Yelp - Earnings Call - Q2 2020

Transcript

Speaker 0

Good day, and welcome to the Yelp Second Quarter twenty twenty Earnings Conference Call. This time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to James Mill, Vice President of Financial Planning and Analysis.

Please go ahead.

Speaker 1

Good afternoon, everyone, and thanks for joining us on Yelp's second quarter earnings conference call. Joining me today are Yelp's CEO, Jeremy Stoppelman CFO, David Schwarzbach and COO, Jed Nachman. We published a shareholder letter on our Investor Relations website and with the SEC about an hour ago 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.

Speaker 2

Thanks, James, and welcome, everyone. Our second quarter results demonstrated the resilience of our business in spite of the significant headwinds faced by local economies following the emergence of COVID-nineteen. Yelp's diversified mix of categories, geographies, and sales channels helped us adapt to the rapidly changing environment, resulting in our traffic and revenue improving over the quarter. I'm proud of the speed and confidence with which our teams confronted one of the most challenging periods in our history. Due to our disciplined actions on expenses in the face of uncertainty coupled with solid revenue performance, we added $35,000,000 of cash and cash equivalents to our balance sheet.

While we began the quarter with a significantly smaller workforce operating in a fully remote environment, we adapted our product efforts and operations to support our users connecting with their favorite local businesses in a socially distant world. We provided new tools for local businesses to connect with our consumers, allowing them to post custom messages, to update their service offerings to include virtual options, and to list health and safety measures. We also continued to make progress on important strategic initiatives, including home and local services, which has long been our largest and often fastest growing category. We continued to increase the percentage of monetized leads for additional improvements to our ad system, including better matching and Request a Quote. Revenue in the subcategory home services grew slightly compared to the 2019.

We remain focused on evolving our go to market to improve our sales efficiency over time. Throughout the quarter, our local sales team maintained a consistent level of productivity even while working remotely. We also delivered a new profile product, Yelp logo, and scaled our connect offering. Our continued investment in self serve helped drive strong acquisition in the channel, which reached near record levels of advertising starts in June. Though the pace of economic recovery remains uncertain and will not be uniform, we have confidence in our strong balance sheet and our proven ability to operate with flexibility in this environment.

This month, we are pleased to return many of our furloughed employees and restore reduced salaries for our teams. This sets us up well to reestablish our growth momentum and capture demand as the economy recovers. With that, I'd like to turn it over to David.

Speaker 3

Thanks, Jeremy. When we spoke to you back in May, the economic outlook for local businesses was highly uncertain. However, in late May, as local economies began to reopen and consumers and local businesses were adapting to the new normal, we saw both traffic and CPC advertising budgets begin to recover. In June, we continued to see steady improvement in ad budgets and retention, benefiting from a strong rate of return from customers who had received relief in April and May. We ended the quarter with $169,000,000 in net revenue, a 32% decline compared to the same period last year and a net loss of $24,000,000 In April, we took several actions to reduce our operating cost to better position Yelp to weather this unprecedented period, including the difficult decision to reduce our workforce.

Our actions contributed to a $71,000,000 reduction in operating expenses from the first quarter, in line with the $70,000,000 that we communicated in May. Coupled with our solid performance in revenue, we delivered positive adjusted EBITDA of $11,000,000 in the quarter and further strengthened our balance sheet. Our cash balance rose from $491,000,000 at the end of the first quarter to $526,000,000 at the end of the second quarter, principally through our positive operating cash flow and the release of restricted cash. Restructuring costs in the quarter were $3,000,000 as a result of the restructuring plan announced on 04/09/2020. These costs include severance, payroll taxes, and related benefit costs for a workforce reduction affecting approximately 1,000 employees.

While we exited the second quarter with increased confidence and an additional $35,000,000 of cash on our balance sheet, economic uncertainty remains high. Therefore, in lieu of a formal business outlook, we are providing additional insight into recent business trends. As a result of improved business performance in June, including the return of spend from many customers who received relief in April and May, revenue in the month declined by 25% compared to June 2019. While we are encouraged by our performance in June, we saw consumer demand begin to plateau in July as the recent resurgence of COVID nineteen cases led many states to pause or reverse their phased reopening measures. As we look ahead in the absence of a vaccine or effective therapeutics, we expect to see continued fluctuations in business openings and closures as communities respond to local outbreaks, which may impact the pace at which our revenue recovers.

