Yelp Inc. (YELP) Earnings Call Transcript & Summary

All right. I'm Cory Carpenter, Internet analyst at JPMorgan. Joining me today is David Schwarzbach, Chief Financial Officer of Yelp. Thanks for coming.

Thanks so much for having us here, Cory. Maybe just to put it aside, 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.

That was a short safe harbor.

Okay. So kicking off, Yelp. So look, you've changed a lot over the past few years. I thought just to kick off, maybe for those who haven't followed you as closely through it all, how has your business model evolved? And what's the state of the business today?

So we have gone through a full transformation over the past several years. And to really distill it down, if Yelp in the past was driven from a growth perspective by adding local sales headcount, we are now a product and engineering-driven growth model. And the way that that's reflected is in 3 strategic initiatives that we set for ourselves. One, was to increase self-serve, obviously, important product and engineering set of considerations there. Two, expand our opportunity by serving the mid-market and national accounts. We call that multilocation, and that is really dependent on having a broad product offering, and we've built out -- up and down the funnel on and off Yelp, and we'll talk more about that, I'm sure. And then we've also been very focused on monetizing our services traffic, which we've also done over the past several years. This year, we actually added, because of our growth in revenue, incremental investment on the consumer front. So those are our 4 strategic initiatives. And we think the first quarter really reflected the outcome of very consistent execution over several years, 19% growth in the first quarter and 35% growth in multi-loc, 30% growth in our self-serve business. So overall, terrific Q1, but really the outcome of many years of effort.

So certainly when I want to talk about macro, you guys have a pretty good view into the state of the consumer and the small businesses. So what are you seeing, what have you seen over the last month? Is anything changing? More broadly, how's macro impacting the business?

So obviously, one of the things that's key about Yelp, of course, is that we serve the local economy. In the first quarter, importantly, we saw very strong advertiser demand. And we saw that across categories. So we're very pleased about that. Again, it was reflected, we think, in the financial result. But what it really underscores is the value we think that we're delivering to advertisers. Now how does that interact with consumers? We run more than 20 million auctions a day. So we're looking for the market clearing price for that visitor against a set of advertisers. So we think that we actually have that mechanism to determine the market clearing price. That's pretty fundamental to our model. And what that means is that our visitors, who are high intent, and by the way, more than 50% of our visitors come from households with income over $100,000, those advertisers wanted to reach those consumers. Now I think, broadly, and this isn't a Yelp thing, but what we've heard from others and certainly from JPMorgan, is that there is a shift in consumer discretionary spend. Again, we skew affluent. So among more affluent folks, more moving to travel and leisure, and so we do believe what we saw in the first quarter with that strong advertiser demand was an increased focus on reaching consumers who are high intent. So overall, we were really pleased with the outcome, and we feel like we're able to continue to deliver value to both advertisers and consumers.

Have you seen any notable impact in that advertiser kind of demand or health in recent weeks may change?

So again, first quarter, what we have definitely seen was consistent performance against our fourth quarter. Equally important, a couple of weeks ago, we provided guidance. And sequentially, with the $277 million in the first quarter, we guided $280 million to $290 million in the second quarter. So sequentially, that's an acceleration, and it certainly reflects the risks and uncertainties that we see on the macro front.

Okay. Perfect. So reopening, pandemics, had its ebbs and flows certainly, which has had made the business ebb and flow a little bit during it all. Are you seeing any impact at all from kind of the most recent flare up of COVID, which I should be cautious saying in this room? Or how do you -- where do you feel like you are on the recovery curve post-COVID?

Yes. Unfortunately, it seems like every time we get together, there's another variant to talk about or another surge. Interestingly, we really saw Delta, all the way -- I mean, this is -- feels like a long time ago, but late last summer and into the early fall, we saw Delta having an effect. And broadly what we saw in our business over the course of COVID was that when people were confident they went out and when they weren't confident, they didn't go out. Omicron really did not have a meaningful impact for us in the first quarter. And I think just broadly, people are moving on past COVID. It doesn't mean that there aren't going to be additional surges, of course, but it just seems like people have decided that this has run its course. There's broad vaccination available, and it just wasn't a factor for us in the first quarter.

