Yelp Inc. (YELP) Earnings Call Transcript & Summary

Okay. Great. So we'll get started. I'm Cory Carpenter, Internet analyst at JPMorgan. And joining me this afternoon is -- or morning depending on where you are is Jeremy Stoppelman, CEO and Co-Founder of Yelp; and David Schwarzbach, CFO. Jeremy and David, thank you both for joining us today. I think I'm going to kick it over to David really quick to read the safe harbor.

Thanks, Cory, and thanks so much for having us at the conference. 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. Back to you, Cory.

All right. Most exciting part of the talk. So I'll kick off with questions. I have a ton. If anyone in the audience wants to ask one, you can just click on the blue Ask a Question button, type it in and I'll try to get to as many as possible. But just to start with you, Jeremy. Look, it's been a challenging year, look, I mean, not just for small businesses in the U.S. but I mean globally. So I think just to start, how would you characterize the state of Yelp's business today and some of the lessons learned over the past year?

Sure. As I think about 2020, it's really a story of resilience and staying power. Consumers really trust Yelp, both the brand and our unique trusted content, and that's really been a key differentiator. And of course, as lots of business shut their doors, so many consumers didn't know where they could go, what the hours were, whether it was safe or not, did they offer takeout, delivery, all of those things. And we really rallied to try and meet those needs, and I think we largely succeeded. We obviously had a very difficult start to the pandemic. We had to make some tough choices. We've reduced the size of our local sales team significantly. It's down by about 50%. But at the same time, we really leaned in where we could, focusing on product development, engineering. We were able to maintain the size of that team and continue our investments there. And I think it largely paid off. As case counts declined in the summer of last year, we saw rapid recovery. We saw consumers walking back to the site. Of course, as case counts took off as we headed into winter, we felt that impact along with local businesses. The Services sector has been incredibly robust throughout the pandemic. So as we switched into that work-from-home mode, we saw healthy demand on that side, and that's really continued. Page views and searches in Home Services in particular are now above pre-pandemic levels. And so that's really been the anchor of our business, is the Services and Home services sector in particular. And then moving on to Q1, I think it was a strong start to the year. Obviously, there was some impact in Restaurant, Retail & Other in the kind of January, February time frame, but as case counts got under control with the rollout of the vaccines, we again saw a robust recovery. And to give you some flavor of that in particular, App Unique Devices rebounded from 29 million in January to 32 million in March. And in some places like Texas and Arizona, where they were particularly advanced in the reopening, we're actually seeing traffic trends above pre-pandemic levels at this point.

Advanced is a nice -- I like how you put that, advanced in the reopening. It's more lenient. So maybe more forward-looking, I guess, you've clearly done a good job of managing through the volatility given the kind of the cards you were dealt. Just as the business is recovering, as CEO, kind of what are your top 2 to 3 priorities over the next 6 to 12 months?

We're really focused on our long-term strategy, which we set out pre pandemic, in the kind of 2018, 2019 time frame. We really were trying to articulate that clearly to The Street. And so that's leaning in to the home and local services sector that I was talking about. Part of that, of course, is Request A Quote, where we saw Request a Quote requests up 30% year-over-year. And again, we saw those Home Services paid views up above pre-pandemic levels in Q1. Home Services revenue was up 15% year-over-year, and Services revenue in general is up 6% year-over-year. We've also got a shift that we've been leaning in to from a go-to-market perspective, and so relying less on a local sales team. While we -- obviously, we still do have a very well-trained, efficient veteran sales force, we're pushing harder in the Self-serve dimension as well as leaning in to Multi-loc, where we see an incredible opportunity there. And then for our advertisers, the focus has really just been on how do we drive more value. And so that comes in a couple of different flavors. One is making the ad system far more efficient. Also, there's better merchandising of those ad units, improving flows like within the Request a Quote ecosystem. And then also, it's about bundling. So what new features and functionality can we deliver that have real value for our advertisers that encourage them to stick around longer, either having a higher LTV or better retention? We'd like to see both of those obviously.

