Yelp Inc. (YELP) Earnings Call Transcript & Summary

Welcome to the Yelp fireside chat at the Goldman Sachs Technology and Internet Conference. I have the privilege of introducing Jeremy Stoppelman, Co-Founder and CEO; and David Schwarzbach, CFO. Jeremy founded Yelp in 2004 and continues to drive the vision and product experience for the company as CEO. David joined Yelp in 2020 as CFO. Prior to joining Yelp, David served as CFO and COO at Optimizely and held several finance roles at eBay, including as CFO for its North American Marketplaces business. My name is Mike Ng, and I cover Yelp here at Goldman. We have about 40 minutes for today's presentation. [Operator Instructions] First, Jeremy and David, I want to thank you very much for participating in our conference and making yourself available for this fireside chat. Before we kick things off, I just want to turn things over to David to read a safe harbor statement.

Thanks, Mike, and I appreciate the opportunity to be here. I'll give the usual caveat that we'll be making some forward-looking statements during the conversation today that are subject to risks and uncertainties. Please refer to our SEC filings for more information on the risk factors that may affect our results. And I'll turn it back to you, Mike.

Great. Jeremy, just to kick things off, could you just share with us your vision for Yelp over the next several years? And does that change at all given the current environment? What do you see as some of the key differentiating points when you compare Yelp to its competitors?

Sure. Yelp's mission remains the same, which is connecting people with great local businesses. But one of the primary ways that we really differentiate and something that we've leaned into is on trust, helping consumers transact with confidence. And if you look at our content quality, both the quantity of reviews, the depth of those reviews, the blank flow -- the stories people tell within the reviews, it really is something unique, I think, in the competitive set of other companies you might compare Yelp to. And that really drives value for consumers, and it drives value for business owners because, ultimately, what we strive to do is create a level playing field. So if there's a great business out there, they can come to Yelp. They could sign up. They could spend money at a high ROI, and they can connect with the consumers that we attract and grow over time. And I think in this world of lots of misinformation, standing -- leaning into trust will really -- and has helped us stand out. I think that's why the Yelp brand is synonymous with local reviews. It's something we both pioneered but also policed from the very, very beginning. And when I think about my own experience, if I go on to some of the other major review sites, even outside the local space, if I'm looking for a product review, it's a pretty messy landscape out there. It's very easy to manipulate these systems. It's very easy to write fake reviews or to pay for reviews. And these are issues that we've taken to heart and taken seriously because at our core, we have to deliver, like we have to help set that consumer expectation. So this is something we put a lot of time and energy into. And I guess just to finish that thought, one of the things people might not know is that we set aside about 1/4 of our content. 25% of our reviews are not even shown to consumers. We have them. We have data about who wrote the review, et cetera. We collect all this information to try and determine what should we show consumers because we care so much about setting their expectations appropriately. And I think that really differentiates us. And so that -- getting that message out, helping more people understand what we do and why Yelp is so valuable, then also educating them on the breadth of Yelp's offering. So of course, people's first interaction with us is often restaurants, but we're so much more than that. And I think some of our financial results show how we've made incredible progress in home and local and with some of our product in engineering investment, in things like Request A Quote. And so we have an incredible opportunity to elevate the Yelp brand for so many people out there that are familiar, but maybe not fully understanding the breadth of the services that Yelp can connect them with. And so that's on us over these next few years to help educate people, bring them to some of these other areas that are really great for Yelp, great for businesses and great for consumers.

That's a great overview. David, so Yelp reported earnings a couple of days ago. Would you just provide us with a postmortem of results? Talk a little bit about 2020 performance and talk about your outlook for 2021. What are some of the selling points that investors should take away from results?

Mike, thanks for the question. And what's really quite impressive, I think, about our fourth quarter and broadly about 2020 is just the resilience of our business. And our fourth quarter results, we came in above on revenue. When the quarter started out, I think we all expected a surge in cases. It far exceeded I think even some of the worst-case scenarios. And our business did continue to perform. Equally, on the profitability side, we actually had, from an adjusted EBITDA margin perspective, our best quarter ever at 26%. I think that really reflects the strategy that the team has put in place over the past several years and our execution against that because you can't deliver that kind of result in the middle of COVID without having that change put in place. So we felt good about how we performed through 2020, and we really do feel like that accelerated the transformation of the business. Now when we look to 2021, there's really 2 halves to the year. The first half is we're still in COVID right now, and we've reflected that in our guidance. It does have an effect on our margins, but we do expect those to rebound as we move into the second half of the year as people are vaccinated and the economy reopens. So overall, for 2021, it's a return to sustainable growth for us. It is a year for investment. If Yelp in the past really drove revenue growth through increasing sales headcount, we've really now focused on product and engineering as well as creating leverage by focusing on our multilocation businesses and really acquiring and engaging advertisers to our self-service business. So there's been some structural changes. We're going to continue to invest in this year and set ourselves up for long-term growth. And overall, we just see a tremendous opportunity for margin leverage over the long term.

