Yelp Inc Q2 FY2020 Earnings Call

Good day, and welcome to the Yelp's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to James Miln, Vice President of Financial Planning and Analysis. Please go ahead.

Good afternoon, everyone, and thanks for joining us on Yelp's second quarter earnings conference call. Joining me today are Yelp's CEO, Jeremy Stoppelman; CFO, David Schwarzbach; and COO, Jed Nachman. We published the shareholder letter on our Investor Relations website and with the SEC about an hour ago and hope everyone had a chance to read it. We'll provide some brief opening comments and then turn to your questions. Now I'll read our safe harbor statement. We'll make certain statements today that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. In addition, we are subject to a number of risks that may significantly impact our business and financial results. Please refer to our SEC filings as well as our shareholder letter for a more detailed description of the risk factors that may affect our results. During our call today, we'll discuss adjusted EBITDA and adjusted EBITDA margin which are non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles. In our shareholder letter released this afternoon and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP financial measures as well as historical reconciliations of GAAP net income to both adjusted EBITDA and adjusted EBITDA margin. And with that, I will turn the call over to Jeremy.

Thanks, James, and welcome, everyone. Our second quarter results demonstrated the resilience of our business in spite of the significant headwinds faced by local economies following the emergence of COVID-19. Yelp's diversified mix of categories, geographies, and sales channels helped us adapt to the rapidly changing environment, resulting in our traffic and revenue improving over the quarter. I am proud of the speed and confidence with which our teams confronted one of the most challenging periods in our history, due to our disciplined actions on expenses in the face of uncertainty coupled with solid revenue performance. We added $35 million of cash and cash equivalents to our balance sheet. While we began the quarter with a significantly smaller workforce operating in a fully remote environment, we adapted our product, efforts, and operations to support our users connecting with their favorite local businesses in a socially distant world. We provided new tools for local businesses to connect with consumers, allowing them to post custom messages to update their service offerings to include virtual options and to list health and safety measures. We also continued to make progress on important strategic initiatives, including home and local services, which has long been our largest and often fastest-growing category. We continue to increase the percentage of monetized leads through additional improvements to our ad system, including better matching and request-a-quote. Revenue in the subcategory home services grew slightly compared to the second quarter of 2019. We remain focused on evolving our go-to-market to improve our sales efficiency over time. Throughout the quarter, our local sales team maintained a consistent level of productivity even while working remotely. We also delivered a new profile product, Yelp Logo, and scaled our connect offerings. Our continued investment in self-serve helped drive strong acquisition in the channel, which reached near record levels of advertising starts in June. The pace of economic recovery remains uncertain and will not be uniform. We have confidence in our strong balance sheet and our proven ability to operate with flexibility in this environment. This month, we are pleased to return many of our furloughed employees and restore reduced salaries for our teams. This sets us up well to reestablish our growth momentum and capture demand as the economy recovers. With that, I'd like to turn it over to David.

Thanks, Jeremy. When we spoke to you back in May, the economic outlook for local businesses was highly uncertain. However, in late May, as local economies began to reopen and consumers and local businesses were adapting to the new normal, we saw both traffic and CPC advertising budgets begin to recover. In June, we continued to see steady improvement in ad budgets and retention, benefiting from a strong rate of return from customers who had received relief in April and May. We ended the quarter with $169 million in net revenue, a 32% decline compared to the same period last year, with a net loss of $24 million. In April, we took several actions to reduce our operating costs to better position Yelp to weather this unprecedented period, including the difficult decision to reduce our workforce. Our actions contributed to a $71 million reduction in operating expenses from the first quarter in line with the $70 million that we communicated in May. Coupled with our solid performance and revenue, we delivered a positive adjusted EBITDA of $11 million in the quarter and further strengthened our balance sheet. Our cash balance rose from $491 million at the end of the first quarter to $526 million at the end of the second quarter, principally through our positive operating cash flow and the release of restricted cash. Restructuring costs in the quarter were $3 million as a result of the restructuring plan announced on April 9, 2020. Though these costs include severance, payroll taxes, and related benefit costs for a workforce reduction affecting approximately 1,000 employees. While we exited the second quarter with increased confidence and an additional $35 million of cash on our balance sheet, economic uncertainty remains high. Therefore, in lieu of a formal business outlook, we are providing additional insight into recent business trends. As a result of improved business performance in June, including the return of spend from many customers who received relief in April and May, revenue in June declined by 25% compared to June 2019. While we are encouraged by our performance in June, we saw consumer demand begin to plateau in July as the recent resurgence of COVID-19 cases led many states to pause or reverse their reopening measures. As we look ahead, in the absence of a vaccine or effective therapeutics, we expect to see continued fluctuations in business openings and closures as communities respond to local outbreaks, which may impact the pace at which our revenue recovers. Our strong balance sheet gives us more flexibility even in the face of this uncertainty. On the cost side, we anticipate third-quarter operating expenses may increase by as much as $30 million compared to the second quarter. In addition to restoring reduced salaries, we are also returning furloughed employees to full-time over a four-month period ending in October, many of whom are trained sales representatives. We are also mindful of various uncertainties, including employee healthcare costs and our provision for doubtful accounts. With that, operator, please open up the line for questions.