Okay. And then kind of tying them to the macro, reopening back the financials, so you touched on this earlier, but the second half guide did call for good sequential growth in 3Q, in 4Q, roughly 5% each quarter. Could you just talk about what some of your assumptions were around macro and the reopening and kind of what's giving you confidence in the guide?

Yes. So again, where I started, which was this consistent execution, we've been very focused on that. We think we've been consistently executing for a number of years now. And we believe that the strategic focus that we set for ourselves has worked and is working. So we're going to keep executing against that. Now the way that we operate is we have a portfolio of initiatives that are lined up against those 4 strategic areas, and we are always looking for the ROI on any given initiative. We're rebalancing that. So if a particular initiative isn't working, then we pull resources away. If initiatives is working, then we're going to double down on that. And that's continuous. Now the first quarter is really a reflection of that effort in 2021. And what we saw in the first quarter was really good execution and performance against our portfolio of initiatives. So what we expect is that, that flows through as we go through the year and then into '23. So that's the part that we're -- is in our control, obviously, and we're heads down executing. What's not in our control is supply chain, labor markets, Fed raising rates, war in Ukraine and so on. And there, for 2022, we have not assumed a recession. We, obviously, reflected though, in the guidance that we gave, both for the second quarter and the full year were these sets of risks and uncertainties. What we believe was the case over the course of COVID is that, we were able to rebalance across categories. So services did particularly well, and we continue to drive performance there. Q1 was another quarter of record revenue in services. Revenue per paying advertising location and services was also at a record. So we think that we have this portfolio of categories that also gives us ways to operate the business and balance. So overall, as we look at 2022, obviously, we've provided the outlook for the year, but we do expect that sequential growth.

Okay. So I want to talk about some of the investments you're making, a little more in some of the things you're doing on the product side. At 1Q earnings, you talked about increasing the near-term investments in product development and marketing. Specifically, kind of why was now the right time to kind of push there? And then could you just talk a bit more about the specific investments you're making?

Sure. So -- again, when we're investing, whether it's product and engineering or marketing, we're not investing for the next 20 days, 30 days, 90 days. Those investments actually play out over a more extended period of time. The way that we think about marketing, we use a 2-year return on advertising spend metric in order to determine whether the ROI is there for us or not. And we saw good ROI opportunities in the second quarter, both for marketing and product and engineering. So we are spending against that. In terms of just managing that expense as we move through the year, it is certainly a bit higher in Q2, but it's relatively modestly higher. So that gives us plenty of flexibility to -- as we move through the second half, to still, and we reaffirmed at the time of guidance, that we would hit the $260 million to $280 million on adjusted EBITDA, which we had given at the beginning of the year on the fourth quarter call. So overall, what gives us confidence is executing on our initiatives, our ability to rebalance the portfolio and being able to deliver growth from investments over time. In terms of the specific things that we're doing, just as a reference point, in 2019, '20 and '21 combined, we only spent $11 million on consumer marketing, $11 million. Now how is it that we were able to do that? Our brand really lowers the cost of acquisition and our investment over more than a decade in the app has really paid off. So we see a tremendous amount of organic traffic. And what we saw through the course of COVID is that we were able to reacquire folks at almost no cost. Now spending nothing on consumer acquisition is probably not the optimal place to be, and we do see opportunities to invest there. So that's one clear area. On the product and engineering side, we've really focused on iOS over the past several years, and Android is a huge opportunity for us. And so we're bringing that experience closer to parity with the iOS experience. So for instance, we just shared on the call that we had invested in improving just the Maps experience on Android, just something that's very basic and that we saw an increase of 20% on click-through rate just by doing that. So Android is going to continue to be an area of investment. Underlying all of that, and I mentioned this, that we're running 20 million-plus auctions daily continuing to improve that ad tech stack. And if you listen to the call, you've heard Jeremy's enthusiasm around this. We think that there's still a tremendous amount of opportunity for us, even though we feel like we're already quite sophisticated, to continue to drive that matching of the consumer with the advertiser in a way that delivers value to both.

So on the consumer marketing side, only spent $11 million over 3 years, stepping it up, how -- is this something that you've already begun doing? And anything that you've seen from the response from the consumers you can talk about yet?

