Yelp Inc Q1 FY2022 Earnings Call

Good afternoon. Thank you for joining us for Yelp's First Quarter 2022 Earnings Call. My name is Hina, and I will be your moderator today. I will now turn the call over to our host, James Miln, the Senior Vice President of Finance and Investor Relations at Yelp. Please proceed.

Good afternoon, everyone, and thanks for joining us on Yelp's first quarter 2022 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 the shareholder letter on our Investor Relations website and with the SEC 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 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 a great first quarter. We continue to see strong momentum from our product driven growth strategy, as net revenue increased quarter-over-quarter and by 19% year-over-year to a record $277 million. Advertisers across both categories and channels showed increased demand for our expanded portfolio of ad products and paying advertising locations reached the pandemic high. Advertising revenue from services businesses increased 14% year-over-year to a quarterly high of $160 million, reflecting record revenue per location. At the same time, advertising revenue from restaurants, retail and other businesses continued to recover increasing 27% year-over-year. We also made further progress on our initiatives to drive sales to our most efficient channels, driven by record acquisition and strong retention self-serve channel revenue increased by more than 30% year-over-year to reach a new high in the first quarter. At the same time, we saw robust demand for our expanded portfolio of ad products for multilocation advertisers. Multilocation channel revenue increased by more than 35% year-over-year. Together, these channels represented 46% of advertising revenue in the first quarter. Beyond these results, our team remains focused on advancing our strategic initiatives, which are designed to drive sustainable and profitable growth in the long-term through an elevated pace of product innovation. We made early progress in the first quarter as we work to advance our 2022 priorities. To grow quality leads and monetization in services, drive sales through the most efficient channels, deliver more value to advertisers, and enhance the consumer experience. In summary, our first quarter results reaffirm the strength and breadth of both our platform and initiatives amid a volatile environment, providing us with continued confidence in our ability to deliver on our plan and drive profitable growth in 2022. We're excited about the opportunities ahead to connect people with great local businesses and remain committed to delivering long-term shareholder value. With that, I'd like to turn it over to David.

Thanks, Jeremy. The fine historical seasonal trends. Net revenue increased by $3 million from the fourth quarter and 19% year-over-year to $277 million, $7 million about the high end of our range. This strong growth was driven by year-over-year increases in both paying advertising locations and revenue per location. Paying advertising locations increased by 3% from the fourth quarter, and by 9% year-over-year to reach 546,000. As Jeremy mentioned, we also accelerated year-over-year advertising revenue growth across categories with services up 14% and restaurant retail and other up 27%. Ad clicks increased by 4% year-over-year, while average CPC increased by 17% over the same period. Growth in average CPC outpaced growth in ad clicks due to higher advertising demand and consumer engagement, particularly in services. We believe this was driven by a combination of macro factors including inflation. We enjoyed another quarter of record non-term contract retention rates, reflecting the value that we continue to deliver to advertisers. Overall, we see Yelp's diversified local ad platform, and dynamic auction system as enabling us to respond to shifts in consumer demand across categories as they occur. And we remain focused on delivering value to advertisers through our portfolio of initiatives. Turning to expenses. Our flexible operating posture and disciplined focus on ROI has positioned us to lean into a broad set of growth opportunities. For example, in the first quarter, we increased our marketing efforts, which contributed to record self-serve customer acquisition. We also invested in driving incremental growth through our off-platform solution, Yelp audiences, an approach that has extended our total addressable market to include non-location-based advertisers. Even as we increase these strategic investments in the first quarter, net loss improved by $5 million year-over-year to a loss of $1 million or adjusted EBITDA increased by 10% year-over-year to $48 million, $3 million above the high end of our range. Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy. In the first quarter, we repurchased $50 million worth of shares at an average purchase price of $34.14. Turning to our outlook. In the second quarter, we anticipate net revenue will increase from the first quarter to be in the range of $280 million to $290 million as our initiatives stack. In addition, following strength in the first quarter, we currently expect net revenue to fall towards the higher end of the range of our previously disclosed outlook range of $1.16 billion to $1.18 billion for the full year. We continue to see attractive long-term growth opportunities and plan to further invest in product development and marketing in the second quarter. As such, we expect second quarter expenses will increase modestly from the first quarter. We anticipate adjusted EBITDA will be relatively flat compared to the first quarter and in the range of $45 million to $55 million. We expect adjusted EBITDA will meaningfully increase in the second half of the year, and currently expect a range of $260 million to $280 million in adjusted EBITDA for 2022. In closing, Yelp's first quarter results demonstrate a great start to the year. While the macro environment remains complex, we are confident in our team's ability to overcome challenges by staying focused on our strategic priorities. We're excited about the opportunities ahead and plan to continue prioritizing investment in areas that we believe will drive profitable growth and shareholder value over the long-term. With that operator, please open up the line for questions.

