Yelp Inc. (NYSE:YELP) Q2 2023 Earnings Call Transcript August 3, 2023

Yelp Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $0.14.

Operator: Hello and welcome to the Yelp Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I’ll now turn the conference over Mr. James Miln, Senior Vice President, Finance and Investor Relations. Please go ahead.

James Miln: Good afternoon, everyone and thanks for joining us on Yelp’s second quarter 2023 earnings conference call. Joining me today are Yelp’s Chief Executive Officer, Jeremy Stoppelman; Chief Financial Officer; David Schwarzbach; and Chief Operating Officer, Jed Nachman. We published the shareholder letter on our Investor Relations website and with the SEC and hope everyone had a chance to read it. We’ll provide some brief opening comments and then turn to your questions. Now, I’ll read our safe harbor statement. We’ll make certain statements today that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

In addition, we are subject to a number of risks that may significantly impact our business and financial results. Please refer to our SEC filings, as well as our shareholder letter for a more detailed description of the risk factors that may affect our results. During our call today, we’ll discuss adjusted EBITDA and adjusted EBITDA margin which are non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with Generally Accepted Accounting Principles. In our shareholder letter released this afternoon and our filings with the SEC, each of which is posted on our website. You will find additional disclosures regarding these non-GAAP financial measures, as well as historical reconciliations of GAAP net income to both adjusted EBITDA and adjusted EBITDA margin.

And with that, I will turn the call over to Jeremy.

Jeremy Stoppelman: Thanks James and welcome everyone. Yelp delivered a number of record results in the second quarter, a testament to our increased product philosophy and consistent execution across the company. We grew net revenue by 13% year-over-year to a record $337 million, representing the ninth consecutive quarter of double-digit growth. We delivered this performance while also expanding net income margin and adjusted EBITDA margin by two percentage points each from the prior year period. Yelp’s elevated pace of product innovation continues to strengthen the company for the long-term. In the second quarter, we leaned into our roadmap to deliver value to advertisers. As a result, businesses spent more on Yelp than ever before across categories.

Advertising revenue from services businesses increased 15% year-over-year with approximately 25% year-over-year growth in the home services category. Advertising revenue from restaurants, retail, and other businesses increased by 11% year-over-year. Our portfolio of down funnel ad products continued to resonate with SMB and multi-location advertisers, and we made progress against our initiative to drive sales through our most efficient channels. Self-serve and multi-location, maintain their strong year-over-year growth rates of approximately 25% and 15%, respectively. As a result, these channels together accounted for the majority of our advertising revenue at 51% for the first time. Turning to product. AI continues to present new opportunities to enhance the product experience for consumers and advertisers alike.

After upgrading our infrastructure over the past year, we’ve been able to leverage neural networks to determine the most useful content to display to consumers on the home feed, as well as to provide them with better targeted ads, which improve the overall performance of our ad system. With a robust pipeline of projects for the remainder of 2023 and beyond, I continue to be excited about the opportunities ahead. In summary, Yelp delivered another standout performance in the second quarter with faster revenue growth than many of our advertising peers. I’m incredibly proud of the execution demonstrated by the entire Yelp team, which has enabled us to deliver consistently strong results. As we look ahead, we remain focused on growing revenue through our strong product pipeline and delivering shareholder value over the long-term.

With that, I’d like to turn it over to David.

David Schwarzbach: Thanks Jeremy. Second quarter net revenue increased by 13% year-over-year to $337 million, $7 million above the high-end of outlook range. We were pleased to see the full amount of this outperformance flow through to the bottom line. Net income increased by 84% year-over-year to $15 million. Adjusted EBITDA increased by 25% year-over-year to $84 million, $14 million above the high-end of our outlook range, and representing a 25% margin. Top line growth was driven by an increase in average revenue per location, which reached a record level in the second quarter. Paying advertising locations were relatively flat, down 1% year-over-year. In services, ad revenue increased by 15% year-over-year to a record $200 million, primarily driven by growth in average revenue per location.

