Yelp Inc

NYSE:YELP

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen, and thank you for your patience. You've joined Yelp's First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Head of Investor Relations, Ronald Clark. Sir, you may begin.

[Ronald Clark, Head IR]

Good afternoon everyone, and thanks for joining us on Yelp's first quarter earnings conference call. Joining me today are Yelp's CEO, Jeremy Stoppelman; CFO, Lanny Baker; and COO, Jed Nachman.

Before we begin, I'll read our Safe Harbor statement. We'll make certain statements today that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. In addition, we are subject to a number of risks that may significantly impact our business and financial results. Please refer to our SEC filings, as well as our Shareholder Letter for a more detailed description of the risk factors that may affect our results.

During our call today, we'll discuss adjusted EBITDA and adjusted EBITDA margins, which are non-GAAP financial measures. 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, as well as historical reconciliations of GAAP net income to adjusted EBITDA and adjusted EBITDA margin.

And with that, I'll turn the call over to Jeremy.

[Jeremy Stoppelman, CEO]

Thanks, Ron, and welcome everyone to Yelp's first quarter earnings conference call. As we discussed with you in February, Yelp has begun undertaking a series of important business transitions designed to accelerate growth, drive stronger profitability, and create shareholder value. We're encouraged by the progress we made in the first quarter.

Our new business products are resonating with customers. We captured more of a national opportunity, and approaching the end of the quarter, we began to drive significantly more value to our advertisers. We are pleased to share more detail on the progress we outlined in our Shareholder Letter, as well as provide you with some additional color on our first quarter results, which were consistent with our business outlook. We expect these early wins along with our continued focus on our 2019 initiatives to accelerate revenue growth. Accordingly, we are reaffirming our business outlook for the full-year. As we look ahead to the next five years, our plan is to make Yelp stronger and more valuable by increasing our focus on serving the needs of advertisers and business centers, leveraging product and marketing alongside sales to enhance our go-to-market strategy, and delivering a mid-teens percentage compound annual revenue growth rate coupled with consistent margin expansion and disciplined capital management.

Our first quarter results reflect several of the benefits of our focused execution, and at the same time, we are still in the early days of a significant business transition. We anticipate that the full benefit of the work we're doing today won't be measured in this quarter or the next one, but rather will play out over the next several years return Yelp to strong revenue growth with more a leverage and profitable business model.

Now, I'll turn it over to Lanny to touch on the key points for the quarter, and then we'll open the call to your questions.

[Lanny Baker, CFO]

Thank you, Jeremy. Total revenue grew 6% year-to-year in the first quarter, led by a healthy growth in our multi-location and national businesses. These are an area of strategic priority where we believe Yelp is -- remains very under-penetrated.

Net income in the second quarter was $1 million or $0.02 per share. Demonstrating once again the operating leverage in Yelp's business model, we delivered 50% of the first quarter revenue growth down to the adjusted EBITDA line, with adjusted EBITDA margins rising 2 percentage points year-to-year in the first quarter. During the first quarter, we repurchased $102 million in Yelp stock, and as of last night, we bought back a total of $205 million year-to-date or 5.7 million shares, reducing the fully diluted share count by approximately 6% since the start of 2019.

Looking ahead to the rest of the year, we are reaffirming our full-year business outlook for 8% to 10% revenue growth over 2018 and 2 to 3 percentage points of adjusted EBITDA margin expansion versus last year. Our second quarter business outlook anticipates higher revenue in the current quarter than in the first quarter of 2019, with year-over-year revenue growth in the range of 4% to 6% compared to the second quarter of 2018. We also expect adjusted EBITDA margins to rise from the first quarter to the second quarter with 2019 adjusted EBITDA margins anticipated to be even with to 1 percentage point higher than what we reported in the second quarter of 2018.

Within our outlook, for both the second quarter and the full-year, we've reflected current business trends as well as some anticipated impact from the efforts and initiatives begun last year and which we advanced during the first quarter. Specifically, we anticipate stronger second half revenue growth based on at least three key priorities and these are areas in which we've already seen early signs of progress.

First, we believe, revenue growth in the multi-location and national advertising business will remain strong and gather momentum in the second half based on the expansion of our sales force, introduction of new products and winning new customers and growing revenue from existing customers. Second, the introduction of new revenue generating business owner products and effective marketing and development of those we've already launched is expected to add to growth across the remainder of 2019. Third, we anticipate our efforts to enhance the control, service and value delivered to advertising customers, headlined by a significant increase in leads delivered and matched with reduced CPC prices will increase customer satisfaction and improve revenue retention as we progress throughout the year.