Our strong balance sheet gives us more flexibility even in the face of this uncertainty. On the cost side, we anticipate third quarter operating expenses may increase by as much as $30,000,000 compared to the second quarter. In addition to restoring reduced salaries, we are also returning furloughed employees to full time over a four month period ending in October, many of whom are trained sales reps. We are also mindful of various uncertainties, including employee health care costs and our provision for doubtful accounts. With that, operator, please open up the line for questions.

Speaker 0

And your first question comes from the line of Shweta Khajuria from RBC Capital Markets. Your line is open.

Speaker 4

Okay. Thank you. I'll try two, please. First one is on locations declined 31% year over year. Could you provide a little bit more color on that?

So are these businesses that are shut down for good? Or are they just closed because of COVID? Second, locations, how fast do you think is that recovery in terms of bringing those locations back onto the platform post COVID? And third, on the same locations question, what percent of these businesses are multi location restaurant chains versus local SMBs? Thank you.

Speaker 3

Shweta, it's David. Thanks so much for your question. So in terms of the reduction in locations, what we believe is the case is that a considerable number of these will be temporary. It's important to be mindful that over the course of the quarter, we did provide relief to many businesses, and that relief took place across the entire three months. When those businesses begin to spend with Yelp again, that will they will show up again in paying advertising locations.

But it's important to be mindful that over the course of the pandemic and the impact on the economy, there are quite a few businesses that are not going to reopen. But we don't have a great sense yet for that distribution, even by category. In terms of how do we think paying advertising locations will recover over time, the pace of that recovery, we think, is very much tied to the pace of the overall recovery. And I think it is actually very important to consider that continued fiscal support from the federal government is gonna have a big impact. So, again, unfortunately, we wish that we had better insights over, how it will play out over the next several months.

But one of the things that we did do through the release relief efforts is establish stronger relationships with many of these business owners. And they have what we did see when that relief was ending in the June time frame that they did come back to us. So we feel good about, where we have positioned ourselves with those business owners. In terms of local versus multi location percentage, we'll need to get back to you on that. Jeremy, I don't know if you want to comment a little bit how you see the longer term for advertising locations.

Speaker 2

Sure. You know, I I would say what we saw is coming off of the the bottom of the panic around the virus, we did see as markets reopened a recovery happening. And so that's encouraging for the long term because as economic activity continues to pick up more widely, you know, we believe that we will also see activity on Yelp picking up more widely. You know? And so while in the short term, that means, you know, categories like restaurants are likely to be and retail are likely to be more impacted.

Home and local, for instance, has been quite robust and actually is an area where we continue to put a lot of our investment even prior, to the COVID pandemic. So we do feel, optimistic that in the long term, we'll see a robust recovery as the virus abates.

Speaker 4

Okay. Thank you, Jeremy. Thank you, David.

Speaker 2

Sure thing.

Speaker 0

Your next question comes from the line of Cory Carpenter from JPMorgan. Your line is open.

Speaker 5

Great. Thanks for the questions. I had two. So just first, hoping you could expand a bit on the trends you're seeing quarter to date. You mentioned in the shareholder letter traffic started to plateau in July.

But any additional color you could you could provide in terms of trends by vertical, or geography would be helpful. And then on the product side, you went through a number of initiatives in the letter. Just curious how we should think about your key priorities and road map in the second half of the year. Thank you.

Speaker 2

Sure. Hi, Corey. This is Jeremy. So, you know, talking first about traffic trends, as we saw you know, as I mentioned on the previous question, we saw, you know, some recovery as markets opened up, as there was more act you know, economic activity, people moved around more. And so, you know, while while that did slow as virus cases rose, we do think over the long term that as the pandemic does ultimately get, under control, we're going to continue to see a a robust recovery of activity and then, therefore, traffic.

And then, you know, on the product side, we had been investing, pretty heavily in home and local services and specifically, you know, things like request a quote,

Speaker 6

our

Speaker 2

ad system increasing, the percentage of monetized leads. We continue to make progress on that front, and we continue to roll out, you know, new updates that are having impact. In addition, we mentioned in the letter, you know, some newer products, that are showing considerable life. So, for example, Yelp Connect, which allows businesses to push out updates to their page, but then those also get sent out to, you know, former customers, people that have expressed interest in their business. And that's really resonating.

