Yelp Inc. (YELP) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. I'm Jason Bazinet, Citi's internet and media analyst. Very pleased to have James Miln, SVP of Finance and Investor Relations, with us today from Yelp. James, thanks for joining us.

Great. Thanks, Jason. Great to be here. Thanks for having us at the conference. Unfortunately, due to a stomach bug and a family emergency, Jeremy and David aren't able to be here today, but I'm happy to be here and looking forward to the conversation. I'll also 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. Jason?

That's great. And 2 other quick housekeeping items. If you do need disclosures, feel free to e-mail me, I'm happy to send them to you. Also, if you want to ask James a question, you can send that to me via e-mail also. I think there's also a way to type it right into the portal you all are using. Either way, direct e-mail or right into the portal, either one is fine, and we'll get those questions to James as quickly as we can.

So I guess I would like to start with just a very sort of simple question, which is the advertising world is so dominated by these ginormous companies, right? But it seems like there's always some scope for a smaller firm to just sort of slip in between the cracks and sort of get less. So maybe we can just level set and just tell us a little bit -- a brief primer on yield in terms of the services you provide, who your customers are, how you generate revenues, and who you think your primary competitors are.

Yes. Thanks, Jason. So yes, I think Jeremy and his co-founder and the team began Yelp with a mission to connect people to great local businesses. And that's been true from day 1 until the current day. And I think even more true or shown very strongly through COVID, where the ability to connect people with great quality, highly relevant information around opening hours, around strategies to get through COVID that coming to Yelp to get that information, businesses using Yelp to be able to share that information was really strong. And it's on the back of that high-quality first-party content in our reviews, which we believe and there are certain studies out there which show, are very well trusted. And something that we continue to invest in, in terms of the quality of that content and nurture and grow through our growth. And then when you couple that first-party content with really the building of a sophisticated ad tech platform, the majority of our revenue is through advertising. And every day, we're here to optimize those -- the budgets that we get from our advertisers and help them perform on Yelp driving those connections with great local businesses. Part of that has also been our transformation over the last couple of years. So even before COVID, we were moving from a model that had really driven our growth through local sales to one being driven through product and marketing and through more accretive channels like our self-serve and multilocation channels. And coming out of COVID this year, I think you see that in the structure of our business and how we've been executing. So the mission has always been very consistent, the quality of our content has always been high and something that we continue to nurture and grow, and we'll continue to do so. We think that differentiates us from the competition, both those that are broader and larger as well as those in other verticals. And you couple that with that sophisticated ad tech platform and I think that, that gives us the ability to deliver on our promise to consumers and local businesses and drive long-term sustainable growth.

That's super helpful. So one of the things I was struck by when I was looking at your financials prior to COVID is just how remarkably steady the growth was. And when I sort of think about sort of the broader ecosystem, it's not like there's a ton of new businesses. I mean there are new businesses that are out there. It's not like people just sort of discovered smartphones or apps, right? So what is it if you had to unpack sort of that consistent sort of top line growth that you guys were able to generate pre-COVID, what would be the 2 or 3 things that you would attribute it to?

And I think over that longer term, what you've seen is a steady increase again. So on the quality content in our reviews, we give an update on that now annually as we continue to grow that corpus. That's driven by the usage of Yelp over time. And then the claim businesses that there are on Yelp, yes, there's a steady increase in the overall ecosystem out there in the economy, but we've also seen that growth on Yelp. And we're over 4 million claim businesses, but -- and being paid by around 500,000 paid locations. So there's a great opportunity for us to continue to monetize the traffic that we have on Yelp. And I think that we hit $1 billion in 2019, just before the pandemic hit. That was a great milestone for us. And what we've done over the last few years, as we look to drive and continue that sustainable growth, is shift from driving that purely through sort of addition of sales headcount and be very local headcount-focused to continuing with that as a key pillar, but broadening that out to self-serve and multilocation channels. And when we take that into this new era, taking advantage of the higher leverage opportunities we think we can drive through product innovation, including such as our self-serve channels, multilocation and a big focus in the last couple of years building out our services businesses. So that combination of initiatives, I think, has, again, consistency with the past, but some change in focus and some structural change to the business in the last couple of years as we look forward to the next phase of growth.

You've mentioned the quality of your content a couple of times. How is it that you measure that? Is that -- it must be something more nuanced than just a number of reviews?