Can you talk a bit about -- I kind of want to stick with the go-to-market strategy. I mean yes, you were undergoing kind of a lot of internal shift before this happened. Maybe could you just update us on where you are in terms of the shift to Self-serve and Multi-location and some of the early results you're seeing?

Yes. On the Self-serve side, we're -- about 40% of our SMB starts are coming from Self-serve. So that's really encouraging. And again, revenue was up 30% year-over-year. And one of the other benefits of Self-serve that makes it so attractive for us is the customer is essentially selling themselves, and so you end up with really strong retention. And that's part of our retention story that we talked about in the non-term contract segment. We saw record NTC retention in Q1. So that's coming from a mix shift to Self-serve and then also more value going to our advertisers. You probably saw there was somewhat lower CPC, and we see that as like a very healthy thing. We want to drive down CPC if we can because the way that we're doing that is by refining our ad auction system, making it more efficient, better matching. And so the more we could get PhDs to come up with great new signals to add to our machine learning algorithms to match better, that's just essentially creating inventory out of thin air, which just flows straight into the pockets of our advertisers, which encourages them obviously to stick around longer. On the Multi-location side, we continue to make really great progress there. Revenue was up -- or sorry, Multi-location ad budget was up 40% year-over-year by the end of March. So that's really encouraging there. There was a bit of a slower start to the year, and Q1 is typically slower because of the transition from holiday to Q1 but also Restaurant, Retail & Other, as we were talking about, was impacted because COVID was still very prevalent. But we saw a steady and eventually rapid improvement happening across that quarter and ultimately, paid advertising locations was in line with Q4.

When you think about -- I mean Multi-loc and the Self-serve are growing really fast. Still, I think it's still the minority of the business. Like how do you think about the right mix longer term? And just where are you kind of in the -- and rightsizing may not be the right word. How do you feel about the current size of your local sales force today?

Yes. I mean our focus is figuring out that sweet spot, the Goldilocks size of the sales force. We feel pretty good about where it's at right now. The sales team's really productive. And so the focus has been in these higher-leverage channels like Self-serve and Multi-location. We do see tremendous opportunity to continue to lean in there. And also making strides on retention, going back to the opportunity on Yelp that exists today. We've talked about how about 20% of our leads are currently -- flowing to advertisers are currently monetized. And so that leaves a lot of headroom to continue to attract those leads to our advertisers and help them at driving better ROI, which ultimately should lead to better retention characteristics. And on the Multi-location side, there's kind of 2 aspects. There's growing the team, starting new relationships, which we see a lot of opportunity. And then there's the other component of that, which is once you have the relationship, it's the land and expand, and so how much wallet share can we drive from some of these massive advertisers. While the budgets we have from them can be healthy, there's a lot of upside there as we continue to build our relationship and help educate them around the power of Yelp and obviously, its down-funnel traffic and how consumers are just making decisions every day about their brands on Yelp.

When -- I mean I'd say it's pretty surprising to see -- I mean one stat that's really stood out to me was that your retention rate of non-term ad budget is at an all-time high, which I don't think you would intuitively think about in this -- or expect in this current environment. So I think you've kind of touched on some of it, but what's really working in your view that's kind of driving this improved retention?

Yes. I mean part of it, as we talked about, is as we bring on more Self-serve customers, those tend to retain better. But then there's also the product and engineering work that I would want to highlight there and so continuing to improve our ad targeting, improve our Request a Quote flows, the bundling that happens, new products like Yelp Connect that get bundled in and become part of that relationship. We've really simplified the purchasing of Yelp ads. So when you get -- when you buy ads, there's an upgrade package. Rather than like 50 different a la carte things that we're throwing it, we now have a very simple bundle that we've gone to market with, and that allows you to essentially choose from an all-you-can-eat buffet of different features and functionality that affect your profile. The Yelp Connect is really, I think, an interesting one in that it taps into something that a lot of SMBs are already doing. They're used to posting visual things like on Instagram or Twitter, what have you. And so taking that same content, bringing it to Yelp and then having us essentially reach an audience that's interested in your business, either because of their past history or look alike essentially consumers that are on Yelp that follow similar behavioral patterns, that allows us to introduce your business to additional people as well. So we think over the long haul, that's a really interesting direction to go in. And we've seen some pretty good reactions to that both on the consumer side as well as the business side. And that one also actually flows over to Multi-loc where we've had some early pilots that look particularly promising, the combination of search ads, along with these visual elements, Yelp Connect getting pushed out to a wider audience.

