Q2 2020 Yelp Inc Earnings Call

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Good day and welcome to the second quarter 2020 earnings Conference call.

This time, all participants are any listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one of your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

I'd now like to turn the conference over to genes Mill, Vice President of financial planning and analysis. Please go ahead.

Good afternoon, everyone and thanks for joining us on Yelps second quarter earnings Conference call.

Joining me today, a yelps CEO, Jeremy Stoppelman, CFA, David Schwartzbach, and see right Jed Nachman.

We publish a shareholder letter on our Investor Relations website, and we'd be FCC about an hour ago I'd hope everyone had a chance to read it.

Well provide some brief opening comments and then tend to your questions.

Now I'll read our safe Harbor statement.

Well 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 affect our opinions only as of today to this coal.

We undertake no obligation to revise or publicly released the results of any revision to these forward looking statements in light of new information well 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 a shareholder letter for more detailed description the risk factors that may affect our results.

During our call today, well 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 <unk> filings with the FCC each of which is posted on our website you will find additional disclosures regarding these non-GAAP financial measures as well as historical reconciliations of GAAP net income to both adjusted EBITDA and adjusted EBITDA margin.

And with that I will turn the call over to Jeremy.

Thanks, James and welcome everyone.

Our second quarter results demonstrated the resilience of our business in spite of the significant headwinds faced by local economies. Following the emergence of cobot Nike.

Yelps diversified mix categories geographies sales channels helped us adapt to the rapidly changing environment, resulting in our traffic and revenue improving over the quarter I.

I'm proud of the speed and confidence with which our teams confronted one of the most challenging periods in our history.

Due to our disciplined actions on expenses in the pace of uncertainty coupled with solid revenue performance, we added $35 million in cash and cash equivalents to our balance sheet.

Well, we began the quarter with it significantly smaller workforce operating in a fully remote environment. We adapted our product efforts in operations to support our users connecting with their favorite local businesses socially distant world.

We provided new tools for local businesses to connect with their consumers, allowing them to post cousin messages to update their service offerings to include virtual option into list health and safety measures.

We also continued to make progress on important strategic initiatives, including on local services, which has long been our largest and often fastest growing category.

We continue to increase the percentage of monetized lead through additional improvements to our I'd system, including better matching and request a quote.

Revenue in the sub category home services grew slightly compared to the second quarter of 20 Nike.

We remain focused on him balding, our go to market to improve our sales efficiency overtime.

Throughout the quarter or local sales came in kinda consistent level of productivity, even while working remotely.

We also delivered a new profile product yelp logo and scaled our connect offering.

Our continued investment in self serve helped drive strong acquisition in the channel, which reached near record levels of advertising starts in June.

Does the pace of economic recovery remains uncertain and will not be uniform.

I have confidence in our strong balance sheet and our proven ability to operate with flexibility in this environment.

This month, we were pleased to return many of our furloughed employees and restore overdue salaries for teams.

This sets us up well to reestablish our growth momentum and capture demand as the economy recovers.

With that I'd like to turn it over to David.

Thanks, Jeremy when we spoke to you back in May the economic outlook for local businesses was highly uncertain.

However in late May as local economies began to reopen consumers in local businesses were adapting to the new normal we saw both Tropicana CPC advertising budgets begins to recover in June we continue to see steady improvement in AD budgets and retention benefiting from a strong laid over time from customers who had missed.

I do believe in April and May.

We ended the quarter with $169 million net revenue, a 32% decline compared to the same period last year and a net loss of $24 million.

In April we took several actions to reduce our operating cost to better position yelp to weather this unprecedented period, including the difficult decision to reduce our workforce.

Our actions contributed to a 71 million dollar reduction in operating expenses from the first quarter in line with the $70 million that we communicated in may.

Coupled with our solid performance in revenue, we delivered positive adjusted EBITDA of $11 million in the quarter and further strengthen our balance sheet, our cash balance rose from $491 million at the end of the first quarter the $526 million at the end of the second quarter principally through our policy.

It is operating cash flow and we'll release of restricted cash restructuring costs in the quarter were $3 million as a result of the restructuring plan announced on April nine.

Each one.

Though these costs include sevens payroll taxes and related benefit costs for workforce reduction affecting approximately 1000 employees.