Yes, absolutely. So actually, there's some third-party studies out there as well, which we could point to in terms of showing how -- there was an FTC study, we talked about this in an earnings letter a few quarters ago, which talks about the quality of the review -- the comparative quality of the review on Yelp. We tend to see a more spread of the ratings. We also tend to see a longer review. And on the whole, where people and Yelp users take the time to write their review and share that with the community, we tend to -- we encourage that on the platform, and we absolutely believe that, that creates a higher-quality experience that is behind our ongoing user growth and user engagement.

Okay. That's super helpful. I can't remember exactly when it was, maybe it was at the end of '20 you changed some of your KPIs. Maybe I have the date wrong. But can you talk a little bit about why you changed, what you changed to, and what you think investors should look at or interpret those new KPIs to glean the most insight about the trajectory of your business?

Yes, absolutely. Thanks, Jason. So yes, we did change those actually at the beginning of this year, and we provided the history. And this was based on our evolving strategy and also investor feedback and where we thought we could better help investors understand the drivers in our business. And so over time, the business evolves from when we IPO-ed, and we hadn't had necessarily an opportunity before then to refresh those KPIs. And so as we were coming out -- as we come out of COVID last year and into this year, felt like a really good time to do that. So there's 2 -- I'd say there's 2 main things that we focus on a quarterly basis. One is our services versus what we call RR&O, Restaurant, Retail & Other revenue and paid locations. This really reflects that there's more differentiation going on, on our platform and through our product teams now between these 2 areas. So with the focus we've had on services monetization and the ongoing focus we have on the engagement around restaurants and retail, and that is an opportunity for advertisers, too. We felt that this will help tell the story better about the initiatives that we're doing to drive those 2 high-level category areas. And then on the monetization side, we are an ad platform. That's the majority of -- vast majority of our revenue. We monetize that through clicks and CPC. We actually take budget -- monthly budget from advertisers and, through our ad tech platform, we're able to execute that. And every day, we're looking to drive that in the most optimal way for our users and advertisers on the platform. And so looking at the trends in clicks and CPCs, we think, is an indication of our ability both to monetize -- increase our monetization of the platform, but also drive more value for advertisers. And so one thing that's interesting for us that may be a little different when you look at other platforms is we're very focused on growing, obviously, overall revenue. But seeing CPCs, as we did in the last quarter, decline year-on-year, for us that's a strong positive in the value that we're driving to advertisers and says a lot about the technology behind that, that our teams are building and executing on.

So can you just unpack that a little bit? Why do you look at falling CPCs and say, "Well, that's a good thing?" Is it as simple as it just means more utility for the -- your end customer?

That's right. Yes. I think it's a good indication of us being able to provide more value to the advertiser. And it's -- there's a lot that goes on behind that, it's a lot about the matching that we have, the relevance, the new ad formats that we've brought in. We talked about that on our last shareholder letter as well, so a combination of all of these elements of the experience. And as clicks grow, that's a good indication of the increasing monetization of the -- of our audience, and we think, particularly in services, that there's a great opportunity there for us, and we've been executing on that in the last couple of years. But relatively, if CPCs don't need to -- if clicks are growing and CPCs grow at a lesser rate, that's a good thing in terms of driving more value to advertisers.

And it's all done via bidding, is that right? Is the CPC sort of an output?

That's right. We have -- we run our own auction marketplace internally. And many of the features that you would see on other platforms, our team run as well as then optimizing it for our particular marketplace, where we take that budget and then we have our wide spectrum of different advertisers from local to multilocation and different ad formats, and we're able to optimize it within that. And I think that is something that we feel that we have a strength in and a core competency and something we've been excited to talk about with investors.

So for some of the other bigger social media firms, if we see sort of pricing go up a lot, it could be just a function of sort of the -- sort of advertising inventory fell a lot, because people went outside and did things and there's still dollars chasing it. So you sort of see the squeeze effect where the pricing can go up a lot. Is the dynamic different in your business? In other words, if you see a falling CPC, could that be just a function of sort of less demand? Or is that not the way to sort of think about it?

Well, I think what we saw in Q2 was, overall, our revenue was growing 50% plus from a year ago. I think clicks were up high double digits, while CPCs were down 20%. So for us, we really love that dynamic where we grow -- we're growing budget, there's more demand, traffic is recovering, but through our matching and relevance and different ad products, we're finding more places to find a relevant match to monetize that click. And so we're finding ways for advertisers to get more value from that budget.

