Yelp Inc

NYSE:YELP

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Q2 2018 Yelp 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. 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, Yelp, Inc.]

Good afternoon, everyone, and thanks for joining us on Yelp's second quarter earnings conference call. Joining me today are 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 margin, which are non-GAAP financial measures. In our Shareholder Letter released this afternoon and our filings with the SEC, each of which is posted to 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 GAAP net income margin to adjusted EBITDA margin.

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

[Jeremy Stoppelman, Yelp, Inc.]

Welcome, and thank you for joining Yelp's second quarter conference call. I hope you've had a chance to read the Shareholder Letter published earlier today.

Yelp had a strong second quarter, with advertising revenue growing 21% year-over-year. The decision to move away from fixed-term contracts has opened our sales funnel and we're executing well, adding a record number of advertising accounts during the second quarter. Customer retention is different under non-term contracts. And so far, what we're seeing in account and revenue retention is matching our expectations for the transition. Meanwhile, investments in other areas such as in restaurants and home services, are showing great momentum in terms of users, businesses and monetization.

We delivered revenue and adjusted EBITDA above our outlook for the second quarter and have bought back $66 million in stock year-to-date. We're looking forward to the second half of the year, and I believe the company is well positioned in local.

[Charles C. Baker, Yelp, Inc.]

Thanks, Jeremy. Before we open the line for questions, this is Lanny Baker, CFO, there're couple points I want to address kind of right off the bat, the repeat rate and our outlook for the year.

We've gotten a number of questions on repeat rate since we began the transition to non-term advertising. And I want to provide some clarity on what it's measuring and how the underlying drivers are moving. This measure of customer loyalty has historically shown that 75% to 80% of Yelp's customers in a given quarter have typically also been advertisers who are active at some point in the prior year.

Now, in the last two quarters, the repeat rate percentage has declined to 71% to now 69% in the second quarter. The reason that the percentage of repeat customers has declined this year is that we've significantly increased the number of brand-new customers in the mix. And new customers, by definition, cannot be repeat customers.

So, essentially, the denominator of total customers, including pre-existing and new in the period is growing faster than the numerator of preexisting customers. And so the percentage has declined. I think it's important to recognize that the numerator, which is the count of repeating advertisers, is very definitely growing at Yelp. Repeating customers grew quarter-over-quarter every quarter last year, and have grown quarter-over-quarter each quarter so far this year.

And the year-to-year growth rate of repeat advertisers, which was mid-teens throughout most of last year, accelerated to the high teens year-over-year in the second quarter of 2018. So what's happening is, non-term advertisers are repeating. New customers are coming in. And what we're seeing in the repeat rate is actually a normal and healthy trend given the way this ratio's calculated. Hopefully that provides a little bit of clarity.

Now, let me provide some detail on the outlook for the year. On revenue, we've adjusted full year outlook range to $952 million to $967 million. That's a $9 million increase on the lower end of the range that brings the midpoint up by $5 million. The top end of the outlook range is unchanged, and this reflects the positive impact of ad revenue upside in the second quarter of 2018 offset by a reduced outlook for other services revenue for the year. The $2 million or $3 million reduction in outlook for other revenue reflects an investment spending decision we made recently to slow the outbound marketing at Yelp WiFi and focus primarily on Yelp Reservations and Nowait where the product market fit is strongest at present.

That brings me to adjusted EBITDA. Our new outlook for the year is $186 million to $192 million in adjusted EBITDA, which at the midpoint is also $5 million higher than our prior outlook for adjusted EBITDA and would represent ad increase in margins of roughly 1-percentage-point versus 2018. The remaining components of the outlook are all presented on page 14 of the Shareholder Letter.

And with that, let's open up the line for questions.

[Operator]

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

[Mark A. May, Citigroup Global Markets, Inc.]

Thanks for taking my question. Just curious what your – I apologize, I didn't see what the number was for the quarter, but if you could just update us on your thinking for sales force expansion this year, especially considering the success that you've seen so far with non-term and the pickup in productivity there. Do you continue to plan to hire, as you have in the recent history, in the teens, grow the sales force, or are you thinking differently given how much more productive the existing team is?

