Yelp Inc

NYSE:YELP

Earnings Call Transcript 2021-Q1

[Operator]

Good day and welcome to the Yelp First Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to James Miln, Senior Vice President of Finance and Investor Relations. Please go ahead.

[James Miln]

Good afternoon everyone and thanks for joining us on Yelp's first quarter 2021 earnings conference call. Joining me today are Yelp's Chief Executive Officer, Jeremy Stoppelman; Chief Financial Officer, David Schwarzbach; and Chief Operating Officer, Jed Nachman. We published the 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 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 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 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 both adjusted EBITDA and adjusted EBITDA margin.

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

[Jeremy Stoppelman, Chief Executive Officer]

Thanks, James, and welcome everyone. Our first quarter results represent a strong start to the year driven by the success of our go-to-market shift and an increased focus on product innovation, which together comprise the foundation of our next stage of growth. We saw record performance from our Services categories, Self-serve channel and non-term advertiser budget retention. Revenue growth in the Self-serve channel accelerated once again to approximately 30% year-over-year in the first quarter. Services revenue performance was driven by ongoing strength in home services, which increased by nearly 15% year-over-year.

At the same time, we're seeing consumer traffic return with the recovery in local economies benefiting businesses in our more COVID impacted categories. Demand from these businesses increased over the course of the first quarter. More recently, the encouraging traffic recovery trends we saw in the first quarter continued in April. Page views and searches for home services businesses continued to exceed pre-pandemic levels while page views and searches for restaurants have rebounded 40% from December 2020.

Building on the strong momentum of our Q1 performance, we're investing in product development, marketing and multi-location sales to support our initiatives and deliver more value to advertisers. We believe this will enable us to drive growth and scale our business in a more profitable way over the long-term through increased revenue retention and a more efficient go-to-market approach. In the first quarter, lower CPCs contributed to record non-term advertiser budget retention.

We were able to achieve these results with local sales headcount remaining at approximately 50% of pre-pandemic levels, which also enabled us to improve net loss by $10 million year-over-year to $6 million and deliver a 19% adjusted EBITDA margin, while heavily investing in our growth initiatives. We are pleased with this start to the year and expect our investments to continue benefiting both revenue and adjusted EBITDA over the long-term. Together with the structural changes we've made to our business over the past year, we believe we are well positioned to fully participate in the economic recovery and to deliver long-term sustainable growth in the years to come.

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

[David Schwarzbach, Chief Financial Officer]

Thanks, Jeremy.

We saw improving trends across the business over the course of the first quarter, as COVID-19 cases declined and restrictions eased. As Jeremy noted our product initiatives continue to drive strength in self-serve and our services categories. As a result of these efforts, advertiser demand increased steadily over the first quarter, which together with a record retention rate for non-term advertiser’s budget enabled us to deliver $232 million of net revenue. In addition to our strong revenue performance, we were very pleased to see another quarter of disciplined expense management, while investing in our initiatives.

Net loss improved by $10 million year-over-year to $6 million or adjusted EBITDA increased by 159% to $44 million. Healthier than expected macro environment and a slower head count ramp did provide some short-term benefit to expenses versus our expectations for the quarter. However, the lower headcount did not have a significant impact on revenue or our strategic initiatives and we expect to continue investing behind our initiatives to drive our revenue momentum over the remainder of the year. Returning capital to shareholders through share repurchases remains an important element of our capital allocation strategy. Since we resumed the purchasing shares in the fourth quarter of 2020, we have repurchased approximately $99 million worth of shares as of today at an average price of $34.98 per share. We currently have approximately $170 million remaining under our current share repurchase authorization. We plan to continue repurchasing shares throughout the year subject to market and economic conditions.

Turning to our outlook. In the second quarter, we expect to move from recovery to year-over-year growth and anticipate net revenue will increase from the first quarter to fall within the range of $240 million to $250 million. In addition, as a result of our strong execution in the first quarter, we are raising our 2021 outlook for net revenue, which we now expect to be between $1 billion and $1,020 million. To drive continued growth we plan to invest further behind our initiatives as we catch-up on hiring in the second quarter. As a result, we anticipate second quarter adjusted EBITDA will fall within the range of $35 million to $45 million. And we are raising our full year 2021 outlook for adjusted EBITDA, which we now expect to be between $175 million and $195 million with increased leverage expected toward the end of the year.

In closing, our first quarter results reflect strong progress towards delivering our plans for the year. As Jeremy mentioned, these results reflect the success of our go-to-market mixture and our increased focus on product innovation, which together laid the foundation for our next stage of growth.

With that operator, please open up the line for questions.

