Q3 2023 Yelp Inc Earnings Call
Yeah.
Good afternoon, everyone and thanks for joining us on Yelps third quarter 2023 earnings conference call.
Joining me today are yelps, Chief Executive Officer, Jeremy Stoppelman, Chief Financial Officer, David was back and Chief operating Officer, Jack Northland.
Published the shareholder letter on our Investor Relations website, and with the SEC and hope everyone had a chance to read it.
We will provide some brief opening comments and then turn to your questions now.
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 opinion 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.
There are 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, 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 website you will find additional disclosures regarding these non-GAAP financial measures.
Well as historical reconciliations of GAAP net income 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, James and welcome everyone.
Delivered its 10th consecutive quarter of double digit revenue growth a testament to our product initiatives and consistent execution. We grew net revenue by 12% year over year to a record $345 million we.
This performance, while also expanding net income margin by 14 percentage points and adjusted EBITDA margin by four percentage points from the prior year period.
Profitable growth was generated across the business as our teams continue to innovate and execute against our product roadmap. This resulted in record advertising revenue in both of our broad categories services and restaurants retail and other.
Services was particularly strong with advertising revenue up 14% year over year led by approximately 20% year over year growth in home services at the same time, our Arnaud advertising revenue growth remained robust up 10% year over year.
With record advertising demand in the quarter, our efforts to deliver more value to advertisers has clearly resonated the.
The product improvements, we've made to enhance our AD formats and AD system drove more high quality clicks to our customers in the third quarter in fact AD clicks returned to year over year growth, increasing by 9% from the prior year period, a marked improvement from flat year over year growth in the second quarter at the same time year over year growth in average.
CPC moderated compared to the second quarter at 4%.
We also made progress against our initiatives to drive sales through our most efficient channels.
<unk> revenue increased by 25% year over year, while Multilocation revenue increased by 10% year over year at a combined 51% of advertising revenue, we continue to see significant opportunities to grow each channel in the years ahead.
In summary, Yelp delivered another great performance in the third quarter as our product led strategy continues to strengthen our business and our team executes against our plan, we have even more conviction in the durability of yelps consistent growth looking ahead, I continue to see tremendous opportunities for innovation and profitable growth.
<unk> focused on generating long term shareholder value with that I'd like to turn it over to David.
Thanks, Jeremy third quarter net revenue increased by 12% year over year to $345 million.
$3 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 539% year over year, the positive $58 million.
Presenting a 17% margin.
Adjusted EBITDA increased by 30% year over year to a record $96 million $7 million above the high end of our outlook range and representing a 28% margin.
<unk> line growth was driven by an increase in advertiser demand as reflected in record average revenue per location across categories.
Paying advertising locations were relatively flat compared to the second quarter of 2023.
Decreasing 2% year over year to 561000.
And services add revenue increased by 14% year over year to a record $206 million.
And our or no AD revenue increased by 10% year over year to a record $124 million.
Turning to expenses.
Third quarter expenses decreased from the second quarter and increased by 3% year over year.
As we stated previously we continue to expect head count will be approximately flat year over year by the end of 2023.
We also remain focused on enhancing the quality of adjusted EBITDA by reducing stock based compensation as a percentage of revenue, but less than 8% by the end of 2025.
In the third quarter, we increased adjusted EBITDA margin by four percentage points year over year to a record 28%, while SBC as a percentage of revenue remained flat, reflecting high quality incremental margin.
To reach our target we are focusing our product development 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.
As a result, we plan to shift a substantial portion of our equity compensation to cash compensation in 2024.
If we had made these compensation mix changes in 2023, SBC would have decreased by approximately $20 million in cash expense would have increased by the same amount.
Returning capital to shareholders through share repurchases.
It remains an important element of our overall capital allocation strategy.
In the third quarter, we repurchased $50 million worth of shares at an average purchase price of $41 eight.