Yes. So again, we're very ROI-driven. We run everything using experimentation, and so we've been running quite a few experiments. We don't have a lot to elaborate on yet because those experiments take a little bit of time to run. But what we are fundamentally focused on is that consumer engagement, and ensuring that folks really do appreciate that Yelp isn't just about restaurants. I'm sure many of you still think perhaps that our principal revenue comes from the restaurant, retail and other categories. Actually, 60% of our revenue comes from services. So what we want to do is when you get that confidence, you went out to a restaurant, you saw that, 3.5-star restaurant was a 3.5-star restaurant and 5-star restaurant early was a 5-star restaurant. We want to see and encourage consumers to translate that confidence over to the services side. So we see on these lower frequency but higher ticket item opportunities that consumers think of Yelp just as much as they would for going out to enjoy the evening. And so we continue to invest there as well.

I want to talk about Yelp Audiences, which is your off-platform ad product. Could you just talk about some of the advertiser engagement that you're seeing there and how that's impacting your growth and margin profile?

So for folks who aren't familiar with Yelp Audiences, this is our off Yelp product. This is where we're providing advertisers with an audience. What we like about it is that for advertisers on Yelp, this is an opportunity to spend more with us. For folks who have no obvious way to advertise on Yelp, it could be financial services, it could be auto OEMs, this is an opportunity for us to engage them in a conversation that we haven't previously been able to do. If you're an enterprise sales rep, of course, you also like having more things to talk to customers about. And so we do view it as part of the set of offerings that we provide national accounts. Over the past several years, we've broadly expanded the offering for national accounts, and that's enabled us to have that dialogue, 35% growth, as I mentioned, in our multilocation business in the first quarter. Yelp Audience, specifically, we are purchasing those ads on behalf of those advertisers off of Yelp. And so definitely at the top line, there's a higher cost of revenue associated with that, but we don't look at it as the product margin, we look at as the overall margin that we're going to earn on the relationship with that advertiser. And if you're a national advertiser and you've decided that Yelp is a good channel for you, then you want to be able to spend as much as you can across different ad products with that particular channel. And so this just broadens the dialogue that we're having with folks, and we think that's an important part of being able to deliver value.

Okay. One more question for me. I have a lot more, one more, then if anyone in the audience wants to ask you a question, you can raise your hand and there's a microphone going around. So one area that's gotten a lot of focus recently with investors is just the margin guide. So you guided to a meaningful increase in margins. I guess, I'm putting the word meaningful in there, but to margins in the second half of the year. What's driving this inflection? And could you just help us bridge kind of where the decreases in the OpEx spend are coming from?

Yes. So the way that we think about the business broadly over the course of 2022 is relatively flat spend quarter-on-quarter. We did increase spend modestly for the second quarter, which we, obviously, reflected in the guide. We expect to make that up in the second half. In terms of the overall margin performance -- I'm sorry, that was on the expense side. So on the revenue, if revenues increasing and expenses are flat, then we expect margin to increase, obviously, and we think there's a leverage -- obvious leverage in being able to do that and broadly by investing product engineering. We think over the long term, that's a high leverage model for us. There is a component of this, which is just related to real estate, which is some of the real estate savings start to show up in the second half. And we are a fully distributed organization today. Every employee can choose whether to ever come back to an office or not. And so that's enabled us to dramatically decrease our real estate footprint. We continue to market our space. And of course, the commercial real estate market has been a bit challenged. So we don't provide an outlook because we're not sure what recovery rate will be in the timing. But we definitely see in the second half some incremental savings around the real estate piece. And then also, there is a little bit of seasonality around employee expenses. But fundamentally, we think that by investing in the first half, that's moving a bit of the spend forward that we can then choose to adjust as we move through the second half and see the actual performance.

Okay. So basically, the core expenses are relatively flat, but then you have some real estate and some employee stuff in there?

Exactly.

Okay. Okay. All right. No questions, I'll keep going. Good. I guess, maybe a bigger picture question, and I know you don't formally guide, but just curious how you think about like the right level of sustainable growth and margins for the business in a more normalized environment, longer term?