Well, we exited the second quarter with increased confidence and an additional $35 million of cash on our balance sheet economic uncertainty remains high therefore in lieu of a formal business outlook. We are providing additional insight into reasons business trends as a result of improved business performance in June.

Putting a return of stem from many customers who is equally in April and May revenue in the month declined by 25% compared to June 2019.

Well, we are encouraged by our performance in June we saw a consumer demand begins to plateau in July as the recent resurgence of cold with 19 cases like many states the pause a reverse the stage reopening measures as we look ahead in the absence of a vaccine for effective therapeutics, we expect this.

He continued fluctuations in business openings and closures as communities respond to local outbreaks, which may impact the pace at which our revenue recovers our strong balance sheet gives us more flexibility even in a phase of this uncertainty on the cost side, we anticipate third quarter operating expenses mainly.

Chris I as much as $30 million compared to the second quarter. In addition to restoring reduce salaries. We are also returning furloughed employees to full time over a four month period ending in October many of whom are trained sales reps.

Ill also mindful of various uncertainties, including employee health care costs at our provision for doubtful accounts with that operator, please open up the line for questions.

At this time in order to ask a question craze Press star one on your telephone keypad.

And your first question comes from the line or should we need a contrarian from RBC capital markets. Your line is open.

Okay. Thank you I'll try to please first one is on locations declined 31% year over year could you provide a little bit more color on that so are these businesses that are shut down for good where I'd just close because it's called it a second on on location how.

Do you think is that recovery in terms of bringing dislocations back onto the platform Post go ahead and third on the under seems allocations question what percent of these businesses I loved allocation restaurant chains worth the locals SMB. Thank you.

Sweat a it's David Thanks, so much for your question. So in terms of the reduction in locations.

What we what we believe is the case is that a considerable number these will be temporary.

It's important to be mindful that over the course of the quarter. We did provide relief in many businesses and that relief took place across the entire three months when those businesses begin to stand with Yelp again that will they will show up again in pain advertising locations, but it's important to me.

Mindful that over the course of the.

Endemic and the impact on the economy. There are quite a few businesses that are not going to reopen but we don't have a great sense yet for that distribution even.

Even by category.

In terms of how do we think pain advertising locations will.

Recover over time, the pace of that recovery. We think is very much tied to the pace of the overall recovery and I think it is actually very important to consider that continuing fiscal support from the federal government is going to have a big impact.

So again, unfortunately, we wish that we had better insights over how will play out over the next several months, but one of the things that we did do through the release relief efforts is established stronger relationships with many of these business owners and they have a what we did see when.

That really was ending in the June timeframe that they did come back to us. So we feel good about where we positioned ourselves with those business owners in terms of local versus multi location percentage I will need to get back to you on that Jeremy.

I don't know if you want to comment a little bit how you see the longer term or.

Advertisement picture.

Sure.

Yeah, I would say what we saw is coming off of the bottom of the panic around the virus, we did see as markets reopened.

Recovery happening and so that's encouraging for the long term because as economic activity continues to pick up more widely.

You know we believe that we will also see activity on yelp picking up more widely and so while in the short term that means categories like restaurants are likely to in retail are likely to be more impacted home in local for instance has been quite robust and actually is an area, where we continue to put a lot of our investment even prior to.

The cobot pandemic. So we do feel optimistic the in long term, we'll see a robust recovery as the virus dates.

Okay. Thank you Jeremy Thank you David.

Sure thing.

Your next question comes from a line of Corey Carpenter from JP Morgan Your line is open.

Great. Thanks for the questions I am too. So so disappears I hope you can expand a bit on the trends you're seeing quarter to date, you mentioned in the shareholder letter traffic started to plateau in July but any additional color you could you could provide in terms of trends by vertical or geography would be helpful.

And then on the product side, you went through a number of initiatives in the latter I just curious how we should think about your key priorities and they math in the second half of the year. Thank you.

Sure Hi, Corey this is Jeremy I'm. So you know talking first about traffic trends as we saw <unk> as I mentioned on the previous question. We saw a you know some recovery as markets opened up a as there was more act economic activity people moved around more and so you know.

Well well that did slow as virus cases roads, we do think over the long term a that's a pandemic does ultimately got a under control we're going to continue to see a robust recovery of activity and then the airport traffic.

And then you know on the product side, we had been investing pretty heavily in home in local service isn't specifically things like request a quote.