The first question is from Colin Sebastian with Baird. Please go ahead.

Thanks. Good afternoon. Good quarter. I guess I have a couple of questions related to the dynamic between the growth in clicks and pricing. On one hand that speaks to the value you're providing advertisers. But I'm also wondering if this could turn into a headwind for growth over time. And on that note, I guess, given the Request-a-Quote, requests remain relatively flat year-over-year. I guess it's increasing that priority looking forward as far as the consumer-facing side of the app is concerned. And I guess more broadly, what initiatives are underway? What are you prioritizing otherwise to improve the consumer-facing side that could increase the number of users and engagement? Thanks.

Hi, Colin. This is Jeremy. I can address that. On the click side, we experienced 4% year-over-year growth, and our retention looks strong, reflecting the value we provide to advertisers. We are optimistic about this. There’s a lot we can control regarding clicks, particularly regarding consumer engagement. In Q4, we discussed various initiatives designed to enhance consumer engagement and audience growth throughout the year. Additionally, we can improve our ad matching and ad tech. We have invested in that area for years, and it continues to yield high returns for us. As our ad system becomes more efficient, we can essentially create inventory from the same traffic more efficiently, generating additional opportunities. Overall, we are pleased with that portfolio. Regarding Request-a-Quote, it has been flat year-over-year. We are observing a shift in consumer interest away from home services, which had been at higher levels for the last couple of years. However, we are a diverse platform with various categories, including restaurant and retail, which has benefited from this shift. We are not going to passively accept market changes; we still see many opportunities ahead of us. There is a significant opportunity in services, especially in home services, and we have plenty of room to innovate and improve, increasing monetization and driving Request-a-Quote volume over the long term.

And Colin, if I can just add on to that. On the CPC side, one of the things that we were really pleased to see in the first quarter was the strength of advertiser demand. We believe that's driven because of our high intent traffic. And what we are able to do because of the auctions that we run, each time a consumer enters a query, and is looking at a search result, that lets us obviously match supply and demand efficiently. And just to underscore what Jeremy is saying, we think that we have a broad set of initiatives underway that will enable us to continue to deliver value to advertisers. And on the theme of delivering value to advertisers, we think that the strong non-term contract retention rate being a record once again, in the first quarter, reflects the fact that we're delivering value.

Great, thank you.

Thank you, Mr. Sebastian. The next question is from the line of Shweta Khajuria with Evercore ISI. Please proceed.

Okay. Thank you for taking my questions. I've got two. One is, you've done a great job with product changes in terms of new product launches, and driving growth through that over the past year and a half. When we think about all the products that you've launched, and perhaps those that may be in the pipeline, could you point to a couple of them that you are most excited about in terms of the magnitude of the impact of those products over the next 12 months? Which ones do you think could have an outsized positive impact on the business over the next year? And then the second question is, if you could please comment on the overall trends that you're seeing, macro trends that you're seeing with the multi-location advertisers, any color on the ad spend sentiment across different verticals, perhaps? And how you see that trend this quarter and in the back half? Thank you.

Thank you, Shweta, for acknowledging our progress in product and innovation. Over the past few years, we've seen significant impact and momentum that we expect to continue. We've made major improvements to our ad system, enhancing efficiency and delivering greater value to our advertisers by elevating the quality of our clicks. Each improvement we make not only creates additional inventory but also increases satisfaction across the board. Consumers are better matched with appropriate businesses, which enhances the likelihood of completing a transaction. We believe that capitalizing on these opportunities will benefit our business long-term. Additionally, we're focusing on the consumer experience, particularly on Android, which has lagged due to previous resource limitations. We've identified straightforward improvements and have started enhancing the Android experience to align more closely with iOS. For instance, we recently improved the map feature on Android, leading to a significant increase in ad clicks, which rose by 20% on that platform. This illustrates the existence of readily available opportunities that we intend to pursue with vigor, similar to our advances in ad technology. Beyond Android, there is ample opportunity to enhance the consumer experience through SEO, feature enhancements, increased reviews, and more photo contributions. I’m excited about our diverse portfolio and will keep you updated on our progress. Additionally, we see substantial investment opportunities in refining our self-serve options for multi-location advertising. This includes improving workflows to boost conversion rates, which leads to a positive feedback loop: the better we guide customers through our self-serve funnel, the more we can invest in advertising to accelerate that process. In Q1, we experienced a 19% increase in revenue, with multi-location advertising being a key factor. A significant driver of our progress has been attribution, essential for accessing larger ad budgets from sophisticated clients. Our Yelp store visits product, which relies on first-party data, allows us to track whether our ads drive incremental store visits, making it a valuable resource for our sales team as we engage with these complex enterprise customers.

Great. This is Jed. I can address the second part of the question regarding macro trends within multi-location advertisers. Looking at it from a broader perspective, we are very pleased with the performance of the multi-location channel, which has grown by 35% year-over-year. This is the result of several years of dedicated effort. We initially invested in our team and simultaneously enhanced our product portfolio. When comparing our current offerings to those from a couple of years ago, it’s clear that we now have a much wider range to present to multi-location customers. Our success spans across various verticals, including shopping, restaurants, retail, and services. Nothing particularly stands out, especially when we consider the growth in our paying advertiser locations, which reached 546,000, largely driven by multi-location businesses in the restaurant, retail, and service categories. We're seeing positive engagement from our customers. We are also pleased with the development of Yelp audiences, even though it still represents a small portion of our overall revenue. This initiative is appealing to different types of customers, including DTC, CPG, and alcohol brands, who previously could not effectively reach our audience with our traditional advertising solutions. In summary, we are dedicated to optimizing strategies along the entire marketing funnel on Yelp, which is resonating well with our large multi-location clients.

Okay. Thanks, Jeremy. Thank you, Jed.

Thank you, Ms. Khajuria. The next question is from the line of Dan Salmon with BMO Capital Markets. Please proceed.

Great. Good afternoon, everybody. I have two questions. First, would love to hear an update on the traction of Yelp Connect with both users and advertisers just broadly. And then second, I think probably more than ever we're hearing your confidence and happiness with the improvement in the ad tech and the ad system. And that continues to build and a lot of that's been organic work pretty much so far. Just curious, if you're going to lean in here more, do you feel like you have the engineering capacity as a hiring environment is okay, or do you start to maybe look at the M&A market to do tuck-in acquisitions, AQUA hires to reel in a little bit more, and maybe lean into the success you've had on the ad platform? Thanks, guys.

Yes. I'll address the advertising aspect first. We've seen a significant impact in this area with a great return on investment. As part of our annual planning, we're evaluating our overall portfolio and determining where to focus our investments. Yelp Ad Tech has consistently been a strong performer in this evaluation process, particularly in 2022, which saw larger investments in this area. While it can be challenging to find quality talent, we have a strong team and have successfully filled many positions. There may still be some open roles, but we are making substantial progress on our initiatives and will keep you informed. Regarding Yelp Connect, I don't have specific statistics available, but it is included in our ad upgrade package. Business owners can create more social-like posts by sharing images and text aimed at consumers who have expressed interest in their business or relevant categories. That's all I have for now.