And then, I don't have the language right in front of me, but I think in your letter you used, in your guidance section, continued conservatism as a result of non-term. Can you just talk about why you're still kind of thinking in that regard, maybe just clarify a little bit what you mean by that? Thanks.

[Joseph R. Nachman, Yelp, Inc.]

Sure. Hey, Mark. This is Jed. I'll take the first part of the question. Right now, we have a total of 3,300 or so heads in the sales force. In the beginning of the year, we talked about a high teens growth rate for that sales force, and we continue to kind of track on that and have no specific changes for the remainder of the year.

[Charles C. Baker, Yelp, Inc.]

And, Mark, on the outlook that we had for the year, as we came into this year, it's really clear, I think, to everybody on the call, we're undergoing a pretty major transition in our go-to-market and our selling structure. After selling term contracts for most of our business over the last decade plus, we're now, since the end of May or since the middle of May, we've switched over to where we're selling non-term contracts.

And it's really different. Sales force productivity on a deal count basis is a lot higher. There's a lot more trial purchase activity. The churn dynamics are different in the early months, although they look pretty similar after first few months to the term patterns that we'd seen. And all of that leads us to say, this is our outlook for the year, but we have caution. We want to be clear that this is a major transition. So far, it's gone generally in line with our expectations. We're pleased with the results we've seen through the first six months of the year, and in another couple quarters we'll be sort of solidly through this transition. But I think just our feeling is, when you're undergoing this kind of a transformation, it's prudent to be cautious about it, which we remain.

[Mark A. May, Citigroup Global Markets, Inc.]

Great, thanks.

[Operator]

Thank you. And next question comes from the line of Mark Mahaney of RBC Capital Markets. Your question, please.

[Mark Mahaney, RBC Capital Markets LLC]

Okay. Let me try two questions. The growth in non-term contracts, is that particularly helping you with certain verticals, and verticals that maybe you were having a harder time getting traction with term contracts? And then, it seems like you're removing friction for advertisers, so I don't know why that wouldn't be an overall benefit to the sales model and that's exactly what's playing out. Does this create kind of a platform flywheel opportunity for you to maybe go back one day and start spending more on advertising focused on consumers? Now that you've expanded the number of advertisers, maybe the offering from the advertisers' side, from the local merchant's side is more robust. And therefore, there's the incentive or the opportunity to then try to accelerate consumer growth to the platform. Thank you very much.

[Charles C. Baker, Yelp, Inc.]

Sure, Mark. In terms of the response of advertisers and local businesses to the switch to non-term contract by category, surprisingly, it's pretty consistently favorable across all categories. We haven't seen a major shift. Home services continues to be the fastest-growing category, whether it's term or non-term. And I don't think there's been a big shift there. We are seeing, there are probably some pockets of seasonal sort of shorter term advertising activity in certain categories that relate to sort of seasonal service businesses. And there's a little bit more of that in the mix, sure, but not in a way that's really changed the overall mix. I'd say, the appeal of non-term is there for all categories across the marketplace.

On your flywheel question, we have a position today where – we have a lot more advertising inventory than we have currently sold. And so, we're not in a situation where, as we attract more businesses, attract more advertising demand, we've got a shortage. Perhaps in a certain geography, in a certain category, there might be some tighter advertising conditions. But across the board, we have got plenty of advertising inventory. So, we're not in the place where we're probably going to drive the marketing flywheel on the ad side. But I will say, on the transaction side, it maybe gets a little bit more interesting. And things like food ordering and perhaps in the home services category, where there's a tighter link potentially between the customers coming in and the revenue that we generate on the back end of that. You could start to see that activity and that's, frankly, why 18 months ago we began to build proficiency in performance marketing that we have today that we really didn't have two years ago.

[Mark Mahaney, RBC Capital Markets LLC]

Okay. Thank you, Lanny.

[Operator]

Thank you. And next question comes from the line of Doug Anmuth of JPMorgan. Your question, please.

