Neighborhood social network Nextdoor (NYSE:KIND) beat analysts' expectations in Q4 FY2023, with revenue up 4.3% year on year to $55.56 million. On top of that, next quarter's revenue guidance ($50.5 million at the midpoint) was surprisingly good and 6.1% above what analysts were expecting. It made a GAAP loss of $0.10 per share, down from its loss of $0.04 per share in the same quarter last year.
Nextdoor (KIND) Q4 FY2023 Highlights:
- Reminder that company released preliminary results last week in conjunction with announcement of CEO stepping down
- Revenue: $55.56 million vs analyst estimates of $51.18 million (8.6% beat)
- EPS: -$0.10 vs analyst estimates of -$0.12 (16.7% beat)
- Revenue Guidance for Q1 2024 is $50.5 million at the midpoint, above analyst estimates of $47.59 million
- Free Cash Flow was -$14.94 million compared to -$18.42 million in the previous quarter
- Gross Margin (GAAP): 81%, in line with the same quarter last year
- Weekly Active Users (WAU): 41.8 million, up 1.8 million year on year
- Market Capitalization: $785.7 million
Helping residents figure out what's happening on their block in real time, Nextdoor (NYSE:KIND) is a social network that connects neighbors with each other and with local businesses.
Nextdoor Holdings was founded in 2008 in San Francisco and went public in 2021. The company aims to connect neighbors and local organizations (restaurants, local government entities) with each other so they can exchange information, goods, and services.
Nextdoor's primary product is a private social network for neighborhoods, and the company generates most of its revenue from advertising (as opposed to from users). The platform allows neighborhood residents to create private groups where they can post updates, events, and classifieds, and connect with neighbors. It also offers a directory of local businesses and services, allowing residents to find trusted recommendations from their neighbors. Additionally, Nextdoor has features such as crime and safety updates, lost and found pets, and emergency preparedness resources, which make it a valuable tool for residents to stay informed and connected with their community.
In the aftermath of natural disasters like hurricanes, wildfires, and earthquakes, for example, Nextdoor was used by residents to connect and support each other. During the COVID-19 pandemic, the platform has been used to organize food drives, mask donations, and other mutual aid efforts.
Businesses must meet their customers where they are, which over the past decade has come to mean on social networks. In 2020, users spent over 2.5 hours a day on social networks, a figure that has increased every year since measurement began. As a result, businesses continue to shift their advertising and marketing dollars online.Competitors offering localized social networking include Meta (NASDAQ:META), Alphabet (NASDAQ:GOOGL) because of its Maps app, and Yelp (NYSE:YELP).
Nextdoor's revenue growth over the last three years has been strong, averaging 24.5% annually. This quarter, Nextdoor beat analysts' estimates but reported lacklustre 4.3% year-on-year revenue growth.
Guidance for the next quarter indicates Nextdoor is expecting revenue to grow 1.5% year on year to $50.5 million, improving on the 2.4% year-on-year decline it recorded in the same quarter last year.
As a social network, Nextdoor generates revenue growth by increasing its user base and charging advertisers more for the ads each user is shown.
Over the last two years, Nextdoor's daily active users, a key performance metric for the company, grew 9.9% annually to 41.8 million. This is decent growth for a consumer internet company.
In Q4, Nextdoor added 1.8 million daily active users, translating into 4.5% year-on-year growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Nextdoor because it measures how much the company earns from the ads shown to its users. ARPU can also be a proxy for how valuable advertisers find Nextdoor's audience and its ad-targeting capabilities.
Nextdoor's ARPU has declined over the last two years, averaging 8.8%. Although the company's users have continued to grow, it's lost its pricing power and will have to make improvements soon. This quarter, ARPU declined 0.2% year on year to $1.33 per user.
A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor.
Nextdoor's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 81% this quarter, down 0.5 percentage points year on year.
For social network businesses like Nextdoor, these aforementioned costs typically include customer service, data center, and other infrastructure expenses. After paying for these expenses, Nextdoor had $0.81 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Gross margins have been relatively stable over the last year, averaging 80.9%. Nextdoor's margins are some of the highest in the consumer internet sector, enabling it to fund large investments in product and marketing during periods of rapid growth to stay one step ahead of the competition.
User Acquisition Efficiency
Consumer internet businesses like Nextdoor grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).
It's very expensive for Nextdoor to acquire new users as the company has spent 69.7% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between Nextdoor and its peers.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
Nextdoor's EBITDA was negative $14.04 million this quarter, translating into a negative 25.3% margin. It pains us to say this company is one of the worst performing consumer internet businesses from a profitability standpoint, averaging negative 33.9% EBITDA margins over the last four quarters.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Nextdoor burned through $14.94 million in Q4, increasing the cash burn by 27.8% year on year.
Nextdoor has burned through $59.54 million of cash over the last 12 months, resulting in an uninspiring negative 27.3% free cash flow margin. This low FCF margin stems from Nextdoor's capital-intensive business model and desire to stay competitive.
Key Takeaways from Nextdoor's Q4 Results
As a reminder, the company released preliminary Q4 results last week in conjunction with the announcement that the CEO Sarah Friar (CEO since 2018) is stepping down, to be replaced by founder Nirav Tolia. Aside from that, we were impressed by Nextdoor's revenue guidance for next quarter, which blew past analysts' expectations. We were also excited its revenue outperformed Wall Street's estimates. On the other hand, its revenue growth regrettably slowed. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is up 2.2% after reporting and currently trades at $2.09 per share.
Is Now The Time?
Nextdoor may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Nextdoor, we'll be cheering from the sidelines. Although its revenue growth has been good over the last three years and its growth over the next 12 months is expected to be higher, its ARPU has declined over the last two years. And while its impressive gross margins are a wonderful starting point for the overall profitability of the business, the downside is its growth is coming at a cost of significant cash burn.
Nextdoor's price/gross profit ratio based on the next 12 months is 4.3x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
Wall Street analysts covering the company had a one-year price target of $2.52 per share right before these results (compared to the current share price of $2.09).
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