Good day, and thank you for standing by. Welcome to the NerdWallet Inc. Q2 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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, operator. Welcome to the NerdWallet Q2 2023 earnings call. Joining us today are Co-Founder and Chief Executive Officer, Tim Chen; and Chief Financial Officer, Lauren Stair. 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 of NerdWallet. Tim?

Thanks, Caitlin. NerdWallet’s Nerd's mission is to provide clarity for all of life's financial decisions. We operate within the larger financial services market and our strategy is to supply consumers and SMBs with the most trusted guidance to grow our share of this market cycle to cycle. Achieving this requires a long-term vision for success, doing right by our users to build our brand affinity in the long run rather than operating solely to maximize profits in the short run. Today, we'll be sharing quarterly results in the context of short-term cyclical headwinds and tailwinds, we expect headwinds to outweigh tailwinds through at least the second half of this year. But if I could ask you to remember one thing today and in the years to come is that those headwinds and tailwinds offset each other over time, and independent of these external macro factors, we are taking share in a large and growing market in a durable, sustainable way. Our primary addressable market, US financial services digital advertising is expanding with the 2022 three-year CAGR of approximately 23%. And NerdWallet share in this growing market has also increased with a three-year CAGR of 33% and driven by robust top of funnel gains and all-time highs in aided brand awareness. In Q2, our brands resonance with consumers and SMBs across verticals help mitigate severe cyclical headwinds in consumer loans and carrier profitability challenges in insurance driven by inflation. As a result, we achieved year-over-year revenue and adjusted EBITDA growth in spite of those factors. We attribute our growing market share to our track record of providing the most trusted financial guidance. Across verticals, including those experiencing headwinds, we continue to provide trusted financial guidance for all of consumers' questions, and we've seen significant consumer engagement in credit cards, travel, home,…

Thanks, Tim. We're proud of the quarter that we achieved in the face of a tough lending and insurance environment, delivering Q2 revenue of $143 million, up 14% year-over-year and above the high end of our guidance. Since last quarter, we've seen that credit quality and unemployment outlooks seem to be trending better than was previously feared and this should improve sub and near-prime lending first. The banks are still taking a conservative approach to balance sheet lending. This conservatism is driven by uncertainty around possible rate hikes, the impacts of upcoming Basel III revisions and the stickiness of their deposit base as consumers spend the last of their excess savings from the pandemic. Now, we'll take a deeper look at the revenue performance during the quarter within each category. Credit cards delivered Q2 revenue of $51 million, declining 6% year-over-year. As we mentioned last quarter, we're facing headwinds in our credit cards vertical, and the partner tightening that increased during Q1 by extending to prime consumer-related products led to a larger than typical seasonal quarter-over-quarter decline. Consumer demand remains healthy, and we believe that the strength we've seen in matches with our financial partners indicates, we are still taking share in the market. Though challenges in balance sheet-intensive areas, such as balance transfer cards is more than offsetting this. Partner behavior was relatively consistent throughout the quarter. And while we believe that current trends will persist during the second half of the year, we should see tailwinds when card issuers regain confidence in expanding their balance sheet. Loans generated Q2 revenue of $23 million, declining 4% year-over-year. Our mortgage vertical, while still declining on a year-over-year basis as the market faces significant headwinds is now starting to comp slightly easier time periods from 2022, which we expect to continue…

Thank you. [Operator Instructions] Our first question comes from the line of Justin Patterson with KeyBanc. Please proceed with your question.

Great. Thank you, and good afternoon. Lauren, I wanted to stick it where you just ended the non-GAAP operating margin. That sounds like great progress in the next year, mid-single digit with the target. I'm curious, just given all the moving parts in the macro environment, what's giving the confidence behind just that progression into next year? Is there any assumption of just fitting passing of these revenue headwinds to achieve that target? And then for Tim, in the letter, you did talk a little bit about a Nerd AI chatbot beta. I'd love to hear a little bit more about just how you think that that a chatbot could change how consumers and advertisers engage with NerdWallet over time? Thank you.