[Douglas T. Anmuth, JPMorgan Securities LLC]

The question, just, when you think about the 31,000 net ads in the first half of the year, and I think you talked about it being roughly equal to the five previous quarters. How do you think about the sustainability of that growth and the degree to which perhaps there's an initial surge of kind of pent-up demand or sales force success with the move to non-term versus potentially sustainable run rates going forward?

And then secondly, can you just elaborate a little bit more on the monthly spending levels in non-term? And then also, your comments on seasonality, just as they relate to new non-term advertisers versus kind of the business previously? Thanks.

[Joseph R. Nachman, Yelp, Inc.]

Yeah. Hi, Doug. This is Jed. Kind of on the sustainability front, one of the reasons we've started to kind of test this thing a while back and I want to say it's been close to two years that there's been some version of testing on the non-term contract model was to kind of see what the durability of our territories kind of showed over time. And did you get to a point where after a certain amount of time, that territory couldn't yield as much. And so, the truth is, we've seen the kind of consistent trends throughout. And we now have territories that have worked under this model for a couple years now, and really haven't seen any degradation in terms of the opportunity. So, to-date there's been no indications that that we can't continue to kind of really sell into those.

And as Yelp continues to grow its review base and photo base, and more businesses are kind of brought into the ecosystem, we have a natural replenishing mechanism that exists. And so, certainly you have businesses that go out of business and a bunch of businesses that start out. And so, for the most part, we think, all of our reps and Yelp, in general, has a lot of opportunity to kind of grow into the 17 million businesses that are out there.

[Charles C. Baker, Yelp, Inc.]

On the advertiser revenue question, Doug. If you look at like a top-level calculation of monthly revenue per advertiser, what I think you'd see right now is that there's kind of a single-digit year-over-year decline, probably 7% or 8% year-over-year decline in average monthly revenue per advertising account. There's a lot of stuff that goes into that, but the big thing that is changing there is the trial purchase activity. That means, an advertiser will be counted as an advertiser, but may only come in for a partial term of the quarter or even a partial term of the month. And that trial purchase activity is going to blend down the observed revenue per account. But when you look at the spend commitments that the advertisers are coming in with and you look at the monthly spending of preexisting advertisers, those numbers are exactly consistent with what our history has been. The monthly budget commit is in the same range as it was when we were selling 12-month contracts. And anything you're seeing on the observed ARPU is really just a reflection of a different trial purchase behavior right now. So, I think we'll get to a place where that trial purchase will sort of equalize in the mix of our business at which point we'll probably see the revenue per account stabilize as well.

[Douglas T. Anmuth, JPMorgan Securities LLC]

Great. Thank you.

[Operator]

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

[Lloyd Walmsley, Deutsche Bank Securities, Inc.]

Thanks. Reading the Shareholder Letter, it just seems like the shift to non-contract is going exceedingly well, and then you talk about accelerating local revenue, 3x growth in gross ads, increasing reactivation and expectation for continued improvement in sales rep success. So, just to some extent the guidance seems excessively conservative and not at odds with just what looks like a really strong performance out of the gate.

So, just wondering, I mean, is there anything you're seeing that gives you pause aside from simply the newness of this go-to-market approach that you would just call out in terms of what might explain part of the caution in the guidance?

And then second one, just on Request-A-Quote. Can you give us an update on what kinds of monetization tests are going outside of just docking business as a paid click? Where are you seeing the most success on that? How should we think about the monetization path outside of just the click business in Request-A-Quote over, call it, the next year or so?

[Charles C. Baker, Yelp, Inc.]

Yeah. I think I'd say on the non-term question, you're right, on the selling end of the market, we've been really pleased with everything we've seen. And the second part of that is how we do on trial purchase conversion and ultimately on account retention. And the purchase of a 12-month contract by a local business at a $3,000 or $4,000 price point is a very highly considered purchase. The purchase by a local business of a $400 monthly commitment that's good until canceled is just a different beast. And until we've got more data under our – in the house here, I'd say that the thing that we remain cautious about is customer retention, trial conversion and sort of how that settles out.