And, you know, thousands of, businesses have started paying for that functionality, which we initially, gave as part of the the relief package, was included as part of the relief package that we're doing as the pandemic hit. Also, we recently rolled out Yelp logo, which is something that we had heard from our customers was really important to them to look professional, to be able to brand themselves, and and put their logo front and center on their business page. And we've seen, you know, pretty pretty solid uptick as we've just launched that that feature. So, you know, needless to say, we we've got a a lot of capability in our product and engineering team. It's today a capability that we maintained, over this period, and they continue to, drive really innovative and, impactful functionality for business owners and for helping people connect with with great local businesses.

Speaker 0

Your next question comes from the line of Colin Sebastian from Robert Baird. Your line is open.

Speaker 6

Thanks very much. Good afternoon, everyone. Within home services, I'm wondering how much of the rebound in activity there is reflective of people adjusting to work from home and refurbishing their homes more broadly, which could be a bit transitory as offices reopen versus how much of that's related to specific product improvements like Jeremy and the ones maybe you mentioned that could have more of a sustainable impact longer term? And then David, with traffic plateauing in July, should we assume given the mix of CPC that that's consistent with sort of the advertising revenue impact and if that's the case? Just trying to put a finer point on what we might expect in Q3 if we assume June monthly revenue trends continue through the third quarter.

It seems like the sequential improvement in revenues would roughly equal the increase in operating expenses. So wondering if that's a fair way to assess the current situation. Thank you.

Speaker 2

Hi, Colin. So this is Jeremy. I'll take your, first question there on, home services. You know, do we believe it's sustainable? Yeah.

Obviously, it's very hard to predict the future, in in this kind of very unique situation of the pandemic. But I would say, you know, within home services, there's a lot of different categories. And while some of them, you know, maybe optional, you know, like building that new deck, optional, things like, getting yourself, you know, back into your house if you need a locksmith or, you know, if your toilet's clogged, you gotta get that fixed. And, obviously, people are spending a lot more time, in their homes, so I think that is driving some of this, robust demand for for home services. So in my opinion, I would say, yes.

It's it's sustainable, but, you know, time will tell. And, obviously, it's a very dynamic situation.

Speaker 3

And just, Colin, it's David, to follow-up on your second question. A few thoughts there. First of all, one of the things that we have been very focused on is investing as we see the recovery pick up. And so in terms of just starting with the operating expenses and the furloughed folks that we brought back, it's really our perspective that we wanna be in a position to, continue to participate. And as Jeremy has really emphasized, we want to participate in that demand around home services in the near term.

But over the longer term, that is the foundation for us to, see revenue grow. In terms of extrapolating from July revenue or from the, excuse me, July traffic or from the the improvement in revenue in June, again, we'd caution you, and that's for a couple reasons. The first is, as you know, traffic is important for us, but through the matching algorithm, there's a variety of adjustments that take place. And so you can't match those one to one. But in general, what we did see and what we're very cautious about is that the, uptick in cases, has been obviously extremely widespread.

And so we as we think about this current quarter but the rest of the year, we continue to believe that we will participate as caseload declines and as the overall economy recovers. But we're not yet prepared to provide a more specific view on July or Q3 performance.

Speaker 6

Okay. That's all very helpful. Thank you, guys.

Speaker 0

Your next question comes from the line of Mike Ng from Goldman Sachs. Your line is open.

Speaker 7

Hey, good afternoon. Thanks for the question. I just have two. First, could you talk about how the composition of the the Salesforce Salesforce or the company may be different relative to pre pandemic? You know, will your Salesforce be, you know, meaningfully more focused on multi location versus individual small businesses?

And then the second question is, could you talk about your plans for, ongoing relief and offering free advertising product in 3Q versus 2Q? I really appreciate you laying out some of those numbers for the second quarter. Will that turn into recognized or paid revenue in the third quarter? Thank you.

Speaker 8

Hey, Mike. This is Jed. I'll take the first one and then maybe David can jump on for the second one. In terms of sales force composition, obviously, we made a very difficult decision early on in the quarter to or maybe it's late third quarter to both furlough folks on the sales team as well as have some permanent a permanent reduction in force. We're really and by the way, the team rallied and responded into a completely remote work environment and productivity within the local sales team was consistent with what we had seen in the past.

We're really happy and proud of the team for kind of turning on a dime on that one. And based on the results that we saw in the second quarter, we felt comfortable bringing back our furloughed employees. And that's a real advantage for us. These are trained employees who kind of can come in and hit the ground running and are a real asset for Yelp. And we believe we're correctly positioned right now to to take advantage of the second half of the year, and that the Salesforce is, for what it's worth, right sized.