As of September 32023, we had $132 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 following our strong Q3 results, we are raising our outlook range for the year. We now expect full year revenue will be in the range of 1.332 billion.
2133 7 billion.
Reflecting a $10 million increase at the midpoint compared to our previous outlook.
Turning to margin, we now expect adjusted EBITDA will be in the range of $319 million to $324 million for the full year.
Reflecting a $7 million increase at the midpoint compared to our previous outlook.
We currently estimate that our effective GAAP tax rate before discrete items for 2023 and beyond will be in the range of 22% to 26% as a result of recent guidance provided by the IRS.
In closing yelps third quarter results demonstrate our ability to sustain double digit revenue growth, while expanding margins amid continued macro uncertainties. Our product strategy has continued to strengthen the long term, giving us even greater confidence in our ability to drive long term profitable growth with that operator.
<unk>. Please open up the line for questions.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.
Yeah.
Your first question comes from the line of Jason <unk> of Craig Hallum.
Your line is open.
Perfect. Thank you guys.
So just in regards to the return to growth in clicks I'm curious.
Part of that due to the test budgets that you've started to deploy in SCM and then maybe if you can just talk a little bit more about what you saw as you deploy those <unk> budget and maybe what your expectations are as you spend more of their into Q4.
Hi, Jason This is Jeremy I'll take your question here.
We were really pleased.
To see clicks returned to growth up 9%.
Looking into the causes there there's a few things that we've been doing they're continuations of a team on the product side.
AD Tech has been an area, where we've been investing significantly and.
We noted in the letter.
Better pacing.
That contributed to creating additional inventory clicks, we have an improvement in the photos select your that Leverages AI.
We made some AD UX improvements to existing ad units.
And then on the consumer side, we also.
I have been working on the mobile website as well as desktop web saw some increased engagement from that.
So theres a number of things we've been doing.
To drive additional value to advertisers and they really paid off in the quarter. So we were delighted to see that.
I guess the second part of the question.
Okay go ahead sorry.
Or do you want me to talk about something else.
No go ahead go ahead.
Okay great.
Yeah, you mentioned SCM and how thats going obviously very early days.
Sort of getting things up and running and kind of the test budget phase I would say, it's going well so far but again early we are excited about this opportunity, especially as we look into 2024 and beyond there are companies that are predicated their entire business model on SCM, which is an area.
Within services that we've historically not played.
Yes.
Ben.
Driven entirely almost entirely by organic traffic and we think we'll continue to find a ton of value on the organic side, but we see an opportunity and part of that is our unique position.
Yelp is relevant to consumers on a daily basis.
Whereas some of the other players that are operating in this space.
Really they don't have an excuse to be talking to consumers. All the time, whereas yelp is broad across so many different categories and has such a strong brand recognition. So I think that gives us a unique take on this space.
That gives me even more excited about the growth opportunities I guess back to the original source of your question with legacy is that cm driving this click percentage I would say, it's not it's not a material contributor now.
Okay, that's very helpful.
Wanted to just ask a follow up on competition <unk>.
During the quarter, Google made some changes and started to restrict anonymous reviews. I think you guys have already done that for quite some time, but I'm. Just curious if you think that had any impact on consumer behavior.
Thanks for the question on that.
Certainly we see our.
Our content as a real advantage, we've always leaned into <unk>.
Turning to.
To have the most trusted local review content possible.
We've never allowed simple anonymous star ratings.
We found it frustrating frankly, the Google with its monopoly position would pretend like those of reviews and mislead consumers.
Certainly I see that as a positive sign in the industry that folks are waking up how important trust is and then I guess I would just point you to.
Ft FTC paper that came out that really highlighted how yelp has.
What we think is the best ratings and review system in the industry really balanced ratings across the different star levels.
And something that really differentiates us and I think consumers, especially now are.
Are waking up to the fact that not all content and not all rating systems are created equal we've always had that belief, but I think our belief that that is finally really paying off and leading more and more folks to understand that yelp is a standout when it comes to trust.