It's clear that opening up the sales funnel is bringing a lot of new customers, it's bringing a lot of revenue right at the front of the curve. We're also continuing to sell those long-term customers just like we always had, the ones that will be the Tried and True long-term Yelp customers. But it's such a transition that I don't think we have found kind of the new normal yet entirely on the account retention and revenue retention side and until we do, we're just going to continue to be a little bit cautious of it.

[Jeremy Stoppelman, Yelp, Inc.]

And then on the second question you had there, Lloyd, this is Jeremy. Home and local has been just an incredible category for us. We're now at $300 million in ad revenue on an annualized basis. And you may have noticed $35 million of that is attributable to Request-A-Quote. So, essentially, add inventory that we started to incorporate and can take credit for and that's grown substantially since the first quarter, which I think it was in the low 20s.

If you go back to the launch of Request-A-Quote, since the launch, home and local as a category has been growing about three times faster than the rest of the business. So, I think that's pretty good evidence that Request-A-Quote has essentially been an afterburner on this already successful category for us. We do have lot of experimentation we've talked about in the past, it continues. I don't have anything new to break out for you right now but we'll definitely keep you posted.

[Lloyd Walmsley, Deutsche Bank Securities, Inc.]

Okay. Thank you, guys.

[Jeremy Stoppelman, Yelp, Inc.]

Sure.

[Operator]

Thank you. Our next question comes from the line of Matthew Thornton of SunTrust. Your line is open.

[Matthew C. Thornton, SunTrust Robinson Humphrey, Inc.]

Hey, good afternoon, guys. Thanks for taking the question. A couple if I could. Lanny, in previous quarters, you talked a little bit about how you kind of moved some of the marketing spend towards engagement and away from kind of getting new users into that funnel. Just any thoughts there at the margin about that shift and whether you're thinking about shifting that back towards new user acquisition in the back half of the year?

And then just secondarily, when you think about the new kind of non-term contract, is there any tie-in or education being done tying it into a self-serve platform, meaning, these users are up and running on this kind of lighter weight lower friction model and then getting them to use this on a self-serve basis and thus lowering the sales force intensity behind this initiative? Any thoughts there would be helpful. Thanks, guys.

[Charles C. Baker, Yelp, Inc.]

Sure. Let me talk about the marketing and I'll let Jed talk about what we're doing from a customer engagement perspective.

On the marketing front, and really on the product front as well, as Jeremy said, we focused on engagement and been really pleased to see the rate at which review volume is growing, the rate at which photo submissions are growing, searches, clicks, Request-A-Quote, setting a table, reserving and getting yourself on a wait list, ordering food, all of those indicators of engagement are growing stronger than overall user growth. So, the folks that we've got are becoming more and more engaged in Yelp, which is really important, particularly on the mobile platform where being that sort of weekly habit is essential to obtaining and retaining placement. And so those have been real high priorities for us.

As we've got things like food ordering where there's a very clear monetization model on the back end, it starts to make some sense to be able to drive marketing spending to drive orders and the like. But I think, most of our efforts to drive engagement thus far has really been more product than it has been on the marketing front. The performance marketing activity that we're doing has been to acquire new mobile app downloads, and we're looking at some things there that are, which phone platform is the right one for us to focus on and various different things we're trying to do with marketing channels.

But I don't anticipate that, at least not in the next six months, there'll be any big change in our marketing plan. We'll continue to probably weight it toward user acquisition and we'll see what the plan unfolds for next year. If I was to look today around the corner to next year, I'd say the one place where I do expect we'll spend more going forward will be on business owner acquisition, which is a relatively small portion of our marketing spend today. But as we've got the self-serve channel lined up, that's probably an area where we'll spend a little bit more in the future kind of looking out. No big change that we're telegraphing there, but at the margin, that's probably the only change I'd note for you.

[Jeremy Stoppelman, Yelp, Inc.]

Yeah. And I think, Matthew, the question was around education that the sales force might be doing for non-term contract customers, and then what can we do on the self-serve side. It's really interesting with this shift, the mechanism by which new customers kind of enter the Yelp ecosystem is the same, and so if I'm a rep on the phone with the business, I actually bring them into the BOA, they self-provision with the BOA with the rep on the phone. And so we have this really unique opportunity that we haven't necessarily had in the past, that you automatically have that business owner engage from the moment they start out with Yelp, whereas in the past they may have had a contract, so it was back and forth. And you had to kind of get them on-boarded into the BOA.