[Operator]

[Operator Instructions] Our first question today comes from Colin Sebastian with Baird.

[Colin Sebastian, Baird]

Great, thanks. Good afternoon guys. Nice to see the progress here. I guess first off, I'm interested in Yelp Connect and the penetration you're seeing across services and multi-location accounts. And if there's a way to quantify how this is benefiting engagement with ads, with advertisers, retention or any other relevant metrics?

[Jeremy Stoppelman, Chief Executive Officer]

Hey, Colin. This is Jeremy. I'll hop in and take that one. So we're very pleased with our progress with Yelp Connect. And in fact, we talked about in the letter that we've released a new audience model, which boosted the performance particularly for services and largely it's being bundled in as part of an upgrade package that's essentially our new model, that we've been working with. As we sell advertisers, we give them a whole host of different profile upgrades and include things like Connect.

On the Multi-loc side we also saw some encouraging early results with some clients that we piloted with, and they're essentially seeing better economics on their investment with Yelp based on those studies. So overall we're feeling really good about our progress with Connect. It seems to be adding value, lifting performance for business advertisers that take advantage of it and so we'll keep you posted on our progress there.

[Colin Sebastian, Baird]

Okay, great. And then secondly, just on CPCs, maybe you can just walked through the moving parts why that shifted to a decline from growth?

[Jeremy Stoppelman, Chief Executive Officer]

Yes. CPCs decline we see as a good thing because ultimately that's more value flowing to our advertisers, so we like to see that. And what's driving that partially, it says more traffic comes into the system, obviously that's going to lower prices which again is a good thing, but then also we're continually refining the ad system and improving the efficiency of that system. So when somebody is taking a look for a business, we want to show them the best possible ad that we can to invest a lot of our engineering product and making sure that those connections happen as efficiently as possible, and we're using our inventory as efficiently as possible. So as we make progress with that, it should drive more value to businesses and ultimately lower prices all things equal.

[Colin Sebastian, Baird]

Alright. Great. Thanks Jeremy.

[Jeremy Stoppelman, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from Shweta Khajuria with Evercore ISI.

[Jenn Lee, Evercore ISI]

Great. Thank you. This is Jenn Lee for Shweta. Maybe just a quick follow-up on that, the trend you're seeing in ad clicks progress and a CPC decline. If you can put any color on the linearity of that, the traffic gets ad clicks recovery in the quarter and maybe into Q2? And also the second question is just on the restaurant part – the restaurant recovery cadence, what are you hearing from the sales team regarding like the multi-location business recovery especially as we are getting into benefit providence with the vaccine penetration? Thank you.

[David Schwarzbach, Chief Financial Officer]

Hi, it's David. So I'll start off and you’ll talk about clicks and then Jed will pick-up around restaurants and multi-location recovery. We are seeing good progress in the recovery of clicks and that has continued over the course of the quarter. It's also important to appreciate that when we look at clicks, we're looking obviously across both our services business, as well as our restaurant business. And we were very pleased to see that we are restaurant – on the restaurant side this traffic is increased. We're also seeing a commensurate increase in clicks there. So overall making good progress as we move through the quarter and do you think it's important to underscore that well, we know that the, the vaccine rollout has gone well today. As we entered the quarter that was less clear with cases being very high and the rollout just added its initial stages. And so what we're are seeing is that progress as people feel more confident to go out.

[Jed Nachman, Chief Operating Officer]

Hi, Jenn, this is Jen. I can take the restaurant's question. Obviously compared to services, our restaurant retail and other category is down more year-over-year. Although we are seeing nice signs of recovery there, we're down about 15% year-over-year from a PAL perspective and doing about $81 million. Those categories were hit hard, but we did look to preserve those relationships throughout COVID and, often gave relief and free services. And this work to support kind of retention in that segment. We are seeing page views and searches in restaurants, rebound. They're up about 40% from December of 2020 and are at about 90% of those pre COVID levels as of April 2021.

Multi-location, we typically see a depth early in Q1, and that was exacerbated this year with some of the COVID case counts moving up, but we did see progress across that segment throughout Q1 with paying advertising locations kind of in the range of where we were during Q4. And so good momentum during the quarter coming out into March and we do see an opportunity to help these national brands with the reopening campaign and certainly when you look at national and the restaurant segment, there has been some structural movement towards pickup and delivery, but there are certainly demand building both on the consumer side, as well as on the business side for kind of in-store dining. And we're seeing those trends and this strength the pipeline kind of going throughout the – coming out of March.

So attribution continues to be a very big part of that story. Making sure we can kind of tie both the store visits online, as well as any offline conversions. And, you know, we're just working hard to get back to our original run rate within that restaurant, retail and other segments.

