Q3 2024 Yelp Inc Earnings Call
to answer the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. I will now turn the conference over to Kate Krieger, Director of Investor Relations. Please go ahead.
Kate Krieger: Good afternoon, everyone, and thanks for joining us on Yelp's third quarter 2024 earnings conference call.
Kate Krieger: Joining me today are Yelp's Chief Executive Officer Jeremy Stoppelman, Chief Financial Officer David Schwarzbach, and Chief Operating Officer Jed Nachman.
Kate Krieger: 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 the Dave Harper statement.
Kate Krieger: will make certain statements today that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially.
Kate Krieger: 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.
Kate Krieger: 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.
Kate Krieger: During our call today, we may discuss adjusted EBITDA, adjusted EBITDA margin, and free cash flow, which are non-GAAP financial measures.
Kate Krieger: These measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with generally accepted accounting principles.
Kate Krieger: 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.
Jeremy Stoppelman: And with that, I will turn the call over to Jeremy.
Thanks, Kate, and welcome, everyone.
Jeremy Stoppelman: led by strengths in services categories, net revenue increased by 4% year-over-year to $360 million. We also delivered an 11% net income margin and 28% adjusted EBITDA margin through disciplined expense management.
Jeremy Stoppelman: We continue to see a divergence in category performance in the third quarter. Businesses in our restaurant, retail, and other categories have faced a challenging operating environment this year and RRNO revenue declined by 6% year-over-year in the quarter as a result.
Jeremy Stoppelman: At the same time, our services business, where we focused our product efforts, saw continued momentum.
Jeremy Stoppelman: Services revenue increased by 11% year over year, making it the 14th consecutive quarter of double digit year over year growth. We saw even stronger performance in the home services category where revenue increased by approximately 15% year over year.
Jeremy Stoppelman: Request to quote projects increased by approximately 25% year-over-year, primarily as a result of improvements to the request flow. We achieved this strong growth, even as we narrowed the focus of our paid project acquisition initiative and reduced our paid search spend by half from the second quarter.
Jeremy Stoppelman: Zooming in on this initiative, we narrowed the focus in the quarter to target businesses with fewer reviews that often experience difficulty competing with more established advertisers for leads.
Jeremy Stoppelman: We continue to see strong top-of-funnel metrics in the third quarter, including more projects, ad clicks, and lower CPCs than in the year-ago quarter. At the bottom of the funnel, while we continue to see positive signals, they were not sufficient to warrant continued investment at the current level.
Jeremy Stoppelman: We will use our learnings to continue iterating on this initiative and in 2025 we anticipate spending and more modest levels
Jeremy Stoppelman: We also see an additional opportunity to deliver leads to multi-location advertisers who have the capacity to ingest substantial lead volumes. This aligns with our approach to capture more demand from multi-location services businesses where we have recently increased our product focus and sales efforts.
Jeremy Stoppelman: 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.
Jeremy Stoppelman: In the third quarter, ad clicks increased by 2% year-over-year. At the same time, average CPC increased by 3% year-over-year, reflecting a mixed shift towards services clicks, which tend to have higher CPCs than RRNO clicks.
Jeremy Stoppelman: We also rolled out a number of user experience and backend improvements to make our search experience even more efficient.
Jeremy Stoppelman: Over the last several years, our focus on delivering the best home services experience for consumers and service pros has driven significant growth in services revenue.
Jeremy Stoppelman: Looking ahead, we see an opportunity to drive additional growth by investing in other key services categories.
Jeremy Stoppelman: Today, we announced that we've agreed to acquire auto services platform RepairPal for approximately $80 million in cash. We believe this acquisition will accelerate our efforts in services by expanding our offerings in the multi-billion dollar U.S. auto services advertising vertical.
Jeremy Stoppelman: In the third quarter, advertising revenue from our auto services category had an annual run rate of approximately $90 million.
Jeremy Stoppelman: In summary, our focus on services continues to strengthen our business and we remain excited by the opportunities ahead to drive profitable growth and shareholder value over the long term. With that, I'll turn it over to David.
David Schwarzbach: Thanks, Jeremy. In the third quarter, net revenue increased by 4% to a record $360 million, which was within our outlook range.
David Schwarzbach: Driven by our disciplined approach, net income was $38 million, or $0.56 per share on a diluted basis, representing an 11% margin. Adjusted EBITDA reached $101 million, representing a 28% margin, putting us $14 million above the high end of our outlook range.
