Yelp - Q3 2023

Transcript

Operator (participant)

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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, again, press star one. I'll now turn the conference over to James Miln, Senior Vice President, Finance and Investor Relations. Please go, please go ahead.

James Miln (Senior VP of Finance and Investor Relations)

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 a 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, 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 activities to free cash flow. With that, I will turn the call over to Jeremy.

Jeremy Stoppelman (CEO)

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 4 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 valued 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 (CFO)

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 to +$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. Paying 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 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 4 percentage points year-over-year to a record 28%, while SBC as a percentage of revenue remained flat, reflecting 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 shift a 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 30th, 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-$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-$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 before discrete items for 2023 and beyond will be in the range of 22%-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.

Operator (participant)

Thank you. If you have a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, simply press star one again. One moment, please, for your first question. Your first question comes from the line of Jason Kreyer of Craig-Hallum. Your line is open.

Jason Kreyer (Senior Research Analyst)

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 SEM? And then maybe if you can just talk a little bit more about what you saw as you deployed those SEM test budgets and maybe what your expectations are as you spend more there into Q4.

Jeremy Stoppelman (CEO)

Hi, Jason, this is Jeremy. I'll take your question here. You know, we were really pleased to see clicks return to growth, up 9%. You know, looking into the causes there, there's a few things that we've been doing. There are continuations of a theme on the product side. You know, ad tech has been an area where we've been investing significantly. You know, we noted in the letter, you know, there was some better pacing, so that contributed to creating additional inventory and 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, you know, have been working on the mobile website 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, the second part of your question-

Jason Kreyer (Senior Research Analyst)

Okay. Go ahead, sorry.

Jeremy Stoppelman (CEO)

You mentioned the SEM part, or do you want me to talk about something else?

Jason Kreyer (Senior Research Analyst)

No, go ahead.

Jeremy Stoppelman (CEO)

Okay, great. Yeah, you mentioned SEM and how that's going. Yeah, obviously, very early days. We're just sort of getting things up and running, you know, in kind of 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. You know, there are companies that have predicated their entire business model on SEM, which is an area, you know, within services that we've historically not played. You know, 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 SEM. Part of that is our unique position. You know, Yelp is relevant to consumers on a daily basis.

Whereas some of the other players that have operated in this space, you know, 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. That gets me even more excited about the growth opportunities. I guess back to your original source of your question was like, is SEM driving this click percentage? I would say, you know, it's not a material contributor, no.

Jason Kreyer (Senior Research Analyst)

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 for quite some time, but I'm just curious if you think that had any impact on consumer behavior?

Jeremy Stoppelman (CEO)

Thanks for the question on that. You know, certainly we see our, our content as a real advantage. We've always leaned into, you know, trying to, to have the most trusted local review content possible. We've never allowed, you know, 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. But certainly, I, I see that as a positive sign in 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, the-- what we think is, 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. And I think consumers, especially now, you know, are waking up to the fact that not all content and not all rating systems are created equal. We've always had that belief, but I think our belief in that is finally really paying off and leading more and more folks to understand that Yelp is a standout when it comes to trust.

Jason Kreyer (Senior Research Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Eric Sheridan of Goldman Sachs. Your line is open.

Eric Sheridan (Partner and Managing Director)

Thanks so much for taking the questions. Maybe two on the services space. You know, you've shown a lot of momentum in the services side of the revenue in the last couple of quarters. How should we think about the momentum in that business and the competitive landscape, and aligning sort of investments behind growth against what you see as the potential or pool of opportunity set that sits in front of you, given the momentum as we exit this year and move into next year in services? Thank you.

Jeremy Stoppelman (CEO)

Eric, I think I can take that one as well. You know, we're very happy with performance in the services space. I guess I would just point folks to, you know, revenue up 14% year-over-year in services, and then if you delve further into home services, up 20% year-over-year in Q3. So we feel really good about that. I think, you know, from our vantage point, it feels like we're continuing to take market share from other players. You know, as far as what's driving that and how do we continue the momentum, I think it's, you know, the product-led innovation. You know, we launched Yelp Guaranteed nationwide in Q3. That's going well, and we have more category expansion coming through the end of the year here.