So definitely, I have some questions on product. One more on sales channel, last one. After that would be just Multi-location sales team. Could you give us a sense of the scale of it? How big is it today? And within that, I think you previously kind of talked about 3 different buckets. Can you just kind of talk about those 3 different areas?

Cory, I'm going to go ahead and cover this piece. And we have a bit more than 350 people in our Multi-location team, and there's 3 channels to that. There's the national channel, there is the mid-market and there's franchise. So we do have more people from a head count perspective sitting in franchise and mid-market. But one of the things that comes with the increased revenue or increased ads from the Multi-loc channel is greater leverage. And we do think this is a structural change that has longer-term implications for us from a margin perspective. Those enterprise reps in particular are really productive. And so we've invested heavily there in order to build the relationships and very much what Jeremy was saying about land and expand. Enterprise sales is a relationship that requires attention, nurturing, focus, and that's what we have been investing against. And then you build those relationships, advertisers start with you and then obviously want to find opportunities to expand those relationships. It can be with new products. It can be with delivering more value. And we're going to continue to invest there as we see ROI. There's also another component that's really important, which is that post-sales experience for national advertisers, how well are you supporting them, working with them on the analytics side and really giving them visibility into the ways that they can optimize their ad spend. So those are all areas that we continue to focus on, and we think that combination of investment in enterprise sales reps and product and marketing -- excuse me, product and engineering will enable us to continue to drive leverage in the Multi-loc channel.

Okay. So do you want to talk about Services a bit? Easier to talk about now, especially with the new disclosure. So David, I assume you had a hand in that, so thank you. I think Jeremy, this is probably something you've been dealing with 3 years. But when many people think of Yelp, they still think of restaurants. And it's not -- obviously not a bad thing, but I think it still surprises people Services is the majority of your revenue and still a substantial growth opportunity. So a couple of questions on Services, but just to start, you alluded to this earlier, 20% of -- or over 20% of monetized leads, services revenue growing year-over-year. What are some of the product changes and innovations that have been driving this?

Yes. Thanks for the question. A big part of what we're doing in Home Services is obviously continuing to drive effective ads and so tuning that ad system, tuning that ad auction, making sure that the inventory that we have, the page views that we're getting on all these Home Services listings are driving valuable leads for our business. The other component is, of course, Request A Quote, which is now a number of years old but was the innovation that we added probably, what was it, 6 years ago or so. And it started frankly with a very simple idea, having -- allowing consumers to message a business, and that was actually what the feature was called. It was just a random thing that we put on the page that said message the business. And while there was some activity there, it really didn't take off initially, but we did get the idea eventually of, "Hey, maybe it's just misnamed," and we decided to put up a link with a different moniker that said Request a Quote. And all of a sudden, we see -- we saw that there was really strong demand, kind of opened the doors and consumers flooded in and said, "Oh, this seems like something interesting to me. I do want to get quotes for these Home Services businesses." And so that was the beginning of it. It really started a long chain of innovation and investment from our engineering team. And I think the reaction that we get from consumers is consistently really great. It's obviously very convenient. It allows you to instantly reach out to a number of different pros for your service need and start a conversation with them, ideally getting back multiple quotes or get a sense of what the cost is going to be and have these trusted conversations. We've also bolted on adjacent products that are newer. You may have heard of Nearby Jobs, for instance, which takes the same flow -- lead flow as Request A Quote but allows us to expose that to the business owner in a more, frankly, transparent way. So for the business owners that say, "You know what, I don't want to necessarily hand you the keys. I want to pull down the quotes that are interesting to me," we now have a new product for them that is only a year-or-so old called Nearby Jobs. And so they can see information about the jobs that are happening in their area and decide to dive in, pick and choose where they would like. And so that's something exciting but still relatively early stage, but I think gives a sense of some of the innovation we continue to drive and investment in this area.