[Jenn Lee, Evercore ISI]

Thank you, guys.

[Operator]

Our next question comes from Dan Salmon with BMO Capital Markets.

[Dan Salmon, BMO Capital Markets]

Hey, good afternoon, everyone. I'm Jeremy in the letter you have aligned choosing some new self-service investment opportunities you foresee as businesses reopened. Any color you care to add about what's on the self-service roadmap ahead in 2021?

And then maybe just a quick one for David, the letter also highlights lower healthcare costs than anticipated. As soon as more than just on an absolute basis due to lower headcount, is that on per employee basis? And if so just you could add some color on that as well be great? Thank you.

[Jeremy Stoppelman, Chief Executive Officer]

Alright. Yes, happy to talk more about self-service. Going back to our long-term strategy, a big part of that is our shift in go-to-market leaning into really profitable channels like self-serve. We made really healthy progress in that channel, self-serve revenue again moves up 30% year-over-year and that's driven by retention as well as acquisition. And some of our investment of course is happening on the pure product side, just enhancing the flows, making advertisers have an easier time to get started streamlining that. But then also some of the engineering and marketing have this happening on the performance marketing side. And so we're building – rapidly building muscle in that area as well. So those are some of the things that are driving the performance there.

[David Schwarzbach, Chief Financial Officer]

And Dan, this is David. Thanks for the question. On the healthcare expense, it is adjusted for headcount. Obviously we're modestly behind on headcount in the quarter, and so that has an effect, but we did see on a per employee basis that we had lower expense per employee. And again, I think overall as we've gone through the pandemic, we have been – we have seen that employees have availed themselves less of healthcare than is probably the historical norm. And so that has seemingly continued at least in the first quarter.

[Dan Salmon, BMO Capital Markets]

Okay, great. And maybe just to follow-up, I mean, is that just people needing to get back out, we're going to the doctor again?

[Jeremy Stoppelman, Chief Executive Officer]

Yes. I mean, it's fundamental. People are pretty apprehensive about heading out and I think in particular to doctor's offices and maybe doing everything they should be doing. And so I would expect as people have gotten vaccinated are more comfortable that we'd see things similar to what they haven't been on an historical basis.

[Dan Salmon, BMO Capital Markets]

Yes. Okay. Thanks you.

[Operator]

Our next question comes from Ygal Arounian with Wedbush Securities.

[Ygal Arounian, Wedbush Securities]

Hey, good afternoon guys. I want to maybe set a little bit of time on the non-term contract retention rate. Obviously doing a lot of things there to improve that and then you wrote in the letter, lower CPC contributed to record retention rate there. So can you maybe spend a little bit of time on where you think you are there and you can continue to improve that retention rate, and exactly what kind of what you're trying to imply there with the lower CPCs?

[Jeremy Stoppelman, Chief Executive Officer]

Yes. I mean, ultimately we want to hang on to every customer that we possibly can deliver performance for. So that's been a big area of focus for us and actually ties back to our long-term strategy of creating more value for our advertisers. We talked about in previous quarters, just the percentage of monetize leads, I think in Q4 we were talking about something like 20%, we've made progress on that, but there's just an enormous amount of leads flowing through our system, many of which are flowing to our advertisers. So we poured a lot of product and engineering bandwidth towards bringing that number up and making sure that our ads work for advertisers and our increasingly performance. And if you are one of our advertisers, you should feel that impact. You should be getting more customers and therefore stick with us longer.

And it does seem like we are seeing that. The impact of all that work, some of that shows-up in lower pricing, but it also shows up in retention. There is another piece too, which is as we've shifted our go-to-market more towards Self-serve, if you sell yourself the product, you tend to stick longer. And so, that's playing out as well. We see better retention rates in our Self-serve channel and that's been growing rapidly and represents about 40% of our SMB starts at this point.

[Ygal Arounian, Wedbush Securities]

Thanks. So, on that point, just to follow-up on the Self-serve versus sales, maybe obviously Self-serve is contributing and growing faster. Are you where you want to be with the balance between Self-serve? And there has been a lot of focus on the local side, but maybe you could just touch on both local and multi-locations. Thanks.

[Jed Nachman, Chief Operating Officer]

Sure. This is Jed. I think from a channel strategy perspective, our long-term strategy, and we've talked about this for 18 months or so now, is to kind of shift a lot of that focus from local sales onto the Self-serve and multi-location strategy. And that was certainly accelerated by COVID right now. I think we have about 50% of the local sales force that we did kind of prior to the pandemic. We're seeing number one, a really nice production out of the existing sales people, a lot of veteran kind of experienced reps contributing from a production perspective.