Thank you.
Your next question comes from the line of Eric Sheridan of Goldman Sachs. Your line is open.
Thanks, so much for taking the questions maybe two other services space, you've shown a lot of momentum in the services side of the revenue in the last couple of quarters, how should we think about the momentum in that business and the competitive landscape at aligning sort of investments behind growth against what you see as the potential or pool of opportunity set that sits in front of you.
Given the momentum as we exit this year and move into next year and services. Thank you.
Eric I think I can take that one as well.
Very happy with performance in the services space I guess I would just point folks to revenue up 14% year over year in services and then if you delve further into home services up 20%.
Year over year in Q3, so we feel really good about that I think from.
From our vantage point it feels like we're continuing to take market share from other players.
As far as what's driving that and how do we continue the momentum I think the product led innovation.
We launched Yelp guaranteed nationwide in Q3, that's going well and we have more category expansion coming through the ended the year here.
Request a quote.
We saw it buck the seasonal trend.
And we were seeing project volume up from Q2.
So that's great.
As we've talked about in recent quarters theres been other innovations that have really streamline things.
Improving the login flows taking a friction mass phone numbers.
This quarter, we introduced dynamic landing pages as part of part of our STM effort to tap into all of that inventory that is new to us that we think is going to be an additional element of our growth.
Going into 'twenty four.
I think between our organic traffic <unk> opportunity, our strong brand and our strong product execution I think we're really set up well for services growth.
Thank you.
Your next question comes from the line of Cory Carpenter of Jpmorgan. Your line is open.
Thank you I wanted to ask the self serving multilocation channels theres been a little bit of kind of keeping out of the growth of those two self serve 25% Multilocation. So Don could you just talk about the dynamics impacting those two categories.
And.
And then secondly, just on on macro.
Called out in the <unk> that you are incorporating macro uncertainties.
You could talk about what you are seeing in the macro landscape right now thank you.
Hi, Cory this is Jed I can take the first question.
In terms of channels.
We were pleased with the performance of both the self serve as well as multi look I guess starting on the multi log side. It grew at approximately 10%.
Healthy growth rate and more importantly, obviously that channel is made up of some sub channels as well.
With enterprise being.
Majority and the largest one there and in fact that business.
Saab.
In line performance with what we saw in Q2.
And those are our most sophisticated advertisers and so that demand continues to be very strong we did see some slight weakness in the mid market channel and we've identified some areas that we can take action on it has in fact begun to do so but overall, we're really pleased with kind of the demand out in the marketplace and the products are resonating with our most sophisticated adverse.
<unk> on the multi log side.
We continue to make progress on our attribution capabilities are off yelp audience.
Our off Yelp offerings.
Resonate in the marketplace new ad formats.
And ultimately when you look at folks in this type of macro economy. They want we're very down funnel way for them to spend money.
And receive quality leads so we're happy with where we are on the on the multi location side and of course, we have a deep product pipeline that we are looking forward to going down that path in the future in terms of self serve at that 25% growth year over year really really healthy now makes up about half of our acquisition.
For SMB.
And I have made it.
A host of product improvements there when you look at the conversion flows for both purchasing ads, claiming.
Claiming a business page on Yelp.
Recommending.
In product, but in product suggestions for folks to kind of drive more out of their self serve spend.
And then of course, we've also.
You use paid marketing in a really effective way and I have had opportunities to that to kind of drive a lot of growth on the self serve channel through that as well so they continue to.
Remain very core strategic pillars for us moving forward.
And.
I look forward to them.
To drive growth in the future.
Hey, Cory it's David just to follow up on the macro question.
First of all obviously super pleased with our performance in the third quarter.
Between 12% growth in the 28% adjusted EBITDA margin, which put us in a position to raise the guide to $30 32 to <unk> 37 on the topline.
$10 million above the midpoint of.
Our previous guide and on adjusted EBITDA 319 to $3 24, which is $7 million above the.