Cory. I'm waiting to know what a normalized environment is going to look like. You're -- I think one of the things that COVID enabled us to do was to accelerate our transformation. And for those of you who followed Yelp, I think if 3 years ago, we had come to you and said we were going to cut local sales headcount 50% overnight and deliver revenue, I think the level of skepticism would have been high, but that's what we did. So we're on the other side of that piece of it, and having rebuilt the foundation of the business. So what does that mean? As we think about a more normalized environment, we think that we're able to continue now to build on top of that foundation. And as we think about the way that we want to operate, we want to continue to operate with the agility that we gained as we went through COVID. At the same time, what we believe is that you can drive revenue faster than the need to invest in product and engineering fundamentally. And we think that we've been proving that. What you saw in Q3 and Q4 last year was the margin expansion that we, obviously, expect to see margin expansion in the second half, but a 25%, 26% adjusted EBITDA margin, Q3 and Q4, we think that's a strong proof point that, that leverage works. But it had to come from having rebuilt the foundation in the first place and having really driven self-serve and the reduction in local sales head count. So if you take all that together, ROI-driven, I think we've demonstrated, over the past several years, the ability to consistently execute and drive meaningful margin expansion. So we want to be in that sweet spot of driving growth profitably over the long term.

Okay. So on the sales -- local sales headcount, so like you said, roughly half the size of where you were pre-pandemic? Do you feel like you're at the right level now? And could you talk about the type of productivity you're seeing relative to maybe pre-pandemic?

We do think that we're at about the right level. We intend to hold it about this half of local sales head count. And again, we've been able to do that because self-service is working 30% growth on self-serve in the first quarter for ad revenue. So that's really been effective for us. And just broadly, we think that we can continue to drive leverage in the multi-loc side. So you have enterprise sales reps. If we -- classic, if we put more products in the bag and they can have a broader dialogue with national advertisers, we think that we can gain additional budget. And as that happens, the leverage shows up because you have that single sales rep doing that work. So it's -- on the local side, efficiency comes self-serve also as a lead gen model for us. It better qualifies the candidate, so we can pass that on. So we think that engine is working, and then we're going to continue to invest on this national sales team side.

So on the Self-serve, Multilocation, now nearly 50% of your business, both grew over 30% in the first quarter. What's really driving the growth in these channels? And are we getting -- do you think we're getting to a point of equilibrium in terms of how the business is split? Or should we expect these to keep taking share?

So we do think that we can continue to drive that, and we're going to continue to invest against it. Again, I know I'm saying it a few times, but product and engineering. So self-serve is all about product and engineering. And by the way, it's not just about acquisition. It's can I manage my ad spend effectively? And then does that -- if we can communicate value, does that lead me to spend more? Again, I already mentioned revenue per paying advertising location on the services side just marched right up over the course of COVID as a record level. That's a reflection of the product delivering value and people being able to manage that spend. So that's on the self-serve side. On the national account side, up and down the funnel. Advertisers want to be able to spend not just at the point of purchase, but above the funnel and then they want to reengage folks after a purchase or purchase decision. And then importantly, on and off Yelp. So that also is a lot of product work. So when we put all of that together, we think that we have a long roadmap to go and that we can continue to drive the share of total revenue for self-serve and Multi-location up.

Do we have a sense of how big would the headcount does look like in the Multi-location team?

So the multi-loc team is about 1/4 of the size of the local sales organization.

Okay. And then just relatively, I would imagine what we've said self-serve, multi-loc, higher margin than local. How should we think about different margin profile of those 3 businesses?

So clearly, what we see is that, if you have a local sales rep involved, it's going to be the lowest contribution margin. Multi-loc is going to be higher. And then, of course, if no salesperson is involved, then that's going to be your highest margin channel. So we blended out on the local side between self-serve and we call it rep-assisted and then in the Multi-loc channel. I actually think that given the progress that we've made, that we can continue to drive up that contribution margin in the multi-location side.

Okay. So one stat that feels like you've given the last 3, 4 quarters, maybe has been around the retention rate of nonterm advertiser budgets, reaching your new highs. What's driving this improved retention that you're seeing? And how should we think about that going forward?