In restaurants, retail, and other, ad revenue increased by 11% year-over-year to a record $122 million, also driven by growth in average revenue per location. In the second quarter, we delivered value to advertisers through high-quality clicks and soft stability in the year-over-year growth rates of our ad clicks and average CPC metrics compared to the first quarter. Ad clicks were flat year-over-year, while average CPCs increased by 14% year-over-year. Turning to expenses. Other than general and administrative expenses, which include a one-time litigation settlement, second quarter expenses decreased from the first quarter and were lower than expected due to a number of factors, including lower employee related expenses and marketing spend.

In addition, while employee attrition remains lower than anticipated, total headcount decreased slightly from the first quarter, and we continue to anticipate that it will be approximately flat year-over-year by the end of 2023. We also remain focused on enhancing the quality of adjusted EBITDA by reducing stock-based compensation as a percentage of revenue to less than 8% by the end of 2025. To reach our target, we are focusing our product development, hiring efforts outside of the United States, particularly in the UK and Canada, as well as adjusting our overall mix of compensation throughout the organization. Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy.

In the second quarter, we repurchased $50 million worth of shares at an average purchase price of $31.98. As of June 30th, 2023, we had $182 million remaining under our existing share repurchase authorization. We plan to continue repurchasing shares throughout the remainder of the year subject to market and economic conditions. Turning to our outlook. Now halfway through the year, we are narrowing our outlook ranges for revenue and adjusted EBITDA. We expect net revenue will increase from the second quarter to be in the range of $337 million to $342 million in the third quarter. For the full year, we are raising our outlook range and now expect net revenue to be in the range of $1.32 billion to $1.33 billion, reflecting a $20 million increase at the midpoint compared to our previous outlook.

Turning the margin. We expect third quarter expenses will be approximately flat compared to second quarter expenses, excluding the litigation settlement, and as a result, we anticipated adjusted EBITDA will be in the range of $84 million to $89 million. For the full year, we now expect adjusted EBITDA will be in the range of $310 million to $320 million, an increase of $15 million at the midpoint compared to our previous outlook. In closing, with nine sequential quarters of double-digit revenue growth, Yelp’s second quarter results demonstrate our ability to sustain top line growth, while delivering healthy profitability. Our product velocity across our strategic initiative supports the durability of our business amid continued macro uncertainties.

As we look to the second half of the year, we remain focused on executing against our strategic priorities and product roadmap. With that operator, please open up the line for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Eric Sheridan: Thanks so much for taking the question. I want to come back to your comments on optimization of both surfacing content for the platform as well as ad targeting overall. Is there a way to either qualitatively or quantitatively talk to us about the momentum you might be able to build around the company looking out through the end of this year and into next year with respect to how under optimized the platform might be in elements like this, could move you in a very different direction in terms of revenue re-acceleration, that would be number one. And then just wanted to make sure I can understand the characterization of the way the implied Q4 revenue tracks. Is there elements of tougher comps or conservatism that might be implied in the implied Q4 revenue against your full year? Just want to make sure we understand a little bit about the trajectory through the end of the year. Thanks so much.

Jeremy Stoppelman: Hi, Eric. Thanks for the question. I’ll take maybe the first half and David can hop in for your second question there. So, the ad tech stack and ad targeting in general has been incredibly deep well for us. We’ve been executing in this area for years and years, and we continue to have a super expansive portfolio projects to tackle to improve our efficiency there and our ad matching. So, there’s absolutely no slowing down. We talked about how we put in place the infrastructure that allowed us to upgrade our matching algorithm using neural nets. That proved to be a positive in the quarter. It also helped — besides helping with ad ranking, we also enhanced the photo selection in our ads, leveraging neural nets as well.

If you look across the entire category of these advanced technologies, sort of in the AI sphere, you also have LOMs. We talked a lot about our initial efforts with LOMs. Last quarter, we continue to see a lot of green shoots, and opportunities there to leverage LOMs. LOMs, of course, are really great at summarizing content, taking a query for instance, and expanding across all of the possible synonyms. And so, we have a very concerted effort within Yelp to leverage that to the maximum possible. So, we are running full speed ahead. We anticipate that there will continue to be great impactful optimization opportunities on the ad side. It’s also not limited — the impacts are not just limited to the ad side. There’s also impacts on the consumer side.

We had a win with our home feed, which is on the app, where we were able to choose a better ranking as well using neural nets. And so that was a positive that resulted in better user retention. So, that was great to see. And then finally, we talked a little bit about this last quarter. I think there are — there’ll continue to be opportunities with LOMs to do things that before were really difficult and expensive and may have involved human things like summarizing what’s on a page. So, you think about — we have a business, there’s lots of great reviews, but maybe you just want to get the essence or the gist of like, well, what are the reviews say, what’s this business really about? What are they offering? And we’re able to do that now trivially.

So that’s another example where just — now that we have the technology boom, you get an upgrade. So, maybe handing off to David on the second part here.

David Schwarzbach: Hi, Eric. So, obviously, we saw strong momentum through the second quarter, 13% growth on top of 13% growth in the first quarter. And obviously, for the guide we were able to raise the full year. While we’ve all seen very encouraging macroeconomic data over the past couple of weeks, whether it’s inflation or the GDP number for the second quarter, consumer sentiment. There are still uncertainties as we go through the rest of the year. And as usual, whenever we’re providing guidance, we want to take those risks and uncertainties into account for how we expect to perform through the remainder of the year.

Eric Sheridan: Thanks so much.

Operator: Your next question comes from the line of Justin Patterson with KeyBanc. Your line is open.

Sergio Segura: Great. Thank you. This is Sergio on for Justin. We had two questions. First on just the views of consumer demand and engagement on Yelp right now. In the letter you noted that clicks were flat for the quarter and a 10% decrease in Request-a-Quote. So, just wondering how you’re seeing demand and engagement on platform. And then relatedly to that, just how consumers are interacting with some of the new features that you guys rolled out earlier this year. And then the second question around services monetization, it looks like that’s been driven by improved matching. So, is there any way to quantify how much matching has improved? Or just maybe some color on how the workflow has improved for service providers due to that matching improvements that you’ve got to make? Thank you.

Jeremy Stoppelman: Hi, Sergio. I think I can try and handle both your questions here. So, on the consumer demand side, I would characterize as continued steady, much like last quarter. We have pivoted a lot of resources in the past year over to the consumer side. And we see a lot of white space opportunity and some early signs of success. Contributions are up. And so, we’re happy to see that. We continue to make improvements like we talked in the letter and I just mentioned earlier, some of the home feed improvements we’ve got that are showing user retention improvements. So, the projects are launching. We’re seeing impacts. Of course, there’s a backdrop here of — a little bit of a headwinds from macro. But I think what we’re seeing — well, we’ve got a — we’ve had a bit of a headwind with macro, but what we’re seeing is the economy.

I think the consensus is that’s actually improving. And so what was a headwind is now potentially a tailwind. And so, between that and some of the investments and things we’re shipping on the consumer side, I think, there’s a lot of opportunity ahead in terms of consumer demand. Switching gears to the second question you had there. On services monetization, we continue to chip away, and make improvements to our ad tech stack. That’s been a winner for us for a number of years. Continue to execute well there. And in fact if you — on the ad click side and services, we were up year-over-year in Q2, so that was great to see. With Request-a-Quote, we continue to invest deeply there. We highlight in the letter, we’re masking phone numbers, so we’re able to capture phone numbers from consumers to the extent they’re willing to volunteer it and then hand that to our advertisers, which improves the quality of the lead.

And so, while there was some softness or has been softness for a while, in terms of project volume, the quality of those leads remain strong. And in fact, we’re doing things to boost the quality of those leads. And I think when you look at — look forward into, or you look into home services revenue, you could see the power of that quality, which was 25% year-over-year revenue growth. And so, advertisers are clearly seeing value, I think at this time with those macro headwinds. Maybe business has been a little slow for a lot of folks and they’ve looked — been out there looking for what are the best ROI positive opportunities to invest. There are hard earned dollars and clearly they’re turning to Yelp. And so that’s great to see.

Operator: Your next question comes from the line of Jason Kreyer with Craig-Hallum. Your line is open.

Jason Kreyer: Great. Thank you, guys. Just wanted to dissect add revenue in terms of clicks and CPCs. Clicks have been relatively flat recently, but CPCs have grown a lot. Curious if you think there’s any upward limits there, or if you can continue to grow CPCs going forward.