We're not going to comment on kind of where we are in 'twenty one as an example from a sales force perspective. But I will say that even prior to the pandemic, when we talked about reducing the sales force over time, this certainly accelerated that. And we're going to continue to lean into the channels that are high leverage channels. And those are self serve and the multi loc opportunity, which both are really, really important for the long term viability of Yelp. By the same token, we're always going to need some version of a Salesforce.

There are local businesses out there that need to be talked to in order to kind of understand the products that we have. We feel like we're coming to the market these days with a really nice suite of products. The addition of Connect and the addition of Logos has been a real boon for folks to be able to talk about that on the phone, and we're excited about the future on those products. So the bottom line is we feel like we're right sized with the local sales force today. We're going to continue to invest in self serve and in the multi look business as well.

Speaker 3

Mike, just to talk a little bit about relief. We first announced $25,000,000 So far, it's coming at about $32,000,000 And that split half and half between direct revenue relief, both on the ad side as well as on the restaurant SaaS side, and then paused or free products. So accounts that we paused over this period of time or where we've provided free products. And what we expect is that there is a few million dollars more to go, in q three, principally around paused SaaS restaurant the paused SaaS, SaaS restaurant product. As you'd imagine, obviously, with some of the openings reversed and dine in, being eliminated in some locales, those restaurants don't have immediate need of the product.

What I do really wanna underscore is that this investment overall has worked well for us. And what we did see in June was where we had, paused for customers or where we had encouraged them to pause and set a restart date, we were very pleased by the number of advertisers who came back to us. And so if it's needed, if we see a need in the market to further invest in that area, then we are not going to hesitate to do that because we are seeing the ROI.

Speaker 7

Great. Thanks, Jed. Thanks, David.

Speaker 0

Your next question comes from the line of Dan Salmon from BMO Capital Markets. Your line is open.

Speaker 2

Hi, good afternoon, everyone. Thanks for taking a couple of questions. First, self-service as a channel, home services as a category, both outperformers, was there some causation to that correlation? In other words, did the home services category particularly help drive self-service? I'd just be interested to hear about that.

And then second, on multi location, what I I'm trying to ask is if you think the pandemic has, helped or or hurt your long term push there, by which I mean, you know, many of those restaurants were able to stay open, pivot to delivery, to pick up, and focus on that. Have you been able to help them with that pivot such that, you know, and in sense, maybe build back goodwill where where maybe that that that push can be accelerated as as things get back to normal? I'd be interested to hear about that too. Thanks. Hi, Dan.

This is Jeremy. I'll take a stab at the first one, whether self-service and home services were connected. I I'm not aware of a, you know, a connotation, between those two. I think, you know, self-service, we did see, you know, healthy starts, you know, near record levels of advertising starts in June, and some strength in that channel, on the home services side. I mean, frankly, you know, I think it's it's the consumer activity that's that's driving, you know, the the strength, or the robustness, compared to other categories, which is just with people at home.

There's a lot to be done. There's a lot of wear

Speaker 4

and tear,

Speaker 2

And so consumers are are showing up that the demand is there, and, you know, businesses are are happy to pick up that demand. And so, you know, we're just enabling successful matching, and and we've been investing in, you know, things like request a quote in our advertising system to drive those leads to our advertisers.

Speaker 8

Yes. And I can take the second one, Dan. In terms of MultiLook and how the pandemic is affecting that segment, first of all, multi look as a whole is a very diverse segment. We operate in all categories. When we think about things like restaurants specifically, even there, there is a kind of a bifurcation in terms of the types of multi look restaurants.

So you have your QSR and fast casual, which throughout the quarter, we're able to make a pretty fast pivot to pickup and delivery. Our goals were to be there right alongside with them and help them in any way kind of navigate that. If we could drive help them drive that business, that was going to be really important. Then you look at kind of the casual dining sector and or fine dining sector. And restaurant dining has obviously been hit really, really, really hard.

And so I would say it's a combination of both in the near term. Over the long term, I've been really impressed with how a lot of these multi location restaurants have pivoted their business. And certainly, we're not back to full steam yet in terms of folks dining out. But this is not something they're taking casually in terms of, you know and I suspect some of the trends that you see happening during the pandemic will, in fact, continue past the pandemic once we get a therapeutic or a vaccine in place. But, you know, I think, you know, they're kind of taking it week by week and month by month as well.

