Yelp Inc. (NYSE:YELP) Q3 2023 Earnings Call Transcript

Yelp Inc. (NYSE:YELP) Q3 2023 Earnings Call Transcript November 2, 2023

Yelp Inc. beats earnings expectations. Reported EPS is $0.79, expectations were $0.35.

Operator: Hello, and welcome to the Yelp Third 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 to 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 third 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 Web site 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, adjusted EBITDA margin, and free cash flow, 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 Web site, 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 historical reconciliation of GAAP to cash flows from operating activities to free cash flow.

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

Jeremy Stoppelman: Thanks, James, and welcome everyone. Yelp delivered its 10th consecutive quarter of double-digit revenue growth, a testament to our product initiatives and consistent execution. We grew net revenue by 12% year-over-year to a record $345 million. We delivered this performance while also expanding net income margin by 14 percentage points, and adjusted EBITDA margin by four percentage points from the prior year period. Profitable growth was generated across the business as our teams continued to innovate and execute against our product roadmap. This resulted in record advertising revenue in both of our broad categories, services and restaurants, retail, and other. Services was particularly strong, with advertising revenue up 14% year-over-year, led by approximately 20% year-over-year growth in home services.

At the same time, our RR&O advertising revenue growth remained robust, up 10% year-over-year. With record advertising demand in the quarter, our efforts to deliver more value to advertisers has clearly resonated. The product improvements we’ve made to enhance our ad formats and ad system drove more high-quality clicks to our customers in the third quarter. In fact, ad clicks returned to year-over-year growth, increasing by 9% from the prior-year period, a marked improvement from flat year-over-year growth in the second quarter. At the same time, year-over-year growth in average CPC moderated compared to the second quarter, at 4%. We also made progress against our initiative to drive sales through our most efficient channels. Self-serve revenue increased by 25% year-over-year, while multi-location revenue increased by 10% year-over-year.

At a combined 51% of advertising revenue, we continue to see significant opportunities to grow each channel in the years ahead. In summary, Yelp delivered another great performance in the third quarter as our product-led strategy continues to strengthen our business and our team executes against our plan, we have even more conviction in the durability of Yelp’s consistent growth. Looking ahead, I continue to see tremendous opportunities for innovation and profitable growth, and remain focused on generating long-term shareholder value. With that, I’d like to turn it over to David.

David Schwarzbach: Thanks, Jeremy. Third quarter net revenue increased by 12% year-over-year to $345 million, $3 million above the high-end of our outlook range. We were pleased to see the full amount of this outperformance flow through to the bottom line. Net income increased by 539% year-over-year with positive $58 million, representing a 17% margin. Adjusted EBITDA increased by 30% year-over-year to a record $96 million, $7 million above the high end of our outlook range, and representing a 28% margin. Top line growth was driven by an increase in advertiser demand as reflected in record average revenue per location across categories. And advertising locations were relatively flat compared to the second quarter of 2023, decreasing 2% year-over-year to 561,000.

In services, ad revenue increased by 14% year-over-year to a record $206 million. In RR&O, ad revenue increased by 10% year-over-year to a record $124 million. Turning to expenses, third quarter expenses decreased from the second quarter, and increased by 3% year-over-year. As we’ve stated previously, we continue to expect headcount 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. In the third quarter, we increased adjusted EBITDA margin by four percentage points year-over-year to a record 28%, while SBC as a percentage of revenue remained flat, reflecting the high-quality incremental margin.