Thanks, Justin. I'll take the first part here. So I'll just remind everyone, given the operating leverage that we have as a result of our organic traffic, we feel confident that we can continue to show margin accretion in both adjusted EBITDA margins as well as our newly disclosed non-GAAP operating income metric, regardless of what type of macro environment we're in. As you've seen over the past couple of quarters, we're continuing to show nice leverage in areas like R&D, as we're more efficient with our use of headcount and the investments in product and engineering. We've also talked about being incredibly disciplined about our sales and marketing spend. We've proactively reduced some of our brand spend, as you can see this year, and then we really see performance marketing as a variable cost that we can lever up or pull back on as needed. And then we talked a little bit about in our G&A. As the result of becoming a public company, you see sort of a step up in cost and we don't expect those to step up any further. And so you can see how we've been showing that leverage over the last couple of quarters, and we expect all those same things to happen as we move into the short-term and into the New Year as well. In addition, we've talked a little bit in the prepared remarks around stock-based compensation and how we're seeing us reach more mature levels on a per head basis. And so that will also help with margin accretion from a non-GAAP OI perspective.

Yes. And I can speak a bit to the 2024 big picture macro before I dive into AI. So generally speaking, on the consumer demand side, we continue to grow our reach and increase the value of our franchisee. We hit records in just about every traffic and brand metric we track during the first half, things like brand awareness, MUU, brand affinity and so I'd say what changed over the last quarter, right? Like the credit default risk and unemployment outlook seem to be trending better than what was previously feared. But as Lauren mentioned in her remarks, there's a bit of conservatism in balance sheet management happening at the banks post-SVB as consumers work through their excess deposits, deposits are a bit slighter. There might be a few more rate hikes coming, and the regulatory rules are kind of finalizing, so that means in consumer lending, you have a dynamic, where near-prime lending has probably found a floor, but prime lending appetite is lagging a bit as banks manage their balance sheets. And sub-prime being subdued versus, say, second half of 2022 and a recovery there will probably follow a recovery in near prime. And you're seeing this show up as personal loans is growing sequentially, whereas in credit cards, you've got areas like Don's [ph] transfer that are facing headwinds relative to the second half of last year. And so anyway, as we look into 2024, I'd say there's a few possible scenarios next year, right? In a soft landing scenario, we probably look back in a few years and say that 2023 was below our normalized revenue growth rate and exiting 2024, we were above it because of those recoveries in cards, loans and insurance, now if the Fed needs to high rates materially more than people are expecting in order to fight off inflation that could lead to another step-down longer period and a more dramatic recovery on the back-end. So we think in either scenario. We've got our game plan. And we're pushing internally on being efficient. In terms of AI, yeah, we remain excited by the possibilities here. NerdAI is a chatbot trained on NerdWallet content, and it's giving our consumers a new way to engage with our financial guidance feel free to play around with it. It's on a lot of our personal finance pages. It can do things like summarize an article or help you navigate to the next relevant article. Beta is live now and like all product features, we see these things as hypotheses to be iterated on overtime and excited to have this online.

One moment for our next question. Our next question comes from the line of Youssef Squali from Truist. Please proceed with your question. Q –Robert Zeller: Hi. This is Robert Zeller on for Youssef. Thanks for taking my questions. Yeah, on your guidance in ad spend, so it looks like brand was down year-over-year, performance was up based on our estimates. I'm just curious, why that was. And on the new channel like short-form video, are you guys taking spend off of different channels, or is this increment? Thanks.

