Yelp Inc. (NYSE:YELP) Q4 2023 Earnings Call Transcript

Yelp Inc. (NYSE:YELP) Q4 2023 Earnings Call Transcript February 15, 2024

Yelp Inc. reports earnings inline with expectations. Reported EPS is $0.37 EPS, expectations were $0.37. YELP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the Yelp Inc. Q4 2023 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions] Thank you. I will now turn the call over to James Miln, Senior Vice President, FP&A and Investor Relations. You may begin your conference.

James Miln: Good afternoon everyone, and thanks for joining us on Yelp’s fourth quarter and full year 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 may 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 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 a historical reconciliation of GAAP cash flows from operating cash flows to free cash flow.

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

Jeremy Stoppelman: Thanks James and welcome everyone. Yelp delivered one of the strongest financial performances in our company’s history in 2023. We set multiple records as local advertisers continued to see the value of Yelp’s high-intent audience. Net revenue increased by 12% year-over-year to a record $1.34 billion in 2023. Net income nearly tripled year-over-year to $99 million and adjusted EBITDA grew to $330 million, delivering a strong 7% net income margin and a record 25% adjusted EBITDA margin. These results demonstrate the quality of execution by our teams as they delivered against our product-led strategy. We rolled out nearly 60 new features and updates over the last 12 months to help consumers more effortlessly connect with the best local businesses.

Our initiatives to grow quality leads and monetization and services continued to pay off in 2023 as advertising revenue from services businesses grew 14% year-over-year to a record $793 million. We believe that Yelp gained market share in 2023 by continuing to differentiate the product experience to better connect consumers with trusted pros, which enabled us to deliver more valuable leads to services businesses. We monetized approximately 30% of leads in services, an increase of approximately 5 percentage points from 2022. The home services category remained particularly strong in 2023 with year-over-year revenue growth of approximately 20%. Since 2019, revenue from this category has compounded at an annual growth rate of nearly 20%. We also saw improved consumer demand in the fourth quarter, with request to quote requests growing by approximately 5% year-over-year.

Advertising revenue from restaurants, retail and other businesses increased by 10% year-over-year to a record $483 million. Average revenue per location grew every quarter throughout 2023 to reach a record level in the fourth quarter, driven by increased spend across our breadth of offerings up and down the funnel. David will talk more about fourth quarter results in RR&O, where we saw weakness in the back half of December due to macro impacts that have continued into the new year. In 2024, we plan to invest more in our services categories where we see a greater near-term opportunity, particularly within home services. In 2023, we worked to enhance the consumer experience with new discovery review and services features. We introduced AI-powered visual search, a more engaging and interactive review writing experience, and Yelp-guaranteed, which helps consumers confidently connect with trusted service pros.

While our overall traffic levels remained about flat in 2023, we continued to grow the trusted content that attracts our large and valuable audience. Yelp users contributed 22 million new reviews in the year to reach a total of 287 million cumulative reviews, up 8% from 2022. Our ad system continued to deliver valuable clicks to advertisers in 2023 by efficiently matching consumers with advertisers. Ad clicks returned to year-over-year growth, increasing 5% as we executed against our roadmap of ad system initiatives. Average cost per click increased by 9% year-over-year as a result of robust advertiser demand for Yelp’s valuable high-intent clicks. We were encouraged by the combination of increasing ad clicks and moderating CPCs in the second half of the year, which typically has a positive impact on retention.

We also made progress on our initiative to drive sales through the most efficient channels, self-serve and multilocation. Together, these channels represented approximately 50% of advertising revenue in 2023. Self-serve revenue increased by approximately 20% year-over-year and multilocation revenue grew by approximately 15% year-over-year. Investments in our strategic initiatives have established Yelp as a leading resource for consumers to confidently search for and discover great local businesses across a broad range of categories, and we plan to build on this position by investing in a portfolio of product and marketing initiatives designed to drive deeper engagement and profitable growth. In 2024, the services category will be the major focus of our product-led strategy.

We believe we have an opportunity to build Yelp into the best place for consumers to connect with trusted service pros. While we have made great progress already, we plan to evolve our product offerings by further reducing friction for consumers and pros so they can more seamlessly coordinate throughout the hiring journey. By investing in our robust product roadmap and services, we plan to continue to enhance the experience for consumers while driving more quality leads to advertisers, both on Yelp and through search engine marketing. Over the coming quarters, we expect to scale our SCM efforts across all-home services categories and believe they have the potential to accelerate overall project growth over the long term and drive more valuable leads to service pros.