But you are certainly seeing some of that acquisition come into Self-serve and we feel really comfortable with kind of the mix at this stage. We're going to continue to kind of improve that business on our platform on the Self-service side, but it also benefits the – everybody we bring in on the sales side as well. And on the multi-location side, we've been really focused on building out that team and specifically the attribution capabilities and products. We have to be able to prove that the dollars that are spent on the Yelp platform are actually yielding either online conversions and/or in-store or in-restaurant consumers. And so that has been moving along nicely and we've seen a solid recovery in terms of those paying advertising locations in that particular segment.

[Ygal Arounian, Wedbush Securities]

Great, thank you.

[Operator]

Our next question comes from Chris Kuntarich with Deutsche Bank.

[Chris Kuntarich, Deutsche Bank]

Hi. Thanks for taking my question. Maybe first one for David. I think yes, when you started – it was effectively around the time of COVID. And so, I guess, there it's been kind of noisy for you guiding, but it's been two quarters now in a row where you've been above behind your guide. And I don't think we've had a chance to ask you kind of how your philosophy is around guiding and whether or not kind of the guide is a guide? Are you looking to do more of a beaten raise sort of strategy or approach to it? And then just – could you help us think about taking up the full year revenue guidance by $15 million at the high-end, and then similarly taking EBITDA guidance up by 25? Thanks.

[David Schwarzbach, Chief Financial Officer]

Thanks for the question, Chris. So a couple of pretty important components. The first, of course, is that as we think about our business performance, what we want to ensure is that we're continuing to execute on our strategy and what we saw in the first quarter is that our strategy is working. When you think about record Services revenue, we can see that we are continuing to improve monetization as Jeremy mentioned. And we're also in the process of enabling our Self-serve customers to really do more and so retain better, when we look at Self-serve starts that's also doing incredibly well in retention.

So as we think about the way that we want to approach forecasting, we want to continue to reflect in our forecast from a medicine that we have in the business. And I guess I would remind you that as much as we're all looking forward to continued performance across the economy, there continue to be uncertainties. And so as the way that I think about the guidance that we provide is that it's a balance between the visibility that we have the uncertainties of our business and ensuring that we are making strong progress against the goals that we set for ourselves from a capital allocation perspective. So, all three of those elements come together in the way that we present guidance.

In terms of the full year numbers, clearly, we were somewhat behind on hiring in the first quarter. And so, we wanted to share where we actually have added into the guide for the year those numbers, but we expect to be back on track. One thing I would say about hiring in the first quarter just to differentiate because product and engineering has become such an important part of our strategy. We were very pleased with our hiring there, and that is very much on track. Where the hiring was a bit behind was in our local sales force. And for that local sales force, we are beginning to make up grounds during the second quarter and continue to focus on it.

The other thing is clearly we want to be able to invest in marketing, given the improvement in conversion that we've been driving when people land for this site and go through those Self-service flows. So looking at the full year guide, we definitely see that we are doing well against the plan that we set for ourselves. We're able and pleased to be able to raise the guide for the year, but there was a bit more and from a cost perspective in the first quarter that had to do with performance against some of the hiring that we wanted to do. And that's why you'll see that adjusted EBITDA comes up a bit more than revenue.

[Chris Kuntarich, Deutsche Bank]

Got it, very helpful. And maybe if I could just have one follow-up for either Jeremy or Jed, there has been a lot of news lately around the $29 billion Restaurant Revitalization Fund. And it seems like the spending should be pretty open-ended as far as how the restaurants could be able to spend these dollars that they'll be receiving. So I was just curious if you guys – yes, is there anything specific that you have lined up at this point to go and try to capture the advertising dollars that are going to be spending all from this Revitalization Fund as these restaurants get back up and running?

[Jeremy Stoppelman, Chief Executive Officer]

This is Jeremy. I mean, our perspective is businesses are getting back to it and we want to participate in that. So, we have definitely put together reopening plans and making sure that our marketing team is reaching out and getting the message out and driving as much Self-care as possible, as well as activating our local sales team, as well as our multi-location team. So, from a general account, hey, are we tackling the reopening and are we excited about it? And are we getting our teams granted rounded? Absolutely. Do we have specific initiatives against the Revitalization Fund? No, but obviously if businesses have more money in hand, that should be a good thing. So, we're happy to see any additional funds that flow into restaurant and retail.

[Chris Kuntarich, Deutsche Bank]

Got it, thanks.

[Operator]

Our next question comes from Trevor Young with Barclays.

