Hello, and welcome to the Q2 2024 Yelp, Inc. Earnings Conference Call. I would now like to turn the conference over to Kate Krieger, Director of Investor Relations. You may begin.

Good afternoon, everyone. And thanks for joining us on Yelp's second quarter 2024 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 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 may discuss adjusted EBITDA, adjusted EBITDA margin, and free cash flow, 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 Investor Relations website, you will find additional disclosures regarding these non-GAAP financial measures, as well as historical reconciliations of GAAP net income or loss to both adjusted EBITDA and adjusted EBITDA margin, and a historical reconciliation of GAAP cash flows from operating activities to free cash flow. And with that, I will turn the call over to Jeremy.

Thanks, Kate. And welcome, everyone. Yelp delivered record net revenue and strong profitability in the second quarter. Net revenue increased by 6% year-over-year to $357 million as we introduced more than 20 new features and updates in the quarter, reflecting our product-led strategy. With a disciplined approach, we expanded net income margin by 6 percentage points and adjusted EBITDA margin by 1 percentage point from the prior year period. Businesses in our restaurant, retail, and other categories continued to face a challenging operating environment in the second quarter, resulting in a decline in revenue for RR&O of 3% year-over-year. At the same time, our services business, which remains the focus of our product-led strategy in 2024, saw continued momentum. Services revenue increased by 11% year-over-year, making it the 13th consecutive quarter of double-digit growth. We saw even stronger performance in the home services category, which increased by approximately 15% year-over-year. Request to quote project growth accelerated from approximately 20% year-over-year in the first quarter to approximately 35% year-over-year in the second quarter. This acceleration resulted from both organic improvements as well as paid project acquisition. Regarding our paid project acquisition, we continued to see strong top-of-funnel metrics including projects, ad clicks, and CPCs. As we scaled spend in the quarter, we also saw early indications of retention benefits among newer businesses with fewer reviews, which often experienced difficulty competing with established advertisers for leads. We plan to leverage this learning to become more precise in lead distribution, narrowing our focus towards the opportunities that we believe have the highest return. With just 20% of services revenue coming from multi-location businesses, we also see an opportunity to extend our success with SMBs in these categories to enterprise businesses. We have been adapting our services product offerings to better fit the needs of these larger advertisers. We recently launched Request-a-Quote for brands and introduced a new leads API. This enables multi-location businesses to compete for the millions of Request-a-Quote projects available on Yelp and seamlessly manage leads across multiple business pages. More broadly, our product and engineering teams continued to leverage AI to further optimize advertisers' budgets by displaying the most relevant ad content to consumers. In the second quarter, ad clicks increased by 9% year-over-year, while average CPC decreased by 1% year-over-year. We also rolled out a number of user experience and back-end improvements to our website, and introduced a number of new features to make Yelp more useful for consumers with accessibility needs. In summary, we were pleased with the continued progress on our product roadmap in the second quarter, particularly in services, while we delivered strong profitability. Overall, we remain confident in our strategy to drive profitable growth and shareholder value over the long term. With that, I'll turn it over to David.