David Schwarzbach: Hey, Jason. It’s David. So, maybe just on clicks and CPCs, if I can step back for one moment. Importantly, when advertisers come to Yelp, they provide us with budget and then it’s up to us to optimize that budget on their behalf. The way we do that is by running an auction, and we’re really looking to find the market claim price at that time for that visitor in that category, in that geography. And so, we are not trying to determine the CPC or the clicks. We’re actually really using all of the machine learning tools that have been built into the ad tech stack and that Jeremy has talked about to optimize the deployment of that budget. That being said, one of the things that is very important is that we are delivering valuable leads to advertisers, and we believe that we have been able to continue to increase the value of those leads that are being provided to advertisers.

One of the ways that we assess that is whether revenue per paying advertising location has been increasing. We did reach a record overall in the second quarter, and particularly revenue propane advertising location and services reached a record in the second quarter. Our belief is that as we can continue to deliver valuable leads, it does provide meaningful headroom on CPCs. But again, I just want to underscore, we don’t per se try to set the CPC. We are trying to optimize the best way to deliver value to the advertiser given their budget.

Jason Kreyer: Perfect. Thanks for the clarification. In the letter you also highlighted positive early results from Yelp Guaranteed in — the nationwide rollout. Just wondering if you can unpack those early returns or what you saw during testing.

Jeremy Stoppelman: Hi, there. Yeah. I’m happy to touch on Yelp Guaranteed. As of today, we are nationwide. So, that’s some exciting updates to come up or to provide on Yelp Guaranteed. We’re really proud to have that rolled out. And the early results showed an increase in project submissions as well as ad clicks. So, this is built on top of Request-a-Quote. I think the way to think about it is it’s part of our continued investment in Request-a-Quote, which provides really great consumer experience. Puts consumers in touch with multiple pros, allows them to start conversations. Consumer can provide the information that they feel is necessary on the project side as well as their own contact information. We also had a phone number masking launch in the quarter.

We highlighted that in the letter, so that maintains the consumer’s privacy, but provides something that we know is really important to pros in love, getting that phone number so that they can try to pitch on the phone, pitch live they all feel. That — they have strong sales skills and we want to give them the opportunity to close that business. So, we continue to invest significantly in Request-a-Quote. And Yelp Guaranteed I think is a great demonstration of that commitment.

Jason Kreyer: Thank you.

Operator: Your next question comes from the line of Colin Sebastian with Baird. Your line is open.

Colin Sebastian: Thanks guys. Good afternoon. Congrats on a really good quarter. Maybe just following up on that on Request-a-Quote, just kind of looking at the trends sequentially and perhaps wondering what you guys may be focused on in terms of driving more velocity there. And then, on the audience network, just curious if that has a larger influence on the business. What are your thoughts there on the go-to-market strategy? Is this something that you want to invest in more, maybe dedicate sales to that or what’s the approach? Thank you.

Jeremy Stoppelman: Hey, Colin. This is Jeremy. I think I can tackle the first one here on Request-a-Quote and services trends generally. I think, stepping back and looking at the performance in the quarter, pretty fantastic, 15% year-over-year revenue growth on services, 25% year-over-year revenue growth in home services. Really it appears like Yelp is taking share. So, we’re very excited to see that. Ad clicks and services were up year-over-year in Q2, so, from that perspective, the pie is growing. I think if you look at macro, you can see there’s been headwinds. The consumer hasn’t been as bold as they were in 2021, early half of 2022. But still, I think the overall performance for Yelp is incredibly strong in the face of that. And as we look out in the second half, I think the consensus view is that the economy is improving, and the consumer is in decent shape. And so that could take a headwind and turn it into the tailwind.

David Schwarzbach: Hey, Colin. This is David. Maybe just to clarify on audience network, did you mean Yelp Audience or perhaps you were referring to SEM marketing? Just want to make sure we understood, what you were asking.

Colin Sebastian: Yeah. The Yelp Audiences — the Yelp Audience Network.

