Good day, and thank you for standing by. Welcome to the NerdWallet, Inc. Q3 2022 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Caitlin MacNamee. Please go ahead.

Thank you, Liz. Welcome to the NerdWallet Q3 2022 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 our annual report on Form 10-K for the year ended December 31, 2021, and 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 we approach NerdWallet's first anniversary as a public company on Friday, I've been reflecting on the past year. I think we can all agree it's been an interesting one. In many ways, this year has played out differently from everyone's expectations, with the current macroeconomic environment creating uncertainty and challenges for consumers and businesses alike. But in looking back at the past year, I'm incredibly proud of the work we have done. In a testament to NerdWallet's trusted brand and our strong diversification, we have met or exceeded all the goals we outlined for our financial performance despite headwinds in mortgages, insurance and student loans, all while making progress towards our vision of becoming a trusted financial ecosystem for consumers and small- and mid-sized businesses. In Q3, we continued executing against our 3 pillars of growth: Land and Expand, Vertical Integration and Registrations, and Data-Driven Engagement, which ladder up to our financial ecosystem vision; a vision where we will provide a single platform that consumers and SMBs can rely on to learn about various financial topics, shop for products, connect their data and receive data-driven nudges. This will not only provide our users with more clarity and confidence around their finances but also help grow and diversify our business through reoccurring engagement and revenue. As a result of our work, in Q3, we exceeded our revenue and adjusted EBITDA outlook driven by growth across credit cards, banking, personal loans and SMB verticals. Our Q3 performance was predicated on building and extending NerdWallet's unique strengths. With our reach and brand as key advantages, our Nerds spent Q3 driving critical initiatives in our 3 pillars of growth to provide consumers and SMBs with clarity and confidence. In particular, this quarter, we saw further evidence of our distinct ability to…

Thanks, Tim. Nine months into a year that remains uncertain for consumers and small businesses, we are once again proud that our diversified portfolio has put us in a position of strength in the midst of a challenging macro environment. We delivered Q3 revenue of $143 million, up 45% year-over-year and above the high end of our guidance. Let's take a deeper look at the revenue performance during the quarter within each category. Credit cards delivered Q3 revenue of $57 million, growing 59% year-over-year. Our credit card vertical has consistently performed throughout this year from product improvements and pricing recovery. And in the third quarter, we reached record levels of transactions and revenue. We believe we've returned to a pre-COVID normalized seasonal cadence for our credit card vertical. And while the market feels healthy today, we are keeping our eyes on metrics such as unemployment to help inform where we believe the industry might trend in the near term. Loans generated Q3 revenue of $28 million, declining 12% year-over-year. Our mortgage vertical continued to be pressured by the rising interest rate environment, but offsetting that decline was another quarter of strong growth in personal loans due to our improved user experience and the addition of our recent acquisition of OTB. As of today, we anticipate that the impact from the rising interest rate environment will extend into 2023 and believe that the integration of our recent acquisition will set us up to take market share when the macro environment stabilizes. Finally, other verticals finished Q3 with revenue of $57 million, growing 87% year-over-year, delivering yet another quarter of triple-digit growth in both SMB products and banking. As Tim discussed, we are encouraged by the enhancements we've made in SMB this year as well as our ability to leverage our strong…

[Operator Instructions] Our first question comes from the line of Justin Patterson with KeyBanc Capital Markets.

Great. Lauren, I was hoping you could unpack a little bit more some of the assumptions driving the Q4 guidance. Obviously, there's a lot of moving parts in the macro environment there, so any more color would be appreciated. And then perhaps for both you and Tim, diving into your final comment, annual EBITDA margin improvements in 2023 and beyond. Could you talk about just some of the drivers there? We've gone through a lot of base level of investments that between marketing, the tech stack and the rest, we can now see the faster cadence of margin expansion ahead.

Sure. Thanks, Justin. I'll comment for your first question on guidance for Q4 and unpack that a little bit more. I think Tim can add some color as well from a top line perspective. And then we'll both actually tackle the '23 margin question. I think Tim will talk a little bit more about our brand spend and how to think about that moving forward, and I can talk about future margin leverage as well. So if we kick off first with just a little bit more guidance on Q4. As we said, our revenue guidance implies a midpoint growth rate of 40% year-over-year. A lot of this is the same story that we've talked about over the last couple of quarters. We continue to expect strong performance across many of the verticals despite headwinds from areas such as mortgages, investing, student loans and insurance. As a reminder, the outlook remains inclusive of our recent acquisition. We'll now have a full quarter of financials included with the NerdWallet core business, and we also expect that the integration will continue to ramp. Maybe, Tim, do you want to talk a little bit more about some of the color you're seeing on the top line, and then we can go back to margins?