Request a Quote, you know, we saw it buck the seasonal trend, and we were seeing project volume up from Q2, so that's great. You know, and as we've talked about in recent quarters, there have been other innovations that have really streamlined things, you know, improving the login flows, taking out friction, masked phone numbers. You know, this quarter, we introduced dynamic landing pages as part of our SEM effort to tap into all that inventory that is new to us, that we think is gonna be an additional element of our growth, going into 2024. So I think between our organic traffic, the SEM opportunity, our strong brand, and our strong product execution, I think we're really set up well for services growth.

Eric Sheridan (Partner and Managing Director)

Thank you.

Operator (participant)

Your next question comes from line of Cory Carpenter of J.P. Morgan. Your line is open.

Cory Carpenter (Internet and Video Games Equity Research Analyst)

Thank you. I wanted to ask, the self-serve and multi-location channels, there's been a little bit of kind of gaping out of the growth of those two. Self-serve, 25%, multi-location slowed down a bit. Could you just talk about the dynamics impacting those two categories? And then secondly, just on macro, I know you called out in 4Q that you're incorporating macro uncertainties, but hoping you could talk about what you are seeing in the macro landscape right now. Thank you.

Jed Nachman (COO)

Hi, Cory, this is Jed. I can take the first question. You know, in terms of channels, you know, we were pleased with the performance of both self-serve as well as multi-loc. I guess starting on the multi-loc side, it grew at approximately 10%, you know, a healthy growth rate. And more importantly, you know, obviously that channel is made up of some sub-channels as well, with enterprise being the majority and the largest one there. And in fact, that business saw you know inline performance with what we saw in Q2. And you know, those are our most sophisticated advertisers, and so you know, that demand continues to be very strong.

We did see some slight weakness in the mid-market channel, and we've identified some areas that we can take action on, and have in fact begun to do so. But overall, we're really pleased with, you know, kind of the demand out in the marketplace. And the products are resonating with our most sophisticated advertisers on the multi-loc side. You know, we continue to make progress on our attribution capabilities, our off-Yelp audience, our off-Yelp offerings, you know, resonate in the marketplace. New ad formats, and ultimately, when you look at, you know, folks in this type of macroeconomy. They want, you know, we are a very down funnel way for them to spend money, and receive quality leads. So we're happy with where we are on the multi-location side.

Of course, we have a deep product pipeline that we are looking forward to going down that path in the future. In terms of self-serve, at that 25% growth year-over-year, really, really healthy, now makes up about half of our acquisition for SMB, and have made a host of product improvements there. You know, when you look at the conversion flows for both, you know, purchasing ads, claiming a business page on Yelp, you know, recommending in product, but in product suggestions for folks to kind of drive more out of their self-serve spend.

And then, of course, we've also, you know, used paid marketing in a really effective way and have had opportunities to kind of drive a lot of growth on the self-serve channel through that as well. So they continue to remain very core strategic pillars for us moving forward, and, you know, I look forward to them to continue to drive growth in the future.

David Schwarzbach (CFO)

Hey, Cory, it's David. Just to follow up on the macro question. First of all, obviously super pleased with our performance in the third quarter, between 12% growth and the 28% Adjusted EBITDA margin, which put us in a position to raise the guide to $1,332-$1,337 on the top line, and $10 million above the midpoint of our previous guide, and on Adjusted EBITDA, $319-$324, which is $7 million above the midpoint of our previous guide for the year. So overall, obviously very pleased with that level of performance. As usual, whenever we give guidance, we provide it, taking into account the risks and uncertainties that we see.

On the revenue side, the implied guide for the fourth quarter is $337 million-$342 million, which is in line with the third quarter, and on expenses, it implies $84 million-$89 million, which is also in line with what we guided on the third quarter. I do think it's important to underscore on the expense side, that expenses can move around between quarters, and there are certain items that have some volatility to them, like vacation and healthcare expenses. So we've reflected that in the guidance that we've provided for the remainder of the year.

Operator (participant)

Your next question comes from the line of Sergio Segura of KeyBanc. Your line is open.

