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

Good afternoon, everyone, and thanks for joining us on Yelp's Third 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 a 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. In the third quarter, Yelp continued to see robust advertiser demand amidst the backdrop of macro uncertainties. With performance-based ad products and a high intent audience, our business reached new highs; net revenue increased by 15% year-over-year to a record of $309 million. Net income was $9 million. We delivered this performance with an adjusted EBITDA margin of 24%. Underlying our record top line, we continue to make inroads across our broad set of categories. Paying advertising locations increased by 7% year-over-year to $572,000. Advertising revenue from services businesses grew 15% year-over-year. The home services category was particularly strong, with year-over-year revenue growth accelerating to approximately 25%. With the benefit of a large organic consumer audience, we continue to focus on the significant opportunity in services advertising by increasing lead quality and monetization. Advertising revenue from Restaurants, Retail, and Other businesses increased by 13% year-over-year, driven by growth in paying advertising locations. In recent years, we have made tremendous progress in improving our ad system to deliver value to advertisers. We will continue to lean into our product roadmap to support Restaurant and Retail advertisers as they navigate a volatile operating environment. Our portfolio of down-funnel ad products that connect local businesses with our high intent and affluent consumer audience have clearly resonated with advertisers. This is a reflection of our long-term focus on building a durable, broad-based local advertising platform. In the third quarter, we continued to make progress against our initiative to drive sales through our most efficient channels; Multi-location and Self-serve channels each grew approximately 25% year-over-year to reach record levels in the third quarter. In summary, our performance in the third quarter underscores the strength of our strategy and our team's ability to execute. In an uncertain macro environment, we believe our mission of connecting people with great local businesses is even more relevant. As we look to the fourth quarter and year ahead, our portfolio of initiatives is robust, and we remain committed to driving long-term shareholder value. With that, I'd like to turn it over to David.

Thanks, Jeremy. Third quarter net revenue increased by 15% year-over-year to $309 million at the high end of our outlook range. Underlying this strong performance, we achieved record average revenue per location and grew paying advertising locations by 7% year-over-year to a record $572,000. As Jeremy mentioned, we also drove growth across our broad set of categories in the quarter. Ad revenue from services businesses grew 15% year-over-year to a record $181 million, with records in paying advertising locations and average revenue per location in these categories. Restaurant, Retail and Other ad revenue increased by 14% year-over-year to $113 million, largely driven by a 10% year-over-year increase in our RR&O paying advertising locations. Third quarter ad clicks remained consistent with the second quarter but decreased by 15% from the prior year period, which had benefited from reopening tailwinds and elevated consumer spending. At the same time, we saw strong advertiser demand for our performance-based ad products, resulting in a 36% year-over-year increase in average CPC. Our retention rate for non-term advertisers' budgets remained solid in the third quarter due to the value we continue to deliver to advertisers, but declined modestly from the second quarter. Turning to expenses. In 2022, we have invested in our growth initiatives, which are designed to drive profitable growth over the long term. For example, investments in product as well as performance marketing drove record Self-Serve customer acquisition in the quarter. Even with these investments, we delivered positive net income of $9 million, which includes an impairment charge of $10 million related to subleasing a portion of our New York office in July. We also delivered record adjusted EBITDA of $74 million at the high end of our outlook range, representing a 24% adjusted EBITDA margin. As we look ahead, we believe that we can drive leverage through our product and engineering-driven growth strategy and reduce workplace operating costs as we continue to embrace a fully remote workplace. We are also evolving our approach to compensation, which we believe will help to reduce stock-based compensation as a percentage of revenue over time. Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy. In the third quarter, we repurchased $50 million worth of shares at an average purchase price of $31.25. To support these ongoing repurchase plans in November, our Board of Directors authorized us to repurchase an additional $250 million worth of shares, bringing our total remaining authorization to $332 million. Turning to our outlook. In any given year, there are commonly a number of competing seasonal dynamics that affect our performance in the fourth quarter. In services, we expect our typical seasonality while continuing our year-over-year strength. In Restaurant, Retail and Other, evidence of increased caution among some Multi-location advertisers emerged late in the third quarter as they responded to heightened macro uncertainties. As a result, we expect to see a more muted holiday season with less incremental spend from these advertisers than we have seen in the past. We anticipate fourth quarter net revenue will be in the range of approximately $300 million to $310 million and net revenue for the full year will be in the range of $1.185 billion to $1.195 billion. At the midpoint, this full year range is $20 million above the initial outlook range we provided in February and remains in line with the raised range we provided in August. Turning to margins. We expect a modest decrease in expenses compared to the third quarter, driven by sales and marketing. At the same time, we are very pleased with the performance of our business amid the macro volatility and have continued to invest in our initiatives to drive profitable growth over the long term. We expect adjusted EBITDA will be in the range of approximately $75 million to $85 million for the fourth quarter and $265 million to $275 million for the full year. In closing, Yelp's broad set of categories, performance ad products, and sophisticated ad tech stack have provided us with a durable foundation. At the same time, our teams have consistently executed against our strategic initiatives among continued macro uncertainties, which has led our business to new highs. As we work through our plans for next year, we're excited by our strong portfolio of opportunities and remain confident in our ability to drive long-term profitable growth. With that, operator, please open up the line for questions.