The midpoint of our previous guide for the year. So overall, obviously very pleased with that level of performance.
As usual whenever we give guidance we provided.
Into account the risks and uncertainties that we see on the revenue side.
The implied guide for the fourth quarter is $3 37 to $3 42, which is in line with the third quarter and on expenses implies 84 to 89, which is also in line with what we guided on the third quarter I do think it's important to underscore on the expense side that expenses can move around between quarters.
<unk>.
And there are certain items that have some volatility to them like vacation and health care expense. So we were we bought.
Bob.
Reflected that in the guidance that we've provided.
For the remainder of the year.
Your next question comes from the line of Sergio.
<unk> of Keybanc Your line is open.
Great. Thanks curious.
Any any commentary you would point to for the advertisers that.
Turned off the advertising spend in the quarter and then relatedly for the advertisers that remained on the platform and continue to increase their spend just how much runway do you see to continue capturing a greater percentage out there okay. Thanks.
Yes, I can take that one Sergio I believe youre, probably referring to.
Where we saw.
Detailed pals overall.
Due to a few multi low customers that did not spend in the third quarter I would say the profile of those customers is a lot of locations with not a lot of spin and we've been talking about this flight to quality in terms of our advertisers a quality revenue.
And as you can tell from the kind of wallet share gains.
With overall multi local rowing at 10% year over year, and the company growing at 12% year over year, and particularly in such an efficient manner with 28% EBITDA margins.
Those are that's kind of the profile of the folks who who did not advertise in the third quarter.
But we feel really.
Positive about kind of where we are moving forward.
From a power perspective, ultimately we are concentrating on both expanding the total number of paying advertising locations as well as continuing to drive wallet share.
And Thats reflected in our record average revenue per location that we saw in the quarter and I believe the second part of the.
Question was what do we see in terms of demand going forward. I mean, you know F&B right now demand is very strong.
We see it across our Repsol channel, we see it across our self serve channel.
We see across our most sophisticated enterprise customers. The product led strategy is really resonating with these customers.
And ultimately Yelp is in a pretty unique position to deliver highly targeted leads.
Across a broad base of businesses. So we feel feel like we're well positioned to capture growth going forward.
Great. Thank you.
Again, if you have a question you May press star one on your telephone Keypad. Your next question comes from the line of Schweda could urea.
Evercore Your line is open.
Okay. Thank you for taking my question.
Jeremy if you were to point to perhaps two to three specific product.
Or product features that you believe will drive meaningful top line growth next year in terms of sustainable double digit growth rate or potentially even acceleration, which ones would you point to that excite you the most and why.
Hi, Scott Thanks for the question.
As we look ahead here, there's a lot of things I think to be optimistic and excited about.
The first one.
Our consistent execution and the way that we operate these days.
We have annual planning process, we're just at the tail end of that it's gone incredibly well.
It generates sort of all the best ideas from.
<unk> engineering and everywhere else and then really tries to focus in on ROI.
We have limited resources. So we want to staff the very best most innovative projects that are going to help connect people with great local businesses and drive.
More value to our advertisers.
When.
And I look at what are the areas. The most obvious areas of continued.
Investment as well as excitement.
I have to point to of course add tech that's been the gift that keeps on giving.
All of the projects that we pretty much have invested in in that area have really paid off at a very high ROI area for us we continue to try and add staffing.
As the ideas bubble up so I think you'll see continued innovation there continue to impact.
And certainly you saw that this quarter.
With better pacing photos select or improvement as well as some AD UX innovation all worked to drive clicks up 9%.
<unk>, which was fantastic.
I think other areas.
Watch out for <unk>, it's still early days, we've already banked some wins, but I think there's a deep well there. We're just getting started and we have a lot of initiatives that will layer in <unk> all throughout the product as well as AD Tech.
Hopefully the business owner, helping on the consumer side as well.
We've got this new SCM area that we've been talking about there that we're excited about we launched dynamic landing pages. This quarter, that's tied to that.