Sergio Segura (VP)

Great, thanks. Curious if any common traits you would point to for the advertisers that turned off advertising spend in the quarter, and then relatedly, for the advertisers that remain on the platform and continue to increase their spend, just how much runway do you see to continue capturing a greater percentage of their ad budget? Thanks.

Jed Nachman (COO)

Yeah, I can take that one, Sergio. I believe you're probably referring to where we saw a detailed PALs overall, you know, largely due to a few multi-loc customers that did not spend in the third quarter. I would say the profile of those customers is, you know, a lot of locations with not a lot of spend. And we've been talking about this flight to quality in terms of our advertisers and quality revenue. And, you know, as you can tell from the, you know, kind of wallet share gains, with overall multi-loc growing at 10% year-over-year and the company growing at 12% year-over-year, and particularly in such an efficient manner with 28% EBITDA margins. You know, those are...

That, that's kind of the profile of the folks who did not advertise in the third quarter. But we feel really positive about, you know, kind of where we are moving forward, you know, from a PALs perspective. Ultimately, we are concentrating on both expanding the total number of paying advertising locations, as well as continuing to drive wallet share. And that's reflected in the record average revenue per location that we saw in the quarter. And I believe the second part of the question was... Oh, what do we see in terms of, you know, demand going forward? I mean, you know, SMB right now, demand is very strong.

We see it across our rep-sold channel, we see it across our self-serve channel, and we see it across our most sophisticated enterprise customers. The product-led strategy is really resonating with these customers. And, you know, ultimately, Yelp is in a pretty unique position to deliver highly targeted leads, across a broad base of businesses. So, you know, we feel like we're well positioned to kind of capture growth going forward.

Sergio Segura (VP)

Great. Thank you.

Operator (participant)

Again, if you have a question, you may press star one on your telephone keypad. Your next question comes from the line of Shweta Khajuria of Evercore. Your line is open.

Shweta Khajuria (Managing Director of Internet Equity Research)

Okay, thank you for taking my question. Jeremy, if you were to point to perhaps two to three specific product or product features that you believe will drive meaningful top-line growth next year in terms of sustainable double-digit growth rate or potentially even acceleration, which ones would you point to that excite you the most, and why?

Jeremy Stoppelman (CEO)

Hi, Shweta. Thanks for the question. You know, as we look ahead here, there's a lot of things, I think, to be optimistic and excited about.

You know, the first would just be our consistent execution and the way that we operate these days. You know, we have an annual planning process, we're just at the tail end of that. It's gone incredibly well. It generates sort of all the best ideas from, you know, product engineering and everywhere else, and then really tries to focus in on ROI. You know, we have limited resources, so we want to staff the very best, most innovative projects that are going to help connect people with great local businesses and drive more value to our advertisers. You know, when I look at what are the areas, the sort of most obvious areas of continued investment as well as excitement, you know, I have to point to, of course, ad tech.

That's been the gift that keeps on giving. You know, all of the projects that we pretty much have invested in, in that area have really paid off. It's a very high ROI area for us. We continue to try and add staffing, you know, as the ideas bubble up. So I think you'll see continued innovation there, continued impact. And certainly, you saw that this quarter, you know, with better pacing, you know, photo selector improvement, as well as some ad UX innovation, all work to drive clicks up 9%, which was fantastic. I think other areas to watch out for LLM, you know, it's still early days. We've already banked some wins, but I think there's a deep well there. We're just getting started.

We have a lot of initiatives that will layer in LLMs all throughout the product, as well as, you know, ad tech, you know, helping the business owner, helping, on the consumer side as well. We've got, this new SEM area, that we've been talking about that, that we're excited about. You know, we launched dynamic landing pages this quarter that's tied to that. You know, there's a lot of work to do, but we're already out there testing, and, we're excited about the early trends. So we'll, we'll keep you posted on that. And then finally, I think there's, there's still plenty of opportunity to innovate on the consumer side. You know, we just returned to investing there. We saw some impact, by adding neural nets to the Home Feed.

