Nextdoor (NYSE:KIND) Q1: Beats On Revenue, Next Quarter Sales Guidance Is Optimistic

Full Report / May 09, 2023
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Neighborhood social network Nextdoor (NYSE:KIND) beat analyst expectations in Q1 FY2023 quarter, with revenue down 2.41% year on year to $49.8 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $53.5 million at the midpoint, 3.22% above what analysts were expecting. Nextdoor made a GAAP loss of $33.7 million, down on its loss of $32.9 million, in the same quarter last year.

Nextdoor (KIND) Q1 FY2023 Highlights:

  • Revenue: $49.8 million vs analyst estimates of $45.9 million (8.34% beat)
  • Revenue guidance for Q2 2023 is $53.5 million at the midpoint, above analyst estimates of $51.8 million
  • Free cash flow was negative $13.8 million, compared to negative free cash flow of $20.7 million in previous quarter
  • Gross Margin (GAAP): 80.1%, down from 82.2% same quarter last year
  • Weekly Active Users (WAU): 42.4 million, up 5.7 million year on year

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).

Sales Growth

Nextdoor's revenue growth over the last three years has been very strong, averaging 31.3% annually. This quarter, Nextdoor beat analyst estimates but reported a rather lacklustre 2.41% year on year revenue decline.

Nextdoor Total Revenue

Nextdoor is guiding for revenue to decline next quarter 1.91% year on year to $53.5 million, reverse on the 19.1% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 8.7% over the next twelve months.

Usage Growth

As a social network, Nextdoor can generate revenue growth by increasing user numbers, and by charging more for the ads each user is exposed to.

Over the last two years the number of Nextdoor's daily active users, a key usage metric for the company, grew 13.3% annually to 42.4 million. This is a solid growth for a consumer internet company.

Nextdoor Weekly Active Users (WAU)

In Q1 the company added 5.7 million daily active users, translating to a 15.5% growth year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Nextdoor it measures how much it makes off ads served to each user, proxy for how valuable advertisers find its audience and its ad-targeting capabilities.Nextdoor ARPU

Nextdoor’s ARPU has declined over the last two years, averaging 17.4% annually. While the number of users has been still growing, it is not great to see the company losing pricing power. This quarter, ARPU shrank 15.5% year on year, settling in at $1.17 for each of the daily active users.

User Acquisition Efficiency

Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Nextdoor grow by a combination of product virality, paid advertisement or incentives.

It is very expensive for Nextdoor to acquire new users, with the company spending 70.7% of its gross profit on marketing over the last year. This low level of sales and marketing efficiency indicates a highly competitive environment, with little differentiation between Nextdoor and its peers.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Nextdoor reported negative EBITDA of $21.7 million this quarter, which was a -43.5% margin. The company is one of the least profitable consumer internet business and over the last twelve months Nextdoor has EBITDA margins of -36.6%.

Nextdoor Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Nextdoor burned through $13.8 million in Q1, increasing the cash burn by 124% year on year.

Nextdoor Free Cash Flow

Nextdoor has burned through $71.3 million in cash over the last twelve months, an uninspiring -33.7% free cash flow margin. This low FCF margin is a result of Nextdoor's capital intensive business model.

Key Takeaways from Nextdoor's Q1 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Nextdoor’s balance sheet, but we note that with a market capitalization of $767.8 million and more than $574.8 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by how strongly Nextdoor outperformed analysts’ revenue expectations this quarter. Weekly Average Users, the key volume metric, also beat. We were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see that the revenue growth was quite weak. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 4.43% on the results and currently trades at $2.12 per share.

Is Now The Time?

When considering Nextdoor, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Nextdoor we will be cheering from the sidelines. But while its user growth has been healthy, the downside is that its ARPU has been declining and its EBITDA margins indicate low profitability of its core business when compared to other consumer internet businesses.

Nextdoor's price/gross profit ratio based on the next twelve months is 5.4x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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