With that, let's turn the call over to questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Shweta Khajuria of RBC Capital Markets. Your line is open.

[Shweta Khajuria, RBC Capital Markets]

Two questions, please. On product expansion, Verified Licenses that's up to 5,000 from 3,000, and I believe now you have another product. So how deep is your new product offering pipeline today and have you been testing some of the new products already that you have not launched. Could you talk a little bit about that for the rest of the year? And then second, in home and local, you plan to double the number of leads to pay the advertisers this year. What are you doing differently on the platform to drive this growth 5 million leads in Q1, up 50% revenue from our Request a Quote. Thank you.

[Jeremy Stoppelman, CEO]

This is Jeremy, I'll take your question here. So the first thing we did on the product side was improve the ad units, better merchandising, better targeting, which we saw a lot of success with driving more clicks and lowering prices, lower CPC. So that was a great win for advertisers, drove them more value. Starting kind of midway, we really started to see the impacts midway through the quarter. We also, as you mentioned, have seen some success -- early success with verified licensing for businesses that have a licensing regime, they can showcase that now on their business profile and in search results, and we've seen really healthy uptake there. It continues to be a bright spot. And then more recently, we just started rolling on Business Highlights. So highlighting different characteristics of your business. You know, how many years you've been open, whether you do offer free quotes and things like that, and that seeing really healthy early signs but just launched as we closed out the quarter as we started Q2. On the national side, we also have a new product offering that started to be out in the wild which is limited time offers and we're seeing a strong market response from the national enterprise segment. That's something that we knew that they wanted. You know we got close to the customer and they were telling us they have seasonal campaigns and things, and they'd like a way to showcase that on Yelp, and it does. We were able to provide our products specifically tailored to help them with that.

And then your second question was on home and local talking about leads and how we're going to drive more leads for advertisers. And you know, some of that has already really begun, I think we were up over 60% of leads driven to advertisers. And a big opportunity there is, we have a lot of -- or what we call organic leads flowing through the system and we have a big opportunity to channel those more towards our paying advertisers and that's through things like ad units and better merchandising and new ad placements and so forth. And so, we've taken some real impactful first steps, but we have a whole lot of additional features and launches that will be coming throughout the year.

[Shweta Khajuria, RBC Capital Markets]

Thank you, Jeremy.

[Operator]

Thank you. Our next question comes from Michael Ng of Goldman Sachs. Your line is open.

[Michael Ng, Goldman Sachs]

Thank you for the question. It is encouraging to see the progress on national accounts in the quarter winning some of the new mandates and budget increases from some of the advertisers. I was just wondering if you could give us a few more details about some of these new wins and if there is any way to quantify the contribution to revenue growth from these national accounts throughout the rest of the year? And secondly, could you just talk about your confidence level in the revenue growth accelerating in the back half? Thanks.

[Jed Nachman, COO]

Sure. Michael, I can take the first one. This is Jed. You know, we had a strong quarter in Q1. In the fourth quarter we actually signed a bunch of new national advertisers, some of those programs were seasonal or short term in nature, and we're starting to get more seasonal in that business and the beginning of the year tends to be little bit of a seasonal well. So we're actually really encouraged by the back half of the year. We certainly contemplated that rate in our outlook for the quarter. We see several encouraging signs as we enter into a stronger spending season. 50% revenue growth in our top 100 accounts, about half of that growth came from existing customers, which is a good sign and half from new customers. As Jeremy mentioned, the LTO product is just kind of getting out into the wild right now and has had strong initial response. And really we've grown that team by 30% year-over-year and are starting to have the real conversations that we have to, a whole viable option based on the other competitors out there. Very far down the funnel in the eyes of national advertisers with a lot of intent driven consumers out there looking at Yelp. So we're encouraged by what we're seeing in the national business and look forward to the rest of the year.