It's -- so we have -- really pleased to see that, and it just fundamentally comes down to, can you demonstrably deliver value to advertisers? It's that straightforward. Now how people perceive value differs by, if you're a sole proprietary services business, how you see value is very different than your very sophisticated national accounts. And so the way that we communicate that value is different for those different channels. For your national accounts, they're going to run attribution all day long, and you've got to consistently deliver that value. Interestingly, what I'd say, in particular, around services, is that we've seen people become more comfortable with the self-serve tools and being online. That was probably a shift that the restaurant folks had made sometime earlier, but COVID really drove folks to start doing more there. Now if you're a sole proprietor, your day is pretty busy. You're trying to get new business. You're trying to deliver on the business you had, not everything is perfect, so you're dealing with that. You've got people working for you. And you're not doing it to your return on advertising spend type of calculation. Do you feel and do you see more leads? That's what it comes down to. And do those leads convert the business for you? And do you hear Yelp mentioned by customers when they reach out to you? And are you engaging on our platform? So what we've done is to really communicate the value through the activity more so than some kind of analytical result that an analytics team has put together for you. But you've got to satisfy both.

All right. Okay. So CPC increased the past few quarters, you mentioned partly due to advertiser demand being stronger than consumer engagement in the first quarter. I mean, what's the latest you're seeing here? And is this a trend that you're concerned about at all if it continues?

So in the first quarter, we did see CPCs rise meaningfully. But I just go back, we're running the auction. We're figuring out what the market clearing price is, and we saw greater demand on the advertising side. So if you're running an auction and you're finding the market clearing price between supply and demand, and there's more demand, then you're going to see a higher price. Importantly, and obviously, advertisers have plenty of choices for where they're going to spend their ad dollars. So if we were not finding that market clearing price, what you would expect is for retention to decline. And actually, what we saw was record retention. So we believe that we are -- in finding that market clearing price, we are continuing to deliver value to advertisers compared to other advertising platforms. And at the end of the day, that's what's most important is your relative price. All that being said, we think there are lots of ways for us to continue to drive value. And so we want to ensure that we have that market clearing price, and that the return on that investment is clearly attributable, particularly for the national accounts.

So services, I think it's bigger than it's ever been for you that business. What's driving that success? And how do you think about the growth of services into the reopening?

Yes. So one of the things that we had to do was really differentiate the experiences on Yelp between restaurant retail and other end services. So going back a few years, and it was very much a restaurant's driven business. So you got to differentiate it because when you're looking for a restaurant, it's a lot different than when you're choosing a services business. And if you're a services advertiser, it's a lot different than if you're a restaurant or a nightlife type of advertisers. On the services side, we built out what we call Request A Quote. It's really a series of questions to determine what exactly you want to do, what project. And then we take all that data, and then we feed it into the matching algorithm, and then that enables us to better match those. So that matching acquisition of -- or clarity on the consumer intent really important, is the person ready to transact? They went through the funnel. So that actually has a lot of signal to it. Building out the math, the algorithm in order to reflect that signal into the way that we're matching with the consumer or the business. And then we look at -- are these businesses responding quickly? Do they respond in a way that gets a response from the consumer? And then we feed all that back in. And we've been able to do that, I think, quite effectively, over the past several years. And we still have a lot of room to run and continuing to improve that.

Why when -- why does a local plumber choose to get their leads through Yelp versus, say, an Angi or Google? What do you think is most differentiated about the Yelp offering?

So we think that we have a very trusted platform. And we are not the only one saying that, we had an FTC economist do -- we didn't have them do it, they did that. But they determined or saw that the ratings on Yelp are more evenly distributed. Why is that so important? If the ratings aren't distributed, first of all, the amount of information is low. Because if they're all concentrated at the top end, what am I learning when I go and look at a rating? We distinguish ratings from reviews though. And what you see is that we have very long reviews, and other platforms have very short reviews. So there's not a lot of information. And the more information there is and the more evenly that distributed -- is distributed, the better they trust. So we think that we differentiate strongly on trust. Now we also monetize very differently than, say, Angi, which is much more of a cost per lead, and they also have their fixed price model. But we're a cost per click model. So first of all, of course, you only pay if there's a click. But also for many services, advertisers, they prefer that way of investing on the ad spend side. So we're differentiated in the way you purchase, we're differentiated in trust. And we believe that we're differentiated on value delivered.