Our first question comes from Colin Sebastian with Baird.

A couple of questions, if I can. I guess, first off, how sustainable are you guys thinking that the growth in both the paying advertising accounts and revenue per advertiser will be, I guess, in particular, given the macro issues and some of the change in retention rates that you noted from Q2? And then secondly, we're just hoping you could talk about some of the initiatives to enhance the consumer-facing parts of the business, and how that might translate into engagement trends going forward.

Colin, this is Jed. I can take the first question on PALs. Paying advertising locations, we're really pleased with that performance. It was a record $572,000 as well as a record revenue on a per location basis. On the PALs side, it's important to understand that they can move up and down on a quarter-to-quarter basis depending on a multitude of factors, particularly spending on seasonal campaigns by our national advertisers. Still, it's a really large TAM for us to pursue, and there are a lot of possible paying advertising locations out there. And we also believe that there's an opportunity to drive revenue growth within our existing business. Acquisition has been strong in both the SMB side and the Multi-location side. Our post-sales team has a large opportunity to upsell within our existing book of business. Overall, we hope to drive a balance between growing revenue per location and increasing PALs, given the large TAM, and we believe there's a lot of headroom there.

Colin, I can take the second part here. This is Jeremy talking about consumer initiatives and what we are doing on that side. For the past few quarters, you may have seen in the notes talking about some of the Android improvements we've been making. If you go back a few years, a lot of our focus admittedly has been on monetization, creating a portfolio of initiatives around that, particularly ads and ad matching. And frankly, that's worked really well for us, and we still have a deep portfolio there. So we're going to keep leaning in that direction. But we've also taken the opportunity to direct more of our attention and resources towards the consumer experience. So Android being a simple and understandable first step where it's lagging behind the iOS experience. We've made some improvements and unlocked some inventory there. I think there's a lot more that we can do. Beyond Android, across all platforms, there's now a series of initiatives, a whole portfolio approach and we've begun executing against that. We're seeing early signs of success. It just started this year, and we'll keep you updated as we turn the quarter into '23. But given our execution and success with this approach on the ad side, I think we're feeling confident that we'll continue to make strides there despite, of course, all the macro uncertainties that everyone knows about.

Our next question comes from the line of Justin Patterson with KeyBanc.

Two, if I can. First, David, I just wanted to unpack a little bit more about the guidance commentary around Retail, Restaurant and Other. Can you talk about some of that softness you observed exiting the quarter, how that's played out into early October? And I did notice that PALs for that category dipped a little bit sequentially. Is that what we're observing there? And then I'll have a follow-up after that.

Justin, maybe just to answer in reverse. The slight dip there that you saw does reflect that increased caution, particularly for Restaurant and Retail. And this is in our Multi-location channel, which as you know consists of both national advertisers as well as mid-market. What we have historically seen is an increase in ad spend for the holiday. That is the part that we don't think we're going to see here in 2022. So the guidance we provided reflects that movement by these national and mid-market advertisers to be more cautious through the fourth quarter. I would still underscore, though, that we're pleased overall with the performance. Obviously, a record Q3, particularly happy about the acceleration on the home services front from about 20% growth in the second quarter to about 25% growth in the third quarter. A theme worth underscoring is we do think that this portfolio of categories on Yelp really helps us manage overall performance and is the foundation for long-term profitable growth.