Yeah, I can take that. So just as a reminder, in the shareholder letter as well as in the Q, we do provide a breakdown of our sales and marketing spend. And you can see the percentage split between our three big investment areas, which we call out as organic, performance marketing and brand. So you can see those in there. As we've mentioned on the last call as well, we are reducing brand spend, while still investing in large-scale campaigns, things like that. We're adjusting to be nimble and flexible based on the macro conditions that we're seeing, and we are being proactive in that area. Performance marketing, we think about it slightly differently. We really see this as variable costs that we can dial up or pullback as needed. And so in areas where we're seeing nice returns, we'll continue to lean in and in areas where we're not seeing the returns either because of consumer behavior changing and our partner demand changing, we can easily pullback as well. So you can expect us to do that. The other thing I'll mention on performance marketing, we see it almost as a means to an end as well. It's a way for us to get folks to the site, get them registered when it makes sense. And then we can reach out to them and proactively nudge them when it's time to come back and make a smart money move or to reengage them with new things. So again, we see it variable costs, but also see it as a means to an end by getting more registrations.

Yeah. Look, can I just add. Yeah. I mean, I think it's exciting to see record brand awareness in the first half and record MUUs, along with 37% growth in cumulative registrations, despite pulling back a bit on brand. I think we're relatively new to this, right? 2022 is our first full year of spending on brand campaigns, and we learned some things. And that means we're going to get smarter about our trades and where we spend. And hopefully, we can get a bigger bang for our buck each ensuing year. So yeah, we'll keep on making adjustments up and down as we get more info. Q –Robert Zeller: Okay. Thanks. And if I can just ask one more on NII. I thought that was very interesting. I just want to clarify if the AI chatbot is through a partnership or if you guys are building it out in-house and what the cost impact will be over the next year or so? And if that's related to the breakout of the non-GAAP operating income, if that's responsible for expectations of software development costs increasing going forward. And that all is what tied into the non-GAAP operating disclosure from AI, or if I'm thinking about that wrong, feel free to let me know. Thanks.

Yes, I'd say we're leveraging third parties. I mean, OpenAI. And so it's really not a big operating expense on a variable basis. The training side is our own content. That's really the secret sauce behind this thing. So -- from a consumer perspective, I think it can really summarize things as well as get people to the great content on our site more effectively. And -- but again, yes, not a huge impact on costs.

Yes. And I can comment on the non-GAAP OI question as it relates to AI. AI we're looking at it still early days, but we don't see this very different than we see other initiatives that we're doing. And so we're continuing to invest for the long term while getting more efficient in areas like R&D. And so again, we treat AI similar to other initiatives. And so your question around non-GAAP OI? No, that's not the reason why we disclosed the new metric this quarter. Again, it's part of the way we think about all of our investments. our need to disclose or want to disclose the non-GAAP OI metric was really around aligning how we operate things internally and providing that clarity for investors as well. And as Tim has talked about in the past, stock-based compensation as well as capitalized software, our true cost of doing business, whether they're cash or non-cash. And so we felt that the increased disclosure was something that shareholders should hold us accountable for.

Okay. Thank you.

One moment for our next question. Our next question comes from the line of James Faucette, Morgan Stanley. Please proceed with your question.

Hi, everyone. It's Michael Infante for James. Thanks for taking our question. Lauren, Tim, I'm curious if you could help us sort of decompose the mix between lead pricing versus volume of matches, just sort of trying to understand while volume of matches might be migrating lower, sort of how is pricing evolving and are both decelerating?

Yes. So I'd characterize this as having similar dynamics to say, in 2020, right? But the core underlying franchise value to me is really around matches and match volumes. So that's actually quite healthy, right? What's really happening is that the financial institutions are pulling back on how much lending they want to do right now in some areas. -- especially in those areas that are more balance sheet intensive like you mentioned balance transfer, right? Imagine you're really subsidizing 0% interest for a year or more. And that that can be kind of a consideration given all the other stuff that's happening right now with deposit stickiness and interest rate hikes and regulatory changes. And so we just think that's a bit of conservatism. We think it's temporal, and it's very similar to past cycles.