In addition to continuing to raise the bar on services product innovation, we plan to execute on our strategic initiatives to deliver even more value to both consumers and advertisers across Yelp’s broad set of categories. Our advertising teams are actively testing ways to more effectively monetize our motivated down funnel local audience, both on the Yelp platform as well as increasingly off-Yelp. We also plan to continue to drive profitable growth through our most efficient channels, self-serve and multi-location. Our team is repeatedly shown that our focus on our product-led strategy can drive durable growth, and we plan to build upon this momentum in 2024. With that, I’d like to turn it over to David.

David Schwarzbach: Thanks Jeremy. I will now turn to our fourth quarter results. Fourth quarter net revenue increased by 11% year-over-year to $342 million, at the high end of our outlook range. Net income increased by 36% year-over-year to $27 million, representing an 8% margin. Adjusted EBITDA grew by 19% year-over-year to $96 million, representing a 28% margin, up 2 percentage points from the fourth quarter of 2022. Robust advertiser demand for our valuable high-intent ad clicks drove this strong performance. Total advertising revenue increased 11% year-over-year to a record $327 million in the quarter, reflecting strong growth in average revenue per location, while overall locations remained approximately flat for the year.

Advertising revenue from services businesses increased by 14% year-over-year to $203 million in the fourth quarter. At 62% of our advertising revenue, services was the main driver of our revenue growth and our product roadmap provides multiple growth levers for the category on and off-Yelp. Advertising revenue from restaurants, retail and other businesses increased by 7% year-over-year to $124 million in Q4. This represented a 3 percentage point deceleration from Q3. Turning to expenses, this past year was a clear demonstration of how disciplined investments in our product-led strategy can drive profitable growth. We ended 2023 with the total headcount of approximately 4,700, down modestly year-over-year. At the same time, full-year net revenue increased by 12% year-over-year.

This contributed to a record adjusted EBITDA margin of 25% for 2023, an increase of 2 percentage points year-over-year. As we turn to 2024, we will continue to be disciplined in our allocation of resources while remaining focused on opportunities to acquire services projects through search engine marketing. Overall, we plan to hold our headcount approximately flat in 2024. We also remain focused on increasing the quality of adjusted EBITDA. We have taken significant action to shift our compensation mix between stock and cash. We expect the number of shares subject to employee equity awards granted in 2024 to be approximately 65% lower than in 2023. While it is important to note that the expected benefit of this action to expenses will be largely offset by cash compensation increases in 2024, we expect the stacking impact of this reduction in stock-based compensation to begin to have a positive impact on our GAAP profitability in subsequent years.

We remain committed to lowering stock-based compensation as a percentage of revenue to less than 8% by the end of 2025. Returning capital to shareholders through share purchases remains an important element of our overall capital allocation strategy. Our capital allocation strategy consists of three main elements. First, maintaining a healthy cash balance to fund our operations; second, retaining capacity for potential acquisitions; and third, returning excess capital to shareholders through share repurchases. Since we began our share repurchase program, we have repurchased nearly $1.4 billion worth of shares, including $200 million in 2023. As of December 31, 2023, we had $82 million remaining under our existing repurchase authorization. We plan to continue repurchasing shares in 2024 subject to market and economic conditions.

To support these ongoing repurchase plans, in February our Board of Directors authorized us to repurchase an additional $500 million worth of shares. Turning to our outlook. As Jeremy shared, we have a strong portfolio of initiatives to drive revenue growth. We continue to believe in the significant long-term opportunities ahead and our team’s ability to capture them. As we exited Q4 and moved through January, we saw weakness across our RR&O categories. We believe this broad-based softness reflects a variety of factors, including a slowdown in consumer traffic from severe weather and widespread respiratory illnesses, as well as margin pressure for businesses from higher input costs. In contrast, services performed in January. Taking these risks and uncertainties into account, we expect net revenue will be in the range of $330 million to $335 million for the first quarter.

For the full year, we expect net revenue will be in the range of $1.42 billion to $1.44 billion as our services initiatives gain traction. Turning to margin, we expect expenses to increase from the fourth quarter to the first quarter, reflecting our cash compensation adjustments and incremental marketing investments, particularly for acquiring services leads through SCM. We also expect a seasonal increase in expense, primarily driven by payroll taxes and benefits. As a result, we anticipate first quarter adjusted EBITDA to be in the range of $47 million to $52 million. For the full year, we anticipate adjusted EBITDA to be in the range of $315 million to $335 million, reflecting in part our shift from equity to cash compensation. We currently estimate that our effective GAAP tax rate before discrete items for 2024 and beyond will be in the range of 24% to 28%.

In closing, we are proud of our performance in 2023, which was filled with record results and product innovation. We intend to continue to execute on our product-led strategy with a focus on services in 2024, while maintaining financial discipline to deliver long-term shareholder value. With that Operator, please open up the line for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Colin Sebastian with Baird. Please go ahead.