To reach our target, we are focusing our product development hiring efforts outside of the United States, particularly in the U.K. and Canada, as well as adjusting our overall mix of compensation throughout the organization. As a result, we plan to ship the substantial portion of our equity compensation to cash compensation in 2024. If we had made these compensation mix changes in 2023, SBC would have decreased by approximately $20 million, and cash expense would have increased by the same amount. Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy. In the third quarter, we repurchased $50 million worth of shares at an average purchase price of $41.08. As of September 30, 2023, we have $132 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, following our strong Q3 results, we are raising our outlook range for the year. We now expect full-year revenue will be in the range of $1.332 billion to $1.337 billion, reflecting a $10 million increase at the midpoint compared to our previous outlook. Turning to margin, we now expect adjusted EBITDA will be in the range of $319 million to $324 million for the full-year, reflecting a $7 million increase at the midpoint compared to our previous outlook. We currently estimate that our effective GAAP tax rate, the four discrete items for 2023 and beyond will be in the range of 22% to 26% as a result of recent guidance provided by the IRS.

In closing, Yelp’s third quarter results demonstrate our ability to sustain double-digit revenue growth, while expanding margins. Amid continued macro uncertainties, our product-led strategy has continued to strengthen Yelp for the long-term, giving us even greater confidence in our ability to drive long-term profitable growth. With that, operator, please open up the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Jason Kreyer of Craig-Hallum. Your line is open.

Jason Kreyer: Perfect. Thank you, guys. So, just in regards to the return to growth in clicks, I’m curious, is part of that due to the test budgets that you’ve started to deploy in SCM? And then maybe if you can just talk a little bit more about what you saw as you deployed those SCM test budgets and maybe what your expectations are as you spend more there into Q4?

Jeremy Stoppelman: Hi, Jason, this is Jeremy, I’ll take your question here. We were really pleased to see clicks return to growth, up 9%. Looking into the causes there, there’s a few things that we’ve been doing that are continuations of a theme on the product side. Ad tech has been an area where we’ve been investing significantly. And we noted in the letter there was some better pacing, so that contributed to creating additional inventory in clicks. We have an improvement in the photo selector that leverages AI. We made some ad UX improvements to existing ad units. And then, on the consumer side, we also have been working on the mobile Web site as well as desktop web. Saw some increased engagement from that. So, there’s a number of things we’ve been doing to drive additional value to advertisers, and they really paid off in the quarter. So, we were delighted to see that. I guess as far as the second part of your question —

Jason Kreyer: [Multiple Speakers] Okay. Go ahead. Sorry.

Jeremy Stoppelman: [Indiscernible] further or do you want me to talk about something else?

Jason Kreyer: No, go ahead.

Jeremy Stoppelman: Okay, great. Yes, you mentioned SCM and how that’s going. Obviously, very early days, we’re just sort of getting things up and running in the test budget phase. I would say it’s going well so far, but again early. We are excited about this opportunity, especially as we look into 2024 and beyond, there are companies that have predicated their entire business model on SCM, which is an area within services that we’ve historically not played. Yelp has been driven almost entirely by organic traffic. And we think we’ll continue to find a ton of value on the organic side, but we see an opportunity in SCM. Part of that is our unique position. Yelp is relevant to consumers on a daily basis, whereas some of the other players that have operated in this space, really they don’t have an excuse to be talking to consumers all the time, whereas Yelp is broad across so many different categories and has such strong brand recognition.

So, I think that gives us a unique take on this space. And that gets me even more excited about the growth opportunities. I guess back to your original source of our question was like is SCM driving this click percentage. I would say it’s not a material contributor, no.

Jason Kreyer: Okay, that’s very helpful. I wanted to just ask a follow-up on competition. And I know, during the quarter, Google made some changes and started to restrict anonymous reviews. I think you guys have already done that sort for quite some time. But I’m just curious if you think that had any impact on consumer behavior?

Jeremy Stoppelman: Thanks for the question on that. Certainly we see our content as a real advantage. We’ve always leaned into trying to have the most trusted local review content possible. We’ve never allowed simple anonymous star ratings. We always found it frustrating, frankly, that Google with its monopoly position would pretend like those are reviews and mislead consumers. Certainly I see that as a positive side of the industry that folks are waking up to how important trust is. And then, I guess I would just point you to an FTC paper that came out that really highlighted how Yelp has, what we think is the best rating and review system in the industry, you know, really balanced ratings across the different star levels and something that really differentiates us.