Understood. Maybe just on the other verticals, in particular, obviously, understand sort of the high-yield savings account tailwinds over the last several quarters. How are you guys sort of thinking about the back half and sort of what that's ultimately going to mean for near to medium-term rev growth as we get some normalization there. A – Tim Chen: Great. Well, specific to banking, just a reminder for everyone on the call, it's part of our other verticals category, and it more than doubled in Q2. So yes, we're starting to see a bit of deceleration. But if rates stay where they are, we'd expect to see a higher new normal in banking. -- though probably a little lower than where we are currently. The macro really depends on where rates go. Like if we revert back to a zero rate environment, we go back to levels we probably saw a few years ago. But conversely, we'd also expect a pickup in our mortgages business that sets this. So big picture, with banking, we really want to make hay while the sun shines, one of our growth pillars is register and engage. And I'd note that this is a bit of a different audience than, for example, personal loan shoppers. So it's a great opportunity to register a broader audience and expand our reach.

Thanks, Tim.

One moment for our next question. Our next question comes from the line of Jed Kelly with Oppenheimer. Please proceed with your question.

Great. Just want to talk about on two verticals where it looks like you're driving more share gains relative to your competitors. One, just on personal loans. Can you sort of talk about what's working there? And then on the strength you called out in insurance, obviously, the underwriting headwinds are pretty self-explanatory. But what is going on with your carrier relationships that's allowing you for your consumers that's allowing you to drive growth in both those segments. Thanks. A – Tim Chen: Yes, I'll take those one out of time. So in terms of personal loans, we've got two underlying factors that drive the broader industry. And then I'll talk about our market share in a second, but yes, the broader factors are credit quality trends and demand pull through. So in terms of credit quality, we've seen 3-plus quarters of tightening, and we're finding a four, I'd say there haven't been major surprises on the credit quality side. Things are tracking roughly where lenders expected them to be. But as a reminder, a lot of lenders were expecting unemployment close to 6% exiting 2023, and they're factoring that into their underwriting in the past couple of quarters. And that's proving pretty conservative. I think that's causing a bit of loosening up there. Those still are pretty trough levels. And then on the demand side, I think there's some pretty good long-term tailwinds there because personal loan demand is driven by mostly people consolidating credit card debt. And we're seeing a demand tailwind in terms of rising credit card balances. I think in terms of our market share there, we mentioned last quarter, we've managed to double our match rate on people looking for personal loans by integrating the OTP technology and then iterating from there. It's everything from a more comprehensive marketplace to asking people the right questions and better matching technology on the back end. So that's definitely helping us serve the consumers better but also gain a little bit on the top of funnel. And then in terms of insurance, yes, it's rough. I mean, even though we're up 41% year-over-year, there's carrier profitability headwinds. The carriers are probably losing money in half the states right now in terms of writing new policies. So there's really a lot of visibility there. I think what ultimately causes this the past is inflation coming down and then carriers getting a chance to reset pricing. In terms of relative market share, I think we talked about last quarter about a more personalized marketplace experience. And we think that's really driving the share gains there and are really excited to continue investing there despite this being a hard market.

Got it. And then just a follow-up, given that when you look at your results, you're obviously operating from a position of strength and a lot of smaller competitors are facing tough times. How should we view the acquisition environment right now and how you're thinking about it?

Yes. More broadly speaking, right? We think about capital allocation as having a few outlets, right? It's everything from returning capital to investing in organic growth, inorganic growth. And we just got to be opportunistic. We care a lot about pricing and relative value. And so yes, unsurprisingly, it's -- there's definitely a lot of activity out there in terms of potential acquisitions. So, we're trying to be disciplined and think hard about what makes a ton of sense and where we can have a pretty good margin for as we execute.

Thank you.

Our next question comes from the line of Ralph Schackart from William Blair. Please proceed with your question.

Good afternoon. Thanks for taking the questions. Two, if I could, please. First, on the strong, I think, 37% growth that you had year-over-year and registered users -- where are some of the top factors driving that and maybe your opportunity to continue to drive registered users going forward? And secondly, Tim, kind of going back to the Nordea chatbot, -- more broadly, I know it's super early, but how is that sort of, I guess, informing or shaping your view on Gen AI more broadly in terms of its impact or opportunity for the platform going forward? Thank you.