Okay. And as I go back to that dichotomy between services and what you called RR&O, the Restaurant, Retail & Other, from the inception of Yelp, were you always providing services or sort of advertising and marketing services to the service category and it's just become big enough where it's worth highlighting? Or is it more that you just see a bigger opportunity there given the way the economy is moving? Maybe just give a little bit of color on why you think the services will be more.

Yes. I think it's always been there. We have spoken about it before. I think what we felt was helpful in making this split in the metrics was it made it even more transparent that there was -- that whilst we get a lot of our engagement from restaurant and retail in these higher-frequency categories and services is less, the monetization is much more. And so you see that in the split in our revenue, with 60% currently coming from services. Now there's certainly -- it's sort of been a great example going through COVID of showing the relative strength and dynamic of services versus restaurant retail. We've seen that through the pandemic, where those categories have been impacted in different ways. And so that's certainly been part of -- that's helped us explain that, and I think helps investors see how our performance there stacks up and how, where we've been focused on driving services monetization, you're seeing like the impact of that from our execution. But going forward, I think both of these continue to have -- again, both of them have long runways. And on restaurants and retail, I think, we're still in recovery, and then that will probably last into next year services. While there are some macro trends, there's so much in our control on how on the traffic we already have on Yelp and how we can continue to monetize that further. There too, we think there's a good runway.

So you said services tend to monetize at a higher rate. Is that -- is the root cause of that just that when a consumer ultimately spends money on a service, the quantum of the bill just is higher than it is under...

That's right.

Okay. Okay. So shifting topics. I guess maybe we could sort of stay -- keep our focus on the pre-COVID era and maybe you could just talk a little bit about what were the main initiatives that you were working on pre-COVID. And then when COVID hit, did any of those change? Or is it just sort of the same set of initiatives, just maybe executing on them at a slightly different cadence?

Yes. I think for investors who have been following us a little for a while, they would remember in 2019, we put forward a strategy with a focus on the opportunity to grow through these other channels, self-serve and multilocation, through more productivity from our products and engineering group who, in 2019, we launched some great products, Verified License, the Business Highlights, Portfolios. We had a nice number of products already going out the door in 2019 before COVID hit as well as a focus on services monetization where we -- it had already -- services had already always been part. We're a broad-based local platform. So we touch everything that goes on in the local economy, and services was always part of that. But we had -- we saw that opportunity, and we had started talking about that. And I think fast forward to now, and I think that, that put us in really -- in actually a good place that these -- despite the difficulties of the pandemic and the difficulties to many local businesses and communities as we are coming through the recovery phase now, that positioning ourselves and putting that investment into grow through self-serve, grow through multilocation and grow through services, we've been very consistent on that. And our -- and it goes -- it says a lot about the teams who, through the pandemic, just consistently worked on those road maps and those initiatives to drive our growth in those areas. And you look at the results in the first half of this year and the growth on self-serve, on multilocation and services. And I think that's directly linked to the leadership team and the teams at Yelp putting those plans in place and executing.

So we already touched on the services momentum and the shift from local sales to self-serve makes a lot of sense, just getting operating leverage -- better operating leverage that you alluded to. Can we sort of dig a little bit deeper on multilocation? Why is multilocation so important to Yelp?

Looking back and just the history and growing to that first $1 billion, a lot of that was driven by Yelp's strength as being hyperlocal, building its business across the country and, over time, the relevance of Yelp to larger regional and then national players become more and more obvious. And I think that, as we look over the last few years, what we've done is build up a really great, strong team across sales and across products and across supporting functions to address that, what in fact like enlarges the addressable market for us from that just smaller, local business to these national and regional players. And our audience -- our valuable audience relatively affluent, high purchase intent, we think, is a very attractive audience for those for those businesses. And what we've done, we've talked about in our last letter, is we've done a lot to expand the offering from the core Yelp search offering to now products like Yelp Audience. And so as we've expanded that offering to provide a more sophisticated product suite to that type of advertiser. And that we think we're making good progress against addressing the TAM that's out there and the long-term opportunity ahead.