David Schwarzbach: Continued strength and services categories drove this growth. Advertising revenue and services increased by 11% year over year to a record $228 million.
Speaker Change: As Jeremy mentioned, restaurants and retailers remain pressured in the quarter, resulting in a 6% year-over-year decline in R&L revenue to $116 million.
Speaker Change: A decrease in RRNO locations offset growth in services locations in the third quarter. This resulted in an overall decline of 7% year-over-year in paying advertising locations to 524,000.
Speaker Change: We remain focused on driving growth through our most efficient channels. Self-serve was strong and grew approximately 15% year-over-year in the quarter. At the same time, multi-location revenue came in approximately flat year-over-year, reflecting continued softness in our R&O.
Speaker Change: Turning to expenses, our third quarter results demonstrate the margin potential of our business with a net income margin of 11% and an adjusted EBITDA margin of 28%. We achieved these strong results through disciplined expense management.
Speaker Change: Through the end of the third quarter, we had spent $24 million on paid project acquisition, including $6 million spent in the quarter.
Speaker Change: As we efficiently allocate resources towards our best opportunities, we continue to expect headcount will be approximately flat year-over-year by the end of 2024, excluding RepairPal employees who will be joining us.
Speaker Change: In the third quarter, we reduced stock-based compensation expense as a percentage of revenue by 2 percentage points year-over-year and remain focused on reaching less than 8% by the end of 2025.
Speaker Change: We expect these efforts to stack over time, improving the quality of our adjusted EBITDA and benefiting GAAP profitability in the years to come.
Speaker Change: Our capital allocation strategy consists of three main elements. First, maintaining a healthy cash balance to fund our operations. Second, retaining capacity for potential acquisitions. And third, returning excess capital to shareholders through share repurchases.
Speaker Change: In the third quarter, we repurchased $62.5 million worth of shares at an average purchase price of $35.07 per share. As of September 30, 2024, we have $393 million remaining under our existing repurchase authorization.
Speaker Change: We plan to continue repurchasing shares through the remainder of 2024, subject to market and economic conditions.
Speaker Change: As Jeremy mentioned, today we announced our planned acquisition of RepairPal. We expect to pay approximately $80 million in cash for this acquisition.
Speaker Change: For the 12 months ended August 31st, 2024, RepairPal generated approximately $30 million in revenue. Over the same period, cash and net income were approximately break-even.
Speaker Change: Subject to customary closing conditions, we expect to close by the end of the year. This acquisition demonstrates our ability to deploy capital from our balance sheet in support of our business strategy.
Speaker Change: Turning to our outlook, when we updated our outlook for 2024 in August, we expected continued strength in services and better performance in our R&O revenue in the fourth quarter, as our R&O advertisers typically increase their spend seasonally.
Speaker Change: While services has maintained its momentum, we no longer expect our R&O revenue to increase in the fourth quarter, given the persistence of the operating challenges impacting R&O businesses.
Speaker Change: For the full year, we now expect net revenue will be in the range of $1.397 billion to $1.402 billion, a decrease of $18 million at the midpoint.
Speaker Change: Turning to margin, we remain dedicated to disciplined expense management. We now expect to spend approximately $30 million for the year on paid search, given that our third quarter experimentation did not achieve our desired returns.
Speaker Change: Going forward, we plan to continue spending on paid search in more modest amounts as part of our overall marketing expense, but no longer expect to break out the specific amount.
Speaker Change: We now expect adjusted EBITDA for the full year to be in the range of $341 million to $346 million, an increase of about $14 million at the midpoint despite continued headwinds in our R&L.
Speaker Change: In closing, Yelp's third quarter results reflect the underlying profitability of our business.
Speaker Change: We continue to believe in the opportunities ahead to create shareholder value over the long term as we focus our investments in areas that we believe will drive business performance. With that, Operator, please open up the line for questions.
Speaker Change: Thank you. As a reminder, if you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, please press star one again.
Speaker Change: If you have dialed in and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: We kindly ask that you limit yourself to one question and one follow-up.
Speaker Change: Our first question comes from the line of Jason Cryer with Craig Hallam. Please go ahead.
Speaker Change: Great, thank you. This is Cal for Jason. Maybe first for me, just kind of curious what the opportunity you're seeing in auto services is, and why is now the time to push more heavily into this vertical?