And so what I think that means for us is that a lot of our efforts will be centered around that on-boarding initially when customers come to us, whether it's through pure self-serve or whether through the non-term contract, self-provisioning guided by the rep. And so, we have an opportunity to show them the future that allow them to have more control, make sure that their pages are set up correctly, and do that through the product a little more than we have in the past because we've got that engagement. And in fact, a lot of the results that we've seen initially in the non-term contract transition, have shown that business owners are much more engaged in the BOA. And so that's a great kind of canvas for us to be able to kind of bring people through that Yelp customer journey. And I think that's the real part that we will focus as it relates to both education and then hopefully moving retention numbers up in the right direction.

[Matthew C. Thornton, SunTrust Robinson Humphrey, Inc.]

And point of clarification, BOA, business owner app.

[Jeremy Stoppelman, Yelp, Inc.]

Yeah, sorry. Yes.

[Joseph R. Nachman, Yelp, Inc.]

BOA is business owner app.

[Matthew C. Thornton, SunTrust Robinson Humphrey, Inc.]

Yeah.

[Operator]

Thank you. Our next question comes from the line of Steven Ju of Credit Suisse. Your line is open. Mr. Ju, your line is open. Please make sure your line is unmuted. Lift up your speakerphone, if you have a handset. We'll go to the next question, Brian Nowak of Morgan Stanley. Your line is open.

[Brian Nowak, Morgan Stanley & Co. LLC]

Thank you so much for taking my questions. I have two. The first one, on Request-A-Quote, can you just talk to whether you're seeing sort of definitive evidence of it leading to new account growth or higher spend per account, sort of incremental new accounts or incremental actually dollars per account? And the second one, Lanny, just going back to one of the comments you made earlier, you mentioned how there was pockets of shorter-term or seasonal advertising helping you in this quarter. Any help on what that was and how large that was in the quarter? Thanks.

[Charles C. Baker, Yelp, Inc.]

Oh, on the seasonal advertising, it wasn't big enough to really be measurable. Mark asked the question, are we seeing big change in customers who are more responsive to non-term or not. My response was really, no, it's kind of across the board. But at the margin, there's a little bit more of that seasonal activity. And you'll get some summer season, you'll get some winter season. I don't think it'll really change things in a dramatic way.

On your other question, which is about Request-A-Quote, in the home and local category overall, revenue per advertised location is 2x what it is in other categories. And revenue per business page view is 5-plus-times what it is in other categories. And as we've introduced Request-A-Quote over the last two years, we've seen the gap of those sort of ratio of monetization of pages or monetization of businesses in the home and local category relative to all the other categories, that gap has widened.

So, it's pretty clear. I think you made pretty clear inference that the product upgrade on the consumer side that's bringing them through to businesses with these very well-articulated, very specific requests for service, and then the visibility that the businesses have into those, and the way we've been able to promote advertisers into that channel, has really clearly helped monetization.

So, yes, we've seen over the last, probably four years, the growth rate of service providers in the home and local category relative to everything else has been faster than other categories. But that margin of the growth rate of advertisers in home and local, relative to everything else, has widened over the last 18 months as we really started to deploy Request-A-Quote. So, it's sort of like pretty much every metric you would look at, search volume, review volume, businesses that are reviewed, new advertisers, new claims, revenue per page, revenue per advertiser, in every dimension, home and local is the strongest category for us. And its margin, relative to other categories, has widened on just about every one of those measures over the last couple years.

[Brian Nowak, Morgan Stanley & Co. LLC]

Great, thanks.

[Operator]

Thank you. Our next question comes from Deepak Mathivanan of Barclays. Your line is open.

[Ryan Gilligan, Barclays Capital, Inc.]

It's actually Ryan, on for Deepak. So, a follow-up on the guidance color commentary you said about continued clients of around PAAs going forward. Can you just give us a sense of what might be backed into your second half outlook, just specifically as it relates to PAAs? And maybe what is a reasonable run rate for net adds going forward?