[Trevor Young, Barclays]

Hi, thanks for taking the questions. Just two from me, dovetailing on one of the earlier questions. Can you provide an update on the results you're seeing with bundling? It seems like you're leaning in there, not just be curious, some early learning’s from the upgrade package as well as the combination of Reservations and Waitlist. And then separately what contributed to the acceleration in Request-A-Quote growth this quarter? Thanks.

[Jed Nachman, Chief Operating Officer]

Sure, Trevor. I can take the first one. It's Jed. On the bundling, we've been really pleased with the results thus far on the bundling. I think it goes back to what Jeremy was talking about prior, which is just providing more value for our customers. We have different forms of bundles depending on what vertical you're in on the restaurant side. We can do things like bundle. Waitlist plus adds plus connect. And it turns out that those three things as an example of work in tandem to create a lot of value for our customers and create some stickiness there and we're seeing that.

On the Services side, if you look at the introduction of things like logo and portfolio and if I'm in the Services business, this gives me just another reason to kind of distinguish myself from the crowd. And in circumstances, as an example, or Verified License as an example, in situations where someone may not have as much of a reputation on Yelp, it gives a pallet for those service customers to actually go out and tell their story and tell why they're trustworthy. And so, we feel like the bundling strategy – it's in its early days and we're going to have a variety of those kinds of going forward as we add product into the mix, but we're happy with the bundling thus far and you should – are looking towards kind of continuing on that path.

[Jeremy Stoppelman, Chief Executive Officer]

And for the second part of the question Request-A-Quote growth, we're very pleased to see a Request-A-Quote growth 30% year-over-year. As you mentioned, what's happening in the macro is obviously – COVID has ended up with a lot of people moving house. And when you're doing that, there are all sorts of account services that can go along with that, whether you're getting ready to sell or whether you're moving into a new place, or whether you're referring to the net up for work-from-home, all of that has created robust consumer demand.

And I think that's also reflected pulling back a second to our – if you look at our home services, revenue performance up 15% year-over-year. That's really great to see as well. What are we specifically doing to drive some of that performance while we have tons of leads flowing through our system? We talked about how approximately 20% in Q4 were monetized. We're continuing to make improvements to drive more of those leads into our advertisers raising performance. We're also trying to improve our matching.

So every time that we're pulling out the different potential advertisers to match with the consumers' request, we want to get those as accurate as possible. So we're not wasting any of our inventories. We're also making slow improvements, just making it easier for consumers to make that request, making it more accurate, collecting the right information based on the category, and things like that. And so I think all of those elements are combining to deliver the performance that you saw. And we're pleased with it. It's been a real area of focus and Home & Local Services is a core part of our long-term strategy.

[Trevor Young, Barclays]

That's really helpful. Just a follow-up on that. Can you provide an update on the percentage of monetized leads there versus the 4Q step?

[Jeremy Stoppelman, Chief Executive Officer]

It has improved since Q4.

[Trevor Young, Barclays]

Great.

[Jeremy Stoppelman, Chief Executive Officer]

I don't know David if we have any more color than that.

[David Schwarzbach, Chief Financial Officer]

We're not providing additional detail on the progress that we're making – that we made here in the first quarter. We remain focused on it. And as Jeremy said, it has improved.

[Trevor Young, Barclays]

Great. Thanks.

[Operator]

[Operator Instructions] Seeing no further questions, we actually have a follow-up from Chris Kuntarich of Deutsche Bank.

[Chris Kuntarich, Deutsche Bank]

Yes. Just quick follow-up on thinking through PAL versus revenue per PAL. Could you help us think about it on a sequential basis? And from 1Q and I saw you had made the comment in the letter that PALs in aggregate were back to 4Q or roughly around 4Q levels in March. So was just curious that this implies that service PALs grew throughout the quarter, yet this was just restaurants. Thanks.

[Jed Nachman, Chief Operating Officer]

Sure. This is Jed, Chris. I can take that. Our PALs from a Services perspective, we were down 4% year-over-year whereas restaurant, retail and other down 15%. And so, there's certainly makes a lot of sense if you think about kind of how the recovery has happened thus far although we did see acceleration in PALs throughout the quarter, particularly in multi-local, we're back to kind of Q4 levels in terms of where we are.

We expect that Services will continue to be kind of resilient for us and restaurant, retail and other to make some progress as the recovery continues. Ultimately, we're focused on both kind of the revenue per PAL as well as the number of PALs and have a bunch of initiatives on both fronts. You should expect that some of those metrics can fluctuate especially within the retail, restaurant and other segment over time depending on seasonality and other factors like that.

[Chris Kuntarich, Deutsche Bank]

Got it. Thanks.

[Operator]

This will conclude our question-and-answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect.