Yelp Inc. (YELP) Earnings Call Transcript & Summary

All right. I think we're going to go ahead and get started. Stephen Ju from the Crédit Suisse Internet Equity Research Team. To my right, we have David Schwarzbach, the CFO of Yelp. Welcome.

Stephen, it's good to be here. I have to share the safe harbor statement. 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.

All right. So with that out of the way, let's dive right into it. So in terms of the strategic initiatives, right? So you guys continue to make pretty good progress against those initiatives, including the monetization of the Services categories. And this was pretty evident with the attractive revenue growth in recent quarters. But in particular, only about 25% of these are being monetized in the Services categories as of the third quarter. So what investments does Yelp need to make in 2022, right? To continue to improve the monetization in this category.

So Stephen, as you know, there's been 3 areas that we focused on over the last 3 years from a strategic perspective, one has been on Self-serve, one has been on Multi-location, but certainly, Services monetization has been very important to us. And what we have seen is that we are under monetizing that traffic. And we've done a great job, I think, of driving up that monetization over the past several years to a point where about 25% of leads are monetized. And that's required a very broad-based set of initiatives that we'll continue. So let me just talk about a couple of the areas there. One is we have wanted to really improve the matching between when a consumer comes in and the business. And it's a better experience if they're well matched and it's a poor experience if they're not. On the consumer side, we've invested heavily in what we call request-a-quote. That's grown significantly. And that's where you go through a flow to really determine exactly what you're looking for. So we're going to keep investing in that. We've added price guides there that helps consumers understand what the cost of that might be as they go into that request-a-quote flow? On the back end, we have quite a sophisticated ad tech platform. And so we are matching those consumers algorithmically, running auctions and so we've continued to improve that. We're looking at ways to really look at auctions across the entire page to continue to improve there. And then broadly, we've differentiated the experience on Yelp between what we call Restaurant, Retail and other categories and then Services categories. And that differentiated experience shows up for the consumer and say, request-a-quote, you don't need that for a restaurant, clearly. But also for advertisers, the type of interface that we have so that they can Self-serve, they can select ZIP code or area for targeting potential leads. And in addition, the ad formats that we're providing to them or something like nearby jobs where they can choose to look at leads. So the investment is going to continue in all 3 of those areas, continuing to differentiate the experience, giving the tools to advertisers, and we will continue to invest in this sophisticated ad tech platform.

Got it. Touched on this in your answer, expanding Self-serve and Multi-location sales channels were your other strategic pillars. And I think as of the third quarter, about 45% of revenue is coming through these other channels, right? So where do you see that penetration normalizing? And how will you capture a greater percentage of revenue through these channels over time, given the success of Self-serve channel? And then how should we think about the sales headcount going forward also. I know that's a multilayered question.

Yes. So just maybe to start with the sales headcount, one of the things that we were able to do is accelerate that transformation last year. Clearly, none of us want COVID. It did afford us an opportunity to dramatically reduce the size of our local sales headcount. We cut that in about half. We believe we can continue to operate at about that level. We've been under that number this year, and we've been working to get back to that half, but we don't see a need to go above it at the moment, though if we could invest there productively we would. And that's because Self-serve has worked quite successfully. And there's a couple of reasons for that. One is when you come into the Self-serve flow and you actually work your way through it. Your level of commitment is higher. And so what we've seen on the back end is better retention when people come through Self-serve. Also we get a nice effect, which is, say, you drop out of that flow, we can then put that lead over to a salesperson and it's more qualified. So it does make the sales force more productive. So we like that as well. And broadly, while we want to do acquisition through Self-serve, no doubt, all the improvements that we're making there in the product mean that you can Self-serve, your advertising once you become a customer. So for instance, let's say you're going to pause for holidays. Well, you can set a restart date. We've seen that be very successful. That was actually very successful last summer as COVID went up and down. We also applied that last holiday season. So it's not just the acquisition piece. It's not just the commitment. It's the ability to Self-serve your ads later once you're a customer. So that's on that side. On the Multi-loc side, we've continued to invest there and grow more sophisticated. One of the things that we had in our Q2 shareholder letter was just an outline of all the products that we've built for national advertisers, in particular, though mid-market can also take advantage of it. And if you think of Yelp in the past, it's just this very narrow CPC ad, I'd say we've really changed that. So we have products up and down the funnel now from awareness through reengagement and through a product that we call Yelp Audiences, you can now advertise with Yelp on Yelp, but 3 Yelp Audiences, use our audience product to target consumers off of Yelp. And so for large national advertisers who didn't have a clear way to advertise on Yelp, CPG or, say, the auto OEMs, this actually gives us an opportunity to sell something to them that's useful and relevant, even though there's not a clear ad format for them on Yelp. And so we feel like we have plenty of room there to continue to add more products and to engage across more use cases for these large national advertisers.

Okay. I think some of these Multi-location, larger advertisers did pause spend in the third quarter because of the Delta variant. Are these larger advertisers or -- well, let's just rephrase the question. So I think that some of the Multi-location advertisers paused spend. I don't know if they were large or small, but given the Delta variant. So -- but in general, were the folks that paused advertising, were they larger or longer tail? And have you seen this pause continue given the emergence of Omicron, I think I'm saying that correctly.

Right, Omicron. So just stepping back for a moment, what we've seen over and over, over the course of the pandemic is that when consumers are confident they go out. When they are worried, they are more cautious. And we do see that dynamic actually to play out across the United States. And so that's a dynamic that very consistently played out on the advertiser side. What we saw early in the pandemic where the large national advertisers were slower. They were slower to turn off spend, they were slower to turn on spend. And they were really working out their playbooks and their strategies for COVID. What we started to see, as we came into the summer this year is that they've worked that out. So their speed of decision-making actually went from probably being somewhat slower than small individual advertisers to faster. And so they're able to respond much more quickly. And we saw that in particular, for instance, in the Restaurant, Retail and Other categories. Now it wasn't just Delta. For them, they have the labor challenges for retailers. They clearly had supply chain challenges. And so if you don't have the people in the restaurant to serve more customers, it doesn't make a whole lot of sense to try to drive incremental foot traffic. So we did see that play out in the third quarter where these Restaurant, Retail and Other advertisers, particularly larger ones, made more rapid decisions around that spend.

Yes. Okay. Now how is Yelp positioned to ensure that these advertisers use your ad tools as they restart their ad spending?

So I'd say just on the individual side, all the investment that's gone into, you're talking about Self-serve?

Yes.

The beauty of that, it's not won and done. It's not just about acquisition. It's about how am I going to manage my advertising. I mentioned restart is a really important part because there's seasonality for those folks. For the large national advertisers, we've built out an enterprise sales team. And that enterprise sales team does engage with those advertisers now continuously. And so it's no longer a hey, buy an ad for a particular seasonal campaign. The conversations have expanded to be, okay, as you look at your budget for the next year, your strategy and the marketing campaigns you're planning for, how can we support you with this multitude of products up and down the funnel on and off Yelp. So that just the dialogue is very different.

So it seems like the risk of sounding presumptuous that Yelp has taken on a role of being the principal as well as the agent to some degree?

That's a very interesting point. So for sure, on the Yelp Audience side, we are -- those are managed accounts or managed campaigns for us. So we are definitely engaged around that. But at the end of the day, we really -- especially for large national advertisers, you work with the agency, you worked with these very sophisticated marketing and analytics teams. They're very focused on incrementality. And so I would say more than us being the principal in the transaction, it's the partnership of what is the metric you're trying to move, how are we performing against it? How do we tune that campaign spend so that you achieve the results that you expect. And I'd say we've become much more sophisticated. And we've invested heavily on the incrementality side to enable them to be able to measure the performance of those campaigns.