Thanks, Jeremy. In the second quarter, net revenue increased by 6% to a record $357 million, $2 million above the high end of our outlook range. Driven by our disciplined approach, net income was $38 million, or $0.54 per share on a diluted basis, representing an 11% margin. Adjusted EBITDA reached $91 million, representing a 26% margin, putting it $16 million above the high end of our outlook range. Continued strength in services categories drove this growth. Advertising revenue in services increased by 11% year-over-year to a record $223 million. As Jeremy mentioned, restaurants and retailers remained pressured in the quarter, resulting in a 3% year-over-year decline in RR&O revenue to $118 million. A decrease in RR&O locations offset growth in services locations in the second quarter. This resulted in an overall decline of 6% year-over-year in paying advertising locations to 531,000. We remain focused on driving growth through our most efficient channels. Self-serve continued its momentum, growing approximately 20% year-over-year in the second quarter. This makes it the 15th consecutive quarter with year-over-year growth at or above this level. At the same time, multilocation revenue came in approximately flat year-over-year, reflecting continued softness in RR&O. Similarly, Yelp audiences maintained its annual run rate of approximately $45 million in the second quarter. We continued to see growth opportunities for Yelp Audiences, and recently expanded its reach to enable advertisers to connect with our high-intent audience through audio platforms, along with additional connected TV platforms. Turning to expenses, in the second quarter, we remained disciplined in our allocation of resources while focusing on opportunities that have the potential to drive incremental returns. This resulted in our net income margin improving by 6 percentage points year-over-year and our adjusted EBITDA margin improving by 1 percentage point year-over-year. We achieved this even as we invested $12 million in paid services project acquisition during the quarter. In the second quarter, we also reduced stock-based compensation expense as a percentage of revenue by 1 percentage point year-over-year, and remained focused on reaching less than 8% by the end of 2025. We expect these efforts to stack over time, improving the quality of our adjusted EBITDA and benefiting GAAP profitability in the years to come. Returning capital to shareholders through share repurchases continues to be a key element of our capital allocation strategy. In the second quarter, we repurchased $63 million worth of shares at an average purchase price of $37.94 per share. As of June 30, 2024, we had $456 million remaining under our existing repurchase authorization. We plan to continue repurchasing shares in the second half of 2024, subject to market and economic conditions. Turning to our outlook. In the second quarter, services revenue maintained double-digit growth, while RR&O revenue remained impacted by a challenging operating environment for businesses in those categories, with additional pressure as we move through the second half of the quarter. As we look to the third and fourth quarters of the year, we expect these trends to persist. In the third quarter, we expect net revenue to be in the range of $357 million to $362 million. For the full year, we now expect net revenue will be in the range of $1.410 billion to $1.425 billion, a decrease of $12.5 million from the midpoint of our prior range. Turning to margin, our business continues to demonstrate its underlying profitability, and we remain dedicated to disciplined expense management. In addition, as Jeremy mentioned, we are narrowing the focus of our paid project acquisition efforts. And expect to spend approximately $35 million in total for the year on paid search, having spent $19 million in the first half of the year. We expect third quarter adjusted EBITDA to be in the range of $82 million to $87 million. For the full year, we now expect adjusted EBITDA to be in the range of $325 million to $335 million, an increase of $10 million at the midpoint, despite continued RR&O headwinds in the second half of the year. As a result of subleasing a portion of our Toronto office space in July, we expect to incur an impairment charge of approximately $4 million in the third quarter related to right-of-use assets and leasehold improvements associated with the underlying operating leases. We expect third quarter net income to be reduced by the full amount of the charge, but do not expect it to impact adjusted EBITDA. In closing, Yelp's second quarter results reflect our ability to drive leverage in the business amid a challenging macro backdrop. We continue to believe in the significant growth opportunities ahead as we focus our investment on areas that we believe will drive business performance and shareholder value over the long term.

Thank you. Your first question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Thank you for the question. We will discuss the macro environment tonight, but I have two broader questions. First, Jeremy, what are your thoughts on the AI landscape and its potential impact on search? Local services are also evolving and there have been many announcements related to data licensing in that area. I would like to hear your updated insights on the AI landscape and its implications for Yelp in the coming years. Second, there was a recent antitrust decision regarding Alphabet, and while we don’t know what the remedies will be, how do you view that ruling? What do you think it could mean for competition in the search and local services market in the medium to long term? Thank you.