And then, as a follow-up to the comments you made about ad revenue per account, can you just remind us about the timing differences between when you see some of that numerator start to catch up with the denominator? Or in other words, the 70,000 record net ads you saw this quarter, is that something that we benefited from 2Q and immediately in 3Q? Or is that longer terms you see it flow through the model? Thanks.

[Charles C. Baker, Yelp, Inc.]

It was a little bit hard to hear you question, so I'll repeat it, at least what I heard of it. One was, what is the paying advertiser account assumption within our outlook for the second half of the year. And we haven't provided one. We've given you a revenue and EBITDA outlook and couple other components of it. And that's not a number that we've historically provided an outlook toward. As I said, I think we've been pretty clear, the reps are closing more deals more often. And I would anticipate that we will add a stronger number than we did before we made the transition, but nothing more specific than that.

Your second question seemed to be about the impact on revenue per account and when that sort of stabilizes. And to put it at its starkest and simplest, in May of next year, we will fully anniversary the transition at which point I would expect that we've fully moved through the sort of the transition's impact on metrics.

Now, we'll probably get there a little bit earlier than the second quarter of next year, where things will start to stabilize. But over the next couple quarters, I think you're going to see the mix is going to be continuing to blend toward the non-term mix. And probably we'll see the revenue per account come down a little bit further. But that's part of what we're playing for here is, growing revenue by expanding the number of customers that are coming in to touch Yelp, and then continuing to innovate with products that keep them and bring them back. So that's pretty consistent with our expectations, and that's reflected in the outlook that we've given you.

[Operator]

Thank you. Our next question comes from the line of Peter Stabler of Wells Fargo Securities. Your line is open.

[Peter C. Stabler, Wells Fargo Securities LLC]

Thanks for taking the questions. A couple. First one for Jed, just a clarification. Can you remind us on the no-contract, are there daily minimums? If so, what are they? Or are they weekly or monthly?

And then, I guess one for Jeremy. As we look at the claimed businesses, so the millions of businesses that continues to grow pretty solidly, can you characterize, at all, the kind of activity levels, right? So, if we rewind the clock and look at a business that claimed their profile two years ago but has not yet been converted as an advertiser, how many of those are being actively managed and updated, et cetera? How many of those? Even if you could just give us general color, or have gone dormant? Just trying to get a sense of general activity levels for the millions of claimed non-paying customers. Thank you very much.

[Joseph R. Nachman, Yelp, Inc.]

I can take the first one. In terms of daily minimums, I don't think there's an explicit daily minimum. I could be wrong, it might be $1 or something like that, or $3. Certainly when you're looking at clicks and the varying prices on clicks, you got to have a certain amount in the budget to even get clicks. And so, we're merchandising them at a much higher level than that. And in general, they've been in line with how we've always merchandised under the contract world kind of at an average of $300-plus on the ad budget side.

And we do not have a weekly minimum, and folks can come in and out as they please. There's certainly a lot of work we can do on the merchandising side within the business owners' account, but there are no specific daily minimums. And then in terms of – I don't know if you want to take the claims.

[Jeremy Stoppelman, Yelp, Inc.]

I could talk to, yeah, I think what you're asking is, are the activity levels in the business owner account rising, or business-facing website and business-facing app? And I would say, yes, they've been climbing, especially with the transition to the non-term contract, and also with the success of Request-A-Quote. Because to participate in Request-A-Quote, you generally need to come to the business owner site or business owner app in order to get your messages and respond in a timely fashion. And so, we've seen a pretty consistent rise as that features become more popular.

[Peter C. Stabler, Wells Fargo Securities LLC]

Thanks, guys.

[Operator]

Thank you. Our next question comes from the line of Ryan Goodman of Bank of America. Your line is open.

[Ryan Goodman, Bank of America Merrill Lynch]

Hey, guys. Thanks for the questions. Two for me. First one, of the 17,000 ads you had to the paying accounts, any sense you have as to how much of that is trial budget that you may have not captured under the prior one-year terms for subscriptions? And I know it's early, but just anything you can share with us on how you're converting these, how successful it's been versus expectations to-date.