Yes. And speaking of incrementality and performance, I think you've been making pretty good progress on delivering more value to advertisers, through higher ad clicks and lower CPCs. And I think in 2020, you conducted about 18 million auctions per day, right? So where does that number stand for 2021? And what investments, whether it's bundling products or other things that position Yelp to continue to drive ROI for advertising?

So certainly, as the business has recovered, we've seen an increase in the -- that number of clicks, or the number of auctions that we're running, that really yields in the number of clicks. And so one of the things that we did at the beginning of the year was revamp our public metrics. That's in our shareholder letter towards the end. And you can see that clicks grew in the third quarter even as CPC was down modestly. And the way that we think about value is we want to deliver more clicks at a lower CPC. Now we want click growth to exceed the decline in CPC for sure. So that we can obviously grow topline. But that represents value to an advertiser because I got more clicks at a lower average price. So we do need to run more auctions and the more effective we are at running those auctions then the more value that we deliver. Now I think you saw some other advertising platforms share in their own Q3 results that CPC -- average price of CPCs were up. We were down a little bit. And we think that's essential for, not only retention, but for being competitive. So we're going to continue to invest there. You will see us driving more auctions as it's more fine grain, you can run more auctions and you almost create inventory out of that because if you can better match folks, just as a reminder, advertisers give us their budget, we optimize their budget on their behalf. If they see better performance, we get more budget out of them. So we are very incentivized to deliver that value, earn more budget, optimize it for them and see that continue to improve.

Got you. Did you guys just recently rolled out sponsored collections on iOS, and I could think Android is probably coming soon?

Right?

So I think this is an expansion product on Yelp Audiences. So it's probably a little bit early, but this has the potential to signal to national advertisers, what local users are interested in and advertise against that backdrop. So what is the early feedback from advertisers? Are there any metrics that you can share with us in terms of the product?

So this format is really good for us in the sense of a national advertiser can spend on Yelp to promote local businesses. So let's start with why does that matter to them? First of all, they want to show that they're supporting the local economy. They want to continue to build that relationship with small local businesses. They want those local businesses to see that they're supporting them. And we, for instance, saw Kraft Heinz decide to advertise in this format where you see their logo, but then it's really the local advertisers ad. The beauty of that, from our perspective, is like Yelp Audiences, it enables advertisers' CPG to advertise on Yelp when they wouldn't have an obvious way to do that. It also enables us to tap into CPM spend on a CPC model. And so we also like that. And then it also fills out yet another product for those large national advertisers to think of Yelp for deploying budget. So we think that it works across a number of areas. And from an experience perspective for the consumer, you do get that brand association of seeing a large national advertiser, might be a beloved brand advertising a small local business, we think that continues to reinforce what we believe, with consumers, is also a very trusted experience.

Yes. You guys recently rolled out a new home feed for iOS, right? So can you share sort of any of the early learnings and how consumer behavior on the platform might have changed on the aftermath?

So one of the things we have been spending time on is around that consumer engagement and the experience. And we did need to go through a modernization effort. I talked about the 3 strategic initiatives. Those were very much on the advertiser side.

Yes. I think it was about 4 years ago, I think when you guys -- I remember it was Jeremy or your predecessors talking about, well, we spent the majority of our engineering resources focused on the consumer...

Exactly.

And not much on the advertiser side thing. There was a major pivot at the time.

Exactly. That's exactly right. And so over the past several years, that investment did shift away from consumer. It went to advertisers. We've clearly seen the results. I mean, look at Q3. Matched our best ever quarter from a topline perspective, record adjusted EBITDA quarter for us, 26% adjusted EBITDA margin. So that worked. And through COVID, we saw Services continue to grow, very pleased by that record quarter for Services. Restaurant, Retail and Other got to $100 million hasn't fully recovered, that all worked. And we think we're on the other side of that strategic transformation. But it means that we did under invest for a period of time on the consumer experience. And so one of the things that we've said is that we are shifting to driving growth by investment in product and engineering. That means that we've been able to add to that team this year. And we've been able to add resources to focus on the consumer experience. So that brings us back to the home feed, which is much more modern. I think if you used the app a year ago and compare it to now I think it's well to 100% or close to it, you'll see you're scrolling through what our very engaging posts and our Yelp Connect product now feeds that. And that's where an advertiser can create their own post. That shows up in the feed. And from our -- and we're a test and learn culture, we do a lot of experimentation. The early test results showed that engagement with those posts went up 30% by going through the home feed. And so that's a win for us in the sense that the content is more relevant, engaging, interesting for the consumer. It's a win for the advertiser because they're seeing that they get the click through for the effort they're putting into putting that post up. So we just think that now we're bringing together consumer and advertiser experiences in the app in a way that benefits both.