We made some improvements on mobile, well, web as well as desktop web, and, you know, again, that one is early days. So everywhere I look, I see a lot of opportunity, I see a lot of excitement, and I see a team that's able to execute. We've been really consistent now, 10 quarters of double-digit revenue growth. And so we're, we're not gonna hold back. We're gonna try our best to keep the momentum going into 2024 and beyond.

Shweta Khajuria (Managing Director of Internet Equity Research)

Okay, that's helpful. If I could please ask a follow-up question on that. So on the consumer side, the last point that you were making, what are you looking for on that front? Is it engagement? Is it time spent? You know, at this point, almost everybody in the U.S., I would imagine, knows about Yelp and probably has downloaded it. So, how often they come back. What are some success metrics that you are tracking?

Jeremy Stoppelman (CEO)

Yeah, certainly engagement is a component of that, and we pointed to some success there this quarter with Home Feed, as well as mobile web and desktop web. We've also had a lot of wins on the contribution side, driving more reviews, allowing consumers to attach additional content, like photos and video, to their reviews, which has driven more contributions of those types. So there's a number of different ways that you could look at it. Certainly, you know, the bigger the audience, the more time spent, all of those are good things. But of course, you have to also think about the categories and the types of activity.

You know, Yelp is not a place where we just want you to check out, you know, photos of your family or a cat stuck in a tree. It's very down-funnel, intent-driven, where we want consumers that are trying to find the very best in their city or the important services to fix a need in their home. And so we're gonna continue to innovate on that. I mean, I guess one area that we didn't talk about was Request a Quote. You know, where we've really been driving a lot of innovation there. We added masked phone numbers, we improved the login, and we saw projects move up sequentially. So that's another area, I think, of excitement. And frankly, it's differentiated.

Being able to have those conversations with trusted pros, have Yelp Guaranteed backing the interaction, and having, you know, the quality of review and photo content that we're known for, I think it's a powerful combination going into 2024.

Shweta Khajuria (Managing Director of Internet Equity Research)

Okay. That's great. Thanks, Jeremy.

Operator (participant)

Your next question comes from the line of Brian FitzGerald of Wells Fargo. Your line is open.

Stan Velikov (VP of Equity Research)

Hi, this is Stan Velikov for Brian. Thanks for taking our questions. If you look at the home services, that was up nicely in the quarter, but at the same time, Request a Quote volumes were down. Anything you can tell us about how overall click volumes versus pricing trends is in home services specifically? And then, has Request a Quote been a leading indicator for the health of that category? And basically, how are you thinking about that?

Jeremy Stoppelman (CEO)

Hi, this is Jeremy. I'll try and take your question here. So Request a Quote, you know, stepping back, I think in the macro, you know, services demand has largely been a bit softer than last year. But I think when you look specifically at Request a Quote, especially sequentially, what we were able to see is project volume go up, which broke a seasonal trend for us. And so, you know, that is a clear positive. You know, and what's driving that, I think, is our innovation. You know, we have improved the service. We've added masked phone numbers, we've improved the login experience. We added Yelp Guaranteed nationwide, and we're moving into other categories. So there's a lot of positive signs in terms of Request a Quote and project volume.

And then, I think if you step back and look at ad clicks overall, of which Request a Quote is a portion, you know, they were up 9% year-over-year, reversing trend. And so I think that's another positive, showing that the product-led strategy that we have is working. We're creating more inventory, we're driving more leads to our advertisers, and ultimately, that's what we're here for, is to drive value for advertisers.

David Schwarzbach (CFO)

If I can just step back in for a moment, going back to my earlier answer, just in case I misspoke on the implied guide for the fourth quarter of 2023. The implied guide is $337 million-$342 million on revenue and $85 million-$90 million on Adjusted EBITDA. Just wanted to make sure to clarify that in case I misspoke earlier.

Stan Velikov (VP of Equity Research)

All right. Great. Thank you very much.

Operator (participant)

There are no further questions at this time. I'll now pass the call over to Jeremy, the CFO, for closing remarks.

Jeremy Stoppelman (CEO)

Thanks, everyone, for joining us on the call. We'll see you next quarter.

Operator (participant)

This concludes today's conference call. You may now disconnect.