Jed Nachman: Great. Hi, Colin. This is Jed. I can take that one. Overall, we were really pleased with the progress that we’ve made on — in — with Yelp audiences. This is largely an incremental product that — if you look back a couple years, it was at a $15 million run rate and we moved to a $30 million run rate last year approximately, and our approximately a $45 million run rate this year. For location-based businesses, it’s blended into what they’re already buying, and allows us to expand wallet share within our existing book of business. And to that extent, we have the go-to-market team in place. And we’ve actually built it up over the past year, and continue to see kind of further penetration there. One of the things we also talked about, particularly with that multi-location channel is that we have a — kind of an agency development team now, that we’ve grown, whose job it is to kind of get out there to the traditional Madison Avenue advertising agencies and do two things.

Number one, educate them on what is more a more broad product strategy within multi-location. And as we’ve kind of released products, it’s important that we’re in front of those agencies. And number two, take out some of the friction involved in those purchases, i.e. master service agreements in some cases, and really understanding how those agencies work. And that really helps on not only the location-based businesses, but on the brand side. It’s still early, but we’re pleased with the growth that we’ve seen, particularly in the current macro environment for brands and especially with compared to the performance by some of our peers on the brand side. We are encouraged by the signals that we’re getting out of the Yelp Audiences and we’ll continue to invest going forward.

Colin Sebastian: Thank you.

Operator: Your next question comes from the line of Stan Velikov with Wells Fargo. Your line is open.

Stan Velikov: Hi. Thanks for taking my question. I guess, first of all, just on your latest product initiative, which do you think are the lowest kind fruits there? And which do you expect among those to provide the most growth opportunities?

Jeremy Stoppelman: Hi, there. Stan, this is Jeremy. So, looking at a growth, we see a lot of opportunity ahead of us, both in the short-term and long-term. We’re at nine consecutive quarters now of double-digit revenue growth. We’ve really been leaning into our product-led strategy for some time now, and I think it’s clear it’s working. Self-serve and multi-location for the first time. We’re 51%, the majority of our revenues, so we feel really good about that. Leaning into self-serve and multi-location channels has been a big part of our strategy, continues to be a big part of our strategy. In terms of where do we continue to get low hanging fruit and a lot of leverage, it’s back to some of the topics of the that were earlier on the call, like our ad tech innovation.

We have our own ad tech stack with the addition of LLM capabilities as well as neural net capabilities, which we highlighted in the letter. This quarter, we continue to make improvements in the efficiency of our algorithms and the more efficient that we make our matching algorithms that essentially generates inventory for advertisers at a thin air, because we’re just wasting less inventory because we know what the consumer is really looking for. We’re matching them with a better provider. The consumer is actually getting better experience and the quality of the lead goes up. So, it’s a really positive feedback loop to the extent that we continue to find wins there. And again, our portfolio in on the ad tech side is strong. We’re not running out of ideas.

We’re not sort of scraping the bottom of the barrel. It’s a deep well, and we’re going to keep going for it. We also have some exciting opportunities off Yelp. Jed, just touched on Yelp Audiences, that’s a newer, exciting area for us. We highlighted on the last call SCM, as a big opportunity that’s hanging out there. It’s not something that we’ve really pursued. But we know there’s public companies that rely on SCM leads in the services sector. And that’s an area we haven’t even participated in. And so, when we look at Request-a-Quote and Yelp Guaranteed and some of our investments there, that’s all building towards tapping into that — to the SCM paid leads, which we think provides another — yet another avenue for growth. It’s not the only one, but it’s an exciting one for us to tap into as well.

Request-a-Quote side, we continue to make great strides and we’ve got obviously the Yelp Guaranteed improvement to highlight as well as, phone number masking is just yet another improvement. Last quarter there was taking friction outta the flow and streamlining the consumer login experience as well as the business owner side experience. And then on the consumer side, there’s plenty of opportunity. We continue to improve contributions and the contribution flows. We’re now getting in twice as many video contributions as we were — now that we incorporated video into our review contribution flow, for example. And finally, we talked about in the letter our home feed improvements, that we just released that improved user engagement. So that’s just kind of a quick tour around all the areas we’re investing in.

But from my perspective, there’s a lot, and there’s a lot of different paths towards growth, which gives us confidence in the long-term.