Okay. And presumably, buying ads within a feed is something that advertisers already know how to do it because they've already done it across other properties?

I mean we obviously already in effect, have sponsored ads at the top of the page. So we are always experimenting. And so there are lots of different ways that we can present ads to folks, and we'll continue to experiment around that.

Okay. Got you. Let's talk about the cost base a little bit. So I think you decided to have a more distributed workforce with less reliance on commercial real estate and mentioned this will achieve about $15.5 million to $17.5 million in annual GAAP cost saving from the office space reduction. So will the full impact of these benefits begin in 2022? And how much of this was realized this year? And what additional opportunities are there out there for additional cost savings?

Yes. So we have done a lot to reduce our space, but that's really out of our strategy of embracing remote work. And this has now been since March of last year, and we are going to continue to be, we call it distributed organization. And so that means we're hiring much more broadly from a geographic perspective that gives us access to a broader set of talent. An outcome of that is that we just don't need as much office space. So we have reduced that. We saw about -- our estimate for 2021 is about $6.5 million of that $15.5 million to $17.5 million. We'll see the full benefit of that next year. And we are continuing to look at ways to further reduce our real estate footprint, as we continue to work on a remote basis.

Okay. Got it. But with that in mind, though, it sounded like on the third quarter call, It does appear that you're playing offense in this environment with the expectation that Yelp will hire Multi-location -- will hire for Multi-location and also for R&D. So are you able to effectively onboard talent right now given the tight labor market that we all are talking about? And Yelp's decision to have that distributed workforce. I guess that's what the counterbalance there, right?

So there's really maybe 2 areas to think about. Sales, and even within sales, local sales.

Yes.

And in local sales, what I would say is it has taken us a bit of time to learn how to recruit, onboard and make reps successful. And we've been working on that through 2021. And that hiring has been a bit behind. So we're going to continue to focus on that. We've made good progress. In terms of the Multi-location part of the business, enterprise sales rep only work remotely. And so in that sense, there's nothing new about hiring and onboarding folks who are very accustomed maybe to working from a home office and traveling to see their customers. So I wouldn't say there's anything particularly different there. On the product and engineering side, we've been very happy with the overall level of hiring. And we do -- we are metrics-driven. And so we've looked at that onboarding time, the ramp time for engineers, we've been pleased with our ability to do that. And in a way, product and engineering lends itself quite well to distributed work. One of the things that's interesting is that working from home for many engineers is a much better environment to work in. It gives them focused time in a quiet environment. And so overall, we feel very good about being able to retain, onboard and ramp on the product and engineering side.

Okay. Got it. At this point, I think we can open it up to the floor for any questions. I think it's been a fairly shy audience throughout the course of the conference, but we'll see if we have any questions. Yes. All right. I've got to talk about this to some degree because it's been on the topic of every internet investor. But most of the ads that Yelp is showing is on platform. It's pretty much on your own app. So it doesn't appear that the company is really affected by IDFA changes, right? So are you seeing some wallet share gains as a result of what's happening in terms of companies who might have been caught flat-footed or are being negatively impacted by retargeting campaigns or otherwise?

