Q2 2023 Yelp Inc Earnings Call

Hello, and welcome to the Yelp second quarter 'twenty twenty-three earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad.

I will now turn the conference over to Mr. James Milam, Senior Vice President Finance and Investor Relations. Please go ahead afternoon, everyone and thanks for joining us on Yelps second quarter 2023 earnings Conference call.

Joining me today are yelps, Chief Executive Officer, Jeremy Stoppelman Chief.

Chief Financial Officer, David <unk>, and Chief operating Officer, Chad Bachman.

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.

All 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 on fire.

<unk> 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 delivered a number of record results in the second quarter, a testament to our increased product velocity and consistent execution across the company. We grew net revenue by 13% year over year to a record $337 million, representing the ninth consecutive quarter of double digit growth.

We delivered this performance while also expanding net income margin and adjusted EBITDA margin by two percentage points each from the prior year period.

Yelps elevated pace of product innovation continues to strengthen the company for the long term in the second quarter, we leaned into our roadmap to deliver value to advertisers as a result businesses spent more on yelp than ever before across categories advertising revenue from services businesses increased 15% year over year with approximately two.

25% year over year growth in the home services category advertising revenue from restaurants retail and other businesses increased by 11% year over year.

Our portfolio is down funnel AD products continued to resonate with SMB and multi location advertisers and we made progress against our initiatives to drive sales through our most efficient channels.

Self serving multilocation maintained their strong year over year growth rates of approximately 25% and 15% respectively. As a result these channels together accounted for the majority of our advertising revenue at 51% for the first time.

Turning to product AI continues to present, new opportunities to enhance the product experience for consumers and advertisers alike.

After upgrading our infrastructure over the past year, we've been able to leverage neural networks to determine the most useful content to display to consumers on the home feed as well as to provide them with better targeted AD, which improve the overall performance of our AD system with a robust pipeline of projects for the remainder of 2023 and beyond I continue.

To be excited about the opportunities ahead in.

In summary, Yelp delivered another standout performance in the second quarter with faster revenue growth in many of our advertising peers.

Credibly proud of the execution demonstrated by the entire Yelp team, which has enabled us to deliver consistently strong results.

As we look ahead, we remain focused on growing revenue through our strong product pipeline and delivering shareholder value over the long term with that I'd like to turn it over to David.

Thanks, Jeremy second quarter net revenue increased by 13% year over year to $337 million $7 million above the high end of our outlook range. We were pleased to see the full amount of this outperformance flow through to the bottom line.

Net income increased by 84% year over year to $15 million.

Adjusted EBITDA increased by 25% year over year to $84 million $14 million above the high end of our outlook range and representing a 25% margin.

Topline growth was driven by an increase in average revenue per location, which reached a record level in the second quarter paying advertising locations were relatively flat.

One 1% year over year.

And services add revenue increased by 15% year over year to a record $200 million.

Primarily driven by growth in average revenue per location.

In restaurants retail and other AD revenue increased by 11% year over year to a record $122 million also driven by growth in average revenue per location.

In the second quarter, we delivered value to advertisers through high quality clicks and profitability in the year over year growth rates of our AD clicks and average CPC metrics compared to the first quarter.

I'd clicks were flat year over year, while average CPC increased by 14% year over year.

Turning to expenses.

Other than in general and administrative expenses, which included a onetime litigation settlement second quarter expenses decreased from the first quarter and were lower than expected due to a number of factors, including lower employee related expenses and marketing spend in addition, while employee attrition remains lower than anticipated total.

Count decreased slightly from the first quarter and we continue to anticipate that it will be approximately flat year over year by the end of 2023.

We also remained focused on enhancing the quality of adjusted EBITA by reducing stock based compensation as a percentage of revenue to less than 8% by the end of 2025.

To reach our target we are focusing our product development and hiring efforts outside of the United States, particularly in the UK and Canada as well as adjusting our overall mix of compensation throughout the organization.

Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy.

In the second quarter, we repurchased $50 million worth of shares at an average purchase price of $31 98.

As of June 32023, we had $182 million remaining under our existing share repurchase authorization.

We plan to continue repurchasing shares throughout the remainder of the year subject to market and economic conditions.

Turning to our outlook.

Now halfway through the year, we are narrowing our outlook ranges for revenue and adjusted EBITDA. We expect net revenue will increase from the second quarter to be in the range of $337 million to $342 million in the third quarter for.

For the full year, we are raising our outlook range and now expect net revenue to be in the range of $1 three $2 billion to $1 $33 billion, reflecting a $20 million increase at the midpoint compared to our previous outlook.

