NerdWallet, Inc. (NASDAQ:NRDS) Q1 2024 Earnings Call Transcript

NerdWallet, Inc. (NASDAQ:NRDS) Q1 2024 Earnings Call Transcript April 25, 2024

NerdWallet, Inc. reports earnings inline with expectations. Reported EPS is $0.01 EPS, expectations were $0.01. NRDS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the NerdWallet Inc Q1 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and--answer session. [Operator Instructions]. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today Caitlin MacNamee. Ma'am please go ahead.

Caitlin MacNamee: Thank you operator. Welcome to the NerdWallet Q1 2024 earnings call. Joining us today are Co-Founder and Chief Executive Officer Tim Chen and Chief Financial Officer Lauren StClair. Our press release and shareholder letter are available on our investor relations website and a replay of this update will also be available following the conclusion of today's call. We intend to use our investor relations website as a means of disclosing certain material information and complying with disclosure obligations under SEC regulation FD from time to time. As a reminder today's call is being webcast live and recorded. Before we begin today's remarks and question and answer session I would like to remind you that certain statements made during this call may relate to future events and expectations and as such constitute forward-looking statements.

Actual results and performance may differ from those expressed or implied by these forward-looking statements as a result of various risks and uncertainties including the risk factors discussed in reports filed or to be filed with the SEC. We urge you to consider these risk factors and remind you that we undertake no obligation to update the information provided on this call to reflect subsequent events or circumstances. You should be aware that these statements should not be considered a guarantee of future performance. Furthermore during this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release except where we are unable without reasonable efforts to calculate certain reconciling items with confidence.

With that I will now turn it over to Tim Chen our co-founder and CEO. Tim?

Tim Chen: Thanks Caitlin. In late 2023 NerdWallet launched a new national brand campaign Don't Make Future You Hate You reminding consumers that the financial decisions they make today can have an outsized effect on their future well-being and of course that they can turn to NerdWallet for trusted guidance as they make those decisions. In Q1 we've seen this campaign achieve great results as our aided brand awareness reached record highs despite brand spend being down 30% year-over-year reinforcing the resonance of our product offering. Similar to our guidance to consumers we operate with a long-term orientation. We remain committed to improving our efficiency so it's been great to see our brand marketing spend work harder for us relative to last year.

In Q1 we more than doubled non-GAAP operating income year-over-year. By continuing to bolster efficiency we'll have more capital to reinvest and more resilience throughout the cycle. We're seeing our long-term orientation bear fruit. Our insurance category has faced inflationary headwinds for most of the past few years but we continue to invest in improving our marketplaces. This work has paid off with record revenue in Q1 despite an end market that is yet to fully recover. These results are a great example of something I said before. Our business is cyclical and over time we know that headwinds and tailwinds will offset each other so our priority is growing from cycle to cycle. We also continue to take share in a large and growing market independent of macroeconomic factors.

Our primary addressable market US. Financial Services Digital Advertising is expanding with a 2023 four-year CAGR of approximately 15% and NerdWallet share in this market has also increased with a four-year revenue CAGR of 27%. In Q1 specifically we are proud of our results. We exceeded guidance across revenue, adjusted EBITDA, and non-GAAP operating income while growing monthly unique users by 25% year-over-year. These results not only speak to our relentless self-improvement but also enable us to invest in NerdWallet's future. Our vision is to build a trusted financial ecosystem or a single platform where consumers and SMB can learn, shop, connect their data, and make decisions about their money. In Q1 we drove progress across our growth pillars and I feel confident that the decisions we're making today will result in durable value for our consumers and our business.

This quarter we continue to leverage our trusted brand and play look to land and expand efficiently in new markets and categories. Internationally we scaled efforts across the UK, Canada, and Australia. Collectively MUU growth for these markets outpaced US. growth in Q1 at 31% year-over-year giving us increased conviction in our ability to grow our international presence over the coming years. Meanwhile our vertical expansion efforts significantly increased our velocity. By repurposing existing assets versus building from scratch with expensive development time we were able to launch and monetize new home services categories within weeks while still investing in other nascent categories like Medicare, Social Security, and estate planning. Vertical integration remains a key focus as we look to grow from cycle to cycle.