So we do have a tremendous amount of trust with our consumers. And we have not seen a significant impact from the IDFA changes because of both that trust, but also because our owned and operated property is where we monetize. You can look at a product that we have called Yelp Store Visits. That's where we track people actually go into the store. And that requires a consumer to enable location tracking. And over the past 2 years, we're seeing a number of advertisers using that product double. We've seen the ad budget from those same advertisers increased fivefold, and we've been able to deliver on that attribution through Yelp Store Visits. And so I think that's a reflection of the willingness of consumers to trust us, but also this is a sophisticated product. It takes a lot of engineering to create something that sophisticated national advertisers believe from a results perspective. So I think overall, what we've seen is our ability to meet the needs of advertisers through our own products that aren't dependent on the IDFA changes, are not impeded by the IDFA changes. And that does enable us, as a result, to show value and to have that conversation with national advertisers about increasing their ad spend on Yelp.

Got it. I think it's been several years since you guys did an exit out of some of the international markets, right? So now you're working on a distributed workforce. So does that really make you think -- rethink about the exit out of international, maybe perhaps reengaging in some of the international markets?

So we're not looking at monetizing internationally today. The app is live in many countries. And people do...

The data is still there?

Yes, the data is there. You can contribute. The platform supports many languages. So the app is running actually internationally, we don't monetize. And again, we don't have any intention of doing that now. I would say the engineers that we're hiring are broader like, when are we going to do more in, say, the U.K. where we've been hiring quite a few folks, but not today.

Okay. So stay tuned, I guess.

Stay tuned.

Okay. I think this might have been almost a decade ago where Jeremy rolled out, I think, it was an announcement at the time on the Yelp Platform. And I think I've always really liked that concept where there's always purchase intent among the users. And probably the best example at the time was, hey, you're looking for a review for a restaurant. And you really like this restaurant. The reviews are cool, that's filtering through to a vehicle for you to actually make a reservation, and this might have been done with any number of partners, whether it might have been OpenTable or otherwise at the time. So I think on the services category, that's where you've taken a direct step to kind of go full funnel. There's going to be other categories where it might make sense for you to have a direct presence, it might make sense for you to have a partner. So where do you stand among the various categories now? Is there a greater potential to open up Yelp as a platform, once again, to serve as a source of demand for various categories?

So we do have our partnership with Grubhub. We do enable people to order on Yelp. That shows up in transaction revenue for us. So we do have that. We're always exploring partnerships. And one of the things that we always balance is the consumer experience with monetization. And so we're very mindful that if the experience becomes, say, too cluttered. Or if there are too many steps between discovering the business, and your initial search that we get drop off and it's a poor experience. So we do continue to explore opportunities. We're mindful of the consumer experience. We have monetized in this way in the past.

Yes. Okay. All right. So we only have a couple of minutes left. So let's fast forward to a year from now. We're sitting in almost the same seats, right? So it's December 2022. So what do you think we're going to be talking about, 12 months times, in terms of what you've been able to accomplish?

So we have done a lot. And we've tried to really lay that out for folks, particularly in the shareholder letter. But hopefully, from my comments today, you have a sense that we have been creating, evolving, advancing the Yelp experience and the range of products that we're offering is much more than it's been. We've transformed our go-to-market. If Yelp in the past grew because we drove an increase in the number of local sales headcount, and we're completely dependent on that, and it was pretty linear and expensive. We've really shifted to this product and engineering-driven growth model. And so as we think about a year from now, first of all, my hope is that Delta, Omicron, COVID is in the rearview mirror. We're all sitting here and we're grateful and hopeful, and we've moved past that. But I think really, this conversation is how have we delivered more value to advertisers, driven growth at the same time by expanding the product portfolio and really continuing to innovate in the experience for the consumer, will still be that trust in brand with high-intent traffic and we'll be able to do more to engage those consumers with great local businesses as well as those national advertisers. You will see more. And I think we've executed on that up until now. I think the third quarter reflects that, and that's where we're going to continue to stay focused.

Awesome. And I think with that, we're out of time. Thanks, David, for joining us.

Thanks so much. Thank you.