Turning to margin, we expect third quarter expenses will be approximately flat compared to second quarter expenses, excluding the litigation settlement.

As a result, we anticipate adjusted EBITDA will be in the range of $84 million to $89 million.

The full year, we now expect adjusted EBITDA will be in the range of $310 million to $320 million, an increase of $15 million at the midpoint compared to our previous outlook and.

In closing with nine sequential quarters of double digit revenue growth <unk> second quarter results demonstrate our ability to sustain topline growth, while delivering healthy profitability or product velocity across our strategic initiatives support the durability of our business amid continued background uncertainties as we look to the second half of the year.

We remain focused on executing against our strategic priorities and product roadmap with that operator, Please open up the line for questions.

Thank you if you have a question. Please press star one on your telephone keypad. If you have queued up and want to withdraw your question simply press Star one again.

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

Thanks, So much for taking the question wanted to come back to your comments on the optimization of both star surfacing content for the platform as well as AD targeting overall is where we've either qualitatively or quantitatively talk to us about the momentum you might people to build around the company looking out through the end of this year and into next.

With respect to how under optimize the platform might be and elements like this could could move you in a very different direction in terms of revenue reacceleration that would be number one and then just wanted to make sure I can understand the characterization of the way the implied Q4 revenue tracks as their elements of tougher comps or conservatism.

That might be implied in the implied Q4 revenue against your full year, just want to make sure we understand a little bit about the trajectory through the end of the year. Thanks, So much.

Hi, Eric.

Thanks for the question I'll take maybe the first half and David can hop in for your second question there.

So the AD tech stack and AD targeting in general has been incredibly deep well for us we've been executing in this area for years and years and we continue to have a super expensive portfolio of projects to tackle to improve our efficiency, there and our AD matching.

So there is absolutely no slowing down.

We talked about how we put in place the infrastructure that allowed us to upgrade our matching algorithm using neural nets.

Proved to be a positive in the quarter. It also besides helping with AD ranking we also enhanced the photo selection in our ads leveraging neural nets as well.

If you look across the entire category of these advanced technologies and the AI steer you also have allo Ams, we talked a lot about our initial efforts with <unk> last quarter. We continue to see a lot of green shoots and opportunities there to leverage all of <unk> of course are really great at summarizing content.

Taking a quarry for instance in expanding across all of the possible <unk> and so we have a very concerted effort within yelp to leverage that to the maximum possible. So we are running full speed ahead, we anticipate that there will continue to be great impactful optimization opportunities on the ad side.

Also not limited impacts are not just limited to the AD side Theres also impacts on the consumer side, we had a win with our home feed which is on the app.

Where we were able to.

Choose a better ranking as well using neural nets.

So that was a positive that resulted in better user retention. So that was great to see and then finally, we talked a little bit about this last quarter I think they are.

<unk> opportunities with <unk> to do things that before were really difficult and expensive and may have involve humans things like summarizing what's on a page. So you'd think about we have a business theres lots of great reviews, but maybe you just want to get to the essence of the gist of like what does the review say, what's this business really about what are they offering and we're able to do that.

<unk>. So that's another example, where just now.

Now that we have the technology boom you get an upgrade.

So maybe handing off to David on the second part here.

Hi, Eric So obviously, we saw strong momentum through the second quarter, 13% growth on top of 13% growth in the first quarter.

And obviously for the guide we are able to raise the full year.

While we are all seeing very encouraging macroeconomic data over the past couple of weeks, whether it's inflation or the GDP number for the second quarter consumer sentiment sentiment.

There are still uncertainties as we go through the rest of the year and as usual whenever we're providing guidance.

We wanted to take those risks and uncertainties into account for how we expect to perform through the remainder of the year.

Thanks, so much.

Your next question comes from the line of Justin Patterson with Keybanc. Your line is open.

Great. Thank you this is Joe on for Justin <unk>.

Two questions first on just the use of consumer demand and engagement on Yelp right now in the letter you noted that clicks were flat for the quarter and 10% decrease in request a quote.

So just wondering how you are seeing.

Demand and engagement on our platform and then relatedly to that just how consumers are interacting with some of the new features that you guys rolled out earlier this year.

And then the second question around services monetization it looks like that's been driven by improved matching.

So is there any way to quantify how much matching has improved or just maybe some color on how the workflow has improved for service providers due to that matching.

Thank you.

Hi, Sergio I think I can try and handle both your questions here. So on the consumer on the consumer demand side I would characterize as continued steady.