Sure. Happy to take those, Eric. Thanks for the questions. AI landscape, I would say, very exciting. Obviously, we've already taken steps to leverage LLMs and find early wins. Obviously, within search, there's improvements that we've made summarizing business reviews, we've rolled that out. We've incorporated LLMs into our ad tech as well as leveraged neural nets. So within the business itself, there's so much that we're able to take advantage of. Yelp Assistant comes to mind, obviously, a recent launch that helps walk people through submitting a project, and that's really showing some promise. So, very exciting from a Yelp product standpoint. And then when you look out at the wider landscape, I think really exciting opportunities for Yelp. One early search engine out there is Perplexity. When they were looking at where to get their local data and how to service their users with trusted local information, they turned to Yelp. And so that's a really good sign. Obviously, they're one of many companies that are working on this. We would hope to see many more of these flourish. And that of course ties into your antitrust question, which I could take in a second. On the data licensing side, we do have a significant data licensing business. There's lots of conversations going on in that area, we'll keep you posted. We do see a lot of opportunities there, both to grow our existing business as well as find additional revenue streams through folks that are looking to leverage AI. And, of course, we also have an AI API that we've put out there that's showing some early signs of promise. And also, when I think about the Yelp Assistant and the way that that product works, that lends itself quite well to a potential Yelp API application as well. And so you think about some of these next-generation search services when a user is asking something that has local intent, that's about a home services project that can then be hitting our API and matching that user with relevant businesses, it has monetization built in. So I think that's a really exciting new area for us to pursue. Obviously, we haven't even built the thing, but it's just something on my mind. There is a clear vision and opportunity that we have there. On the antitrust decision side, DOJ versus Google, obviously, that's a huge watershed moment, I would say, for antitrust. And certainly we're very excited about it. This is something that we've been calling for scrutiny of Google regulation and antitrust enforcement. So, we're very excited, obviously. The wheels of justice turned slowly. I testified in front of the Senate in 2011, so it's been a long time that we've been advocating for scrutiny of Google and its illegal monopolistic practices. And so, it's great that we've reached this moment. I do think it is going to breathe a lot of oxygen into the search space. It's going to create opportunities for startups; it's going to create opportunities for innovation for smaller companies like Yelp and others. So, it's very exciting. There's a lot of factors at play here. It's hard to predict exactly what might the remedies be, how will it play out. Obviously, Google will do its best to delay things, as well as likely appeal etc. So, it's going to take some time to fully play out, but I think a very positive development for Yelp.

Thank you.

Your next question comes from the line of Jason Kreyer with Craig-Hallum Capital Group. Your line is open.

Great. Thank you. This is Cal on for Jason. So, first question, can you just kind of walk us through what you're seeing in paid search? Looks like you might be pulling back the budget a little bit this year, but just curious the thoughts on your confidence in that opportunity, and whether you're seeing any early signs of users returning to the platform after you've acquired them through paid search, more engagement. Just kind of curious, your thoughts there.

Yes, Cal, I can take that question. So to set the stage a little, we're talking about Yelp driving projects through paid search. So, those projects show up as Request-a-Quote. And if you look at the top-of-funnel metrics, Request-a-Quote project's up to 35%, you can see that impact there. So we're really excited about what we've learned. Sure enough, there is a large pool of untapped leads that we can bring into the Yelp ecosystem, at what we think are pretty reasonable prices. So that's a really exciting first step. As we saw those projects flowing through our system, where we saw the most opportunity was, and the businesses that seem to be reacting to those additional leads the fastest seem to be businesses with fewer reviews. So no reviews or just a few reviews, they seem to be really picking up on the additional value. And so as a result, as we go into the back half of the year, we're going to be focusing on that lead distribution, trying to drive those leads to the businesses that are most likely to change their behavior, whether it's upping their budget, retaining for a longer period, etc. So I think, it's still a very exciting area for us. We've learned a lot and so we're honing in on where the ROI is. And obviously, we want to be thoughtful with our shareholders' money and drive a healthy ROI over the long term.

Perfect. Makes sense. And then secondly, can you just kind of give any additional color on the progression of some of these RR&O pressures throughout Q2 and how that's kind of progressed into Q3?