Yes, I guess, Jeremy, I would just add on.

Sure.

Yes, I will just add on the Connect side. We've also seen some traction on the multi-location side in bundling that with our other products. And so, as I mentioned, kind of in the previous answer, when you kind of take the totality of what we can offer, whether that's CPC ads on Yelp, Yelp audience ads off of Yelp Connect is just another way that those multi-location advertisers are used to advertising. And so, oftentimes they have the assets ready and as part of an overall package, it's certainly something that is attractive to that multi-location side.

Okay. That's great. That's helpful. Thanks, guys.

Thank you, Mr. Salmon. The next question is from the line of Justin Patterson with KeyBanc. Please proceed.

Great. Thank you and good afternoon. For the …

We are experiencing some technical difficulties. Please hold. Again, please remain on hold. You may proceed with the presentation. The next question is from Jon with Jefferies. Please continue.

Hi, everyone. This is Stan Velikov for Jon. Thank you for taking my question. Actually, I have two. First one, you mentioned earlier on the call product development and marketing being areas of investment. But the sequential margin improvement implied in your guidance looking at the midpoint is not to believe the overall what we've seen historically. Can you provide more color on the various puts and takes in that guidance? And question number two, are you seeing any signs of slowdown from the macro environment or the consumer sentiment turning negative?

Thanks for the question. So starting with the first one on expenses. What we have done over the course of the past number of quarters is invest particularly in increase in hiring and product and engineering. We've also had an opportunity to increase investment in marketing. We've seen ROI from both of those investments. And overall the dynamic as we came into the year was reflecting an increase in headcount. We also have our Yelp Audiences product, which actually has expenses related to it as we syndicate ads across the internet on behalf of advertisers. And you'll see that increase in expense showing up in our cost of sales line. Overall, as we look at expenses coming into the second quarter, what we intend to do is to continue to invest for that longer term since we do see an opportunity to earn a return on it. And clearly, we were very pleased with the 19% growth that we delivered in the first quarter. And then, of course, the sequential guide on revenue as we come into the second quarter. Broadly, what we saw in the first quarter, from a macro perspective again, was a very complex backdrop, where we see consumers certainly very focused on inflation. One of the things that we think makes Yelp particularly valuable is our core mission of enabling consumers to make better decisions by being able to learn more about businesses. And as things are more expensive, whether that's dining out or hiring a services professional, we think that's even more relevant. So we think that trusted content is quite important for consumers. And I think, as we said earlier, we were certainly pleased by the strength of advertiser demand over the course of the first quarter. And we think that's a reflection, both of the expanded portfolio of products that we're providing, as well as obviously, the opportunity for those advertisers to reach high intent consumers who come more than 50% of the time from households with income over $100,000.

Great, thanks very much.

Thank you. The next question is from the line of Justin Patterson with KeyBanc. Please proceed.

Great. Thank you and good afternoon. You've done a really great job with non-term contract retention rates. How much more room for improvement do you have around that metric? And as retention improves, how do you think about adjusting the pace of advertiser acquisition? Thank you.

Hi, Justin. This is Jed. I can address the retention question. We believe there is significant potential for improvement in retention. The progress we've seen is primarily due to providing more value to our customers. As Jeremy previously mentioned, enhancements in the ad system, better matching, and ensuring we connect the right opportunities with the right consumers and business owners at the optimal time have contributed to this. We have a substantial number of initiatives we will pursue to continue making strides in this area. We were happy to see record retention during Q1, reflecting our ongoing progress. Regarding acquisition, we are also satisfied with the pace. Despite having only half the sales team, we managed to achieve strong acquisition results in Q1, showcasing the effectiveness of our approach. As we identify opportunities to invest more in marketing, especially in B2B marketing, we plan to act on those when we see strong returns. Overall, we are very pleased with our advancements in both acquisition and retention.

Thank you.

There are no additional questions waiting at this time. That concludes today's call. Thank you for your participation. You may now disconnect your lines.