These efforts pair NerdWallet's trusted brand and reach with best in class consumer shopping experiences a combination that should drive improved monetization over time. This quarter we focused on improving our services to cater to consumers who want more human guidance when making financial decisions. We've always seen tiered support options work effectively in SMB which operates a hybrid model including both digital and human assisted shopping experiences. In Q1 this team furthered their efficiency by leveraging machine learning to more accurately route consumers to the right level of support for their circumstances. Over time we'll seek to bring this hybrid model to more areas to help people make smarter financial decisions. As we've achieved record MUU growth over the past several quarters we've doubled down on our registration and data-driven engagement efforts.

By registering users we can more easily engage and re-engage them over time with thoughtful personalized cross-sell opportunities increasing their loyalty to NerdWallet and making it a no-brainer for consumers that turn to us directly for their financial product needs. Already we've seen that our active registered users visit us more than three times a month on average signalling the potential value of our registered user base. In Q1 we drove a significant increase in registered users which we attribute to work in areas such as optimizing registration prompts as part of our larger insurance shopping funnel. We also continued to relentlessly improve how we re-engage users over time. Much like our vertical integration work in SMB seeks to route consumers to the right experience for them our CRM work is focused on increasingly personalized campaigns that match registered users with content and offers tailored to their profiles.

I am proud of our results in Q1 and the progress we've made toward our vision for consumers. Elevated delinquency rates and high interest rates are contributing to a tough lending environment despite seemingly positive economic indicators. We believe these are normal cyclical dynamics so we are focused on the long term to grow from cycle to cycle. In the meantime I'll pass it over to Lauren to provide a financial update.

Lauren StClair: Thanks Tim. We ended the quarter above the high end of our guidance range delivering Q1 revenue of $162 million down 5% year-over-year. We remain in a cyclically depressed lending environment affecting interest rate sensitive areas such as loans and balance transfer credit cards. Our first quarter results showcase early signs of growth recovery being in sight led by both insurance and SMB verticals. Let's take a deeper look at the revenue performance during the quarter within each category. Credit cards delivered Q1 revenue of $50 million declining 19% year-over-year. As we've spoken about previously last year's regional banking crisis drove increased balance sheet constraints and issuer conservatism. We believe these dynamics are temporal rather than structural but they continue to weigh on our Q1 year-over-year results.

We still saw our seasonal cadence of a quarter over quarter increase from Q4 to Q1. While issuers remain conservative in balance sheet intensive areas such as balance transfer cards consumer demand for products remains high. This gives us confidence that we will see an eventual recovery as issuer appetite returns. Loans generated Q1 revenue of $21 million declining 3% year-over-year. Our personal loans vertical grew 12% year-over-year during Q1 a deceleration versus Q4 as we have not yet fully recovered from the pullback that began last quarter while we work through some of the growing pains in scaling with new audiences and partners. 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.

While we do not expect to return to revenue levels from last year in the near term we will continue to invest in this vertical in anticipation of an improving lending environment. We expect that macro changes combined with leveraging our improving ability to align consumer demand more effectively with financial services providers will put us in a prime position to take advantage of demand as it surfaces. We are also optimistic that structural improvements we've made to our mortgage marketplaces will help us capture meaningful share when the housing market recovers. As a reminder from last quarter we recently changed our revenue product category presentation and are now providing SMB products revenue as a separate disclosure. SMB products consisting of loans credit cards and other financial products and services intended for small and mid-sized businesses delivered Q1 revenue of $30 million growing 21% year-over-year.

SMB loans remain pressured by elevated rates and tighter underwriting but we continue to drive growth with our diversified product offerings for small and mid-sized businesses in areas such as credit cards banking and software. We believe this serves as a further proof point that we have a substantial runway of additional subcategories outside of SMB loans that can provide tailwinds over the long run. Finally our emerging verticals formerly named our other verticals revenue product category finished Q1 with revenue of $60 million declining 2% year-over-year. As a reminder after the regrouping of SMB products revenue emerging verticals consist of areas such as banking, insurance, investing and international. Banking declined 9% year-over-year as we lap our toughest comparison period in 2023 but grew versus Q4 which we primarily attribute to our seasonal cadence.