And then, the second question is more in the user growth. The app unique device growth has decelerated again. Desktop users were down. I know that's not a big traffic driver, but I think that traffic may be skewed to some of the higher-value verticals. You've talked a bit about performance marketing initiatives under way. But anything else you can add just in terms of how you're thinking about these trends into the second half and 2019? Thanks.

[Charles C. Baker, Yelp, Inc.]

Sure. It's hard to tease out. What would have happened if you hadn't done this, what happened when you did it. But I guess what I would look at, is really a simple way, is if you go all the way back to like 2015, you'd see we typically add 6,000 or 7,000 new customers under the long-term model. Last couple quarters, we've been adding kind of mid-teens number. And the delta is probably largely defined by folks who are coming into the non-term contract model that wouldn't have been there before.

The second part of the question, though, is, or one comment that I'd put on that, that we're pretty encouraged by, is that the growth rate of repeating customers has picked up. And so, the repeat customer count this quarter versus a year ago was high teens. And over the last several quarters, it was sort of a mid-teens growth rate in repeating customers. So what that kind of says is that non-term customers that are coming in on that trial basis in the first quarter are coming back into the second quarter. So that probably gives you a little bit of a picture, but I don't have a way to really tease out exactly how much we'd say is incremental from non-term, but maybe that's a rough way to think about it.

[Jeremy Stoppelman, Yelp, Inc.]

And this is Jeremy, I'll take the traffic question. The app was 15% year-over-year growth. There is a little bit of a tough comp. We had a good year last year, good Q2. There's some international drag in there. But when you peel back the onion and look at engagement, that looks solid with reviews up 21%, page views up 20%, Request-A-Quote up 63%. I could kind of go on with a litany of different engagement metrics that look pretty good. So, we feel solid there.

And then on the desktop side, as you rightly pointed out, it's a little bit less significant. The app represents around 75% of our engagement. And so, desktop's importance has faded. But last year was also a surprisingly good year from traffic. I mean, a lot of that is just fluctuations with Google's algorithm. And so this year, it's a little bit softer but we have plenty of inventory and don't see a real impact from it.

[Operator]

Thank you. Our next question comes from the line of Brent Thill of Jefferies. Your line is open.

[Brent Thill, Jefferies LLC]

Thanks. Good afternoon. I was curious if you could just update us on the performance of the national channel and what you're seeing with some of the larger advertisers if there's anything new. And perhaps just a quick update on the Grubhub partnership and how that's trending.

[Joseph R. Nachman, Yelp, Inc.]

Yeah. Hey, Brent. This is Jed. I'll take the national question. So, national has really been a bright spot for us over the first half of the year growing at a 30% clip. That's up from, I think, 24% and 20% in the prior two quarters. As a reminder – kind of how we segment the national – we call it multi-look, and it includes kind of your large enterprise accounts, your midmarket accounts which is anything from the kind of 5 to 50 location level, and then our franchise business. All three contributed to that growth during the second quarter. And it's been a long process.

The lead times on those accounts are a lot longer and we're really happy that a lot of the efforts that we've put into place kind of in Q3, Q4 and Q1 of this year are really kind of bearing fruit. We're getting deeper into our existing customers and establishing a track record with them and we're bringing on a bunch of new logos that are kind of coming and trying Yelp for the first time.

Of note, we're certainly not going to go, bring it all the way to the bank, but we've done very well in kind of third-party attribution studies. And we used a couple of partners, and typically because of the fact that we're really low down on the funnel, we perform very well. And I think specifically within the large national segment, we live in a world where there are a couple options that you could spend your money for the most part. And that being kind of Facebook and Google, and we're a really attractive third option there.

Certainly, some room to go in terms of the tools that we provide folks to go manage those campaigns. And we're by no means there, but when you kind of look at the reaction in the marketplace as you sit across from some of these larger clients, I believe there's number one, demand for an alternative place to spend. And they really start to see the Yelp value there. So, we're pleased with the national segment. And we're also seeing a burgeoning channel segment as well, which we've kind of dipped our toe into last year and we're a little bit more than maybe the ankle's in the water right now, but we continue to kind of see promise going forward.