Our I'd system, the increasing the percentage of monetize leads we continue to make progress on that front and we continue to roll out a you know new updates that are having impact a in addition, we mentioned in the letter you know some newer products that are showing considerable life. So for example, yelp connect.

Which allows businesses to push out updates to their page, but then there was also get sent out to former customers people that have expressed interest in their business and that's really resonating and thousands of businesses have start paying for that functionality, which we initially I gave as part of that the belief package. I was included as part of the believe package that we're doing it depends on a kit.

Also we recently rolled out Yelp logo, which is something that we had heard from our customers was really important to them to look professional to be able to brand themselves.

And put their logo front and center on their business stage than we've seen pretty pretty solid uptick as we've just launched that feature.

So needless to say, we've got a lot of capability in our product and engineering team is today a capability that we maintained a over this period and they continue to drive really innovative and paxil functionality for business owners and for helping people connect with great local businesses.

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

Hi, Thanks, very much good afternoon, everyone.

Within home services I'm wondering how much of the rebound in activity. There is reflective of people adjusting to work from home and.

And refurbishing their their home is more broadly which could be a bit transitory as offices reopen versus how much of that's related to specific product improvements like Jeremy the ones, maybe you mentioned.

That could have more of a sustainable impact longer term and then David with traffic Plateauing in July should we assume given the mix CPC that that's consistent with sort of the advertising revenue impact going if that's the case I'm just trying to put a finer point on what we might expect in Q.

Three if we assume June monthly revenue trends continue through the third quarter. It seems like the sequential improvement in revenues would roughly equal the increase in operating expenses. So wondering if that's a fair way too to assess the current situation. Thank you.

Hi call until there's a Jeremy I will take care of first question. There on a home services you know do we believe it's sustainable yeah, obviously, it's very hard to predict the future I had it in this kind of very unique situation on dependent but I would say you know within home services, there's a lot of different categories and while some of them.

Maybe optional a you know a building not new DAC, maybe optional or things like a getting yourself a you know back into your house. If you need a locksmith or are you know if your 12 o'clock, you've got to get that fixed and obviously people are spending a lot more time in their homes I think that is driving some of its a robust demand for.

Home services. So in my opinion I would say, yes, it's it's sustainable but time will tell and obviously, it's a very dynamic situation.

And just calling it's David to follow up on your second question a few thoughts there first of all one of the things that would be have.

Been very focused on is investing.

As we see the recovery pick up and so in terms of just starting with the operating expenses and acrylic folks that we bought back it's really our perspective that we want to be in a position to continue to participate in as Jeremy has really emphasize we want to participate in that demand around home services and the New York.

Sure.

But over the longer term that is the foundation for us to she revenue growth in terms of extrapolating from July revenue or from the.

Oh excuse me July traffic or problem that the improvement in revenue in June but again, we caution you and that's for a couple of reasons. The first is as you know traffic is important for us side through the matching algorithm.

There's a variety of adjustments that take place and so you can't.

Match, those one to one but in general what we did see and what we're very cautious about is that the upticking cases or has been obviously extremely widespread and so we as we think about the the this current quarter, but so the rest of the year we can.

Turning to believe that we will participate as caseload declines and as the overall economy recovers, but we're not yet prepared to provide a more specific view on July or Q3 performance.

Okay. That's all very helpful I guess.

Your next question comes from a line of my game from Goldman Sachs. Your line is open.

Hey, good afternoon. Thanks to the question I just have to first can you talk about how the composition of the sales or salesforce or the company may be different relative to prepare to Nick you know pull your salesforce be meaningfully more focused on multi location.

Versus individual small businesses and then the second question is.

Can you talk about your plans for ongoing relief and offering free advertising product in Q3 Q versus Twoq you.

I really appreciate you laying out.

Some of those numbers for the second quarter, well that turned into Recognizer paid revenue in the three core and then in the third quarter. Thank you.

Sure Hey, Mike This is Jeff I'll take the first one and then maybe David can jump on off for the second one I you know in terms of sales force composition. Obviously, we made a very difficult decision early on in the quarter two or they may be as late third quarter to to both furlough folks on the sales team as well as have some.

Permanent hi permanent reduction in force.

You know, where really a and and and by the way the team rallied and responded into a completely remote work environment and productivity within the local sales team.

