Thank you for standing by. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the NerdWallet, Inc. Q2 2022 Earnings Conference Call. [Operator Instructions] Thank you. Ms. MacNamee, you may begin your conference.

Thank you, Christie, and welcome to the NerdWallet Q2 2022 Earnings Call. Joining us today are Co-founder and Chief Executive Officer, Tim Chen; and Chief Financial Officer, Lauren St. Clair. 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 our annual report on Form 10-K for the year ended December 31, 2021, and in other 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. With that, I will now turn it over to Tim Chen, our Co-founder and CEO of NerdWallet. Tim?

Thanks, Caitlin. As you know, the current macroeconomic environment has been challenging for a lot of people. The challenges that consumers and SMBs are facing are varied and complicated, and in many cases, they've actually heightened the need for trustworthy and knowledgeable financial guidance. While we know we don't have all the answers, we can provide a lot of value during this time by offering financial clarity across multiple topics. Our objective is the same as it has always been, serve as a trusted financial ecosystem that consumers and SMBs can rely on to learn about various financial topics, shop for products, connect their data and receive data-driven nudges. By doing this, we will help our users navigate through all of the new financial decisions they're facing while continuing to deliver solid financial results. In Q2, the increased demand for financial guidance, our diversified business and solid execution against our strategy helped us deliver better-than-expected revenue and adjusted EBITDA results. We also continue to help more consumers and SMBs in more ways by expanding product offerings within our lending business, growing our presence in Canada and engaging our base of registered users. NerdWallet's philosophy on product line expansion continues to be pragmatic and focus on leveraging our advantages. We believe our trusted brand and organic reach give us an unfair starting point when landing and expanding and vertically integrating. As a reminder, we define vertical integration as combining our brand and reach with best-in-class user experiences. By executing on both of these expansion strategies, we can improve customer experiences, monetization, registration and engagement. A few great examples of this in action include the continued growth of our SMB business, our acquisition of On the Barrelhead and the organic growth we've driven in NerdWallet Canada. This past quarter, our SMB business…

Thanks, Tim. We had a strong first half of 2022 that showed once again how our year’s long diversification efforts put us in a position of strength when we see headwinds in any particular portion of the macro environment. We delivered Q2 revenue of $125 million, up 37% year-over-year and above the high end of our guidance. And while we have predominantly surpassed quarters that were impacted the most by COVID-19 lows, we continue to look at our pre-COVID revenue CAGR from 2019, which at roughly 30% during Q2, is consistent with our historical growth. Let's take a deeper look at the revenue performance during the quarter within each category. Credit cards delivered Q2 revenue of $55 million, growing 82% year-over-year. Our credit cards vertical has been a great example of our ability to recover from a difficult macroeconomic environment, and we have consistently delivered on meeting both our consumer and partner needs while providing quality user experience improvements. This is especially critical in a time where we see higher consumer engagement, and we focused on driving enhancements such as optimizing the comparison experience, making it easier for consumers to get the most relevant products. Credit cards had another quarter of strong growth due primarily to the high-intent nature of our audience and our deep alignment with partners to deliver quality matches. Loans generated Q2 revenue of $24 million, declining 26% year-over-year. Mortgages have seen increasing headwinds as we moved into the second quarter, where we're now seeing year-over-year declines in both refinance and purchase revenue. But despite a very challenging interest rate environment, we're proud of our ability to drive another quarter of strong growth in personal loans as our user experience delivered on key conversion wins, combined with leveraging higher consumer interest. While we expect that this tougher…

[Operator Instructions] And your first question comes from the line of Ralph Schackart with William Blair.

Hi, good afternoon. Thanks for taking the question. Tim, as you think about the relative headwinds and tailwinds for your products, maybe just give us a sense how you're thinking about the overall portfolio of products that you have today. How does that position you as we potentially go through the macro tunnel here and increasing interest rate environment? Just maybe kind of the overall ability of the combination of the portfolio of products to continue to grow in potentially increasing challenging environment. And then I have a follow-up.