[Jeremy Stoppelman, CEO]

And then your second question about sort of the shape of the year or confidence level, various drivers in the like. Your know in the first quarter, from a revenue growth perspective, the enterprise business was -- and the national accounts were really important driver. Very strong growth in that category as Jed just described. And as we look across the rest of the year between the sales force expansion, the products that we have that go -- there is some attribution things that we continue to do beyond the limited time offer, we feel like we've got a very strong product slate that's going to allow us to continue to get good advertiser response, both new accounts and then growing the accounts that we have. We are in the middle of a transition year. We've described it that way. And after the end of the first quarter, we've seen progress in many of the key areas that we prioritized for this year, be that self-service, new products, customer retention, lowering CPCs, enterprise growth, and those are all the formulation that go into our full-year outlook. So we are reaffirming our outlook today and we're very focused on achieving the goals we've set up.

[Michael Ng, Goldman Sachs]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Mark May of Citi. Your line is open.

[Mark May, Citi]

Thank you. And I apologize if these have been asked already, but maybe two quick ones kind of housekeeping. Notice that I believe ad clicks in total grew faster than advertising revenue, correct me if I'm wrong, but if that's the case, maybe if you could share a little bit of what causes that to occur? And then secondly in terms of some of the new products that you're rolling out, Verified License, Business Highlights and sounds like more to come. Are these -- they have to be an existing advertiser to purchase those products or, if not, are those -- what sort of the strategy around is that meant to kind of allow sort of a little bit of a lower priced entry-level and then to upsell, just kind of curious about how you're selling this products and the strategy behind that? Thanks.

[Lanny Baker, CFO]

Sure, I'll talk first about the revenue in the ad clicks and what's going on there. You're right. Ad clicks grew faster than advertising revenue in this quarter. And as we've said, as Jeremy talked about it earlier, a big focus for us has been to increase the value that we're delivering to our paying customers. And as we do that, we're driving more of -- by improving ad units, by improving the efficacy, by improving the way they stand out within search results, by giving advertisers more control over the way that those ads look and where they show. We are able to drive an increasing volume of our consumer activity to our paid advertisers. And effectively what that does is, it reduces the -- improves their gas mileage per dollar spent. They get more advertising result. It reduces the Cost-Per-Click and we know and we believe that will continue to contribute to advertiser satisfaction and ultimately to advertiser retention rates. So it's very purposeful activity there to increase the ad volume delivered to our customers and that's kind of what's behind that dynamic.

[Jeremy Stoppelman, CEO]

Hi Mark, this is Jeremy. I'll talk a little bit more about verifying our profile product strategy there. You're asking, you know -- do you have to be an existing advertisers buying CTC to purchase product. The answer is no, and so we do see a mix of both existing as well as new advertisers. One of the ideas behind this product was looking at our overall offering, we didn't have something that was really at the entry-level. So most of our efforts were focused on getting you as an -- potential advertiser spend, $300, $400 with us. And so we thought it was worth exploring some entry level options and this is essentially our first foray. And it's getting a really strong reception from both the big spenders, the ones that are spending $400 plus with us. And in fact, we do see some improved retention characteristics when they pick up the product. So it does seem to make them more committed to Yelp, but then we are also seeing a healthy mix of new spenders that maybe wouldn't have bought from us before or just dipping their toe and exploring, and we do think there's opportunity to experiment there with selling -- starting with some of these new customers that are coming in on verified and then upselling them later. We do have client services team and local client partners team that is really focused on upselling and providing extra value to our advertisers. So we see no additional opportunities in experimentation there.

[Lanny Baker, CFO]

One of the key element of the strategy around the products is really how they dovetail with self-serve. I don't want people to miss that. Verified License, half of the customers that are currently subscribing to Verified License were self-serve buyers of the product and now we believe that lower price point based on our market research, competitive analysis, customer feedback, we believe that these low price products are going to be an important sort of ignition point for our self-serve product and channel over time.

[Mark May, Citi]

Thanks, that's helpful.

[Operator]

Thank you. Our next question comes from the line of Justin Patterson of Raymond James. Your line is open.

[Justin Patterson, Raymond James]

Thank you very much. I just wanted to dig into home and local a little bit. We're seeing a lot more interest in on-demand products and companies moving from high up the funnel leads to giving service providers leads that are ready to book today. From that perspective, how do you think about the ability of Request a Quote to deliver customers very ready to transact to more of your service providers. Are there any more product developments or changes in traffic acquisition you need to make? Thank you.