Great. Let's talk a little bit about how the pandemic may have affected the business. Clearly, it's affected advertising spending overall. Several businesses have closed, many have started as a result of it. The near-term visibility into growth has clearly been a bit past dependent as it relates to where the virus is going. With vaccines rolling out and some businesses reopening, can you talk in a little bit of detail about, number one, the impact of the pandemic on Yelp's businesses, including whether you expect any long-lasting impacts? And number two, how do you see advertising on Yelp recovering as we emerge into a post-COVID world?

Sure. So going back to March, it was a very scary time. It's the beginning of the pandemic. Obviously, with shelter-in-place orders and fear spreading, a lot of economic activity ground to a halt. Ad spend was obviously impacted. So our focus at that time was to make the necessary adjustments to our business as well as extend relief as much as possible to our valuable clients, particularly those hardest hit in the beginning of the pandemic like restaurants, nightlife, some of those categories. And the difficult changes that we made, reducing the size of the sales team, furloughing about 1,000 people for 4 months, ended up working out appropriately in that we sort of aligned our expense base. The panic subsided, businesses switched -- many restaurant businesses that maybe didn't provide delivery switched over to delivery. Home and local services emerged as a resilient category. So it did initially take a hit along with everything else in March. But as people converted into a work-from-home posture, they suddenly had more projects around the house and more things to do. And so that's essentially how it played out, was things stabilized. Home and local services became a real source of strength for Yelp. And we were set up to get into a posture that actually reflected the transformation that we -- in a lot of ways that we had planned years prior. So if you go back a couple of years ago, we laid out a plan where we would lean into multilocation, lean into self-serve, drive more value to our advertisers, improving -- to improve retention. And all of those things were still true. And in particular, we also -- we're investing heavily, as it turns out, in home and local services, things like Request A Quote or algorithms to better match advertisers when we have an opportunity. And all of those things came into play as we got to the third and then fourth quarter. And we were able to deliver, I think, results that showed our resilience and the fact that our business is incredibly horizontal. And so even though people often know us for restaurants, and those were obviously affected, some categories, retail, et cetera, et cetera, we still had a pretty phenomenal business that was generating cash even in a very difficult environment. Where do we go from here? I think one thing that we've been able to see through the rollercoaster of 2020 is that as virus case counts drop, people get more confident, economic activity picks up. And that really showed up in our traffic, showed up in our business. And so as we get to the other side of this pandemic, as the vaccines roll out and the pandemic becomes under control, presumably, there will be a pickup in economic activity, particularly the categories that have been hardest hit. And so I think that's a positive. We're well positioned to participate in that recovery as it comes. And in the meantime, I think we're doing quite well off of the categories that are resilient, things like home and local.

David, so at earnings this week, you guys provided an outlook for 2021 and 2022, which included another mid-teens top line growth here in '22 and EBITDA is ultimately ending up in excess of 20% that year. Could you talk a little bit about some of the assumptions underpinning your '21 and '22 outlook and what you're assuming as it relates to product as well as the path of the virus and the economy?

Thanks, Mike. And I'll talk a little bit about the broad assumptions that went into the model from a macro perspective. I'll talk a little bit about Yelp. And then I think Jeremy will talk a little bit about the product road map and what we have in store. From a macro perspective, we continue to see COVID as a headwind along with the economy here in the first half of the year. And obviously, we really want to see the vaccinations continue to pick up pace and for them -- for there to be plenty of vaccine available. So we believe as we move into the second half, we're going to see that COVID becomes something -- or the economy becomes a tailwind. And we don't anticipate a full recovery of the U.S. economy before 2022. So that's really from a macro perspective. On the company side, we do have a robust product road map. Jeremy, as I said, will talk a little bit more about that. But we also have just a Yelp seasonality to our business where revenue increases as you go through the year. That's not unique to this year. That's really how advertising has played out on Yelp over time. Equally, we do have some seasonality to our expenses as we come into the new year like payroll tax. So margins are lower here in the first half, and then we expect that those will improve as we move through the second half. So when you combine those things, that's what went into our guidance, and we feel all of that sets us up for 2022 in the guidance that we provided. And maybe, Jeremy, I could turn it over to you for a little bit around the product road map.

Yes, sure. I mean one of the things that we set out to do a few years back was to say, "Hey, we really need to shift the way we go to market. We don't want to lead with additional headcount in local sales. We want to lean into product and engineering investments to drive revenue growth with more leverage." And that strategy is really working. We've put a lot of energy into things like self-serve and Request A Quote. We've improved our ad system. We're driving more value to our advertisers, which is resulting in better retention. And some of these areas that we've been investing like multilocation and self-serve, when you bring in clients, they actually retain better. Someone that goes through self-serve is essentially convincing themselves to buy the product, and that shows up in our retention rates. And in multilocation, it's some of our most sophisticated advertisers. And so they're really studying the ROI, taking in all the data that we can provide, working with third-party attribution providers. And they're coming back to us saying, "Yelp is performing really well. Let's expand our budgets." And so all of those things are serving to drive revenue growth with a better margin structure than what we've seen historically by just growing revenue through headcount. And so we're excited about that. We're also spending time improving the value of participating in ads by adding different profile products, some of which can get bundled into the overall sale. And we've seen in recent months, a -- there's just a brand-new launch of a feature called heatmap, which helps prove the confidence of advertisers in where the ads are showing. So you can see with one of those heatmaps that ads are being delivered in places that are relevant to you. And you can make the necessary adjustments with control features that we provide if you don't feel like the ads are showing in locales that are aligned with your business. So needless to say, there is a long road map -- a long and deep road map for 2021 that we have high confidence in. And we can take each project and we can estimate the value that it will deliver to Yelp based on when it arrives. And we can stack all of those projects up and that feeds in, of course, to our financial planning process and gives us confidence that we can have -- that we can reach the outlook that we provided. So it's a new muscle for Yelp over the last few years, but it's something that we've now proven out and we have confidence.

That's great. And it's a good segue because -- as it relates to the financial planning process because during earnings, Yelp decided to provide new disclosures around CPCs, clicks, advertising revenue and paying advertising location by category. Would you talk about these new disclosures? What are some of the notable trends that investors should expect to see, either currently or over the next 12 months, to really demonstrate the resilience and growth in the business model?

So Mike, the one thing that we've heard regularly both from analysts as well as investors is that they want metrics that align with the way that we manage the business internally. And so we aim to do that with these metrics. The other thing is that the metrics that accumulated a little bit all the way back to the IPO, and we wanted to really focus folks on the things that we are going to think would drive performance. And so the first of these was to break out our business broadly between services and restaurant, retail and other. Now increasingly, Yelp has a differentiated experience broadly against these 2 areas. And so this helps to reflect that. And it's true for the consumer experience where, for instance, on home and local services, you might go through Request A Quote, but you're not doing Request A Quote for a restaurant. That's a different experience. So it really helps to also show what a large services business Yelp has today. And then I think as you look at the numbers, you see that restaurant, retail and other declined pretty dramatically over the course of COVID. And so we'd look for that to rebound. So that's the first. The second is ad clicks and CPCs. We are an advertising business. We believe we have quite a sophisticated ad platform. And so ad clicks times CPC obviously generates advertising revenue. And we think that helps to show what we are doing to drive clicks up, which is about revenue, but at the same time, we want to deliver value to advertisers. And so CPC is declining. If you look back at 2019, you saw we drove tremendous click growth yet CPCs declined, but they didn't decline as much as clicks increased. So that helps to show the leverage in the business. So obviously, we're focused in that area. And then finally paying advertising locations helped to show the scale of our business. So we think these 3 areas will really help both investors to understand the business, but equally important, it is how we are running the business.

Earlier, when Jeremy, you were talking about the home and local category and its resilience during 2020, I just -- that's something that I wanted to follow up on. Home and local -- the home and local category ended up growing mid-single-digit percentage year-over-year in 4Q and 2020. Could you just expand a little bit more about the drivers of that strong performance in 2020? You mentioned stay-at-home and how that refocused consumers on their house. How should we think about the drivers into 2021?