Yes. So we have confidence that our model sets us up to weather future uncertainty pretty well. So first off, we're still earlier in our growth curve, hence, our year-over-year growth rates. So there's strong secular tailwinds behind us. And then second, as you alluded to, we have a diversified business. In fact, many parts of our business offset each other. This is why we've been going through cycles. So for example, during the pandemic, cards, personal loans and SMBs were weak, and now they're strong, and now mortgages and insurance are facing headwinds, whereas they were strong during the pandemic. But in spite of that, we grew in 2020, and we're growing again in 2022 with a 3-year compounded annual growth rate of roughly 30%. And as we look forward, we think we're currently under earning in mortgages and insurance. And in terms of cards, we think any future downturn is likely driven by unemployment, which is exactly what we saw during the financial crisis and in early 2020. We're not currently expecting that. So we feel pretty good about the outlook there. And then just in terms of the broader model we have, we have a pretty nimble cost structure. Being able to pull back quickly in areas like brand really insulates us. So for example, in the second half of 2020, we had over 10% adjusted EBITDA margins despite revenue being down almost 10% year-over-year as we scaled back on brand spend. And so we have factored all this into our guide for Q3 and our commentary on Q4 and feel pretty balanced.

Great. That's really helpful. Maybe just a follow-up on M&A. You talked about being disciplined, particularly in this environment, which is quite understandable. But also guessing valuations have softened with some companies you've been potentially looking at. So how do you sort of balance those 2 out right now as you sort of think about growth and positioning yourself going forward?

Yes. So certainly, yes, we think about the relative value of cash and our equity versus the prices we're seeing out there in the market. And just to reiterate, we've got a pretty unique situation that we're typically chasing, which is we've got a really strong brand and reach. And we have, at times, seen opportunities to really improve our product experience and monetization at the same time by integrating with some businesses like digital concierges and just better matching technology and things like that. So that's going to continue to be what we're looking for going into the future.

Your next question comes from the line of Ross Sandler with Barclays.

Hi, Tim. Just two for me. Could you talk about the On the Barrelhead? Just what do these guys do? What's their core competency? I think you said loan matching, but any -- could you elaborate a little bit more on that? And then the release, when you guys acquired them, so they did $38 million last year and $5 million in net income. I would guess that, that's also probably facing the same pressure year-on-year as your loans business, but is that the right way to look at it? And then for these guys, how much of their traffic is going to their website or their app organically versus via e-mail, which I read that, that was a pretty big part of their business? So that's all the acquisition questions. And then for sales and marketing, it looks like really good leverage on both brand and performance. And do you expect those to kind of stay in the same neighborhood as a percent of revenue based on the kind of new macro environment we're in? I think you had talked about brand topping out at like $150 million annually. Previously, it looks like maybe more like $100 million based on the current macro. So just any color on how we should think about those two brand and performance marketing.

Yes. I'll kick it off. So On the Barrelhead is great at loan matching. I mean it's a technology-oriented company. They've continually iterated and applied data science and partner integration in a way that is a couple of years ahead of where we are. So we're very excited about what they can bring to our business. In terms of the headwinds they're facing, they're also in the loans business. And so they're seeing pretty similar things to what we're seeing, which would be headwinds in mortgages, but personal loans remains quite strong. So their business is actually doing pretty well. And then in terms of their traffic acquisition sources, we think of them more as a technology play than an audience play. They tend to be in various different channels and pretty diversified there.

Yes. And let me take the question on sales and marketing spend. So first of all, as a reminder for everyone, 70% of our traffic comes through organic channels. And because of that, we've been able to diversify into other areas like performance marketing and even brand. And as we've said before, we're incredibly lucky to have the unique ability to reinvest some of our earnings into our trusted brand, given that all of our verticals fit under one brand as opposed to under consideration of brands. With that being said, long-term growth and profitability are both incredibly important to us. So we're making disciplined investment decisions today while maintaining our commitment to improve full year margins, both in '22 and over the longer term. We feel really good about the brand spend this year. Tim has talked about aided awareness being really high. And when we think about performance marketing, as we've also said in the past, we see this as really a variable expense that we can ratchet up or dial back as needed. In certain areas where we see things like pricing improvements or conversion improvements, it allows us to lean in at still very good ROIs. And so we'll continue to lean in when we see the need, and we'll also pull back if needed. In terms of further macroeconomic uncertainty, the other great part of the business is that we can pull back if needed. You saw this in 2020, we were able to pull back on both brand and performance marketing. And so again, we feel really good about the investments we made in Q2 and what we're making in Q3, and we'll also be incredibly disciplined. And if needed, we have the ability to pull back.