Despite the recent moderation of consumer demand we expect to eventually reach a new normal in our banking vertical as demand remains higher than it was in a zero interest rate environment. The decline in banking was partially offset by growth in investing due to recent stock market strength combined with the resurgence in our insurance vertical. Despite tough comps from the prior year insurance revenue grew 5% year-over-year in Q1. We remain optimistic that the end market will continue to improve assuming inflation remains stable. Moving on to investments and profitability during Q1 we earned nearly $11 million of non-GAAP operating income at a 7% margin a four point increase versus the prior year primarily driven by leverage and brand marketing as we continue to optimize our investment levels which began during the latter three quarters of 2023.

We also earned over $25 million of adjusted EBITDA at a 16% margin. In the first quarter we had GAAP operating income of $3.7 million and net income of $1.1 million which includes a $3.7 million income tax provision. Similar to what we've mentioned in previous quarters we expect to be a cash taxpayer for the foreseeable future. Please refer to today's earnings press release for a full reconciliation of our GAAP to non-GAAP measures. Consumers continue to turn to the nerds for their money questions. We provided trustworthy guidance to 29 million average monthly unique users in Q1 up 25% year-over-year. Growth was a result of strength in many areas across NerdWallet such as investing, travel, taxes, and insurance. We are seeing consistently strong consumer demand for both our learn and shop content though our learn content has been a larger portion of where consumer demand has more recently concentrated causing higher MUU growth with some pressure on revenue per MUU.

Growth in areas such as investing was bolstered by interest in the stock market as well as Bitcoin strength, and insurance saw rising premiums drive more consumers to look for the best options for them. Despite these near-term monetization pressures, more MUUs engaging with our learn higher content and coming to us during specific macro events builds our brand recognition and trust and compounds the value of our franchise over time. On to our financial outlook. Similar to what we discussed last quarter, we believe that we have line of sight to returning growth in Q2. We will continue providing quarterly guidance along with a mix of quantitative and qualitative commentary for full-year expectations. We expect to deliver second quarter revenue in the range of $147 million to $152 million, which at the midpoint would increase 4% versus prior year, but decrease sequentially roughly 8%, somewhat larger than our normal seasonal cadence.

To give you more color on our expectations, the primary driver of the larger than normal seasonal decline from Q1 to Q2 is that banking demand continues to moderate. In addition, we are still facing tight lending conditions across both credit cards and loans. Given the material increase we've recently experienced in insurance revenue, we expect to see a return to much higher year-over-year growth in Q2 as comps get easier. We are also seeing continued momentum in SMB products. As we look to the rest of the year, we remain confident in our ability to return to double-digit revenue growth at some point in the second half, given recent recovery in SMB products and insurance. But the timing of the recovery in areas such as balanced transfer cards, combined with how potential interest rate movements will impact inversely correlated demand in banking and loans remains uncertain and will ultimately influence how high those double-digit growth rates will be.

Moving to profitability, we expect Q2 non-GAAP operating income in the range of negative $1.5 million to $1.5 million. We began to pull back on our brand investment during Q2 of 2023 and are not expecting to see the same level of year-over-year margin accretion during Q2 this year as previous quarters. We are still facing headwinds in monetizing portions of our organic traffic, including areas such as balanced transfer credit cards. And as we start to see tailwinds in areas such as insurance and SMB, normalizing demand from financial services providers should result in more paid traffic acquisition. As we've mentioned in the past, we view paid marketing as a means to an end and will continue to spend in a disciplined manner with the aim to be paid back within the quarter in which we spent.

Compared to Q1, non-GAAP OI will be lower sequentially due to a larger than seasonal decline in revenue, partially offset by lower brand spend. We will also have planned increases in employee engagement costs, including a biannual employee event, which will have roughly a two-point margin impact in the quarter. We are reiterating our full-year guidance for 2024 margin expectations. Given recent economic data, which indicates continued inflationary pressures, we believe where we fall in these ranges will depend on the pace of improvements in the lending environment. Aligned with our previous full-year guidance, we expect non-GAAP OI margin of approximately 6.5% to 8% of revenue and adjusted EBITDA margin in the range of 18% to 19.5% of revenue.

We're proud of the results we've delivered so far this year and remain optimistic about the future. Our growing consumer mindshare, with strong traffic and brand signals, give us confidence that as macroeconomic conditions recover, our ability to meet consumer needs will strengthen our long-term positioning. With that, we're ready for questions. Operator?

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