Yelp Inc Q3 FY2021 Earnings Call

Hello, everyone, and a warm welcome to the Yelp Third Quarter 2021 Earnings Call. My name is Mona and I'll be coordinating your call today. Operator provided instructions. With that, I have the pleasure of handing you over to your host, James Miln, Senior Vice President of Finance and Investor Relations to begin. Please go ahead, James.

Good afternoon, everyone, and thanks for joining us on Yelp's Third Quarter 2021 Earnings Conference Call. Joining me today are Yelp's Chief Executive Officer, Jeremy Stoppelman; Chief Financial Officer, David Schwarzbach; and Chief Operating Officer, Jed Nachman. We published a shareholder letter on our Investor Relations website and with the SEC and I 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. Yelp had another strong quarter of consistent execution. Our teams continue to deliver on our strategic initiatives, resulting in net revenue growth of 22% from the third quarter of 2020 to $269 million and equal to our best quarterly performance ever. At the same time, our more efficient business model means that much of this strong revenue performance flowed through to the bottom line. We delivered positive net income of $18 million and record adjusted EBITDA of $71 million, representing a 26% adjusted EBITDA margin. Underlying this performance, advertising revenue from Services businesses increased by 18% year-over-year, driven by the continued progress our team has made to improve monetization and deliver more value to our advertisers. At the same time, advertising revenue from restaurants, retail and other increased by 28% year-over-year, despite a slowdown in the pace of reopening. We believe that there is significant room for further recovery in these categories as the effects of the pandemic subside. Consumers have continued to turn to Yelp for trusted local content, which includes up-to-date important local business information. In the third quarter, we launched several new attributes to enable businesses to communicate vaccine requirements to their customers, which have been well received. Our trusted content gives consumers the confidence to connect and transact with local businesses. For example, diners seated via Yelp more than doubled year-over-year, while Request-A-Quote requests increased by nearly 10% year-over-year. In summary, the progress on our strategic initiatives and our third quarter results underscore that Yelp is a stronger and more efficient business than ever before, despite continued pandemic-related impacts to local businesses in many of our core categories. While we anticipate that the macro environment will continue to fluctuate in the short term, we are excited about the long-term opportunities ahead and remain confident in our team's ability to execute. With that, I'd like to turn it over to David.

Thanks, Jeremy. Third quarter net revenue grew by 22% year-over-year and by 3% from the third quarter of 2019 as our strategic initiatives continue to deliver strong results, largely driven by structural improvements and another quarter of disciplined expense management. Net income increased by $19 million year-over-year and $8 million from the third quarter of 2019, while adjusted EBITDA increased by 34% year-over-year. Adjusted EBITDA margin increased by 2 percentage points year-over-year and by 4 percentage points versus the third quarter of 2019. Advertising revenue from Services businesses reached a record $157 million in the third quarter, supported by consistent consumer demand and our continued focus on monetization. At the same time, revenue from restaurants, retail and other businesses further recovered in the third quarter, reaching $100 million. We were also pleased to see paying advertising locations improved by 7,000 from the second quarter to 535,000 in the third quarter, an increase of 6% year-over-year. Our efforts to increase services monetization and deliver more value to advertisers also contributed to record revenue per services location in the quarter. Even as we increased our headcount to support strategic investments in the third quarter, our record 26% adjusted EBITDA margin is another important proof point of Yelp's margin potential. While our distributed operating approach provides an opportunity for us to continue to drive efficiency through our real estate expense over the next several years, we remain focused on investing behind our initiatives to drive long-term sustainable growth. We expect the office space reductions we've executed to date will result in annual GAAP expense savings of approximately $15.5 million to $17.5 million through the end of the related leases and subleases between December 2024 and July 2025. We anticipate that this GAAP expense reduction will benefit adjusted EBITDA by approximately $15 million to $17 million on an annual basis. Returning excess capital to shareholders in the form of share repurchases is an important part of our overall capital allocation strategy. Since we resumed share repurchases in the fourth quarter of 2020, we had repurchased $224 million worth of shares as of October 29th, including $49 million worth of share repurchases in the three months following our second quarter earnings call. Turning to our outlook. Net revenue in the third quarter matched our record quarterly performance despite a slowdown in economic recovery as labor and supply chain issues continued and the COVID-19 Delta variant spread across the United States. While these macro impacts were less severe than in previous waves of the pandemic, paying advertising locations decreased in August and September compared to July as some multi-location advertisers in our restaurants, retail and other categories paused their spend. As a result of these trends and continued macro uncertainty related to COVID-19, we expect fourth quarter net revenue will remain relatively flat with the third quarter, coming in between $265 million and $275 million. We now expect net revenue for the full year will be between $1.02 billion and $1.03 billion. Turning to adjusted EBITDA. We continue to see attractive investment opportunities and plan to further increase our headcount as we continue our hiring efforts in the fourth quarter across sales, product and engineering. As a result, we anticipate expenses will increase sequentially and expect adjusted EBITDA will come in between $55 million and $65 million in the fourth quarter and between $233 million and $243 million for the full year. In closing, our third quarter results again demonstrated how the consistent execution of our strategic initiatives and structural improvements have transformed Yelp into a better business than ever before. In addition to seeing substantial room for further recovery in our business categories most impacted by the pandemic, we believe that continuing to invest in our broad set of strategic opportunities will allow us to drive sustainable growth at attractive margins over the long term. With that, operator, please open up the line for questions.