Yes, sure. So I guess as we think about the macro, both for Q4 and looking into 2023, for us, the big picture is that as I talk through the puts and takes of some of the macro here, we've managed to grow our business in both years where there's been a really strong cycle versus years where the cycle has been really weak. And if you step back and dissect why, it comes down to one, a high underlying growth rate as we land and expand and vertically integrate. But then second, also just the inverse correlation between various parts of our business, right? And so diving into the macro, I mean, you can really think of parts of our business as being pro-cyclical, some parts of our business being countercyclical, and some parts not really being directly tied to the cycle. So the pro-cyclical parts are like cards and personal loans and SMB. We actually see some latent demand here, given credit card loan balances are still below pre-pandemic levels if you look at Federal Reserve data, right? And then countercyclical parts of our business include anything, really, that benefits from rate cuts. So as you think about mortgage refi, auto refi, student loan refi, things like that, those are all pretty weak right now. And then there's the parts of our business that are uncorrelated, like insurance. It's legally mandated, not as directly tied to the credit cycle. And in sum, what this all means is that you're going to see various parts of our business growing and contracting through the cycle, but we think we can grow in a variety of climates. And it's really something we've lived during the past 3 years, where the weather changed a lot, but we've managed a healthy 3-year growth rate. So that's how we're thinking a little further out.

Yes. And let's go back now to adjusted EBITDA margin. So as a reminder, the midpoint of our Q4 guide implies an adjusted EBITDA margin of roughly 19%. As we've talked about in the past, we're not making as material of investments in brand this quarter, and as a result, the margin in Q4 is expected to be much higher than the first 3 quarters of the year, which averaged roughly 9%. And then as a result of the Q4 outlook, we expect that our full year adjusted EBITDA margin to be roughly 12%, which is a 5-point improvement over last year and consistent with the expectations that we've been setting all year long. Now as we think about moving into 2023 and even beyond, we have said that margin and profitability is important to us, and that we would expect margin improvement in 3 big areas. One, and I'll hand it over to Tim to comment more, but we expect to hit a logical ceiling on our brand spend. At that point, it will become a fixed cost, and we'll get significant leverage there. The second piece is increasing our registered users and overall engagement on the site is going to make all of our acquisition channels much more efficient. And then the third piece, which is not as large, but it's probably worth calling out that we're not expecting to have that step up in expenses as a result of becoming a public company. So you see that step up in areas like G&A, and then also in some of our stock-based compensation. I wouldn't expect that same step up as we think about next year and further into the future.

We do expect brand spend to grow next year, but really not to the extent that we grew our brand spend in 2022. So yes, like Lauren mentioned, as of this year, we think we've found a good cadence with spending in the first 3 quarters and with Q4 being a lower quarter of spend there. And we think we're getting, yes, right to like the long-term cadence and aggregate spend level. So we're going to continue to iterate on our campaigns and test into the best channels and get more and more efficient. So we're going to scale these investments efficiently over time where we think they make the most sense, but feeling more closer to steady state now.

[Operator Instructions] The next question comes from Ralph Schackart with William Blair.

First one for Tim. Just in terms of some of the product enhancements that you called out, I think making the prequalification flow a little bit easier, also product improvements that you called out and ability or currently more effectively monetizing traffic. Maybe kind of talk to some of the enhancements you made there and sort of the opportunity to really drive that forward, enhance that in 2023 and then the opportunity and impact on the business? And then just on brand spend, I'll touch on the last question. Just curious how happy you've been with the brand spend. How have the campaigns performed versus expectations? So any color on that would be great.

Yes. Thanks for the question. So I guess just at a very high level, I always point back to Page 2 of our shareholder letter for a visual of the scaffolding from which we think about our product development really around landing, expanding, vertical integration and increasing engagement. So specifically, we called out improvements to the prequalification flows. I mean, that really comes down to asking the customer the right questions to really better match them to the right solutions and just getting more efficient at getting them to a great match quickly. So in terms of that opportunity, that broadly exists across pretty much any vertical where there's risk-based pricing, whether it's lending or insurance, and we're investing pretty broadly there. So yes, the impact to the business is pretty meaningful. I mean, driving conversion improves the customer experience. It improves revenue and conversion. So it's a virtuous cycle, and we love the effects of that. In terms of brand spend, brand spend, we continue to have record levels of brand awareness. We think that's a result of the brand campaigns, and we're very happy with the results there. As with anything where you're doing it for the first time in the third quarter of the year, you're going to learn things about how to optimize both channels and the messaging. And so that's definitely something we're iterating on and hope to be even more effective next time around.

[Operator Instructions] The next question comes from Youssef Squali with Truist Securities.