[Jeremy Stoppelman, Yelp, Inc.]

On the Grubhub partnership, Brent, this is our first full quarter of being fully integrated with Grubhub, and we feel really good about it. Overall, food orders on the Yelp platform were up in the 30% range year-over-year in the second quarter. That understates the growth of orders that we're driving to Grubhub by a bunch. There are some other partners in there that are not growing as quickly and Grubhub is growing, it's our biggest partner by a large front. And we're really benefiting from the additional supply that they've brought to us and the deliverability that they've brought to all those restaurants. So, as you know probably, we've added a delivery tab to the bottom of the Yelp app and we're doing a lot of cross-promotion within the app to raise awareness amongst users of this new service or enhanced service. Thanks to the presence of Grubhub. So, we're feeling really good about that relationship.

[Brent Thill, Jefferies LLC]

Thanks.

[Operator]

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

[Justin T. Patterson, Raymond James & Associates, Inc.]

Great. Thank you very much. There was a comment in the Shareholder Letter about in-app cross-promotion driving some healthy traffic increases for the home and local services categories. Could you talk about which innings you are, and just driving that cross-promotion, and what leverage you think you can pull to drive more of that behavior going forward? Thanks.

[Jeremy Stoppelman, Yelp, Inc.]

Hey, Justin. This is Jeremy. Yeah. So, we had a number of campaigns that were contained entirely within Yelp properties. So, there were across different platforms. We had some promotions on desktop, various places in the app. And it really works, it raised awareness for particular use cases like moving. And there were a few others that we cited in the letter. And so, we're really encouraged by that. I think it's like the first inning-and-a-half or so, in pushing that idea. But I think we're really excited at how far we were able to drive things, given a relatively small effort.

[Justin T. Patterson, Raymond James & Associates, Inc.]

Great. Thank you.

[Charles C. Baker, Yelp, Inc.]

Yeah. I think I would just add that the thing that's exciting there is that this is all organic. This is Yelp users that are coming in for their daily habit or their weekly fix for restaurants to whom we are making them aware of all the other things on Yelp. And it's giving us a sort of captive growth opportunity from a user perspective.

[Jeremy Stoppelman, Yelp, Inc.]

And I think the really special thing is that it's sustained. So, it's not that we're only seeing lift during campaigns, but we're actually seeing lift subsequent to the campaigns, when the merchandising is gone.

[Justin T. Patterson, Raymond James & Associates, Inc.]

Great. Thanks, Jeremy. Thanks, Lanny.

[Charles C. Baker, Yelp, Inc.]

All right.

[Operator]

Thank you. We do have another question from Steven Ju, Credit Suisse. Your line is open.

[Steve D. Ju, Credit Suisse Securities (NYSE:USA) LLC]

Hey, thanks. Sorry about the mix-up earlier. So, Jeremy, I'm starting to see on the app, Yelp basically asking me if I like this type of food or that type of food to, I guess, gather my preferences which makes the optimist of me start to think about explicit content recommendations you may look to drive to consumer at some point. So, where are you now on that initiative? Is that something that you've tried before? Is it mostly the community managers at any given city that came up with that type of content? So, just wanted to see if I can get some perspective there. Thanks.

[Jeremy Stoppelman, Yelp, Inc.]

Hi, Steven. Sure. Understanding user preferences or consumer preferences and tailoring search and recommendations to them is something that we've been chipping away at for a long time. But we do have some increased efforts there that I think you'll see over the next couple of quarters that I think are really exciting. And so, I'd just say stay tuned. Certainly we know consumers want to be matched with the right place at the right time. And so, we're working hard to make sure that we are the best at that.

[Steve D. Ju, Credit Suisse Securities (NYSE:USA) LLC]

Thanks.

[Jeremy Stoppelman, Yelp, Inc.]

Sure.

[Operator]

Thank you. Ladies and gentlemen, that does conclude the Q&A session and this call. Thank you for your participation and have a wonderful day. You may disconnect.