[Jeremy Stoppelman, CEO]

Justin, this is Jeremy. You know certainly in specific categories there can be emergency services or something that you want right away like you can imagine if you cracked your iPhone screen, you want to get that replace sooner rather than later and there are actually mobile services it'll come right to you. So Request a Quote does handle those types of offerings and we do provide response times since that can help consumers get what they're looking for really quickly. But I think there is product opportunity to go even deeper and make it even more responsive. And so we'll continue to chip away that and explore.

[Justin Patterson, Raymond James]

Got it. Thanks.

[Operator]

Thank you. Our next question comes from Lloyd Walmsley of Deutsche Bank. Your question please.

[Unidentified Analyst]

Hi, this is Chris [ph] on for Lloyd. Maybe a few if I can. Just maybe a quick one, the piggyback on what market ask. Our advertisers that are just using the likes of Business Highlights, Verified License or the limited time offer, are they being included in the PAA number or the paid local number? And if so, how many advertisers were just using those products? And then maybe one on the national for us, just curious, how are you thinking about the vertical makeup on a go-forward basis of your top 100 advertisers? Thanks.

[Lanny Baker, CFO]

Sure. Yes. The Verified License customers, Biz Highlight customers and other new products that are rolling out will be included in our paying advertising account, paying advertising location statistics. As we roll those services out, they are promoted within the claim flow, as I talked about the importance of these products in the self-serve perspective. They are promoted within the business owner accounts and we've had strong uptake from both new customers brand new to Yelp, as well as existing customers saying, Oh! that's a nice feature, that's a nice upgrade, I'm going to add it to the package that I already have. So the 5,000 customers that we have on Verified License today are a combination of brand new customers who are only buying that -- brand new customers who are buying that and also upgraded advertising.

At the same time or shortly thereafter as well as existing advertisers who have bought the Verified product. So all these things will be in account and they are today. The 5,000 accounts relative to the grand total of 193,000 advertising accounts that we have, that is not a huge impact from the net brand new Verified License only within that number yet, though overtime, our belief is that those low priced products are important for getting us through a wider distribution in the marketplace. On the national front, Jed?

[Jed Nachman, COO]

Sure. In terms of verticals that we're going after, I would say that the major focus is on restaurant and retail. The limited time offer specifically for restaurants and we're going to continue to kind of work on that product for the retail sector as well is really resonates.

You see a lot of international clients going through one, two, three month campaigns where they want to promote a specific menu item or specific deal or you can eat buffet at Olive Garden and so. We really think restaurants are a great place to focus and also should be noted that our attribution studies that we do with third parties, as well as our own first party data works really well and high-volume categories were obviously people are walking into stores. And so, you see a big focus on restaurant and retail. That being said, we'll have a nice service in national business as well, and less on the limited time offer side but they find a lot of value in the Request a Quote product as well.

[Unidentified Analyst]

Got it. Thanks.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Tom Champion of Cowen. Your line is open.

[Unidentified Analyst]

This is Henry [ph] on for Tom. How do you feel about sales force productivity so far this year and what steps are you taking to increase it, and also curious if you could talk about how your cost savings initiatives are tracking?

[Jeremy Stoppelman, CEO]

Sure, I'll take the first one, Henry, in terms of sales force productivity. The bottom line is, at the top of the funnel, we feel really healthy right now. Oftentimes when people are calculating sales force productivity, they are looking at some sort of combination of net revenue and additions, which doesn't really accurately reflect kind of sales productivity. We were encouraged with the gross account additions, driven by the sales force in Q1, that number was stronger than the prior two quarters and metrics like deals per rep were right in line with our targets. You know, a lot of the action on the productivity side which doesn't actually have to do with sales people is on the retention side, and so we're still feeling some of the effects of the transition in long-term contracts and short-term customer retention is lower than it was a year ago and that's what's kind of impacting the overall productivity number. But as we mentioned previously, we're keenly focused on delivering more value to our customers and driving more product in to the channel with the intended effect of improving the retention side of the equation. But our top in the funnel is as healthy as it's ever been.

[Lanny Baker, CFO]

And Henry on the -- with respect to cost savings, we have a plan there that is proceeding on pace and on plan. A couple of the highlights that we called out right now that we'll talk about are, we sublet portion of our space in San Francisco, leasing three floors today with plans to let more space in San Francisco facilities go as we progress throughout the year. It's obviously very high cost rental market and where as we move some of our sales resources in the other offices that will allow us to get some savings we talked about. Another area where we've found some pretty compelling, both savings and sort of strategic benefit is that, as we add more only on Yelp product features to the mobile apps, such as reservations and wait list, we're finding a nice flywheel of users and locations driving mobile app user growth. There's a lot of us to back off on some of the customer acquisition spending that we might have done previously to propel user growth.

