Yelp Inc

NYSE:YELP

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon and welcome to the Yelp Second Quarter 2021 Earnings Conference 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, SVP of Finance and IR]

Good afternoon, everyone. And thanks for joining us on Yelp’s second 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, CEO]

Thanks, James, and welcome everyone. Yelp had a strong quarter. Net revenue growth was 52% from the second quarter of 2020, resulting in positive net income of $4 million. Adjusted EBITDA grew to a record $64 million representing a 25% adjusted EBITDA margin. Underlying this performance Ylp of 2021 looks very different than it did when we began implementing our strategic initiatives in 2019.

We've elevated the pace of product innovation and made tremendous progress. Advertising revenue from our services categories and self-serve channel as well as our non-term contract retention rate, all reached record highs in the second quarter. These results are a testament to the resilience and creativity of all of our teams. Their consistent execution of our multi-year strategy has transformed Yelp into a structurally stronger business. Consumers continue to come to Yelp to connect with great local businesses through trusted content and reviews.

We were pleased by the rate at which our users returned to Yelp in the second quarter. For example, diners seated via Yelp were up 70% from the first quarter and 45% from the second quarter of 2019, even by all public health restrictions remained in place in several of our historically strongest metros. The services category has been an area of strength for us throughout the pandemic and this continued in the second quarter.

Consumer requests via requested quote grew nearly 30% in the first quarter, and more than 50% year over year. Our advertisers are also seeing greater value from their spend with more high intent clicks and a lower average cost. We were pleased to see our ongoing advertising platform investments pay off in the second quarter as average CPCs declined by 20% and ad clicks increased by 87% compared to the prior year period.

Combined with our increased pace of product innovation over the last few years, we saw strong momentum in our revenue initiatives. Advertising revenue from services businesses in the second quarter was 23% higher than in the second quarter of 2019, while revenue from our self-serve and multi-location channels represented approximately 45% of total advertising revenue. In summary, the progress on our strategic initiatives paved the way for our financial performance to surpass pre COVID levels.

Second quarter net revenue was up 4% from the second quarter of 2019, while adjusted EBITDA margin was up 3 percentage points. We remain focused on continuing to build momentum in our initiatives and we are excited about the long-term opportunity ahead. With that, I'd like to turn it over to David.

[David Schwarzbach, CFO]

Thanks, Jeremy. Second quarter net revenue grew by 11% from the first quarter of 2021 and by 52%, in the second quarter of 2020 as we transition from recovery to growth. In particular, much of this strong revenue performance flowed through to the bottom line, driven by the contribution of our product and engineering teams.

Net income increased by $10 million from the first quarter to $4 million. Despite aggregate non-cash impairment charges of $11 million. We were pleased to see adjusted EBITDA increase by $20 million from the first quarter to reach a record $64 million, representing a 25% adjusted EBITDA margin. As many multilocation advertisers would return to spend, paying advertising locations reached 528,000, an increase of 25,000 from the first quarter of 2021 and 150,000 in the second quarter of 2020.

Advertising revenue from services businesses in the second quarter was at 39% year over year, supported by consumer demand and our ongoing improvements in services monetization. Advertising revenue from restaurants, retail and other businesses improved by 14% from the first quarter, and 76% year over year despite ongoing constraints for local businesses, from both staffing shortages and COVID.

Our margin in the second quarter demonstrates how our business model transformation and growth strategy is driving structural efficiency. Our go-to-market mix shift has made our business more productive and allowed us to maintain a local sales force approximately 50% smaller than prior to the COVID-19 pandemic. Ongoing product improvements have delivered more value to advertisers driving increased retention rates.

In addition, our location and real estate strategies give us additional levers to drive further efficiency over the next several years. That said, in 2021, our focus remains on investing for long term sustainable revenue growth. We do believe that over the long term, we can drive significant adjusted EBITDA margin expansion. Returning excess capital to shareholders in the form of share repurchases is an important part of our overall capital allocation strategy. Since we resume share repurchases in the fourth quarter of 2020, we have repurchased $174 million worth of shares, including $75 million worth of share repurchases in the three months following our first quarter earnings call.

To support this in August 2021, our Board of Directors authorized a $250 million increase to our share repurchase program. Turning to our outlook, our consistent execution of our strategic plan enabled us to deliver net revenue that surpass pre COVID levels in the second quarter, despite ongoing constraints in several of our key categories.

While the pace of recovery in our restaurants, retail and other categories remain subject to the evolution of the COVID-19 pandemic and related public health restrictions, we expect our initiatives will continue to drive momentum in the third quarter. As such, we anticipate net revenue will be in the range of $255 million to $265 million. In addition, our strong second quarter results have raised our growth expectations for the year.