Thank you. Operator provided instructions. Our first question comes from Justin Patterson of KeyBanc. Justin, your line is open. Please go ahead.

Great. Thank you very much. You've made a lot of progress with non-term advertiser retention rates. As you look ahead, how much more room do you have to improve that metric? And what are the levers to do so? As that advertiser retention rate improves and the lifetime value increases, how do you think about reinvesting differently into the Yelp platform? Thank you.

Hi Justin, this is Jeremy. Yes, we're really happy with how we've made a lot of progress with our retention rate. And going back to our theme that has been one of our major themes, which is delivering more value to advertisers. The way that we do that has been through a variety of different mechanisms, leveraging product and engineering, but particularly our ad system. So, when we better match advertisers, we're essentially creating inventory out of thin air. And so you think about someone that maybe does pool covers, they don't want a job that's digging a hole for a pool. So, the better that we can do on matching, the more value we're delivering per lead and we believe that shows up in our retention rate. And so there is a long pipeline of product improvements that we have going into the ad system as well as merchandising our ads. Another thing I would point out is that about 25% of the leads flowing through Yelp right now in the services category are monetized. That gives us a lot of room to continue driving that number up over time and capturing more value of the great down-funnel leads that are flowing through the system. So, there's a lot more work to do, but we're really happy with the progress that we've made thus far.

Thank you, Justin. Our next question comes from Cory Carpenter of JPMorgan. Please proceed Cory.

Thanks for the questions. I had two, maybe one for Jeremy, one for Jed. Just you kind of spoke to it a little earlier around August and September and the Delta variant and the impact that had on paying ad locations and multi-location spend. Just curious maybe if you could give us an update on how that's trended kind of in October and more recently, as things have kind of improved, I think, since then? And then, Jed, last quarter, you talked about you need to catch up on sales hiring. Maybe if you can just give us an update there. And then more broadly, just the state of the sales force today? Thanks.

Hi Cory, I'll take the first part of that question. Absolutely, as we've seen in the past, as virus case counts go up, people tend to move around a little bit less and transact locally a little bit less. And so we do see those impacts show up. As far as the more recent trends, I think it's just too early to call anything different. Delta is obviously still out there. But going back and looking at it historically through the pandemic, we do see a pattern there, which is as case counts go up, people do less. As case counts go down, people feel safer. They get out there pretty quick and return to their old patterns and things they want to do like go out to restaurants. So, we really feel very confident about how things will play out, but that's the dynamic that exists today.

Great. Cory, I'll take that second part. In terms of the sales force, we have made progress against that hiring shortfall and are pleased with the way we're trending right now compared to Q2 where we're definitely moving in the right direction, although not all the way there. But we continue to be very, very focused on that. In terms of the overall sales force right now, we've actually really benefited from our posture. It allows us to go out and find talent all across the country and not just in select markets. And we believe that also affects retention rates among employees as well, which is obviously a big lever in the equation. In fact, if you look back right now, I think our retention rates within the sales force are better than they were in 2019. We attribute a lot of that to the fact that we can go out and find great talent across the country. We're right where we want to be from a multi-location perspective on hiring. And, of course, when you take the long-term view, we're much less reliant on the local sales force. We now have 45% of our revenue coming from both multi-location and self-serve. Self-serve grew 45% year-over-year, so it continues to be a bright spot there. But overall, we're pleased with our progress in catching up on the local sales side and believe that we're in a good position based on some of this distributed work environment.

Okay. Thank you.

Thank you, Cory. Our next question comes from Trevor Young of Barclays. Trevor, please go ahead.

Great. Thank you. First one on the comment from the letter that content is going to be integrated in infotainment systems. Is that something that's going to be bundled with like Android Auto or Apple CarPlay or certain apps they're in? And what do the economics of that look like? Is it per an install or an ongoing licensing fee? Just help us unpack that a little bit. And then on Request a Quote, it looks like request slowed pretty markedly. I think it was up 10% year-on-year in the quarter versus 50% last quarter. What drove that slowdown? Was it just more difficult comps or something else? And were requests actually up quarter-on-quarter? Thank you.

Hi, Trevor, I can talk to these questions. So first up, on the data licensing side, we have had a strategy of getting our data out there for many, many years. We obviously have very trusted local content that is rare, and there's a lot of people that want to tap into that valuable information. For some of these relationships, historically, we weren't really chasing revenue, trying to turn them into paid relationships. But a few years back, our strategy shifted there, and we're seeing the benefits of that play out, where we're driving revenue, albeit small but fast growing. It is an exciting area for us. We're really amazed at the different ways that people are finding value with our data. You mentioned in-car, where we're pretty excited about something like half the cars shipping next year in the U.S. will have Yelp data available in them. But then also things that are maybe less obvious, like sales intelligence for businesses that sell locally. So we see a lot of different opportunities there, and we'll be certain to keep you posted on that. On the Request a Quote side, we're quite pleased with where things are at. If you look at how Q3 performed relative to 2019, which is a more normal baseline from an environment standpoint, we're actually up 25% on a two-year comparison. That's been pretty consistent in the comparison to 2019 all year long. There is obviously funky stuff going on with the comps given what happened in 2020.

Got it. So steady comps on that two-year basis?

That's right.

Thank you, Trevor. Our next question comes from Dan Salmon of BMO Capital Markets. Please go ahead, Dan.

Hey. Good afternoon, everyone. I just maybe wanted to follow up first on the questions on the sales force. It makes a lot of sense that the remote posture is helping you a lot. My question is, do you expect the sales force to get back to the same level as it was before? I don't know, I might have missed it in this note, but I think you'd said that it was up to 50% before, and I know you wanted to keep it growing. But is getting it back to the same size still the goal or even bigger than that? I'd love to hear more on that first. And then just second, there's been a lot of sensitivity around ad performance this quarter, and it was related in particular to Apple's privacy changes. Just be curious, any comments about that broadly across your business? And maybe in particular, an update on your Yelp Audiences product. Thanks.

Yes. Hi, Dan, I'll take the first part in terms of the sales force. Yes, it is our goal to get back up to those levels of 50%. And as of now, that's about as far as we're going to go. That being said, we'll always look at different ROI opportunities as conditions change. But as of right now, that 50% mark is what we're aiming for.

And then on your second question around ad performance, more specifically you were asking about changes like the IDFA. The vast majority of our ad revenue and ads that we deliver are on-platform and so really aren't affected by those privacy changes. You did mention the Yelp Audiences platform. We have a trusted brand that allows us to get the data and opt-ins we need to continue to grow that business. It's a relatively new one for us, not a huge revenue number today, but very fast growing, and we're quite excited about it. It also gives us a chance to reach advertisers that maybe couldn't get onto the platform because of the type of ad units they want to run or because they're a consumer brand without a specific location to advertise on Yelp but they want to reach a valuable audience. So there is an exciting business there, and we're looking forward to continuing to grow it.

Great. Thank you both.

Thank you, Dan. Our next question comes from Jason Bazinet of Citigroup. Jason, please go ahead.

I just had a real simple question. The last couple of quarters, you guys have put up revenue numbers that have been a little bit better than your guide. But the flow-through to EBITDA has been even larger. So I guess my question is, can you just elaborate on what's causing the higher flow through? Is that something that sort of has to reverse as we move to next year and your expenses sort of catch up, or is it more sustainable?

Hey, Jason. So a couple of dynamics are at play around adjusted EBITDA. First of all, one of the things we've seen with our focus on product and engineering is that when we do better on revenue, we see that largely, almost entirely, flowing through to the bottom line. So we like that. That's part of the strategic shift we've engaged in over the past couple of years. And we will continue to invest in product and engineering to drive that. In terms of expenses themselves, what we did see in the third quarter, somewhat similar to the second quarter, is good performance across the board. One of the areas that has been especially good this year has been bad debt. I do think that will normalize at some point, but that has certainly been better than expectations. In addition, as Jed was speaking to, we have been somewhat behind on hiring in our local sales team, and that dynamic has played out. We've been making progress against that. And I would just say, in general, we are hiring not just in local sales but also in multi-location and continuing to invest in R&D. So what we do expect is those hires in the second half of the year will play out in 2022 with a higher expense base. Those are the factors that go into where things can head. Overall, we are pleased with the progress we've made from an adjusted EBITDA perspective; 26% adjusted EBITDA margin in the third quarter, a record for us, is another proof point for the margin potential of the business.

That's very helpful. Thank you.

Thank you, Jason. Operator provided instructions. We have no further questions registered. So this concludes the Yelp Third Quarter 2021 earnings call. Thank you for your participation. We hope you have a great rest of your day. You may now disconnect your lines.