sort of be appreciated, I think. You know, we have these big companies building up all these AI models, but you also have a lot of individual websites and platforms and apps like yourself that have data sets they don't have access to that you're gonna be the ones that can optimize it for you.
Exactly.
Yep. You can also get more pictures of the chicken cacciatore.
It's true. When you get into multimodal co-creation.
Yeah
'cause it won't just be the text, it'll be the cool pic or the video.
Yeah.
All of that is gonna be created, and you choose what way you want it to show up.
Yep. On the user side, your user growth, whether it's MAUs or WAUs, has actually been really pretty strong.
Mm-hmm.
maybe I'd love to hear just about some of the use cases that have driven the growth so far, both in users and sessions and time, in the U.S. or international.
Mm-hmm.
As you sort of look into 2023, what types of new innovation should we look for to drive further inflections in session counts?
Yeah. I'll start, and Mike, if you wanna jump in on numbers-
Okay
go for it. Last year was a continuation of a focus on engagement, and it has really paid off for us.
Mm-hmm.
We are the only social platform that grew off our COVID high. We've had eight consecutive quarters of growth. In fact, through 2022, every single quarter, we saw consecutive acceleration in terms of WAUs being added to the platform, including 1 million new WAUs coming out of the U.S. in Q4, which is important because that's largely where we monetize. What's been driving that? Last year, we said we were gonna do five things. Number one was notifications, which is really ML, but it's the way it would show up. We invested in our ML team, and now we see the right notification going to the right person at the right time brings people back to the platform. That's why I started by saying we have that really kind of best-in-class sort of engagement.
Second thing we did was a complete reskin of the app. We wanted to simplify it. We wanted to put the number one thing we want you to do front and center. There's a big green circle that says Post. Post is the atomic unit of Nextdoor. When you get a post, someone can now react to it, they can comment on it, they can share it. That creates all of these flywheels. It flows into something like notifications. Again, that's a big part of what drove more growth. It drives more session growth and so on.
Okay.
The third area, part of that reskin is we wanted to create a surface, we call it Discover, because we wanted to be able to unfold place. Everything about Nextdoor should be about place, but it's a map-forward interface that now allows you to see everything that's going on around you locally. The next step with that will be how do we go from neighborhood to neighborhoods? We wanted to really change it from a private social network for your neighborhood to the place you connect to the neighborhoods that matter to you so you can belong. We want you to be able to drop that pin, because you're now at an investor conference in San Francisco, and immediately be able to see around you the neighborhood favorites, the Events, maybe even some of what's being talked about in the local neighborhoods.
That was Discover. The fourth area was Connections. We talked a lot about it at the beginning of last year. That was changing the signal to not just know what you're interested in, but who you know. We also felt it could be a top-of-funnel growth driver.
Mm-hmm.
Put a pin in that because that's 2023. Finally, the ad tech stack. As we go into 2023, our focus shifts now almost not completely, but largely to top-of-funnel growth, because we know that once we get you, we can keep you. We no longer have a leaky bucket. When we think about top-of-funnel growth, there's three areas. One is continued virality of neighbors inviting neighbors. 90% of our new verified neighbors last year came organically. We're also thinking about how do we get businesses to invite neighbors? That's that flywheel of being saved or recommended. Getting a recommendation allows you to show up higher in search, allows you to get more direct messages, like ways that we know warm leads are being created. That's kind of virality.
Second is SEO, which will just be a journey of continuing to invest. The third area is content sharing. Again, when I came to Nextdoor, you couldn't share content out of the platform. You couldn't actually share it out of the neighborhood. We completely changed that. Now we are working with partners like Microsoft to put local content into things like Bing Local, and we're looking to do that with more partners. We're also thinking about sharing. Today, if you're on a site like GoFundMe, it's a place you see a lot of URLs copied back into Nextdoor.
Mm-hmm.
When you create your content, your GoFundMe, in this case, or maybe your event on Eventbrite, the natural next step in that flow is, would you like to share this content? You'll see the other platforms show up. Nextdoor has never historically shown up. We didn't have a Share API.
Mm-hmm.