And your first question comes from Shweta Khajuria from RBC Capital Markets. Your line is open.

Okay. Thank you. I'll try two, please. First one is on locations declined 31% year-over-year. Could you provide a little bit more color on that? So are these businesses that are shut down for good or are they just closed because of COVID? Second, on location, how fast do you think is that recovery in terms of bringing those locations back onto the platform post COVID? And third, on the same locations question, what percent of these businesses are multi-location restaurant chains versus local SMBs? Thank you.

Shweta, it's David. Thanks so much for your question. So in terms of the reduction in locations, what we believe is the case is that a considerable number of these will be temporary. It's important to be mindful that over the course of the quarter, we did provide relief to many businesses, and that relief took place across the entire three months. So when those businesses begin to spend with Yelp again, they will show up again in paying advertising locations. But it's important to recognize that over the course of the pandemic and the impact on the economy, there are quite a few businesses that are not going to reopen, but we don't have a great sense yet for that distribution even by category. In terms of how we think paying advertising locations will recover over time, the pace of that recovery is very much tied to the pace of the overall recovery. And I think it is actually very important to consider that continued fiscal support from the federal government will have a big impact. So again, unfortunately, we wish that we had better insights on how it will play out over the next several months. One of the things that we did do through the relief efforts is establish strong relationships with many of these business owners, and they have shown a willingness to return when that relief was ending in the June timeframe. So we feel good about where we positioned ourselves with those business owners. In terms of local versus multi-location percentage, I will need to get back to you on that. Jeremy, I don't know if you want to comment a little bit on how you see the longer-term prospects for advertising locations.

Sure. I would say what we saw is coming off the bottom of the panic around the virus. We did see as markets reopened a recovery happening. And so that's encouraging for the long-term because as economic activity continues to pick up more widely, we believe that we will also see activity on Yelp picking up more widely. While in the short-term that means categories like restaurants are likely to be more impacted, home and local, for instance, has been quite robust. We continue to put a lot of our investment into that area even prior to the COVID pandemic. So we do feel optimistic that in the long-term, we'll see a robust recovery as the virus fades.

Okay. Thank you, Jeremy. Thank you, David.

Sure. Thanks.

Your next question comes from the line of Cory Carpenter from JPMorgan. Your line is open.

Great. Thanks for the questions. I had two. So just first, I hope you could expand a bit on the trends you're seeing quarter-to-date. You mentioned in the shareholder letter, traffic started to plateau in July, but any additional color you could provide in terms of trends by vertical or geography would be helpful? And then on the product side, you went through a number of initiatives in the letter, just curious how we should think about your key priorities and roadmap in the second half of the year? Thank you.

Sure. Hi Corey, this is Jeremy. So talking first about traffic trends, we saw some recovery as markets opened up, as there was more economic activity, people moved around more. While that did slow as virus cases rose, we do think over the long-term that as the pandemic ultimately gets under control, we're going to continue to see a robust recovery of activity and then, therefore, traffic. On the product side, we had been investing pretty heavily in home and local services, specifically things like request-a-quote or ad system increasing the percentage of monetized leads. We continue to make progress on that front and we continue to roll out new updates that are having an impact. In addition, we have mentioned in the letter some newer products that are showing considerable life. For example, Yelp Connect allows businesses to push out updates to their page, but then those also get sent out to former customers, people that have expressed interest in their business, and that's really resonating. Thousands of businesses have started paying for that functionality, which we initially included as part of the relief package during the pandemic. Also, we recently rolled out Yelp Logo, which was something that we heard from our customers was really important to them to look professional to be able to brand themselves and put their logo front and center on their business page. We've seen a pretty solid uptick as we've just launched that feature. We've got a lot of capability in our product and engineering team, and they continue to drive innovative and impactful functionality for business owners and for helping people connect with great local businesses.