Jeremy Stoppelman: All right, hey Kel, this is Jeremy. I think I can take that. You know, we do maintain capital on our balance sheet, as David mentioned earlier. For tuck-in acquisitions, we're always looking for opportunities and this fits squarely within our services strategy. If you look at auto, it's one of our top categories within services. It's a 90 million dollar run rate annually for Yelp.
repairs as well as the cost of those repairs.
Jeremy Stoppelman: and we think that's particularly useful in products like Request-A-Quote and Yelp Assistant where we've seen a lot of success.
Jeremy Stoppelman: like auto shops that may be able to help them give clarity around pricing. We see a lot of benefits for both sides of our marketplace by bringing in their knowledge. We also see an opportunity to leverage some of our strengths, you know, be it our audience, our SEO capabilities and knowledge, as well as our SEM knowledge.
Jeremy Stoppelman: So it's really a win-win. We're excited to grow together from this point.
Speaker Change: Great. And then just last for me, just kind of want to follow up on some of the RRNO commentary. I'm just curious if there's anything new to call out in RRNO, if headwinds have gotten better or worse, or if this is just kind of a continuation of the trends you've seen throughout the year.
Speaker Change: and continue to invest from a product perspective and invest from a relationship perspective.
Perfect. Thanks for all the color.
Speaker Change: Our next question comes from the line of Shweta Kajuria with Wolf Research. Please go ahead.
Speaker Change: Hi, I was wondering if you could talk a little bit more about your guide for the rest of the year. You've brought in kind of revenue a little bit and EBITDA has stepped up.
Speaker Change: kind of in response and so wondering what specific measures or discipline you're going to be taking, maybe what line items, any color would be helpful there.
David Schwarzbach: Great, this is David. So just stepping back on on the guidance in terms of
Revenue.
Speaker Change: As I said in my remarks, on the restaurant retail and other side,
These types of advertisers typically increase their spend seasonally.
Speaker Change: and we no longer expect that to be the case. So that's the dynamic pointing out on RRNO plus what Jed just shared. And you know it's worth underscoring though on the services side we grew 11 percent.
Speaker Change: In the third quarter, and we continue to see strength there in terms of the margin components.
Speaker Change: We believe that our strong expense discipline is showing up. We believe we're getting more efficient. As a reminder, we're planning to hold headcount flat again here in 2024.
Speaker Change: And just for the overall year, obviously, we're able to increase the guidance as a reflection both of that performance
Speaker Change: In the third quarter and just continuing expense discipline. We're very, very focused on ROI and making sure that we're allocating all of our resources, marketing dollars, folks on the team in the right places to drive performance.
Speaker Change: Let me just say, overall, for the long term, we are very, very focused on driving profitable growth.
Speaker Change: So when you put all that together, that's what informs the updated guidance for 2020.
Speaker Change: Okay, that's helpful. Thank you. And if I could ask one more, could you talk a little bit about what you're seeing in paid search and maybe top-of-funnel growth for request-to-quote?
Speaker Change: Sure, I can take that. Yes, we've been working on paid search driving in particular projects to request a quote. We've learned a ton this year and those learnings will definitely go into improve the product and our efforts.
Speaker Change: the rest of the year, as well as into 2025. The top of funnel, you know, we're really happy with. We were able to bring in.
from those folks.
Speaker Change: And anecdotally, it's a little bit hard if you're suddenly getting a bunch more projects, you might not be able to spool up a truck right away. And so there's some challenges there. So we have work to do.
Speaker Change: So we're going to bring down those spend levels, or we have already brought down those spend levels, and we're going to keep iterating. We do believe there is a there there. We're excited about having validated that there is this pool of leads and that we can bring them effectively at Yelp, but we want to make sure that there's a significant ROI there and one that we're happy with.
Speaker Change: So in the meantime, we're not going to spend that money at the scale that we were and we'll flow that through to Justice Ibadan.
for shareholders.
Okay, thank you. That's helpful. Thanks for the time.
Speaker Change: Our next question comes from the line of Josh Beck with Raymond James. Please go ahead.
Josh Beck: Yeah, thanks so much for taking the question. I wanted to also ask about the acquisition in the auto space. I think you mentioned that it was around $30 million of revenue. I think your run rate there is kind of $90 million in that vertical.
Is this something that, you know, you feel like...
Josh Beck: maybe more of a vertical specific approach in some of these
Josh Beck: Verticals that are smaller, you know, for you can kind of really help.
Speaker Change: I can take a stab at that one. You know, we do, there is a large number of categories within services.