We launched that in Q4, and now we have a BD team going and just knocking down the top 40 sites that are naturally shared. Why that will drive top-of-funnel growth is in order to be able to complete the post to Nextdoor, you're gonna have to sign up, 'cause otherwise you can't react to any of the comments or anything that's going on with the post.
Right
if people don't know who you are.
Got it.
We're pretty excited about what we can do to drive top-of-funnel growth in 2023.
That's actually, that's really helpful. It's very good color. Mike, how has the innovation on users, sessions, overall time spent, how has that helped the pitch to advertisers to come to Nextdoor? Maybe talk to us about where you made the most progress there. I think it was pretty interesting on the fourth quarter call when you talked about a real focus on adding more advertisers to the platform. Can you walk us through the go-to-market for that?
Yeah, that's, I mean, that's the natural segue there. Of all the innovation and the increased utility and use cases there, driving deeper engagement is the biggest driver of monetization. With a larger unique audience, so having more WAU on the platform, and having them come back to the platform more frequently, have the greater sessions, and creating more impressions through their just through their greater use, it really opens up the aperture for what we can do with advertisers. We've really we have made a big stride already in increasing the addressable market of advertisers with the self-serve mid-market part of the ad platform.
We've gone from, call it 200 active enterprise advertisers to now more than 1,000 mid-market and enterprise advertisers, which is great for the overall ecosystem as well. We know with diversity of ad content, members are more likely to engage with that content, which is good for performance and retention. It just gives us more opportunity to work with advertisers in a differentiated way. Some of those new surfaces and new products like the Discover surface, like Events are not monetized today. It represents a huge opportunity going forward to do things that with a different set of advertisers and take advantage of the impressions that we're creating.
Yet we still have growing engagement in core areas of the product, like Newsfeed.
Mm-hmm.
We can continue to do more hyperlocal messaging and targeting using our rich first-party data, so that advertisers are reaching the audience they're after, which drives retention, which I mentioned we've had some good results on. Importantly, it also helps to drive evergreen spend. For us, we define evergreen as advertisers that have spent five quarters in a row, and we're now at 60%, which has been a big move for us, and it really helps to drive sales, the sales organization efficiency, knowing that coming into each quarter, we have a base of committed and highly engaged advertisers, and then we can go out and attract the new logos that we're after.
That's a really big push in 2023, is new logos and continuing the verticalization that we've seen. Taking, say, the retail vertical that we have today and segmenting it into home decor or pets, where we have, you know, really strong affinity, and conversion on the platform, and we can dedicate more resources.
You've talked about retail and government and travel as some of the verticals. Can you just talk to us about if you look at the local advertiser opportunity, which verticals have you made the most progress on, and which ones are you most excited where you see the most opportunity to really increase your overall penetration of advertisers on the platform?
I mean, I mentioned some of the endemic verticals that have historically been very strong performers, home services, home security, financial services, real estate, and we expect those to be contributing in a big way going forward as well. Where we've seen some great tailwinds that are some of the newer verticals. Healthcare, for example, something we launched during the pandemic working with the vaccine providers, and that sort of moved into working with retail pharmacies, Walgreens and CVS, for example. Tech and telco, we see increased spend even in the current environment with T-Mobile and Verizon and Comcast. You know, again, really strong need for a local message, targeting services that are relevant to the neighbors on our platform.
Travel is a new vertical for us. It didn't really exist pre-pandemic, and one that has a lot of potential in front of it. Then government services too. We have always had public agencies on the platform, but there is a lot of spend happening at a centralized level that has a great deal of relevance to neighbors as well.
There are ways here that AI could actually help you grow your users more as well. If we sort of think about, you know, it's such a, it's a local-based platform of, you know, people in Dallas, people in Houston, people in Tallahassee. Are there ways with these bigger models you could actually analyze more global datasets and find more commonalities, and maybe you could target people in Houston or Dallas who are similar to what people do in Tallahassee or Tampa to get them to come on the platform? Are you doing those things, or are those more sort of opportunities with these models?
Yeah. There's when you have big data, there's always more and more ways to be able to cut it, to use it to your advantage. We definitely look... It's interesting. I would say our international teams have always been better at this because they're starting a country from scratch.
Right.
Like, our UK team will say, "We're now in one in three households in London. Let's go look at Bristol and Bath and, I don't know, Manchester.
Right.
They'll do the full overlay of, again, when you look at place, you try to use things like census data and so on, right? This demographic, this, you know, particular, like, where a local government tends to show up or whatever. Like, there's other metrics that you can use. Where I thought you were gonna go with it is something that the team has been thinking a lot about, which is we already use this neighbor to neighbor invitation loop. It's been very effective for us. However, even sometimes I think we can lose sight of, like, the big data for what can be done interestingly at small data sets.
For example, training a model to look at all of Sarah's posts on Nextdoor and her interests, and then creating an invitation that I use to invite other people to the platform that sounds much more like my voice.
Mm-hmm.
It's been able to take 80 million people's micro voice and push that back out. That's where the scale gets really interesting, and it's not about training it on a vast data set, but it's being really smart about it on a very particular proprietary data set.
Okay.
Does that make sense?
Yeah, it makes sense. You mentioned the international side and the U.K. a little bit. Maybe talk to us about, you know, which countries or regions you're most excited about?
Mm-hmm
... to sort of invest in for the next legs of growth internationally.
Yeah. If you look at where we currently have a lot of traction, U.K. I've already talked about. U.K. is a market where we monetize both large enterprises through small businesses. Again, anything that we're building that I talked about earlier is always done globally. All of that will be available to U.K. market. We're pretty excited about it. Canada's our youngest country and yet a place we wanna keep investing in. You know, we're 2 and a half years in, and we're already seeing places like Toronto, like the GTA, the Greater Toronto Area, is already up to, I think about 1 in 5, 1 in 6 households on the platform. In pretty short order, we're showing the ability to kind of own a country.
Our simmer markets, the markets that we haven't put as much investment into, but we've just been letting them curiously scale in these countries and the ability to turn on monetization. In some countries, we may go to SMB first, not start even with a large enterprise. That's certainly been true in Canada, for example.
Okay. Any differences in how people use the platform in those international markets that could make the monetization different at all, or is it pretty.
It's more consistent that you would, that than you would expect, I think. I mean, for example, a lot of those European markets, even our U.K. market, the engagement is higher, in terms of ratios compared to the U.S. I don't know if that's a call on how neighborly people are outside the U.S., but there's certainly higher engagement.
Great.
You know, there's definitely... Rather than cut it by country, again, going back to data sets, we tend to much more look at, like, pockets of neighborhoods that look similar. Some neighborhoods love For Sale & Free. Recall, like, you know, about $1.2 billion of For Sale & Free is put up on the platform every single month. Not every neighborhood loves For Sale & Free. Some neighborhoods are more inclined to post Events versus others. It's more trying to find the commonalities across the whole platform rather than thinking by country.
Got it. Okay. You're all in investment. Mike, you've got to watch the P&L.
Mm-hmm.
maybe, talk to us sort of about the KPIs within the P&L that you're most focused on, areas of incremental efficiency, and how do you think about the leverage potential in the model the next couple of years?
Yeah. I think that's an important point to maybe wrap up here, 'cause I think we are maybe in the minority at the conference where we are investing in our business, and it's, I think, speaks to the conviction we have and the opportunity in front of us and where we are in our life cycle. We aren't going to cost cut our way to profitability. We've got to be focused on delivering on our product roadmap and driving scale. It's really the leverage is gonna come from top line growth. That said, we know what's happening around us, and we've been, I think, very disciplined in how we're investing. In fact, our team size hasn't grown over the last three quarters.
In the fourth quarter, our OpEx was flat year-on-year and sequentially. We are making some selective hiring in 2023, particularly on the product side and with ad tech. It's important that we are equally focused on our path to profitability. I guided on our call for delivering EBITDA margin improvement in 23 and in every year thereafter on our path to sustainable profitability. It's an important discipline to have the team focused on. It was how we sized the pool of OpEx that we were gonna invest in 2023 and decided on how that was best allocated. We have a very close eye there and will in 23.
really it's about growing the top line though and driving leverage.
Great. It should be an exciting story to watch throughout the course of the year. Sarah and Mike, thank you so much.
Appreciate it.
Thank you.
Okay.