Colin Sebastian: Thanks guys. Good afternoon and congrats on the year. I guess first off, with advertiser demand driving the majority of growth on the platform. How much of an impact are you expecting from the search marketing initiatives in terms of driving new users or traffic? And is that factored in the outlook for the top line growth for the year? And then secondly, monetizing 30% of leads today, that’s a nice step up from 25%, and I guess I’m curious what a reasonable goal is as you make these improvements in the services category and maybe to contextualize that a bit you know what are the two or three most important initiatives there to unlock that value? Thank you.

Jeremy Stoppelman: Hi, Colin, this is Jeremy, I’ll take a stab, I’ll take both of your questions here. We do have strong advertiser demand, as you said, particularly within services, and you know we’ve made continued progress with Request-a-Quote, and as you mentioned we’ve made significant progress with respect to monetizing connections. What SCM allows us to do is tap into really a greenfield for us opportunity, where there aren’t a lot of leads out there that could benefit our advertisers and introduce new users to the platform. And we really haven’t played in that space. There’s businesses that do hundreds of millions, many hundreds of millions of dollars in revenue in this area and we’ve really not approached it. And partially that’s because we’ve been building to this moment working on Request-a-Quote in particular, and we’ve made incredible strides there.

And now we’ve really wired it up, we’ve got all the plumbing, we’re out in the market, we are buying leads, we in fact upped our spend level by $5 million. And so, we’re really excited about what SCM could mean, particularly for services. I think it is important to note that overall services is a relatively small amount of traffic, compared to the overall picture. So, we do think there is going to be a positive benefit in introducing new people to the platform, and those users very well may be – extremely valuable, because they’re coming in for a services request, which is by definition much more valuable than say restaurant searcher. So, we do think there’s a potential benefit there. But again, because it’s high value down funnel leads in the services category.

The numbers aren’t going to really dramatically shape the overall traffic picture. And then for your second question, you were asking about monetized connections, noting that we had moved that up in ’22, it was 25% and in ’23 we saw 30%. We are really happy with the progress there. I think that speaks to the success that we’ve had investing in the ad platform. We have a significant investment going into ’24 in that area and then also improvements within Request-a-Quote both in the flows, converting more users into projects, and then matching those projects successfully with advertisers. How far can we push that percentage? I don’t know exactly what the ceiling is, 30% doesn’t seem that high, it does feel like there is significant headroom there.

And so, we’re going to keep pushing on that to see how high can we push that without of course compromising the consumer experience, that’s really important to us as well.

David Schwarzbach: And Colin, it’s David, just to follow-up, sorry Colin. Yes, just to follow-up on your question with regard to that outlook, obviously it’s still relatively small spend. We obviously are increasing that, during the first quarter by $5 million, compared to the fourth quarter, but overall that still a small amount, as Jeremy mentioned. So as we move through the year, we’ll provide more updates on the performance there, but we certainly reflected in our guidance the risks and uncertainties as we see them, understanding that the total level of spend on this is still very modest.

Colin Sebastian: Perfect. Thank you.

Operator: Your next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

Eric Sheridan: Thanks so much for taking the questions, maybe two on the services space. You said in the letter and in your remarks that services, is going to be a major focus of the product-led strategy, can you give us a little more color of, how you’re thinking about the product roadmap in services? And the second piece of it was you appear to be sort of gaining share broadly in the services landscape, talk a little bit about the momentum you have in services coming out of 2023, how that might inform that product roadmap, and I should be thinking about competitive or market share dynamics in 2024? Thanks.

Jeremy Stoppelman: Thanks, Eric, I’ll take a stab at that one as well. We’re really pleased with our performance in services. Revenue there was up 14% year-over-year. We actually had Request-a-Quote, requests were up 5% year-over-year in Q4, home services in particular 20% year-over-year. And then, as I noted earlier, monetized connections over the year took a jump up to 30%. So, all of that is reflecting, I think, some of the great work the team is doing, again with the ad tech stack, but also with Request-a-Quote. You may have noticed our winter product release. We had a whole number of features and functionality that we were showcasing with ad and in there we continued Request-a-Quote improvements. We enhanced the projects tab, we continued to work on merchandising Yelp guaranteed.

We’ve actually added both phone and SMS intermediation. And so, consumers can now make a phone call to a business or text with a business, and Yelp is standing in the middle to maintain their privacy. So they’re not getting barraged from inbound phone calls they don’t want, they can turn them off at any time. And so, this is the type of work that we’re doing to make Request-a-Quote really stand out. I think, as you alluded to, it does appear that Yelp continues to gain share in this area. And I think in 2024 this is a real focus for us. It feels like we have good momentum in this area, the business is really working, and that leads us to SCM. There is a significant opportunity on the SCM side. As I mentioned earlier, there’s multiple companies doing hundreds of millions of dollars, at least in revenue off of these leads.