Stan Velikov: All right. Great. Thank you.

Operator: [Operator Instructions] Your next question comes from the line of Shweta Khajuria with Evercore ISI. Your line is open.

Shweta Khajuria: Thanks for taking my question. I guess — and thanks for that summary, Jeremy. That was well put. I guess, my follow-up is on multi-location. So, how would you — what is a low hanging fruit there? Or maybe where do you see as the biggest opportunity when you think about the product suite that Yelp has today for multi-location versus maybe where the market is, or where you were two years ago? You are much better in terms of the offerings you have, but where do you see the biggest opportunity?

Jed Nachman: Hi, Shweta. This is Jed. I can start out. Obviously, we’re really pleased with the performance of the multi-location channel over the course of Q2. It was up 15% year-over-year on a relatively tough comp from last year. It was actually up 15% quarter-over-quarter sequentially. And the team is really performing, kind of on the blocking and tackling side. We’ve obviously invested in the team a lot, and I think it’s kind of a world-class team at this point. And we’re able to kind of tackle it at all ends of the spectrum i.e. directly to client in the mid-market section– in the mid-market channel, in the partner channel, in the enterprise channel as well. And those relationships continue to be deeper and deeper as time goes by.

We’ve highlighted Yelp Audiences as a growth driver for both location-based customers as well as brand advertisers that we’ve never been able to kind of access before. Also made a ton of improvements kind of on the UI of the ads. Multi-location advertisers have a different need in, a lot of cases than, some of the local, and versus some of the local advertisers and really making sure that we continue to innovate on the product side in terms of what those advertisers are looking for at — in terms of our larger customers. Overall, we do have another area I would just highlight that we continue to be on top of is attribution. Clearly in the multi-location channel attribution becomes really important and particularly in the economic environments that we’re in.

Folks want to know that they’re getting ROI on their advertising, and we’re able to show that through various — in various ways. Off Yelp attribution is important. But we also have YSV, which is our Yelp Store Visits, which has really come into its own over the last few years. And I think it’s a real asset of Yelp that we have our own first party data, and are not completely reliant on third parties in order to kind of show the efficacy of our ads. And in general, obviously it’s — there’s a lot of spend that goes through that channel and we feel like we’re well positioned to kind of take that as we go forward.

Shweta Khajuria: Okay. Thanks Jed.

Operator: Your next question comes from the line of John Colantuoni of Jefferies. Your line is open.

Unidentified Analyst: Hi, there. This is Chris on for John. Thanks for taking a question. You’ve called out macro uncertainty a few times in the shareholder latter. Could you just unpack that in a little more detail for us and maybe talk about what you’re specifically seeing and kind of how you measure the impact on — each of your segments, maybe staffing [ph] services versus RRO, and is it kind of fair to say those macro headwinds might be subsiding with it? Thank you.

Jeremy Stoppelman: Chris, thanks for the question. On the macro front, it’s obviously been complex. It’s been very hard for folks broadly to forecast where we think we’ll land. Clearly, we’ve seen the US economy holding up very nicely. And I just want underscore in particular, when we look on the SMB side in the second quarter, we did broadly see strength in advertising demand. Obviously, we’re pleased with our ability to generate that, but I just want to underscore in SMB, we saw strengthen advertising demand. And because we support the local economy, we think that we’re very well placed obviously to help local advertisers, SMB businesses to reach consumers, and they have proven durable in both their business and in their demand for advertising.

So that’s definitely a strength that we’ve been seeing. In terms of the overall economy and how it may play out in the coming months, I — unfortunately, I’m not sure we have more insights than everybody else who’s paying so much attention to this. But I just want to underscore that we think that our focus on executing around delivering value to advertisers is what has enabled us to perform among the best companies of our peers. And you just look at Q2 for us, we deliver 13% growth and we delivered 25% adjusted EBITDA margin. That’s the two percentage point improvement there. So, we were really pleased with our ability to obviously stay focused on the things that are in our control, and that’s what we’re going to do through the rest of the year.

Unidentified Analyst: Great. Thanks so much.

End of Q&A:

Operator: This concludes the question-and-answer session as well as today’s conference call. Thank you for joining. You may now disconnect your lines.