How -- I would agree. I remember for Request a Quote, every quarter, it was you give the number of quotes and year-over-year growth. It's definitely been around for a few years. How -- I mean I feel like that product though has also evolved. I know it started as messenger, but it feels like you've also made a lot of innovations to it this year. Can you just talk about how you kind of continued to advance and push forward Request A Quote? And is there a way to get a sense of just, I don't know, how important it is to the Services business overall just in terms of the overall pie of the business?

Yes. I mean, I think it is a significant lead driver as part of the business. And our product development strategy has really been to look at how it's being used and try to continue to refine it, talk to business owners what value would they like to see out of it, talk to consumers, what's frustrating them. And so we have layered on additional functionality. Fairly recently, we added some scheduling functionality to make it easier to coordinate between consumer and business owner. So business owner has a little module they could drop in the specified times that they're available and the consumer can then kind of push a button to lock in an appointment. And so we continue to be very paying close attention to both sides of the equation because, ultimately, we want to make it more and more convenient. So I think that's probably a fairly recent good example of how we continue to improve things. We're, of course, always refining the flows. So when you were -- depending on the job type, there's all sorts of nuances and information you either want to collect or don't want to collect because it's not necessary and it's just frustrating for the consumer. So figuring out that right balance of what is the minimum amount of information necessary to collect to give the pro a good idea of what the job entails and whether they want to take that on and then also ideally be able to get back to that consumer with a quote.

Last one on Services. I'd say, I mean, look, I think it's pretty clear it's a massive TAM, whatever you want to call it, $400 billion, $500 billion services spend in the U.S. a year. There's also a lot -- there's a lot of companies going after it. I guess the question we get a lot and I'd be curious to hear your view on is what does Yelp bring or offer to, call it, the local plumber that is differentiated from a competitor such as an Angi? Not the single amount, of course, but what's kind of the differentiated aspect that Yelp brings?

Yes. I think Yelp is a very unique asset in the marketplace, kind of opened the conversation talking about trust. And the Yelp brand has stood firm now going on 16-plus years and stands for trusted reviews and trusted businesses. And so I think if you're participating in the Yelp marketplace, the consumers come to Yelp knowing that they can rely on our content in a way that, frankly, they pretty much can't on any competitor. And we pay a high price over time to deliver that value proposition for consumers. For those that have been very long time Yelp watchers, we police our content very aggressively. Like of the review content that we take in from consumers, about 25% is set aside and not shown on average on the business' page. You can find it. There's a link at the bottom that says certain number of reviews are not recommended, and this has really been critical to protecting consumers. And doing so has a very high frictional cost. So obviously, if a business owner is used to say working with reputation management sites to collect a bunch of positive reviews that are maybe fairly questionable in their origins and they go up on a competitor, in Mountain View's site let's say, then they get frustrated with Yelp where those reviews maybe naturally come down. But I think over time, consumers do pick up on that. They realize that when they use Yelp, something is fundamentally different. The experience is consistently better. And I think that accrues to a long-term advantage. I mean just think about your own usage -- like my usage of Amazon over time has changed dramatically, where you -- like frankly, my perspective is you can't kind of trust anything about the experience at this point, especially the reviews component because, for whatever reason, they've just decided they'd rather maybe maximize business in the short run and police content only if they're forced to or if they're really embarrassed by it. And our attitude has always been put the consumer first, make sure that you're delivering as reliable and trustworthy an experience and use the tool of experience as possible. And that's hard to do, but that's what we believe. And we've always stuck to it, and I don't anticipate changing any time soon.

So I want to stick with the Mountain View, if that's okay.

Yes, sure.

So you've not been shy, I think, over the years on sharing your views there. Would just love to hear -- I guess a 2-part question. One, your latest thoughts on Google as a competitor. They're certainly doing more even in services with their local services ads. And then two, how successful have you guys been in driving organic traffic to your website and app, which has been a huge priority for you?