Much like last quarter.

We have pivoted a lot of resources in the past year over to the consumer side, and we see a lot of white space opportunity and some early signs of success contributions are.

And so we're happy to see that we continue to make improvements like we talked.

In the letter and I just mentioned earlier some of the home feed improvements we've got that are showing user retention.

<unk> improvements so the projects are launching we're seeing impacts of course, theres a backdrop here of a little bit of a headwind from macro but.

I think what we're seeing.

Well, we've got we've had a bit of a headwind with macro but what we're seeing is the economy I think the consensus is thats actually.

Improving and say what are the headwinds.

It is now potentially a tailwind and so between that and some of the investments and things were shipping on the consumer side I think there's a lot of opportunity ahead in terms of consumer demand.

Switching gears to the second question you had there.

On services monetization, we continue to chip away and make improvements to our AD Tech stack. That's been a winner for us for a number of years continue to execute well there.

And in fact, if you add click side and services, we were up year over year in Q2, So that was great to see with request a quote we continue to invest deeply there we highlighted in the letter.

We're masking phone numbers so.

We're able to capture phone numbers from consumers to the extent they are willing to volunteer it in hand, that's where advertisers, which improves the quality of the lead.

And so while there was some softness there has been softness for a while in.

In terms of project volume the quality of those leads remains strong and in fact, we're doing things to boost the quality of those leads and I think when you look at look forward into or you look into home services revenue you can see the power of that quality, which was 25% year over year revenue growth.

And so advertisers are clearly seeing value I think at this time with those macro headwinds maybe business has been a little slow for a lot of folks and they've looked better out there looking for what are the best ROI positive opportunities to invest their hard earned dollars and clearly they are turning to yelp.

Great to see.

Your next question comes from the line of Jason <unk> with Craig Hallum. Your line is open.

Great. Thank you guys I just wanted to dissect AD revenue in terms of clicks and CPC.

Quick have been relatively flat recently, but.

<unk> grown a lot curious if you think theres any upward limits there or have you can continue to grow CPC is going forward.

Hey, Jason its David So maybe just on clicks and CPC is if I can step back for one moment.

Importantly, when advertisers come to Yelp, they provide us with budget and then it's up to us to optimize that budget on their behalf. The way we do that is by running an auction and we're really looking to find the market claim price at that time for that visit are in that category.

In that geography, and so we are not.

I'm trying to determine the CPC or the clicks were actually really using all of the machine learning tools that had been built into the AD tech stack and that Jeremy talked about to optimize the deployment of that budget.

That being said one of the things that is very important is that we are delivering valuable leads to advertisers and we believe that we have been able to.

To continue to increase the value of those leads that are being provided to advertisers.

Other ways that we assess that is whether revenue per paying advertising locations has been increasing.

We did reach a record overall in the second quarter, and particularly revenue per paying advertising locations and services reached a record in the second quarter. Our belief is that as we can continue to deliver valuable it does provide meaningful headroom on CPC, but again I just want to under.

Score, we don't per se try to set the CPC, we're trying to optimize the best way to deliver value to the advertiser gift their budget.

Perfect. Thanks for the clarification.

In the letter you also highlighted positive early results from Yelp guaranteed.

The nationwide rollout just wondering if you can unpack those early returns and what you saw during testing.

Hi, there I'm happy to touch on Yelp guaranteed as of today, we are nationwide. So that's some exciting updates to come on to provide an annual guaranteed we are proud to have that rolled out and the early results showed an increase in <unk>.

<unk> submissions as well as add thanks. So this is built on top of request a quote.

I think the way to think about it is it's part of our continued investment in request a quote which provides really great consumer experience puts consumers in touch.

With multiple pros allows them to start conversations consumer can provide the information that they feel is necessary on the project side as well as their own contact information. We also had a phone number I'm asking launch in the quarter, we highlighted that in the letters that maintains the consumer's privacy, but provide something that we know is really important to present love.

Getting that phone numbers and that they can try to to pitch on the phone pitch life. They all feel that they have strong sales skills and we want to give them the opportunity to close that business. So we continue to invest significantly in request a quote and yelp guaranteed I think is a great demonstration of that commitment.

Thank you.

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

Thanks, guys. Good afternoon, congrats on a really good quarter, maybe just following up on that on request a quote just kind of looking at the trends sequentially.

And perhaps wondering what what you guys may be focused on in terms of in terms of driving more velocity there.

And then on the audience network.

Just curious if that has a larger influence on the business.