So one more, I guess, on the competitive environment. Google is often a company that comes up when people think about Yelp. So you've made a big effort to drive more traffic through your app inorganically. Any update on how big of a source of traffic Google is for you? Or how successful you've been at diversifying away?

So we think we've been super successful. We set the strategy more than a decade ago to really focus on the app. And so the majority of our clicks in our page views, I should say, are coming through the app. So we've decreased quite significantly compared to, say, a decade ago, our dependence on Google. And we love to have organic traffic. $11 million spent over the course of 3 years on consumer acquisition, I think, is a real reflection of both the value of the brand, the trusted content, but also our ability once someone downloads the app, to continue to use it. So we do get this question a lot. I think what I would say is that we have successfully competed with Google for more than a decade, and we're at 19% growth in the first quarter, 35% growth in multi-loc, 30% -- we had 27% growth in restaurant, retail and other. And I believe that we've done a really good job in consistently executing against that in what is clearly a very competitive environment even as Google has invested significantly in their competitive product.

So on capital allocation, you bought back a ton of shares in recent years, $50 million in 1Q, you have about $500 million of cash on the balance sheet, no debt. What are your priorities on the capital allocation side? Should we expect you to continue buying back shares of the space?

So we just passed the $1 billion in share repurchases. The way that we think about capital allocation, pretty straightforward, we have our operating requirements and a buffer to that. Then we do hold cash for tuck-in acquisitions beyond it. What we have committed to do is to return all capital in excess of that target cash balance. And we're going to continue to do that. We've been doing that consistently.

And then M&A, it's been a while since you've acquired a sizable business. Are there any assets that could be not -- I know you're not going to name me specifically, any areas where assets may be more interesting to you?

I would just say, against the current backdrop, asset values have declined somewhat to...

Significantly?

More than somewhat. And so we're always looking for opportunities. My own experience is that the private markets take a while to catch up to the public markets in terms of valuation expectations and the willingness to transact after obviously you've built this business and you believe in it, and you've put your heart and soul. So it always takes a little bit of time. It may be a little quicker this time, just given how dramatically things have moved in the public markets. Overall, we continue to look for opportunities. We've held capital for tuck-in acquisitions. We have nothing to share today, but that's certainly something that we'd love to be able to accelerate time to market or added capability or a feature that enables us to deliver value to advertisers or to make the app more engaging for consumers.

Any audience questions? Shy audience today. Okay. So a closing question for you. I think more -- just bigger picture. What is -- what are you most excited about and the opportunity ahead? What does Yelp look like in 3 to 5 years? And any messages you'd like to leave us with?

Yes. So just the 3 to 5 years, I think we've gotten a question that you didn't quite touch on directly. But in an inflationary environment, how does that affect the overall business? And I'd say we think we're even more relevant because things are more expensive. So I want to make a better decision. The going out to eat is more expensive. So I want to make sure it's a great evening or I want to make sure that if I'm doing this home repair or home remodel or I'm adding a fence, I want to make sure that I'm finding the right person. So we think we're even more relevant. And when we think about the long term, it's being that relevant more often. That's our opportunity. Because of our trusted content, our trusted brand and our ability, I think, to connect consumers with great local businesses. And we think we play a really important role in that local economy. So that's our strength, and I think there's still more than we can do. What am I excited about in terms of products and initiatives and things that we're bringing to market? Fundamentally, I continue to believe in the core set of initiatives that we've set for ourselves. Again, I just -- I think it's underappreciated how hard it is to both match consumers with businesses that ad tech stack is really hard to build. And we have a great team that's made great progress and continues to have a broad set of opportunities ahead of them. And so I know it's on the more technical side, maybe on the more geeky side, but actually, that is really, really encouraging. I'm also encouraged that because we've been driving top line, we have capacity to invest in the consumer experience because that's obviously really important. We've been able to drive the business on increasing monetization in the services categories. And we still think we have a lot of room to run there. But clearly, the consumer is also important for us. And to know that we can just do simple things on Android that drive a 20% increase in clicks on a particular experience, that is super encouraging to me. And then finally, being able to offer advertisers, national accounts, the opportunity to spend with us when they couldn't spend before. That's also really, really encouraging. So overall, I'd say Yelp is extremely well positioned to drive profitable growth over the long term.

Great. David, thank you.

Thanks, Cory.