Consistent with what we've seen in the past, we're really happy and proud of the team for for kind of turning on a dime on that one and based on the results that we saw in the second quarter, we felt comfortable bringing back our furloughed employees and you know that's it's a real advantage for US. These are trained employees, who kind of can come in and hit the ground running in our real assets.

We're yelp and we believe were correctly position right now to take advantage of the second half of the year and that the Salesforce is for what it's worth Rightsized, we're not going to comment on on kind of where we are in 21 as an example from a sales force perspective, but I will say that.

You know as even prior to the pandemic when we talked about reducing the salesforce over time to certainly accelerated that and we're going to continue to lean into the channels that are high leverage channels and those are self serve and the multi look opportunity, which both our you know really really important for the long term viability of yelp.

And <unk> and by the same token we're always going to need some version of a sales force there our local businesses out there that I need to be talk to I in order to kind of understand the products that we have we feel like we're coming to the are coming to the market. These days with a really nice suite of products. The addition of connect and the addition of logos.

Has been you know a real boon for folks to be able to talk about that on the phone and we're excited about kind of the future on those products. So you know the Bottomline is we feel evercore rightsized with the local salesforce today I will get a continued to invest in self serve and in the multi look business as well.

And hi, Mike just to talk a little bit about the leap.

We first and that was 25 million so far it's it's coming out at about 32 million.

And that split half and half between direct revenue really.

Oh, both on the AD side as well as on the restaurants outside and then paused or free products. So accounts that would be pause over this period of time or where we provided free products and.

Well, we expect is that there is a few million dollars more to go.

In Q3, principally around pause SaaS restaurant, the pause sascar msas restaurant product as you'd imagine obviously with some of the openings reversed and dine in being eliminated in some locales those restaurants don't have immediate need of the product.

What I do really want to underscore is that this investment overall has worked well for us and what we did see in June was where we had paused for customers are where we hit encouraged them to pause and set a restart the we were very pleased by the number of.

Advertisers, who came back to us and so if it's needed if we see a need in the market to further invest.

In that area, then we're not gonna hesitate to do that because we're seeing the ROI.

Great. Thanks, Chad Thanks, David.

Your next question comes from a line of Dan Salmon from BMO capital markets. Your line is open.

Hi, good afternoon, everyone. Thanks for taking a couple of questions first.

Self service as a channel home services as a category.

Both outperformers was there a there's some conversation to that correlation in other words that did did the home services category, particularly helped drive a self service would just be interested to hear about that and then second on multi location.

What I am trying to ask is if you think the pandemic has.

Helped or hurt your long term push there by which I mean.

You know many of those restaurants rebel to stay open pit that hit delivery to pick up a and focus on that have you been able to help them with that pivot such that you know the in a sense, maybe build back goodwill, where where maybe that that got pushed Kim.

Accelerated as things get back to normal I'd be interested to hear about that too. Thanks.

Hi, Dan is Jeremy I'll take a stab at the first on a weather self service and home services were connected.

I I'm not aware of a you know it.

Hey conversation between those two I think you know self service I. We did see you know healthy starts a you know near record levels of advertising starting June.

In some strength in that channel on the home services side, I mean, frankly, I think it's it's that consumer activity. That's that's driving a you know the strike or the robustness compared to other categories, which is just for people at home. There's a lot to be done there's a lot of wearing hair and so consumers are showing up at the demand is there and you know businesses.

There are happy to pick up that demand and so we're just in enabling successful matching and we've been investing and things like request a quote a in our advertising system to drive those leads a tour to no to our advertisers.

Yeah, and I can take the second one on Dan are you know in terms of multi look in how the pandemic as it is affecting that segment first of all obviously multi look as a whole is a very diverse segment.

We operate in all categories. When we think about things like restaurants, specifically, even there there is a kind of a a bifurcation in terms of the types of multi look restaurants. So you have your QSR and fast casual, which you know throughout the quarter were able to make it pretty fast pivot to pickup and delivery I you know our goals were to be there right.

Alongside with them and help them in any way kind of navigate that if we could drive help them drive that business on that was gonna be really important then you look at kind of the casual dining sector and we're fine dining sector and you know in in restaurant dining has obviously been hit really really really hard and so I would say, it's a combination of both in the near term.