Is it -- let me try and frame this and you tell me if I have this wrong, is it simple to think of a single location business would be primarily self-serve and primarily user search product and a multilocation business would probably get a salesperson and the needs that they have are more varied, both top of funnel and bottom of funnel, and there's a whole sort of product suite for them? Or is it much more intertwined? Or you could have a single location person have a salesperson that uses a full panoply of the services that you offer and you could have a multilocation that does a self-serve ave and only uses your core product? Is that -- does the question makes sense?

Yes, yes. I think, yes, there's -- it's a little bit more than that, but I think we've grown that now. It was, I think, 10% a couple of years ago. It's now 17% of our revenue, and that's in -- that's significant growth within that local. And yes, I think on multilocation, that suite of products we have, the teams we have in place, they obviously have much larger clients, but there's also a certain degree of sophistication there that is appropriate to have a strong sales team in place to help.

Can you talk a little bit about your attribution solution and sort of explain the dichotomy between on Yelp and off Yelp attribution?

Yes. So we have, again, Yelp as a trusted brand with a large organic audience, a lot of that audience using our own app is a strength for us. It means that with that first-party data, we have developed our own first-party attribution solutions. We have Yelp store visits where particularly for these more sophisticated advertisers, we're able to help them get attribution down to that specific action. We also work with advertisers and we can work with other third-parties in that space as well. So there's a lot that we do there, I think, with a degree of sophistication that we can bring but it's on the back of, I think, having this strong first-party content, organic audience and our own ad technology that we're able to drive this ourselves and continue to improve our solutions there as well as work with others to give some of these advertisers the attribution that they're looking for.

Perfect. What about your R&D investments? One of the things I noticed is it hit not only a record level in dollar terms, but a record level, I think, as a percent of revenues. What is it that you're investing in that might pay dividends next year or year after or year after?

Yes, absolutely. So I mean, you've seen -- again, this ties back to that strategy that we put in place, you're seeing the efficiencies we're getting from our sales channels and our execution there and more coming to the self-serve and multi-loc and so less expense on the local sales. And some of that is going into increases into product as well as into marketing. And the initiatives behind those remain, I think, very consistent with the opportunities that we see. So there's initiatives to drive up services monetization. And so looking at tools like Request A Quote, the ability also to look at other ways that consumers connect with businesses on our platform and how we can help make those more effective to generate valuable leads. And so there's a -- we've done a lot of progress on Request a Quote. We're seeing a lot of growth there. I think, again, it's just a good example of the types of initiatives that we have and the runway that we have there to continue to invest there. We -- our teams are very focused on the -- supporting our go-to-market. So whether that's through the efficiency of our local sales team, which still remains relatively a good-sized team and a very important pillar, but also complementing that with continue to improve the self-serve tools and continuing to improve things like attribution and this product suite that we have for our multilocation advertisers. And then beneath that, like, again, I point to our ad technology and the infrastructure that we have behind this and consistent investment there is helping drive those sorts of performances where we can grow budget, grow revenue that finds -- find ways to try and continue to drive value and more value to advertisers. So we've been able to be very consistent with those initiatives through the pandemic. I think it says a lot about the teams in place that we have there and the leadership and, I think, where we're getting into planning now for next year and even looking further ahead. And so it's exciting to be able to see the momentum we've delivered over the last couple of years and to work with the teams on driving that continuing to go forward.

I don't think this was an initiative of yours prior to COVID. A lot of those were pretty consistent that you talked about, just sort of continuing to push on them. But the one that I think is new is sort of the notion of the distributed workforce?

Yes.

Is that something that's sort of -- okay. Can you talk a little bit about...

Yes. Yes. I mean we had already made some moves here. We had moved local sales out of San Francisco back in 2019. We had already recognized that there was a lot of great talent outside the Bay Area, and so there was a way to get the talent -- the strong talent for Yelp by looking further afield and looking at a more diverse workforce. I think what's happened is that in -- COVID and the pandemic have accelerated that beyond what we probably would have done without it. And the shift -- there has been a shift from us to actually lean in positively to being remote and distributed first rather than in office. And so that allows us -- when we look at employee satisfaction and just productivity and how we've been performing through this and what employees are looking for going ahead, we think that, that works well -- is going to work well for us and that also provides savings because we're subleasing space, and we've already talked about some of the sort of annual run rate savings that we've already locked in there.

That's great. So you mentioned earlier, almost all of your revenues are ad-based and I think most of it is CPC-based. Is there any scope for that to change where you begin to generate revenues in different ways or not?