Okay. Thank you.

Our next question comes from the line of Colin Sebastian from Robert Baird. Your line is open.

Thanks very much. Good afternoon, everyone. Within home services, I'm wondering how much of the rebound in activity there reflects people adjusting to work-from-home and refurbishing their homes more broadly, which could be a bit transitory as offices reopen versus how much of that relates to specific product improvements like Jeremy mentioned, that could have a more sustainable impact longer-term? And then, David, with traffic plateauing in July, should we assume given the mix of CPC that that's consistent with the sort of the advertising revenue impact? If that's the case, just trying to put a finer point on what we might expect in Q3? If we assume June monthly revenue trends continued through the third quarter, it seems like the sequential improvement in revenues would roughly equal the increase in operating expenses. So wondering if that's a fair way to assess the current situation? Thank you.

Hi, Colin. This is Jeremy. I'll take your first question there on home services. Do we believe it's sustainable? Yes, obviously it's very hard to predict the future in this unique situation of the pandemic. But I would say in home services, there's a lot of different categories and while some may be optional, like building a new deck, there are essential services like locksmiths or urgent plumbing needs. People are spending a lot more time in their homes, which I think is driving some of this robust demand for home services. So I would say, yes, it's sustainable, but time will tell, and it's a very dynamic situation.

And just Colin, it's David. To follow up on your second question, we have been focused on investing as we see the recovery pick up. Starting with the operating expenses and the furloughed folks that we've bought back, we want to be in a position to participate in that demand around home services in the near term. Over the longer term, that is the foundation for us to see revenue growth. In terms of extrapolating from July revenue or traffic, we would caution you against that for a couple of reasons. First, traffic is important for us, but through the matching algorithm, a variety of adjustments take place. And so you can't match those one-to-one. But in general, what we did see, and what we're cautious about, is that the uptick in cases has been extremely widespread. Thus, as we think about this quarter and the rest of the year, we continue to believe we will participate as caseloads decline and the overall economy recovers, but we're not yet prepared to provide a more specific view on July or Q3 performance.

Okay. That's all. Very helpful. Thank you, guys.

Your next question comes from the line of Mike Ng from Goldman Sachs. Your line is open.

Hey, good afternoon. Thanks for the question. I just have two. First, can you talk about how the composition of the sales force for the company may be different relative to pre-pandemic? Will your sales force be meaningfully more focused on multi-location versus individual small businesses? And then the second question is, could you talk about your plans for ongoing relief and offering free advertising products in Q3 versus Q2? I really appreciate you laying out some of those numbers for the second quarter. Will that turn into recognized or paid revenue in the third quarter? Thank you.

Sure. Hey Mike, this is Jed. I'll take the first one, and then maybe David can jump on for the second one. In terms of sales force composition, obviously, we made the decision early on in Q2 to furlough some folks on the sales team as well as have some permanent reductions. We are really happy and proud of the team for turning on a dime in a completely remote work environment. Based on the results that we saw in the second quarter, we felt comfortable bringing back our furloughed employees. These trained employees can come in and hit the ground running, and we believe we're correctly positioned right now to take advantage of the second half of the year. In the future, we will continue to lean into high-leverage channels, such as self-serve and the multi-location opportunity, which are essential for the long-term viability of Yelp.

Hi, Mike. Just to talk a little bit about relief, we first announced $25 million in relief, and so far, it's coming in at about $32 million, split half and half between direct revenue relief on the ad side and restaurant SaaS side, and paused or free products. What we expect is a few million dollars more to go in Q3 mainly around paused SaaS restaurant products. What I do want to underscore is that this investment overall has worked well for us. In June, where we had paused customers or encouraged them to pause and set a restart date, we were pleased by the number of advertisers who came back to us. If it's needed, we will not hesitate to further invest in that area.