I have two. One, Lauren, can you maybe just quantify mortgage revenues for us as a percentage of the loans business in Q3 and what it was last year just to kind of get a sense of how important mortgage now is to the business? I'm assuming it's a lot lower, but it would be great to quantify. And then either you or Tim, as you look at 2023, thanks for the color on the margin. But on the top line, can you maybe just help us think through the base case that you are working under for your budgeting process?

Yes. First off, so I'll take mortgage, and Tim, jump in. So what we said is when you think about mortgage last year and how quickly it was growing and how the interest rate environment was making it very favorable for folks to continue to refinance, we said that mortgage was growing incredibly quickly, and it was the largest part of that loans category. Given the headwinds, given the rising interest rate environment, that is no longer the largest in the loans category. We have not quantified exactly how large that is, but through the growth rates, you can see that, that's declined pretty considerably. But offsetting that, as we've talked about, is growth in personal loans, which we feel good about. And then in terms of revenue for next year, again, we have not provided any sort of forward-looking guidance on revenue for '23. What we can say though and point to is that you can see from our Q4 guide that we are still feeling good. There's certainly some tailwinds. There are still some headwinds in the business today. But we're confident in our ability to execute no matter the macro environment or situation because of the diversification that we've had. And then, Tim, if there's anything else you want to add in terms of revenue and how we're thinking about it?

Yes, I'd probably just provide a little more color, too. Traditionally, Q4 is a seasonally weaker quarter for us. So that's probably one point of context. And then the other one I would think about is just the most macro-sensitive areas of our business, you could probably think about credit cards and personal loans. So I'll provide a little bit more color there in terms of how we're thinking about it. There's kind of two factors driving this. One is credit quality, and one is demand pull-through, right? So in terms of credit quality, we've seen -- we've been seeing some proactive tightening in the riskier parts of partner portfolios and that's been going on for a while now. So there's been some deterioration in credit quality metrics. But we're still at really healthy levels relative to pre-pandemic. And then in terms of demand, we do expect to see some latent tailwinds at some point maybe going into '23. So if you look at the trajectory of revolving credit card balances, they're going up and are not yet back to pre-pandemic levels. And by the way, consolidating credit card debt is the #1 source of personal loan demand. So all that kind of presents a backdrop of some future strength potentially in both cards and personal loans into '23. So from what we see right now, feeling good about the trends but are baking in a bit of conservatism in our outlook just given macro uncertainty.

[Operator Instructions] The next question comes from Jed Kelly with Oppenheimer & Co.

Great. Just going back, Tim, you mentioned more users and driving more integration in the data funnel. Can you talk about where you are on like sort of your larger issuers' appetite to have more integration or you to do more integration for qualification? Sorry. And then my second question, you did mention insurance. And I know it's a smaller vertical, but we've seen the insurtech industry have a pretty tough year. I mean, where is your appetite for strategic acquisitions in that sector?

Yes. Thanks for the question. So I think, yes, in terms of the appetite from issuers and partners for more integrations, I mean, I'd say generally speaking, it's a win-win, right? I mean, it's a better user experience. There's higher conversion rates. There's fewer declines and maybe even save a bit in terms of the underwriting costs. So those tend to be ongoing conversations and just really a prioritization question for us. So definitely excited to pursue more of that going forward across many different verticals, including cards. And then in terms of insurance, yes, it's really a hard market out there. I mean, we mentioned last quarter that sometimes a tough macro presents opportunities. So it's something that we're going to evaluate in terms of whether it's right for long-term product vision. But yes, nothing -- yes, I can't comment beyond that.

Just in insurance, just following up. I know you want a good customer experience. The customer experience for insurance, is that still really tricky just with issuers? If you go on other sites, they call you, and it's not the best consumer experience?

Right. Yes. So we care deeply about that, and that's definitely top of mind in terms of thinking about the long-term strategy and brand in NerdWallet. So it's a big part of the consideration.

[Operator Instructions] The next question comes from Ross Sandler with Barclays.

Question on the other revenue line. Looked really strong accelerating in the quarter. Can you talk about what's driving that? I think you mentioned consumers looking for higher deposit rates and SMB both being strong. Just anything -- any additional color on what's going on there? And then I got to ask the standard question on performance marketing. So it's a little bit more deleveraged in the quarter than the normal trend line. So is there like a different approach around performance marketing as you try to get more registered users? Or is it this mix dynamic where deposits or something like that have a different CAC/LTV profile than mortgage? What's driving the deleverage there?