There's a lot of work to do but we're already out there testing and we're excited about the early trends.
So we'll keep you posted on that and then finally I think there's still plenty of opportunity to innovate on the consumer side.
We just returned to investing there we.
Some impact.
Adding neural nets to the home feed we made some improvements on mobile web as well as desktop web and again that one is early days. So everywhere I look I see a lot of opportunity a lot of excitement and I see a team that's able to execute.
We've been really consistent now 10 quarters of double digit revenue growth.
And so we're not going to hold back we're going to try our best to keep the momentum going into 'twenty four and beyond.
Okay. That's helpful. If I could please ask a follow up question on that.
The.
Consumer side. The last point that you were making what is what are you looking for on that front is it engagement is it time spent is it.
At this point almost everybody in the U S. I would imagine knows about yellow button it probably has downloaded it so.
How often they come back what are some success metrics that you are.
Tracking.
Yes, certainly engagement as a component of that and we pointed to some success. There this quarter with home feed as well as mobile web and desktop web. We've also had a lot of wins on the contribution side driving more reviews, allowing consumers to attach additional content like photos and videos to their reviews, which is driven.
Contributions of those types.
So theres a number of different ways that you could look at it certainly.
The bigger the audience no more time span all of those are good things, but of course, you have to also think about the categories.
The types of activity.
<unk> is not a place where we just want you to check out.
Photos of your family or a cat stuck in a tree, it's very down funnel intent.
Driven where we might consumers that are trying to find the very best in their city are the important services to fix the need in their home and so we're going to continue to innovate on that I mean, I guess, one area that we didn't talk about.
Request a quote.
We've really been driving a lot of innovation there we added mass flow numbers, we improved the log in.
And we saw projects move up sequentially. So that's another area of excitement and frankly, its differentiated being able to have those conversations with trusted pros have yelp guaranteed.
Backing the interaction and having the quality review and photo content that we're known for I think it's a powerful combination going into 'twenty four.
Okay, that's great. Thanks, Jeremy.
Your next question comes from the line of Brian Fitzgerald of Wells Fargo. Your line is open.
Hi, This is Tom Velika, Brian Thanks.
Thanks for taking our questions.
If you look at the home services.
That was up nicely in the quarter, but at the same time request a quote volumes were down.
Anything you can tell us about.
Overall click volumes persist.
Pricing trended in Comms services, specifically and then.
Has a request a quote being a leading indicator for the health of that category.
Basically how are you thinking about that.
Hi, This is Jeremy I'll try and take your question here.
The request a quote stepping back I think in the macro.
Services demand has largely been a bit softer than last year, but I think when you look specifically at request a quote especially sequentially.
What we were able to see is project volume go up which broke a seasonal trend for us and so you know that.
That is a clear positive.
And what's driving that I think is our innovation.
We have.
Prove the service we've added my phone numbers.
Improve the log in experience.
Yes.
Guaranteed nationwide and we're moving into other categories. So theres a lot of positive signs in terms of request a quote and project volume and then I think if you step back and look at AD clicks overall of which request a quote as a portion.
They were up 9% year over year reversing trend and so I think thats another positive showing that the product led strategy that we have is working we're creating more inventory we're driving more leads.
It leads to our advertisers and ultimately that's what we're here for is to drive value for advertisers.
If I can just step back for a moment going back to my earlier answer just in case I misspoke on the implied guidance for the fourth quarter of 2023, the implied guide.
This $3 $37 million to $342 million on revenue and 85 million to $90 million on adjusted EBITDA just wanted to make sure.
To clarify that in case I misspoke there.
Alright, great. Thank you very much.
There are no further questions at this time I will now pass the call over to Jeremy.
CFO for closing remarks.
Thanks, everyone for joining us on the call, we'll see you next quarter.
This concludes today's conference call will now disconnect.
Okay.
Yeah.
Yeah.
Yeah.