And then for the follow-up, I think about your PALs entering the pandemic and then where they're at today. It looks like there's just a much more durable base within there. So as we head into whatever 2023 brings on the macro side, you look at the PAL composition, you look at the product portfolio, the go-to-market strategy. How should we think about the business as being different from the churn perspective and, say, in the past?

Sure, Justin, this is Jed. I can talk about that. Yes, we feel like we have a really durable and diversified customer base. It's made up of a broad set of categories as well as a broad set of customer sizes. We've experienced periods of volatility in the past, not the least of which was COVID. Inevitably, certain categories will do better than others. Right now, we're seeing a lot of strength on the Services side, as David mentioned, with acceleration in Home Services quarter-over-quarter and overall 15% growth there. Ultimately, we believe we have a very high intent down-funnel audience that's performance-based. In volatile macro environments, that is certainly something that advertisers value. When you look at services, the value of leads has become more important in this type of environment where you may see a consumer pullback. Those advertisers are certainly in need of driving valuable leads, and we've seen that show up in those home services numbers. But broadly speaking, the breadth of our categories is really helpful. Ultimately, the performance-based nature of our advertising really shines through in this type of environment.

This is Jeremy. I would just add that I think our product and engineering execution significantly contributes by enhancing lead quality, improving matching, streamlining aspects like self-service, and providing additional tools for multi-location services. All of this execution supports our ability to maintain growth, even amidst a volatile macro environment.

Our next question comes from the line of Cory Carpenter with JP Morgan.

Hoping you could expand a bit on what's working so well for you in the Home Services category. It feels like you're taking share from some of the other companies out there, certainly had less exciting results on the Home Services side. So what's working so well for you? And then how sustainable do you think this is as request volume does continue to moderate going forward?

Cory, this is Jeremy, again. Yes, we're really pleased with our 25% year-over-year growth in Home Services revenue. Frankly, I think it speaks to our large organic audience that is on Yelp to transact. They're doing research, trying to figure out how to solve a problem. It's clear that if you're delivering valuable leads to advertisers, especially at a time when their trucks aren't rolling as frequently as they'd like, they're going to seek out higher ROI channels to advertise. Given the demand, they're finding Yelp really meets the quality bar. So we're really encouraged by that momentum relative to other players in the field. We're going to keep leaning into that, improving the product experience, streamlining the consumer experience. We talked about boosting engagement there and continuing to improve across all platforms. It feels like our approach on the product and engineering side is working. We've got this broad portfolio of initiatives in various areas that we're going to keep executing and try to continue our momentum.

Our next question comes from the line of John Colantoni with Jefferies.

This is Vincent Kardos on for John. I'd be curious to hear a little bit about your outlook for small and medium-sized businesses going into next year, so beyond Q4. In an environment where we're currently having declining consumer sentiment, rising rates, high inflation, etc., there is a lot of chatter about whether we will have a consumer recession into 2023. How do you see '23 shaking out for those small and medium businesses that you work with? And looking back at comparable downturns, how do those businesses tend to adjust their ad spend in these sorts of climates?

Great. I can start out with that one, Vincent. As I mentioned, we have a pretty varied customer base in terms of category and size and have gone through these macro periods in the past. Our advertisers in services tend to skew more SMB, while the advertisers in the Restaurant, Retail and Other categories skew toward the Multi-location side. In the quarter, obviously, you saw really strong growth on Services overall at about 15% year-over-year. We believe that the SMB segment is durable. We've seen strong acquisition and solid performance on the retention side. Ultimately, as we go through these macroeconomic periods, we've seen a lot of resilience out of our customer base in the past when we have gone through these.

Yes. I guess I'll chime in. It's Jeremy here. We've been through a lot of ups and downs over the years; I think it's my 18th year. The one thing that always comes into play is just the breadth across so many categories. Even in the worst of the pandemic, we saw home services pop up as particularly strong, and we're continuing to see really great demand on the home services side from advertisers. I think that is a strength in an uncertain environment that accrues uniquely to Yelp.

There are currently no questions registered. There are no questions waiting at this time. That concludes today's Yelp Third Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.