Sure, Cal. This is Jed, and I can address that. As we approached the latter half of the second quarter, we experienced further challenges in the restaurant, retail, and other categories. This trend has carried over from the first quarter. Our major restaurant, retail, and other clients have been impacted by a decrease in transactions and have not been able to raise prices as they did in previous years. This situation is evident in their current marketing budgets. We believe we are in a cyclical phase for these sectors, and while the timing of recovery remains uncertain, we anticipate consumer spending will rebound, and we are well-prepared to engage in that recovery when it occurs. In the meantime, we are highly focused on expanding our services for multi-location clients. Currently, only 20% of our services revenue comes from multi-location businesses. We have recently introduced several enhancements to our business owner platform, enabling easier management of leads on Yelp, along with a leads API that allows our enterprise clients to integrate Yelp leads into their own CRM systems and workflows. Additionally, we have developed a playbook for multi-location customers to leverage the Request-a-Quote system for the first time. We are aggressively pursuing this opportunity as we await a complete recovery. I want to emphasize that we are maintaining strong relationships, especially in the restaurant, retail, and other sectors, and feel confident we will be well-positioned when those markets rebound.

Great. Thank you guys.

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

Thanks. Good afternoon, everybody. Nice quarter, guys. Maybe just to follow-up a bit on the outlook provision for the second half and the decision to pare back on the paid project acquisition. Was there more of a general decision to favor profitability over growth given macro or other considerations? Or is it really just a reallocation of priorities? And I think related to that, I guess, if you're pleased with the levels of retention, do you have confidence that other ways of engaging consumers and service providers will kind of give you that same level of, I guess, lifetime value? Thank you.

Hi, Colin, it's David. I'll answer the first part of that. On the outlook, the decision around paid search was very much independent of the overall profitability that we saw in the second quarter and the outlook for the year, and the impact of what's happening to RR&O on revenue. So, they're actually very separate. I want to underscore that we think that we continue to become even more efficient. And so we are driving that underlying profitability and that's what put us in a position to raise the guide for the full year. And then when we think about the LTV of these, the opportunity with advertisers, we, as Jeremy said, are really looking for the folks who are going to be most responsive. And there's work to do in order to ensure that we're actually funneling those leads directly to the advertisers that are most responsive. And what we did see was that folks who are unreviewed or only have a few reviews, they do respond when they get those leads. So, we're directing it there, but there's more work to do. We're going to keep you posted. We'll come back, obviously, on the Q3 call to provide the next update, and we're going to continue to refine it.

Okay. Thanks, David.

Your next question comes from the line of Sergio Segura with KeyBanc. Your line is open.

Thank you for taking my questions. I wanted to revisit the weakness in RR&O that you experienced this quarter. The shareholder letter attributes competition from food delivery as a secondary reason for this weakness. Considering the strong results reported by food delivery platforms this quarter, what makes you confident that competition is a more significant factor than the challenges you’re facing within that category?

Thanks, Sergio. I can take that. This is Jed. Certainly at the margins, there are some pressures from the delivery ad platforms. But our belief is it is largely macro. And in talking to customers, their posture in light of what's happening to the consumer these days and spending habits, and what is a volatile outlook for the second half of the year, then it largely falls in the camp of macro. That's not to say there's not a marginal competitive dynamic coming in from these delivery ad platforms. A lot of that had been baked in kind of from prior years as consumer behavior changed.

Understood. And then maybe a second one. I was hoping if you could just talk about the EBITDA outperformance for the quarter, that came in nicely above the outlook you gave. So just wondering what was the primary driver behind that or what was different versus your initial outlook? Was it more finding efficiencies in the business or just a shift in investment spend to the second half? Just any color behind the EBITDA outperformance for the quarter would be helpful. Thanks.

Thanks for the question. In the second quarter, we observed increased efficiency in our marketing expenditures. While we invested $12 million in paid search along with other marketing expenses, we managed to enhance the results we were achieving. This leverage was a significant factor. Additionally, we had more projects that we could capitalize under our capitalized software development, which contributed positively as well. There were also typical fluctuations in forecasting related to areas like healthcare that turned out to be favorable. When you consider these aspects, it reinforces my earlier point that we are becoming increasingly efficient as a business. To clarify my earlier response, the reduction of $5 million from our previous expectation of $40 million in spending for 2024 down to $35 million also plays a role in the higher EBITDA, although these decisions are quite independent. Ultimately, we see ourselves consistently improving our ability to deliver on our roadmap and meet our marketing targets. Considering all these factors, the 26% adjusted EBITDA in the second quarter serves as further evidence of the ongoing leverage we believe we are building in the business.