What are your thoughts there on the go to market strategy is this something that you want to invest in more maybe dedicate sales to that or.

What's the approach thank you.

Hey, Colin this is Jeremy I think again tackle the first one here on request a quote and services trends generally.

Stepping back and looking at the performance in the quarter pretty fantastic, 15% year over year revenue growth on services, 25% year over year revenue growth in home services really it appears like Yelp is taking share.

So we're very excited to see that AD clicks and services were up year over year in Q2.

So from that perspective, the pie is growing I think if you look at macro you can see there has been headwinds.

Consumer Hasnt been.

As bold as they were in 2021 early half of 2022, but still I think the overall performance for Yelp is incredibly strong in the face of that and as we look out in the second half I think the consensus view is that the economy is improving.

And the consumer is in decent shape, and so that that could take a headwind it and turn it into the tailwind.

Hey, Collin. This is David maybe just to clarify on audience network did you mean, yelp audience or perhaps you're referring to.

Cm marketing just wanted to make sure we understood what you were asking.

Yes, the yelp audience.

And so.

Great Hi, Colin this is Jed I can take that one.

Overall, we were really pleased with the progress that we've made on <unk>.

With Yelp audiences. This is largely an incremental product that if you look back a couple of years. It was at a $15 million run rate and we moved to a $30 million run rate last year, approximately and approximately a $45 million run rate this year.

For location based businesses.

Blended into what they're already buying hand allows us to expand wallet share within our existing book of business and to that extent, we have the go to market team in place and we've actually built it up over the over the past year and continue to see.

Kind of further penetration there.

One of the things, we also talked about particularly with that Multilocation Chan.

Channel is that we have a kind of an agency development team know.

That we've grown whose job it is to kind of get out there to the traditional Madison Avenue advertising agencies and do two things number one to educate them on what is more a more broad a product strategy with a multi location and as we've kind of release product. It's important that we're in front of those agencies and number two take out some of the friction involved in those purchases.

I E Master service agreements in some cases and really understanding how those agencies work.

And that really helps on not only the location based businesses, but on the brand side.

It's still early but we're pleased with with the growth that we've seen particularly in the current macro environment for brands and especially when compared to the performance by some of our peers on the brand side.

We are encouraged by the signals that we're getting out of yelp audiences and we'll continue to invest going forward.

Thank you.

Yeah.

Your next question comes from the line of Stan <unk> with Wells Fargo. Your line is open.

Hi, Thanks for taking my question.

I guess first of all.

Just on their latest productivity initiatives.

Which do you think the lowest hanging fruit, there and which they expect.

One dose to provide the most growth opportunities.

Hi, there.

Dan This is Jeremy.

So looking at a graph, we see a lot of opportunity ahead of us both in the short term and long term.

We're at nine consecutive quarters now of double digit revenue growth, we've really been leaning into our product led strategy for some time now and I think it's clear it's working.

Self serve and multi location for the first time with 51% the majority of our revenues. So we feel really good about that leaning into self serve and multi location channel has been a big part of our strategy continues to be a big part of our strategy in terms of where do we continue to get.

Low hanging fruit and a lot of leverage it's back to some of the topics that we.

There are earlier on the call like our AD Tech innovation.

Our own AD Tech stack.

With the addition of LLM capabilities as well as neural net capabilities, which we highlighted in the letter.

This quarter, we continue to make improvements in the efficiency of our algorithms and the more efficient that we make our matching algorithms that essentially generate inventory for advertisers that are thinner because we're just wasting less inventory because we know what the consumer is really looking for we're matching them with a better provider of the consumer is actually getting better experienced Macquarie.

The lead goes up so it's a really positive feedback loop to the extent that we continue to find wins there and again are our portfolio in the AD Tech side is strong and we're not running out of ideas, we're not sort of scraping the bottom of the barrel, it's a deep well and we're going to keep going for it and we also have some exciting opportunities off the <unk>.

Judges touched on Yelp audiences, that's a newer exciting area for us we highlighted on the last call SCM.

As a big opportunity that's hanging out there is not something that we really pursued but we know there is the public companies that rely on SCM leaves.

The services sector.

That's an area, we haven't even participated in and so when we look at request a quote and yelp guaranteed in some of our investments there that's all building towards tapping into that.

Two the SCN paid leads which we think provides another yet another avenue for growth, it's not the only one but it's an exciting one for us to tap into as well.

Request, a quote side, we continue to make great strides and we've got obviously, the yelp guaranteed improvement to highlight as well as fund number I'm asking is just yet another improvement last quarter. There was taking friction out of the flow and streamlining the consumer log in experience as well as the business owner site experience.