Your next question comes from the line of Justin Patterson with KeyBanc.

Great. Thank you very much. Two, if I can. Tim, in one of the earlier responses, you mentioned you believe you're under earning in some categories. What are the levers to improve upon that? And then at the very end of that question, credit card revenue really continues to increase nicely. As you talk to just your various partners in there, what are really the key incremental drivers to capture more share of partner budgets?

Yes. So I spoke of under earning in areas like mortgage and insurance, and mortgages were facing everything from rising rates, reducing affordability to low inventories driven by labor shortages and all sorts of other things. So as those things normalize, we'd expect a bit of a pickup. There's maybe even a bit of a countercyclical tailwind there if the macro gets more diminished. Insurance is driven by similar factors. Inflation is having an impact on the cost of repairing a car or replacing a car. And so that's really causing carriers to struggle with profitability as they have to go through state-by-state regulations to raise prices, and it kind of diminishes their appetite to write new policies. So that is also a temporal issue that we fully expect to reverse, and I didn't mention student loans as well, forbearance being extended. Again, we're not expecting a ton from that in the rest of 2022 and beyond. But yes, at some point, that could turn as well. So in terms of credit cards, the conversations with partners go both in terms of direct response, right, like what kind of value and quality are we delivering to partners, but also how are we doing as a brand partner. NerdWallet has a trusted brand, and they really want to -- they really want our stamp of approval. And so maybe there's talk of what that means for pricing as well. Budgets are relatively healthy. I really think that the main lever to think about in terms of cards is unemployment. That's what it's been in the past. And it's a pretty tight market, especially in the high FICO segment where you have multiple job openings per job applicant. So I think that's probably what some of the credit card partners are seeing, and that's probably what's driving some of their optimism right now. And that, combined with pretty healthy consumer balance sheet relative to -- and even delinquency rates versus what we saw going into the pandemic, that's probably feeling some optimism as well.

The next question comes from the line of James Faucette with Morgan Stanley.

He, it's Michael Infante on for James. Thanks for taking my question. Tim, I just wanted to go back to some of the credit card commentary you were just making. I guess the one thing that we struggle with is just if we look at sort of credit card balances, they're still fairly low. So there really is room for those to move higher. So it's a question of just over the medium term, how much do your partners really need to lean in on new customer acquisition? So I guess, just how would you respond to that? I know you're sort of quoting unemployment as the main driver here, but what would you sort of say in response to that?

Yes. So if you think about it from our partner perspective, they have a pretty good sense of LTV of a customer, and they have a pretty clear idea of customer acquisition costs through NerdWallet, right? So it tends to be a pretty easy calculus for them. And so we don't really typically see constraints driven by more -- bigger macro factors like that. It tends to be the more, the better.

Got it. That makes sense. And maybe jumping back to Ross' question from earlier. I guess as you think about On the Barrelhead, and recognizing you may not be able to fully comment here. But I guess, just how should we think about composition of that business from a mortgage perspective? Like what's the split between mortgage versus personal loans or maybe other categories?

Yes. We haven't broken that out. They have a couple of properties across mortgages, personal loans and even small business. And yes, the mix has shifted over time as the macro has shifted, but we haven't broken that out.

And there are no further questions at this time. Are there any closing comments?

Yes. So thank you for all the questions today. And as always, a huge thank you to the Nerds for another great quarter. Our diversification continues to be a significant advantage for us. We're currently facing really tough market conditions in mortgages and insurance but are still managing to grow through those headwinds. Our brand awareness and preference metrics remained at all-time highs, and we had another quarter of record registrations. And we continue to leverage the unfair advantage we have with our brand and reach, implementing our vertical integration playbook in SMB and furthered these efforts through our acquisition of On the Barrelhead. So all of this progress moves us closer to becoming the trusted financial ecosystem and helps us achieve our vision, a world where everyone makes financial decisions with confidence. Thanks for joining us, and enjoy the rest of your day.

This concludes today's conference call. You may now disconnect.