I'll take the first question. Yes. So other revenue, very strong, certainly driven by high-yield saving accounts. A lot of demand for that is the interest rates pick up and then yes, also strength in SMB. I guess if I were to add a little bit of color to that, banking as a vertical grew 250% year-over-year in the quarter, and that more than offset the declines that we saw in mortgages and really highlights the inverse correlation between those businesses. In terms of where banking can go, we're in an environment we really haven't experienced in 15 years. So candidly, we don't know, right? We see cost of capital going up for financial institutions. And as a result, the value of gathering deposits is also going up. Now we think we're delivering a lot of value to both depositors and banks right now. And if rates remain elevated, we'd expect this to continue. So I guess another way of looking at that is, in hindsight, the zero rate environment was really masking the potential for this part of the business. And then yes, in terms of small business, right, like, we're not going to grow triple digits forever. But there's just so much opportunity in SMB to expand into new financial products and services. And definitely, there's the dynamic of registering small businesses and seeing repeat and reoccurring engagement with them over time, which we've talked about in the past. So our loan [cores] are getting stronger. The new origination growth has been great recently as well, and that sets us up for more renewal growth in future periods, and we're seeing this as a great proof point for vertical integration.

Great. And let me comment on the performance marketing. So first, taking a step back, just as a reminder, 70% of our traffic comes through organic channels, which has allowed us over time to diversify into other channels such as performance marketing that we believe are incremental and just opens up top of funnel more for us. And as we also have talked about in the past, we think of performance marketing as a variable expense that we can dial up or pull back as needed. In Q3, we were able to lean into certain verticals where we saw benefits in conversion and pricing, and we'll continue to do that in a disciplined way. Another call out I would make though is while it certainly wasn't the key benefit or thesis of the acquisition, one of the shorter-term impacts of adding the expertise of the OTB team to our organization has been their success in diversified traffic channels that we've had yet to scale in, and so you'll see some of that impact in our sales and marketing expense in the near term. But we maintain the same philosophy regarding our performance marketing expansion as we always have, which is we strive to be in quarter profitable. But to your -- I think to your point there, Ross, we do think of performance marketing really as a means to an end. Of course, we'll be disciplined in the use of it, but really, the long-term benefit is getting more folks in the doors that we can help register and collect more important first-party data, which will then give us the ability to nudge consumers to make smart money moves at the right time for them.

[Operator Instructions] The next question comes from James Faucette with Morgan Stanley.

Obviously, it's been a very dynamic environment, and you guys have managed through that really well. I'm wondering, though, with how much movement we're seeing at different parts and products in your business, if your visibility into next year and what your partners are planning is changing at all? Is it shortened up? Is it lengthened? Just wondering like what that opportunity to plan in looks like for the time being.

Yes, I'll take that one. I'd really say it doesn't feel that different from prior years. I think we are always in active discussions with, for example, lending partners in terms of underwriting. Like are they in the process of tightening near prime? Or are they super ambitious and aggressive with prime and super prime? So those conversations are ongoing, and we definitely keep an eye on that. But nothing really has changed in our outlook there in the past quarter.

Got it. Got it. And then, I guess, when you think about, once again, planning assumptions, et cetera, like how are you taking into account or what's your sense as to what you need to do, both in terms of being prepared for changes in the competitive environment as well as other factors like the impact of student loan forgiveness or the end of this moratorium there? Any more color on your planning assumptions around kind of the environment itself would be helpful, especially as it relates to potential competition and these other exogenous factors.

So I'd say broadly speaking, we try to run our long-term playbook. So just as an example, right, insurance is in a pretty weak spot right now, but we're investing in marketplaces that we think are going to be very important during a rebound, same with certain parts of mortgage like refi. We think that market comes back eventually. We think we have a lot of progress to make in terms of making the product more compelling for consumers there. So we're investing now. It's kind of an all-weather type approach. Just focus on the long run. And so yes, I haven't seen any big changes in terms of competitive dynamics or anything like that. But yes, just focus on the long run.

Yes, and I'll just add again. We are -- we're here for the long term. We're going to continue running our playbook. And again, we feel really good going into next year even despite some of the uncertainties, given the diversification that we have, and as Tim has talked about, lots of puts and takes. And so we think we're really well positioned to continue to execute on our strategy regardless of what next year brings us.

At this time, I would like to turn it back to the CEO, Tim Chen, for closing remarks.

Thanks, all, for the questions today. And as always, I want to give a huge shout out to our Nerds, whose hard work and dedication make all of these results possible. Because of our Nerds and our unfair advantages, we continue to do what we say we'll do, and in most cases, more. And I still see a lot of opportunities ahead. So in particular, it's clear that our diversification efforts continue to pay dividends, allowing us to adjust course depending on macro factors to meet our goals while still executing our larger strategy. As a result, our revenue growth is intact, diversified and can be resilient, even in an uncertain economy. This enables us to continue investing efficiently in what matters, and I'm particularly looking forward to sharing updates towards our progress of becoming a trusted financial ecosystem in the quarters to come. And with that, we'll be back next quarter with a look at both Q4 and the full year. Thanks again, and have a great rest of your day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.