Yes. Thanks for the question. On the registered users, I'd say the top drivers are really around our success in land and expand. We're just getting into more verticals and recovering our existing verticals more deeply, which is giving us a larger surface area by which to register users. So, for example, areas like social security, Medicare, small business, we're really building things out and getting people on board there. And the second driver there, I would say, is shopping. As we get more personalized with our shopping experiences, there's a really good reason for users to register to get more personalized results, and that's also driving more registrations. So, we're just getting more organized and iterating aggressively there. On Gen AI, I'd like to always go back to first principles. What are the consumer problems that need to be solved? I think the biggest opportunities for us are can we democratize access to great financial guidance. Typically, you would need a human that's very expensive, managing a lot of investable AUM to justify the expense. So, how do we make that more mass market, right? And in terms of other opportunities, I mean, obviously, every function at Derby should be thinking about using generative AI to be more productive. That probably applies to every company out there, not just us. You're just going to get left behind in two or three years if you're not figuring that part out. So, those are kind of like two big areas we're thinking a lot about.

Great. Thanks.

Our next question comes from the line of Pete Christiansen with Citi. Please proceed with your question.

Thank you. Good afternoon. Hi, guys. Nice job on the MAU growth. That's pretty impressive. I was wondering, if you could talk about the health of -- or at least the health of your partners' budgets, particularly on the loan side, and I was wondering if you could tell us, are you seeing any differences between some of the smaller banks, like community banks, which I believe are still aggressively spending there to drive share versus some of the larger players? And if you're seeing differences between those two groups? Thank you.

I would call out that most of our revenue in the different parts of lending -- well, so I'll go by cards and then broader loans. In cards, we really the US heavily indexed towards six credit card issuers. Many of them are money center banks. So we're definitely seeing the effect at the money center banks. And then in terms of other verticals, you might index more towards non-bank lenders and mortgage or fintechs and personal loans. So less of an obvious impact there, probably how I can characterize it.

That's fair. Thank you. And then I thought it was interesting, your comment earlier saying perhaps we're at the bottom on the personal loan issuance side. I was just curious if we could just dig into that comment a little bit and what gives you confidence that you think that vertical can improve at least from here or at least not go down further?

Right. So internally, we're seeing sequential growth in personal loans. Things seem to have stabilized. It seemed like -- ever since the middle of 2022, it was incremental tightening every quarter, more talk of this impending spike in unemployment. And so, I feel like more recently that that tune has changed a little bit. Even some of the personal lending partners out there, they don't lend from their own balance sheet in some cases and their access to capital seems to be improving a little bit, too. So it's just a general sense that things are stabilizing a bit there and people are starting to look for volume again.

That's helpful. I'm sorry, just one more for me. Just curious if you've seen any heightened activity around the student loan, news that's been out recently? And do you think that's been a driver of some of your traffic?

Right. So this -- so the student loans, high level, there's been the Supreme Court ruling followed by the Biden administration putting out several initiatives for forgiveness, so applicable to a smaller subset of borrowers. At this point, we're really waiting for the outcome of the current forgiveness proposals. And just taking into account the frequent litigation and policy changes, which all in all gives us pretty low visibility in terms of predicting the timing or outcome of political and legal activities in play, right? So, from a forecasting perspective, we're really not expecting much of a change in 2023.

Okay. That's helpful. Thank you very much.

Yes.

I'm showing no further questions at this time. I would now like to turn the conference back to management for closing remarks.

All right. Thanks, everyone. Before we wrap up, I really wanted to give a sincere thanks to our Nerds for their hard work during the quarter. Through this credit cycle in the next, we remain committed to executing on our strategy by investing opportunistically in our business and building on our significant reach to capture more consumer mind share in our growing market. I look forward to sharing more highlights and examples of our relentless improvements in Q3.

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