Understood. Thank you.

Your next question comes from the line of Josh Beck with Raymond James. Your line is open.

Thanks for taking the question. Maybe to go back to Eric's earlier question about generative AI, I'm kind of curious how you may dissect the data licensing benefit from just potential traffic. It certainly seems like, just with Perplexity, that you're featured quite heavily when it's local or review-oriented query. And I'm just wondering, which one of those two dimensions do you see as the most important? And a little bit related, we've got a pretty good idea of what the Apple intelligence system will look like with iPhone 16 and beyond. Does that kind of create any opportunity for you within the Apple ecosystem?

Hi, Josh, I'm happy to address those questions. When it comes to data licensing versus traffic, this is a longstanding topic for Yelp. We have a lot of different structures we've used before. The reality is that we possess very unique data that includes accurate information about local businesses, such as their attributes and hours, as well as detailed subjective information like ratings and reviews. For any AI players aiming to enhance local search experiences, we are a natural partner. While Google is also in the mix, they are competing against numerous others. This dynamic reinforces our position as a key source of information in the future. I see this as an exciting opportunity for us. There are various ways we can collaborate with potential partners, including providing APIs, which we already have and will continue to expand. For some experiences, it might make more sense to license data, which we already do in a range of non-AI applications. It's a promising landscape that is evolving rapidly, making it difficult to predict its full scope or impact. However, one thing we can agree on is that Yelp is an exceptional resource for local information and connecting people with businesses. If we remain the best channel for this type of information, we are well-positioned for developments in the AI sector. Regarding the question about Apple, we maintain a strong relationship with them, and our data is integrated into their Maps application. You may have noticed the recent addition of Request-a-Quote to Apple Maps, which is a positive development. As for their future plans, I can't say for certain. We are here as a resource for them, and we remain open to opportunities, but I can't comment on their specific direction in the AI domain.

Okay. Yes, I think we all await anxiously. And maybe more of a just financial framework question. EBITDA margins have kind of roughly been low to mid-20s for the last three to four years. Is that somewhat of a line that you would look to hold depending on various macro scenarios as we think about '25? And then just anything else that we need to be mindful of in terms of trends as we're thinking about key factors for growth next year?

Josh, thanks for the question. And obviously, we'll have a lot more to share when we get to the Q4 call next year. But fundamentally, I just want to underscore again, we think that a product-led strategy will enable us to deliver margin leverage over time. And I'd say over the past several years, margins actually have increased. And then, what we have done is taken the opportunity, as we were doing with paid search, to invest in the business. So, we're always looking at ways to drive top-line performance. And a theme for us most definitely has been tapping into all of this off-Yelp traffic, whether it's through paid search, whether it's through syndication on sites like Facebook, and whether it's monetizing our own audience of off-Yelp through something like Yelp Audiences. So we're going to continue to look for those opportunities and we're very disciplined. If we think there's an ROI to be had, then we're going to make that incremental investment. But again, what we have been able to do over the past number of years is to continue to drive margins up and take time along the way to continue to invest in the business. So, the whole time we've been talking about profitable growth, our commitment is to deliver long-term profitable growth. And we're always evaluating the best way to run the business that takes into account the trade-offs between top-line growth and delivering EBITDA. That's something that we'll continue to do and we'll look forward to sharing more about '24 when we get there, I mean, excuse me, for '25 when we get there.

Super helpful. Thank you both.

Our next question comes from the line of Dion Lee with Evercore. Your line is open.

Great. Thanks for taking the question. First, I have a just to follow-up on the AI search again for the, you mentioned Perplexity. But maybe at a high level, do you have a sense of whether the traffic through these AI search engines have better conversion or higher intent? If you can just kind of share any color around what you've seen in user behavior around Yelp content and then AI search context?