We have transactions revenue and other revenues. The other revenues consists of 2 main streams: one around our restaurant SaaS business, which, for obvious reasons, has been impacted through the pandemic, but we continue to have many locations out there and a strong team in place there working with restaurants on our reservation and waitlist product. So that's strategic to us. We think it's -- again, because it's an area of high frequency and high engagement, it lends itself very well to Yelp's strategy and our core mission. And so while small today, I think we still think that over the long term, it's a very important area for us to be in. And the other area that we have there is around data licensing and the value that goes to the value that Yelp brings. Again, the uniqueness of our data and the high quality of the users and the reviews and the interactions that we have. So those are -- I mean, it's a strategic, they're small today. And I think over the longer term potentially could become a larger part of our business. But I'd say the focus right now is on the core advertising and the opportunities we have through the recovery and through our initiatives to continue to drive growth there and sustainable growth going forward.

So when I was looking at your advertising expenses, it was something like, I don't know, 8% maybe of your revenues back in '16 and fell to 2% prior to COVID. That's a pretty big drop in terms of ad outlays. What should investors infer from that? And do you think you've maybe cut too much? Or does it feel like it's sort of the right level of ad spend?

Yes. I think it shows a lot about this -- again, the strength of our organic position, the strength of our app, the strength of the brand. A lot of what we did through COVID by being -- being that trusted content by helping consumers connect with their local businesses around their COVID eras, now we also have flags around vaccination status. I think those are more important delivering on our mission and being trusted every day. Now as we come out this year and as we plan ahead, we have been developing, I think, again, more of our particularly business marketing muscle as we look at shifting from that so local sales driven to more multichannel with self-serve. And there's a -- I think there is opportunity for us there to look at good opportunities on the ROI front that can help drive our growth there. And on the consumer side, I think there could also be opportunities there. I think as we go through looking where will we be post-recovery and so where are some opportunities for us. I think that's part of what we're looking for and planning right now. And I think -- yes, I think there may be opportunities there that make a lot of sense and investors would agree with.

Okay. What about capital returns? I mean you guys have been buying back stock in not insignificant amount, I think, since 2017. What's your overall philosophy? I mean some companies have like a grid, where they sort of look at their stock price and they say, "Well, look, if we think it's attractive, we'll buy more and if it gets too expensive, we buy less." Other companies are a bit more mechanical about it, where they just sort of buy a certain amount every year, sort of independent of what the share price is. Do you guys have a philosophy when you sort of think about capital returns?

We do. And with David and Jeremy, we've -- it's something that we've talked about. We did pause, obviously, in the middle of the pandemic and then restart again this year. So the -- as they look at it, there's a certain amount of cash that we think about in terms of where we'd want to be to operate the business while remaining flexible. And we have a good degree of confidence now coming out of the pandemic in our ability to continue to generate cash even in very difficult situations. So that -- that's good to see. And so when we look at that excess capital, we do think about shareholder return and repurchases as an important element of that and an important element of being consistent in our approach. I think as we continue to get through the recovery, what we do is just we have that framework and then we're adjusting it based on -- as we look at what we think our organic plans look like the opportunity that could be to supplement those on the M&A front and then shareholder -- share repurchases as being another element of that consistency of strategy going forward.

Okay. My last question for you, James, on capital structure. When I've gone back and looked at your historical financials, you've never had any debt. And rate is obviously very low. You talked about your ability to generate cash flow even in difficult times.

Right.

Is that just sort of a bright line that just Yelp doesn't take on debt and it's a philosophical point? Or is there scope to redo your cap structure to sort of enhance sort of equity returns, if you will, by getting your cost of -- blended cost of capital down?

Yes. No, there's not a philosophical sort of point here. I think we're pragmatic and we look at -- and I think it will come to looking at, again, those -- that what I just went through, like as we work through and get a sense of our growth trajectory and our first focus is on like that sustainable -- long-term sustainable revenue growth at attractive margins. And so the degree at which we can do things on the capital side to help drive confidence and even accelerate that, I think we'll always be open to.

Okay. Well, that's super helpful. James, thank you for taking the time to spend with us today. And thank you for stepping in, given some of the changes with Jeremy and David not being able to join us today. So we really do appreciate it.

Well, yes, very excited to talk to you soon. So -- but thank you for the time. I appreciate the time at the conference. And thank you, Jason.

Yes. Thank you, James. Be well.

Goodbye.