Yes. I mean, I think from a traffic standpoint, we still obviously have lots of people coming to Yelp. That was impacted by COVID. But as we discussed, as case counts came under control and people started moving around more, we do see consumers rapidly return. And then we also have all sorts of channels that we can push to remind people that Yelp's out there, whether it's e-mail or push notifications or what have you. And so we continue to push hard on driving as much traffic as possible from all channels, including from Google. I mean Google as a competitor, obviously, we have issues. They obviously put their thumb on the scale when it comes to exposing their own in-house property. They even put their thumb on the scale in trying to communicate with consumers about the content that they have. So when you see Google Places or whatever they call it, Google listing and it says a 500 reviews, what is a review exactly? In my book, a review is maybe a star rating and some text, some useful information. In Google's view because, of course, they're trying to stack the deck and look bigger than they are, about half the content doesn't even have any text. So it's literally a star rating that could mean anything. You have no idea what's behind that, et cetera, et cetera. So again, they take more of an Amazon monopoly view towards, "Well, you're going to see our product. We're going to stick it in your face, and we're trying to maximize our business. And of course, if we're easy to spam, then, oh well." That's actually better in your -- in working with business owners sometimes. If you're not policing things, you're just saying, "Hey, we have more content, look." But I think getting back to Yelp, like we have always stuck to our guns and said we want to be the most trusted site. We know that smart consumers over time will figure that out and migrate, and we have staying power. And so even though we've been battling it out for, I don't know, over a decade against probably one of the largest, most powerful corporations on the planet, we're still here standing, and we see a great long-term opportunity. We're executing on our long-term strategy. And I think looking at our performance in Q1, we're pretty happy with where we're at today.

So one thing that I think stood out, I mean, through all the volatility, and you've mentioned it in your opening remarks, was the constant has been your continued investment in product. And from an outsider's perspective, it certainly feels like the pace of product rollout has really picked up over the last, call it, year or 2. So my question for you is where are you most focused today on the product side? Where do you still see the most opportunity for innovation on Yelp?

Yes. I think our product resources are very aligned with our long-term strategy. So we've got a real focus on the Services area of our business, which, as you said, is driving the majority of our revenue. We've got a lot of features and functionality lined up to help continue to drive Self-serve, to help support our Multi-location sales team. And then, of course, we've got to deliver for the consumer and so continuing to refine that experience. So that's a lot of the focus. And all of that should lead to continued improvement in the percentage of monetized leads, better retention over time and happy and engaged consumers.

One more question and I'll -- David, I do have some financial questions for you as well, I promise, and for our listeners. So the innovation, I think, also extends to ad formats. You certainly tried a lot of new formats recently. You talked about bundling them -- you kind of alluded to bundling them earlier. Could you talk about where are you in terms of bundling your ad products together? I mean how successful -- how is that being received by your advertisers?

Yes. So we basically look at it for most advertisers as there's some -- 2 things that we're offering. The main thing is Yelp ads. And so that's essentially the search ads that you see all over the site, especially in the Services category. And then the other is an upgrade package which includes all sorts of profile enhancements. So that could be, hey, we heard from our customers that they really wanted to feature their logo and try to brand consumers that visit their page. So we offer Yelp logo. We heard from service providers, the ones that have maybe a portfolio to showcase -- if they're a deck builder, they want to showcase beautiful decks. And so we built a portfolio feature just for those types of businesses that they can pull off the shelf and use if they've got the upgrade package. And then we talked about Yelp Connect, which is more of a Instagram-like put a photo anytime that you want to with a little bit of captioning or text to talk about what your latest offering is or what your new special this week is or an event that's going on at your business, et cetera, et cetera. So that gives you some of the flavor of the types of enhancements you get with that upgrade package. And we are seeing really healthy attach rates and good usage of the features and functionality when it's pulled off the shelf.

All right. David, we'll shift to you for a minute. So you expect to finish this year at a similar level of revenue in 2019. You have updated your guide last quarter. I think it's certainly a faster recovery than most people expected. I'd probably throw myself in that bucket as well. And you've also talked about sustaining mid-teens percent growth next year as well. So my question is what are you seeing in the business that gives you the confidence in kind of being able to sustain this growth trajectory going forward?