So those are -- it doesn't matter -- I believe, in the first quarter, we reduced our marketing spending by $4 million, $5 million relative to a year ago even while seeing acceleration in mobile app user. So that strategy on restaurants to be a source of our user growth really is making the company healthier and stronger and more profitable going forward. So we are on track on cost savings. I appreciate the question.

[Unidentified Analyst]

Thank you.

[Operator]

Thank you. Our next question comes from Sameet Sinha of B Riley FBR. Your question please.

[Sameet Sinha, B Riley FBR]

Yes, thank you very much. On the CPC question, it's -- you decided to add more value to what your advertisers are paying you for now. The question is, did you have to reduce prices or is it automated -- reducing prices also mean did you have to remove the floors on certain CPCs or is it just an automated process so it worked out that way, it's just a result. And secondly on Request a Quote, if I'm looking at the numbers, it seems like annualized revenue came up at about 50% year-over-year. How much of that is also dependent on the CPC slowdown? Thank you.

[Jeremy Stoppelman, CEO]

So on your first question -- this is Jeremy around CPC pricing. It is a largely automated system. We did improve the effectiveness as well as number of ad placements. And so that has an effect on inventory, which drives down CPC pricing, that's pretty much the main driver of why value went up and pricing as a result went down. And then on Request a Quote.

[Lanny Baker, CFO]

On Request a Quote, yes, you're right, you have the numbers right in terms of the attributable revenue growth and the things that we're doing to improve the delivery of Request a Quote consumers to pay advertisers has the same effect that Jeremy just described. And so, as we drive more value, i.e., more leads per dollar spent, it does reduce CPCs in the near term and we think improved customer satisfaction and retention in the intermediate and longer-term.

[Sameet Sinha, B Riley FBR]

Great. Thank you very much.

[Operator]

Thank you. Our next question comes from the line of Elliot Alper of DA Davidson. Your line is open.

[Elliot Alper, DA Davidson]

Thanks for the question. So with data privacy becoming a hot topic, could you remind us about your policies and strategy when it comes to collecting and using customer data on your platform? Thanks.

[Jeremy Stoppelman, CEO]

Yes, it's Jeremy. I mean, we obviously take data privacy very seriously. I think we're not collecting the amount of data that a Facebook or Google has. So we're not really in the heart of the bull's-eye. We don't sell off our data to third parties or anything like that. When we are talking about things like attribution, which can be more sensitive, we have first-party data, we collect ourselves, we work with other third parties that do their own data collection, but we are very careful and thoughtful about user privacy. Thank you.

[Elliot Alper, DA Davidson]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Victor Anthony of Aegis Capital. Your line is open.

[Victor Anthony, Aegis Capital]

Thanks for putting me on. I've a question on the partnership paragraph in the shareholder letter. You guys are saying that you are open to pursuing effective partnerships. The company Angie's Home Service business said that they are open to some sort of commercial relationship with you guys. So you're open to partnerships, they're open to partnerships with you, what's holding you guys back since that is kind of a win-win situation? Thanks.

[Jeremy Stoppelman, CEO]

Thanks, Victor. You know as we've said in the past, if we're looking at partnerships, we're looking at sort of two-gate process. One, does the partner enhance the customer experience we have; and two, does the partner offer to our shareholders better economics than we can generate on our own. We're still fairly early in the development of the home services category. It's growing as fast as some of them, if not faster than some of the apparent current leaders in the marketplace and we've got a lot of new products coming for that area. It's a -- we're pretty excited about the growth we've seen and reviewed businesses are growing at a teens rate in the home and local category year-over-year and then the number of reviews per business are growing at a even faster rate. So our depth, breadth and coverage of this category continues to only get stronger. We are open to partnerships. We've still got -- we're always weighing that build versus buy versus partner equation that most companies are doing at the moment. We're very committed to building our business and we're always open to partnership ideas.

[Victor Anthony, Aegis Capital]

Okay. Thank you.

[Operator]

Thank you. Ladies and gentlemen, that's the end of the Q&A session and today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.