Yes, sure. We had a lot of success, as you mentioned, with home and local during a relatively difficult period for the company. It now represents 44% of ad revenue in Q4. One of the big drivers there is Request A Quote, which continues to perform. And in fact, that was up 25% year-over-year in Q4. So that reflects I think the work -- the great work that our product and engineering teams have been doing in this area. It's something that we were already investing in prior to the arrival of the pandemic, and it's something we'll continue to double down in. Obviously, it's working. I think one of the underlying factors is that we have this engaged audience that is already transacting. And we talked about the percentage of monetized leads, and that's moved up over time. We're now at 20% monetized leads, but there's obviously a lot of headroom left. And so the more that we are able to tweak the experience and drive value for consumers, value on the business owner side, that percentage is going to keep moving up. And we have confidence in our road map to keep driving that up. And so that gives us high confidence and a long runway of improvements that we can tap into basically in a straightforward manner through product innovation.

And just as a follow-up, home and local services traffic still seems somewhat under monetized relative to lead generation models like HomeAdvisor, which is a good example. I think they charge about $30 per lead. Could you talk about any opportunities that you can share with us today about Yelp's new products that are going to improve monetization or opportunities to partner with others like HomeAdvisor, for instance, to help with monetization?

Yes. I don't think it's -- the way that they're looking at their leads versus our -- it's hard to do an apples-to-apples. I think for us, we have a very different model. We have lots of traffic already flowing through the system, lots of leads flowing through the system. And we're undermonetized, 20% isn't enough. And so we are focused on features and functionality that is going to drive up that number. I mean one thing that we haven't talked about is the matching system. That's a great area of opportunity because if you think about it, you have a customer right there that's engaged and who's wanting to transact, you can match them with 4 businesses. But if those 4 businesses can't service what the consumer need is, you have a problem. You just wasted a perfectly good lead. So the better that our ad and matching technology gets, it essentially creates inventory out of thin air because you stop wasting inventory. And that's something that's really performed for us in the past, investments in our ad system and our Request A Quote matching system. And we have, again, a deep well of projects that we're going to be taking off this year into the future years that's going to keep improving that system, creating inventory literally out of thin air, which I think is really great because ultimately, not only are you making the system more efficient, but you're making the consumer happier because in that particular case, like maybe they're not getting multiple quotes or maybe they're not getting anyone that could service their need at all. And that's a bad consumer experience. So the better that we get at matching, the more leads we're going to be able to monetize, the happier advertisers are going to be and the happier consumers are going to be as well.

Let's talk a little bit about the restaurants vertical. It seems like a lot of the restaurant discovery and value-add services like reservations and waitlist naturally would have been hurt during the pandemic, but things like delivery should have done really well. What's your outlook for the recovery in restaurants, specifically?

Yes. Well, you're right. Delivery did do well. Transactions in Q4 was up 37%. So that was good to see. But what gives us confidence on the restaurant side over the long haul is what we saw in the summer of 2020. So as virus counts began to decline, we had good weather, people started getting out more and we saw traffic recover significantly. And then, of course, as we were in Q4, we saw sort of the opposite happen. Virus case counts were on the rise. People are a little bit more concerned. We had some modest declines as a result. But here we are now in February and, again, we're seeing same cycle of virus counts are dropping, people are doing -- it's early days, but we're seeing some consumer activity picking up. And so I think as the virus gets under control, this incredible audience that we've built through our trusted content does return. People do want to go to restaurants. And they don't just want to do delivery. We saw -- with our front-of-house SaaS products, we saw that demand really returned for dining out on patios or if there was in-room dining, like, people wanted to do it. And so we have high confidence that as it becomes safer, more and more people will want to return to restaurants. It's a fun experience. It can't really be replaced by some food in a box. And we have confidence in that.

Great. So I want to shift gears a little bit and talk about multilocation and self-serve, both of which have led to a greater level of sales force efficiency relative to just scaling the local sales force like in the past. Would you talk a little bit more about Yelp's current customer strategy and how the sales force has evolved to accommodate that? How do all these advertiser types and channels fit in with each other? And could you just describe for us also how big multilocation and self-serve are as a percentage of the advertising business today?