Speaker Change: We've been happy with that. But at the same time, we have reserve capital on our balance sheet for tuck-in acquisitions.
Speaker Change: We do see this fit again very nicely, bringing in a lot of expertise and intelligence within auto to make us better, particularly with Request a Quote and Yelp Assistant being able to bake in some of that pricing for our consumers. And then on their existing business, as you said, you know, there is a significant business there north of $30 million.
Speaker Change: and we're able to bring our audience potentially to bear to help them. We have obviously a lot of expertise in SEO and paid search. So we're excited to see what we can do together going forward.
Speaker Change: Okay, that's super helpful. And then maybe just a little bit of a...
Speaker Change: maybe how that market could unfold and potentially create, you know, either traffic generation opportunities for you or just, you know, in some ways kind of
gauge the frequency at which consumers see Yelp results.
Sure.
Speaker Change: that we can bring to bear for companies that are pursuing this. So I do think it represents a really interesting opportunity for Yelp. If you step back and look at what does Yelp have to offer, I think if you're looking for local content in North America, we are an obvious place to knock on the door. If you're working with LLMs,
Speaker Change: You know that trust is going to be an issue. You know that they can hallucinate even locations. They can hallucinate hours, all sorts of things.
Speaker Change: So you really do want to be grounded in trustworthy content, and that's one thing that Yelp absolutely excels at, you know, be it both location information, things like hours, attributes, but also, you know, and perhaps most importantly, reputation information about individual businesses.
Speaker Change: So we are excited about the opportunity. It's still very early, but our door is open and we're having conversations.
Good to hear. Thank you.
Speaker Change: Our next question comes from the line of Sergio Segura with KeyBank Capital Markets. Please go ahead.
Speaker Change: Great, thank you for taking the questions. I guess the first on SEM, the investment hasn't really translated into the results you envisioned when you started this investment. So I guess, could you just walk us through why you believe it played out this way and just kind of what did you learn that was different than your original thesis?
Yeah, this is Jeremy.
Speaker Change: You know, I think when we first stepped in, you know, we wanted to validate, hey, that there is a big pool of leads that we can bring into Yelp and direct to where we need them.
pretty good quality.
Speaker Change: at reasonable prices. Now the unique challenge that we have on our side
Speaker Change: is when it comes to advertisers, they really have to change their behavior for us to drive a return. So they have to either retain a lot better or they have to be willing in relatively short order to bump up their spending with us.
Speaker Change: And while we did see improvements there, especially as we narrowed our focus into the businesses that we thought needed leads the most.
Speaker Change: that we did, we do still think there is real value to unlock there, but we have work to do to to unlock the opportunity. And so we're bringing down that spend.
Speaker Change: so we can continue to focus and iterate and, you know, we look forward to keeping you informed about the opportunity as it develops.
Speaker Change: Got it. That's helpful, Jeremy. And maybe if I could sneak a two-in-one, two short ones here. You know, one of the drivers you guys pointed out for AdClicks was that SEM investment. So as you do moderate that investment, should we expect AdClicks to also slow down because of that?
Speaker Change: And then secondly, you know, you mentioned CPC increasing due to services mix. Any commentary on what CPC looks within services? Is that increasing, staying stable, decreasing? Any comments on around that would be helpful. Thank you.
It's your first question there. With respect to projects,
Speaker Change: We continued to grow project volume at 25%. And so how did we do that? Well, a lot of that is through our product-led strategy. So Yelp Assistant has been really delivering for us. We also continue to do work on the ad matching system, which yields efficiencies.
Speaker Change: and we have a deep portfolio of improvements. So we do believe there's still plenty of room for innovation there to drive ad clicks and create efficiencies on the volume that we have, the traffic volume that we have.
Speaker Change: Sergio, just to add a few more thoughts here and stepping back for a second, the overall auction system is designed to optimize the deployment of budget on behalf of advertisers who give us that budget to deploy.
Speaker Change: And so we're not specifically targeting ad clicks or CPCs, rather we're letting the auction find the market clearing price in that category at that time in that geography. So that's just the fundamental of the way that the system.
Speaker Change: overall operates now. The more traffic that you have if you're bringing projects and that's delivering clicks then certainly that's going to feed into the overall system and then that impact typically would be if budgets constant for CPCs to decline.