Over the long term I you know I've been really impressed with you know how a lot of these multi location our restaurants have have I pivoted their business and and certainly we're not back to full steam yet in terms of folks dining out but this is not something they're taking casually in terms of you know and I suspect some of the trends that you see happening during the.

Pandemic will in fact continue past the pandemic once we get a therapeutic or or a vaccine in place.

But you know I think they're kind of taking it week by week and month by month is well I think one of the advantages that we have out right. Now you know kind of hitting that market is that we can be very local in terms of how people react it's not a national television campaign. That's gotta go out to everybody when somebody's when somebody's not I have.

And capability can serve people across the country. It. So you can pick markets, where the southeast and and as things are closing an opening they can get very specific around how their marketing out to those are those those segments. So.

Overall, we believe the tams there for restaurants going forward and that when we come out of this thing or we may even come out come out stronger but in the meantime, your we're still going to see some volatility in every restaurant operator is handling it a different ways and putting priorities on different things.

That's great. Thank you books.

Yes, again, if you would like to ask a question. Please press star one in your telephone. Your next question comes from a line of Elliott Alper from D.A. Davidson. Your line is open.

Great. Thank you similar to previous question, but as you look at some of the geography isn't are farther along in the phase of reopening what are you seeing as far as consumer Reengagement with Yelp as was the local businesses Reengagement Yelp.

I'm curious on any contracts and through the sales force and small business sentiment as it relates to continuing their partnerships with yelp and utilizing some of the free services offered and the corner. Thank you.

Hi, I'm. So on your first question there yeah, as we saw markets reopened and more economic activity pick up we did see.

Recoveries or you know the that were what I would characterize it fairly rapid is people left their houses and started transacting with local businesses.

So I see that as an encouraging sign that as things do ultimately get back to normal you kind of the medium term I suppose the virus gets control. The vaccine is here I do think that we will see a recovery along with that activity and that's that's kind of what we've seen on a market by market basis as more activity.

Picks up a you know more transactions are happening on Yelp more you know obviously more website visits for mobile app activity.

More requests for quotes all of those good things.

And I can take the engagement question you know overall I, you know, where we're really happy with the engagement of local businesses with you all product right now, albeit you know this is a very stressful time for local businesses and certainly we want to be an advocate for them and a partner along the way when you look at some of the statistics that we have in terms of folks taking it up.

Manager of covert related products as an example, I, it's really robust a you know we have over 650000 customized cobot 19 sections.

At the at the end of July you can imagine as a consumer today, it's a really and as a business owner. It's really important you have communication channels that are accurate up to date.

And folks really don't know in their day to day, which businesses are open how they're operating whether they're operating with health and safety measures in place.

And you know we think we provide a really key critical communication channel for those businesses and so you know sentiment as you imagine it's not exactly a happy non stressful time for local business owner. So I don't think people are on the phone jumping for joy about the situation that being said, there, there's a and appreciative sentiment and.

One of our goals throughout this entire processes to make sure that we're having relationships that that last well beyond just pandemic and that we're in a position to a recapture clients that potentially not spending now.

And and and also engage customers that have not used yelp and as a robust way our prior so we're pretty happy with engagements thus far.

Great appreciate it.

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

Yeah. Thanks for taking my question. This is Tom does it go for Brent.

Prefund Emeka high frequency categories like restaurants here is to drive traffic to your high value categories make services now does dynamic has changed compared to what can you do to increase traffic to the high end. It I mean, you got your go to seemed to kind of thing vitamins.

Hi, there are so yeah, we definitely have relied historically on the high frequency categories like restaurants to drive engagement and the good news is there still traffic there it hasn't gone to zero, but I think what what's particularly encouraging is even though you know over the long term we'd love.

And we will I think are we certainly believe we all see restaurant traffic back and robust or you know is the virus gets under control in the meantime, yeah, we have seen the home and local category our recover from the lows of kind of March and April and so it's not exactly a.

Restaurants have to be gang busters for us to have a solid business.

I think you can kind of see from the attraction that we've seen particularly in home services that people still do rely on yelp, obviously, they're coming to restaurants up but there are also coming to us for a whole host of other categories. We are quite diversified from a category standpoint, and that's resulted in a you know I'd say solid revenue and.

In the home services category, that's really in the business and is giving us the confidence frankly that never going to get through the the other end of this crisis and then ultimately be well positioned for recovery.

Oh I get it yeah. Thanks for the color.

Sure.

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

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