I think one of the advantages that we have right now, you know, kinda hitting that market is that we can be very local in terms of how people react. Not a national television campaign that's got to go out to everybody when somebody's not having capability to kind of serve people across the country. And so you can pick markets or the Southeast. As things are closing and opening, they can get very specific around how they're marketing out to those segments. So overall, we believe that TAM is there for restaurants going forward and that when we come out of this thing, we may even come out stronger.

But in the meantime, we're still going to see some volatility. And every restaurant operator is handling it in different ways and putting priorities on different things.

Speaker 1

That's great. Thank you both.

Speaker 0

Your next question comes from the line of Elliot Alper from D. A. Davidson. Your line is open.

Speaker 9

Great. Thank you. Similar to the previous question, but as you look at some of the geographies that are farther along in the phases of reopening, what are you seeing as far as consumer reengagement with Yelp as well as the local businesses reengagement with Yelp? And then curious on any context into the Salesforce and small business sentiment as it relates to continuing their partnerships with Yelp and utilizing some of the free services offered in the quarter. Thank you.

Speaker 2

Hi, Elliot. So on your first question there, as we saw markets reopen and more economic activity pick up, we did see recoveries that were what I would characterize as fairly rapid as people left their houses and started transacting with local businesses. So, you know, I see that as an encouraging sign that as things do ultimately get back to normal in kind of the medium term, as as the virus gets, controlled, the vaccine is here, I do think that we will, see a recovery along with that activity. And that's that's kinda what we've seen on a market by market basis as more activity picks up, you know, more transactions, are happening on Yelp, you know, obviously more website visits, more mobile app activity, more request quotes, all those good things.

Speaker 8

And I can take the engagement question. You know, overall, you know, we're really happy with the engagement of local businesses with the Yelp product right now, albeit this is a very stressful time for local businesses. And certainly, we want to be an advocate for them and a partner along the way. When you look at some of the statistics that we have in terms of folks taking advantage of COVID related products as an example, it's really robust. We have over 650,000 customized COVID-nineteen secondtions at the July.

You can imagine as a consumer today, it's a really and as a business owner, it's really important that you have communication channels that are accurate, up to date, and folks really don't know in their day to day which businesses are open, how they're operating, whether they're operating with health and safety measures in place. And we think we provide a really key critical communication channel for those businesses. And so sentiment, as you imagine, it's not exactly a happy, non stressful time for local business owners, so I don't think people are on the phone jumping for joy about the situation. That being said, there is an appreciative sentiment. And one of our goals throughout this entire process is to make sure that we're having relationships that last well beyond this pandemic and that we're in a position to, a, recapture clients that, you know, are potentially not spending now, and and and also engage customers that, you know, have not used Yelp in in in as a robust way, prior.

So, we're pretty happy with the engagement thus far.

Speaker 9

Great. Appreciate it.

Speaker 0

Your next question comes from the line of Brent Thill from Jefferies. Your line is open.

Speaker 10

Hi. Thanks for taking my question. This is Tan Vallico for Brent. Pre pandemic high frequency categories like restaurants used to drive traffic to your high value categories like services. Now this dynamic has changed a bit.

What can you do to increase traffic to the higher revenue categories in the current current environment?

Speaker 2

Hi there. So, you know, yeah, we we definitely have relied historically on the high frequency categories like restaurants to drive engagement. And the good news is there's still traffic there. It it hasn't gone to zero. But I think what what's particularly encouraging is even though, you know, over the long term, we'd love and we will, I think, we we certainly believe we will see restaurant traffic back and robust, you know, as the virus gets under control.

In the meantime, you know, we have seen the home and local category, recover, from the lows of kinda March and April. And so it's not exactly a you know, restaurants have to be gangbusters, for us to have a a solid business. They I I think you you can kinda see from the traction that we've seen, particularly in in home services, that people still do rely on y'all. You know? Obviously, they're coming to restaurants, but they're they're also coming to us for a whole host of other categories.

We are quite diversified, from a category standpoint, and that's resulted in, you know, I'd say, solid revenue in in the home services category that's brewing the business and is giving us the confidence, frankly, that that we're gonna, you know, get through the the other end of this crisis and and ultimately be well positioned for the recovery.

Speaker 10

I get it. Thanks for the color.

Speaker 2

Sure thing.

Speaker 0

And there are no further questions at this time. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating and you may now disconnect.