Speaker Change: Now it's obviously under the hood it's a bit more complicated than all of that and what we're focused on most of all is continuing to deliver more value to advertisers and so we're continuously working to improve the matching. One of the things that's so important for us around Yelp
Speaker Change: customers very quickly with the right questions, that speeds right back into the system and enables us to do even better matching.
Speaker Change: So we're always looking for ways to drive improvements and, you know, while the overall project growth has been up significantly, a considerable amount of that is just from the improvements that we're driving and not.
Speaker Change: exclusively from the paid search spend. So we remain optimistic in the roadmap that we have ahead to continue to generate projects.
Speaker Change: and when we get those projects to direct them to the right advertisers and then of course to deliver value to the advertisers and to the consumers. In terms of your question about services versus restaurant retail and other
In general
Speaker Change: What we do see is strength of demand on the services front.
Speaker Change: And so, typically, if you're going to see stronger demand from advertisers, you would expect to see CPCs rise.
Speaker Change: projects that are in categories that have a higher payout for that service pro, then obviously the clicks are more expensive. And we've seen a mixture there. So that's going to add to the potential growth in CP.
Speaker Change: What we obviously aim to do but we're going to provide a lot more commentary when we get to the Q4 call. We havent, we just announced the transaction obviously today. So we still have to close and start working together directly.
Speaker Change: But in concept, but we want to do of course as Jeremy mentioned is too.
Speaker Change: Hope.
Speaker Change: Drive traffic with them, we have both that experience on the SCO and SCM side. So that's in a sense leveraging.
Speaker Change: The investments that we've made in yelp over time, we can bring that to bear we think on repair Pal. We think that can be a positive from both from a revenue perspective and potentially from a margin perspective.
Speaker Change: And then they have a lot of expertise that we think can really help with our $90 million run rate.
Speaker Change: Auto business as it currently stands obviously of request a quote is request a quote and they are really expert in estimating the cost of our repair and we think that that can be really additive. So.
Speaker Change: Net net we think we're in a great starting point, we're excited to have the team joining us we think they bring a lot to yelp, we think that we can bring a lot to repair Powell and we look forward to sharing more with you when we get to the Q4 call.
Speaker Change: Great very helpful. Thank you one more if I may can you help us dig into the pressure within our I know by subsegment. So that is our restaurants driving a disproportionate share of the weakness or are there other buckets of advertisers within <unk> that have also been weak or maybe performed better than the consolidated number.
Jed Nachman: Yeah. Thanks for the question this is Jed.
Jed Nachman: Overall, certainly we do see the weakness on the restaurant component.
Jed Nachman: And that makes it but overall in the entire Arnaud restaurant retail and other we are feeling.
Jed Nachman: From a macro perspective, and they tend to operate in kind of at the same way from a consumer perspective.
Jed Nachman: And so when we look at it we're really obviously pleased on the services side.
Jed Nachman: And has continued to see kind of broad based strength and one of the things that.
Jed Nachman: On services is from a channel perspective, we have the opportunity to go after the multi location opportunity.
Jed Nachman:
Jed Nachman: The we've made product improvements over the course of the past year, our lead to API and.
Jed Nachman: Improved business owner account to kind of take friction out of the process for those folks who have.
Jed Nachman: From a relationship management software.
Jed Nachman: And we've had very healthy dialogue.
Jed Nachman: <unk>.
Jed Nachman: To date, we've also learned a lot from the SCM.
Jed Nachman: That we've done over the last year and be able to drive leads to particular customer so but going back to your original question on the <unk> now.
Jed Nachman: Broad based against.
Jed Nachman: Our restaurant retail.
Jed Nachman: Okay Super helpful. Thanks, very much.
Speaker Change: Our next question comes from the line of Robert <unk> with Evercore ISI. Please go ahead.
Speaker Change: Hi, Good afternoon. Thanks for taking my question just wanted to ask I don't think you talked about it but the changes in the consent regulations under the TCP AA from the FCC.
Speaker Change: Any sense of a tailwind to your business from maybe changes in the supply environment.
Speaker Change: For leads and home services online or just any broad thoughts on puts and takes.
Speaker Change: Thank you.
David Schwarzbach: Hey, Robert This is David Thanks. Thanks for the question in general that has not been as relevant for us as it is for other advertisers. So can't say that that's been a cigar.
<unk> driver.
Speaker Change: Okay got it thank you very much.
Speaker Change: We have no further questions at this time with that we will conclude today's conference call. Thank you all for your participation and you may now disconnect.
Yeah.
Speaker Change: Okay.
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Speaker Change: Okay.