And then on the consumer side, there's plenty of opportunity we continue to improve contributions and the contribution flows. We're now getting in twice as many video contributions as we were.

Now that we incorporated video into our review contribution flow for example, and finally, we talked about in the letter our home feed improvements.

We just released that improved user engagement.

Kind of a quick tour around all the areas, we're investing in but from my perspective, there is a lot and there's a lot of different paths towards growth, which gives us confidence in the long term.

Alright, great. Thank you.

Once again, ladies and gentlemen, if you have a question or a follow up question. It is star one on your telephone keypad.

Your next question comes from the line of Suita Cava.

Julia with Evercore ISI your line is open.

Thanks for taking my question I guess and then thanks for that summary, Jeremy that was that was well put.

I guess my follow up is on multi location. So how would you what is the low hanging fruit, there or maybe where do you see as the biggest opportunity. When you think about the product suite that yelp has today.

For multi location versus maybe where the.

The market is or where you were two years ago you are much.

Better in terms of the offerings, you have but where do you see the biggest opportunity.

Hi, <unk>. This is Jed I can I can start out.

Obviously, we're really pleased with the performance of multi location channel over the course of Q2.

It was up 15% year over year on a relatively tough comp from last year, it was actually up 15% quarter over quarter sequentially.

And the team is really performing kind of on the blocking and tackling side. We've obviously invested in the team along and I think it's kind of a world class team at this point.

And we're able to kind of tackle it at all ends of the spectrum ie directly to client in the mid market section.

And the mid market channel and the partner channel in the enterprise channel as well and those relationships continue to be deeper and deeper as time goes by we highlighted yelp audiences.

A growth driver for both location based customers as well as brand advertisers that we've never been all of the kind of access before also made a ton of improvements kind of on the UI of the ads.

Multilocation advertisers have a different need than a lot of cases than some of the local.

And so and versus some of the local advertisers and really making sure that we continue to innovate on the product side in terms of what those advertisers are looking for at the at the <unk>.

In terms of our larger customers.

And overall, we do have a.

Another area I would just highlight that we continue to be.

On top of his attribution clearly in the Multilocation.

Channel attribution becomes really important and particularly in the economic environment that we're in.

Folks want to know that Theyre getting ROI on their advertising and we're able to show that through various in various ways off Yelp attribution.

It is important but we also have <unk>, which is our yelp store visits which has really come into its own over the last few years and I think it's a real asset of Yelp that we have our own first party data.

And are not completely reliant on third parties in order to kind of show the efficacy of our ads.

And in general obviously, there's a lot of spend that goes through that channel and we feel like we're well positioned to kind of take that as we go forward.

Okay. Thanks, Chad.

Your next question comes from the line of John Kelly.

Kaelin Kimani of Jefferies. Your line is open.

Hi, there this is Chris on for John Thanks for taking our question. So you've called out macro uncertainty a few times in the shareholder letter could you just unpack that in a little more detail for us maybe talk about what you're specifically seeing and kind of how you measure the impact on Easter.

Each of your segments, maybe the staffing services versus our ROE and is it kind of fair to say those macro headwinds might be society with it. Thank.

Thank you.

Okay.

Chris Thanks for the question on the on the macro side, it's obviously paying a complex it's been very hard.

Sure.

Looks broadly to forecast where.

We think we will land clearly we have seen in the U S economy, holding up very nicely and I just wanted to underscore in particular, when we look on the SMB side in the second quarter, we did broadly see strengthen advertising demand. Obviously, we're pleased with our ability to generate that but I just want to underscore.

In SMB, we saw strength in advertising demand and because we support the local economy. We think that we're very well placed obviously to help local advertisers SMB business is to reach consumers and they have proven durable in both their business and in their demand for advertising.

So that's definitely a strength that we've been seeing in terms of the overall economy and how it may play out in the coming months.

Hi.

Unfortunately, I am not sure we have more insights than everybody else's paying so much attention to this but I just want to underscore that we think that our focus on executing.

Round delivering value.

<unk> is what has enabled us to perform.

Among the best companies of our peers and you just look at Q2 for US we delivered 13% growth.

And we delivered 25% adjusted EBITA margin Thats, a two percentage point improvement. There. So we were really pleased with our ability to obviously stay focused on the things that are our control and that's where we're going to do through the rest of the year.

Great. Thanks, so much.

Yeah.

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

Yeah.

Yeah.

Yeah.