This is Jeremy, I can take that one. Again, I think AI search represents an exciting opportunity for Yelp as a partner to the ecosystem that develops here. I think it's really too early to sort of describe the characteristics or know what it means. The players that are out there, Perplexity or otherwise, are all pretty small still. And if you step back and look at the overall search industry, it's still very much structured the same way it always has been, which is Google is completely dominant and an abusive monopoly as the court recently ruled. So unfortunately, that structure remains. How AI search develops and infuses competition is an interesting possibility. And I think antitrust could also play into that. So depending on how that all plays out, that could breathe oxygen into the environment and create a lot of new and interesting competitors for Google.

Got it. And second question, just on ad pricing. If you can parse out the CPC trends for services and RR&O separately, I'm assuming that you're seeing more pricing pressure on RR&O side, if you can double click on that. And also, just given the improvement you've made in the ad tech stack, should we expect this to be reflected in ad pricing improvement maybe to counter or to offset some of the macro pressure as you're able to drive greater ROAs from the ad stack improvement? Thank you.

Thanks for the question. Just zooming out for one second if I can. We have built an auction system for matching consumers with advertisers. That auction system takes into account a very large number of parameters. And what we're really doing is finding the market clearing price at a moment in time for that visitor in the category they're searching for, in the geography at that time of the year. And what we're always striving to do is to get better and better at doing that matching. And fundamentally what we believe is that when we do that well, we drive incremental value to the advertisers in terms of cost per lead, and we drive incremental value to the consumer in the form of relevance. So, the trends over the past several quarters has been around the same level of growth, which is 9% click growth with about flat CPC growth. Now, I just want to underscore, we did see real strength in growth in clicks in the second half of next year. So, over the coming two quarters, we do expect that CPCs will moderate and that is to go up a few percentage points. Click growth will come down a few percentage points. But obviously, it's clicks time CPC, and that's what supports the guide that we've given you. Now, what are the things that we're concerned with in terms of being able to continue to deliver value with continuing to also deliver on the revenue targets? That is where we're always trying to drive, and again I just want to underscore, cost per lead. If we have a more relevant lead, then we do believe that advertisers would be willing to pay more on a cost-per-click basis. So, that's something that we track very closely. It's something that we've been able to do in the past. And we do have quite a robust roadmap to continue to drive improvements in the ad tech stack.

Thank you very much.

Your next question comes from Georgia Anderson with Wolfe Research. Your line is open.

Hi, I'm standing in for Shweta Khajuria, and I have a question regarding your full-year guidance. What gives you the confidence to raise EBITDA by $10 million? Additionally, how do you plan to address the weakness in RR&O that we've discussed?

Thanks for the question, Georgia. Fundamentally, there are a couple of things that are happening simultaneously that do give us the confidence to be able to raise the EBITDA guide. The first is, again, notwithstanding the fact that we have spent $12 million on paid search in the second quarter and still have, so that's $90 million in the first half, we've revised our estimate to $35 million. So even as we spend $60 million in the second half, we believe that the improvements that we've been able to make to the way that we build our advertising programs, that those will persist. And there's something I did want to underscore that's very important about our broad effort around paid search, something that we've said in the past which is, as we have built out our capability to purchase leads at scale, and as we've worked to do that efficiently and generate a ROAs, we've made numerous improvements to the site from the experience, whether it's new account creation, magic links for login, the way that we buy those ads, the landing pages that we land folks to, we're now embarked on improving the way that we direct those leads. That has benefit not just for paid search around consumer acquisition, but more broadly, all of the marketing that we're doing in paid search, for instance, around business acquisition. And then broadly enabling consumers to use Yelp in a more seamless way. It also rolls over to the Request-a-Quote side where we've continued to make improvements. So, you take this focus on continuous improvement, you combine it with very, very strong discipline around incremental spend, and we feel that that supports, obviously, the guide that we've provided for the second half of the year.

That's helpful. Thank you.

This concludes the question-and-answer session and concludes today's conference call. Thank you for joining. You may now disconnect your lines.