Great. Thanks, Jed. Thanks, David.

Your next question comes from the line of Dan Salmon from BMO Capital Markets. Your line is open.

Hey, good afternoon, everyone. Thanks for taking a couple of questions. First, self-service as a channel and home service as a category both performed well. Was there some causation to that correlation? In other words, did the home services category particularly help drive self-service? And then second, on multi-location, what I'm trying to ask is, do you think the pandemic has helped or hurt your long-term push there? Many of those restaurants were able to stay open, pivot to delivery, pick up, and focus on that. Have you been able to help them with that pivot, thereby building goodwill that might accelerate that push once things normalize? I would be interested to hear about that too. Thanks.

Hi, Dan. This is Jeremy. The connection between self-service and home services is not one I'm aware of causation for. We saw healthy starts in self-service, near record levels of advertising starts in June. On the home services side, consumer activity is what we attribute to the strength or robustness compared to other categories. People are at home, and there's a lot to be done. The demand is there, and businesses are happy to pick up that demand. We're just enabling successful matching and investing in things like request-a-quote to drive leads to our advertisers.

Dan, in terms of multi-location and how the pandemic is affecting that segment, multi-location is a very diverse segment, and we operate across categories. In restaurants, specifically, there is a bifurcation among multi-location restaurants. QSR and fast casual were able to pivot quickly to pick up delivery. Our goal was to help them navigate that and drive business. Casual dining and fine dining have been hit hard due to in-restaurant dining being eliminated. Over the long term, I'm impressed by how many multi-location restaurants have pivoted their business. We are not back to full steam in dining out, but those trends may continue beyond the pandemic. We can be very local in how we react as markets close and open, allowing us to adjust marketing strategies accordingly. Overall, we believe the TAM for restaurants is strong, and once we come out of this, we may see an even stronger market.

Great. Thank you both.

Your next question comes from the line of Elliot Alper from D.A. Davidson. Your line is open.

Great. Thank you. Similar to the previous question, but as you look at some of the geographies that are farther along in the phases of reopening, what are you seeing as far as consumer re-engagement with Yelp as well as local businesses re-engaging with Yelp? And I'm curious about any contacts into the sales force and small business sentiment as it relates to continuing their partnerships with Yelp and utilizing some of the free services offered in the quarter. Thank you.

Hi, Elliot. On your first question regarding markets reopening, as we saw more economic activity pick up, we did observe recovery that was fairly rapid as people started transacting with local businesses. I see this as an encouraging sign that as we ultimately get back to normal and as the vaccine is distributed, we'll see a recovery along with that activity. This has happened in a market-by-market basis as more activity increases. We see more transactions happening on Yelp, more website visits, and mobile app activity.

In terms of local businesses, we're happy with their engagement with Yelp products despite this being a stressful time for them. Over 650,000 customized COVID-19 sections existed at the end of July. Communication channels need to be accurate and up-to-date, especially in this climate, where consumers need to understand which businesses are open and operating under health and safety measures. While sentiment among business owners is understandably not very cheerful, there is appreciation for our support. Our goal during this process has been to foster relationships that last beyond the pandemic and recapture clients that are not spending now, and also engage customers that have not used Yelp as robustly before. We're happy with the engagement we've cultivated so far.

Great. Appreciate it.

Your next question comes from the line of Brent Thill from Jefferies. Your line is open.

Yes, thanks for taking my question. This is Dan Alico for Brent. Pre-pandemic, high-frequency categories like restaurants used to drive traffic to your high-value categories like services. Now this dynamic has changed. What can you do to increase traffic to the higher revenue categories in the current environment?

Yes, we have historically relied on high-frequency categories like restaurants to drive engagement. The good news is that restaurant traffic hasn't gone to zero. While we would love to see restaurant traffic back and robust as the virus control improves, it's encouraging to see that the home and local category has recovered from the lows of March and April. The demand for home services continues to be strong, and consumer reliance on Yelp remains diverse. We're confident that as economic activity increases more widely, we'll continue to see sustained activity in various categories.

I got it. Thanks for the color.

Sure. Thanks.

And there are no further questions at this time. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating, and you may now disconnect.