Thanks for that, Cory. And I would say we did hear a perspective that returning to 2019 levels here in 2021 would be a challenge, and obviously, we're really pleased to be in a position where we are getting back to 2019. And I'll talk a little bit more about what we're seeing that's super encouraging. With regard to 2022, we'll provide our next update as part of our Q4 earnings call. With regard to the things that we're seeing, first of all, we felt like we had a really, really strong first quarter, and it really reflects the fact that we believe our strategy is working. So we continue to see improvements in monetization and Services. We had record retention, which we were pleased by. We saw dramatic acceleration in the use of Self-serve, and Request a Quote is going well. And we just see that the initiatives that we've put in place are yielding. And maybe even more important to that than that and really following on what Jeremy has been saying is that we have a portfolio of initiatives across these strategic areas of focus for us that enable us to very systematically work on both that consumer experience, which is increasingly differentiated between Services and Restaurant, Retail & Other and also generating a differentiated experience for advertisers, where services advertisers are able to really get meaningful information from a Request a Quote flow so that they know it's a good qualified lead and that it's worth responding to. On the Restaurant, Retail & Other side, that engagement that comes with Connect and really reminding folks that these restaurants are there, they're open for business; as things reopen, there's great experience. And I think we're all anxious to get back out. And so we're able to support those restaurant owners in communicating with those customers. So you see improvements on the consumer side, business side, Services, Restaurant, Retail & Other, and taken together, we think that all supports what has been our paramount mission, which is not only returning to growth but returning to sustainable growth over the longer term with some structural improvements that also give us confidence around long-term margins.

I was on mute. Only my second time to do that today. I'm better than normal. So on the margins, I'm going to stick on that. So look, I mean, you obviously made some -- had to make tough decisions, but you've come out with a pretty -- what feels like a pretty rational expense base on the other side. I guess going from here to there, where do you still see the most leverage opportunity going forward? And then also, where are you still investing the most in the business?

So we do think that we've made a number of pretty fundamental structural changes to the business. Clearly, we accelerated the shift on the local sales head count side, and we reduced that by 50%. But it's really important to underscore that local advertisers, businesses, business owners, they still do want to have a conversation at times, and so we still think that's an important part. But that smaller team, which we think is more productive today, is able to engage those business owners at the best moments. And that Self-serve really helps not just with the acquisition of the customer but also the whole post-sales experience because, first of all, there's reasons to engage like Connect or Nearby Jobs where you come in to see opportunities but also being able to set restart dates later in the future rather than churning out, being able to manage our advertising spend, having that all much more seamlessly, being able to increase your presence on Yelp through upgrade package. All of that comes with Self-serve. It's not just the acquisition that is important to us in the start but that entire experience, which we believe leads to strengthened retention. And so that improved retention also eases the requirement for us to have as large a sales force. So that's the local piece. I touched on Multi-loc. We think there's a tremendous amount of leverage there, and these large advertisers obviously have significant budget to deploy. And so as we invest in product and engineering to give them the analytics they need, the ad formats they need and then on the back end, something that's not really visible is that whole matching part where we make sure a consumer is seeing the right ads and that those ads are productive and deliver more value with lower CPCs with more clicks, we think all of that is a structural improvement as well. And then we still see a lot of room to monetize services. So you take all of those things -- and we've shifted to a distributed workforce. We have fewer folks who are more productive who aren't going to be coming into the office as frequently. We see room there as well to contribute to margin over the longer term. So we're really working across the entire business to deliver growth more efficiently, find areas to continue to invest and over the long term, to drive that margin.

Last question. And I know -- I'm getting the message that we're going to be out of time. I want to ask about -- I mean you can't have -- I can't have one of these talks with an online advertising company without asking about some of the privacy changes going on in the ad landscape, whether it's with Apple, cookies depreciation or whatever. How does that impact you, if at all, in the near term?

The vast majority of the ads that we're serving are happening within the walls of Yelp, so we don't see any significant impacts from those changes right now.

That is a very easy, straightforward answer. Awesome. Well, thank you both, Jeremy and David, for joining. Really appreciate it. And we look forward, hopefully, to having you again next year.

All right. Thanks for having us.

Thanks, Cory.

Okay. Thank you.