We now anticipate full your net revenue will be between $1.01 billion and $1.03 billion. Turning to adjusted EBITDA, we are focused on catching up on sales hiring in this quarter and plan to increase our investments. As a result, we expect adjusted EBITDA to be between $45 million and $5 million for the third quarter. Additionally, we now anticipate adjusted EBITDA for the full year to fall in the range of $200 million to $220 million.

In closing, our second quarter results again demonstrated how our strategic initiatives have transformed our business. We continue to see a broad set of investment opportunities for the second half of the year, and expect that the continued execution of our long-term strategy will enable us to drive profitable growth along with shareholder value over the long term.

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

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Cory Carpenter with JP Morgan.

[Cory Carpenter, JP Morgan]

Great, thanks for the questions. I had two, first would be helpful if you could talk about what impacts if any, you see in recent weeks as the pandemic has flared up here again in the U.S. a bit? And then secondly, Jeremy, hoping you could talk a bit more about your product initiatives in multi-location, specifically, and Yelp audiences? Thanks.

[Jeremy Stoppelman, CEO]

Hi, Cory, this is Jeremy here. So, to kick things off now, I guess, obviously, you're talking about delta, I would say it's too early to say what the impacts are. I think if you look back historically, obviously, as people get more concerned about their safety, they tend to pull back. But how that will play out with a much more vaccinated population in the markets, obviously, where we're strongest is hard to say at this point. But we have taken some of that uncertainty and baked it into our outlook.

So, our guide for the quarter and for the for the year reflect the impact of delta to the best of our abilities. On the multilocation side, from a product standpoint, we noted that, we started talking about this new product, Yelp Audience Platform. And that's been a really great addition to our portfolio products for multilocation. And in particular, it represents a TAM expansion, essentially, because there are lots of businesses out there that we’re simply not, we're interested in our audience and in the segments that were able to create, but weren't able to spend because they don't have a physical location.

And so, that is really exciting to us. And obviously there, you can kind of see that the business is at a scale where it's really starting to get interesting. We also have talked about Yelp Connect is an interesting product for multilocation. And so, that's really about awareness and reaching out to both your existing customers, getting in front of them, reminding them, that you're there and what your seasonal offering is, et cetera, et cetera.

But then it's also can be repurposed for look-alike audiences. And we have a model that can also say, okay, users that like your type of business, that but maybe haven't seen your business recently, we could still reach out to people that look very similar to them. And so, it's not only just reaching your existing customers, but also extending out to similar customers. And, we're seeing positive impacts in the early -- it's still very early days for multilocation.

But we're seeing some positive momentum there as well. I don't know Jed, if there's any other things you'd like to highlight.

[Jed Nachman, COO]

Yeah, we included a chart in the shareholder letter. But ultimately, we're focused on that consumer funnel and providing products across down that entire consumer funnel from awareness to consideration to conversion. And then retention, connecting one of the retention products both on and off Yelp. And Yelp audiences certainly addresses the off-Yelp component and opens up a potentially larger camp for us with non-location based advertisers.

But you do see with the addition of different attribution products as well we use third party attribution, but we've also been developing our own first party attributional called Yelp store visits. And we believe that's really powerful going forward to have that kind of data set within the Yelp walls. And things like spotlight ads and showcase ads, different ad formats that allow these multilocation advertisers really tell their story the way that they want to tell them.

So, we're happy with the progress on the innovation side within multi-loc. But certainly, there's still room on that roadmap, and we're going to continue to kind of fill out that consumer following.

[Cory Carpenter, JP Morgan]

Great. Thank you, guys.

[Operator]

Our next question comes from Jason Bazinet with Citi.

[Jason Bazinet, Citi]

I just had a basic question on the guidance. It seems like the guidance was raised by about $10 million in the top line, but $25 million on EBITDA for the full year. And then you had a big EBITDA beat in the current quarter. And so, it almost implies something happened on the expense side that was beneficial, but you're sort of viewing as is sort of a one-timer or a transitory. Is that a fair interpretation? And if so, what was the cost that came in lower in the second quarter that may not unfold in the third and fourth? Thanks.

[Jeremy Stoppelman, CEO]

Jason, thanks for the question. So, in the second quarter, we obviously were pleased with our performance on adjusted EBITDA. Fundamentally, we do see this as a strong marker for the margin potential for the business, especially coming on top with a 26% adjusted EBITDA margin that we saw in the fourth quarter. But that being said, 2021 continues to be a year of investment for us.

And so, as we move through the year we're going to continue to focus on investing on the product and engineering side, to drive long term sustainable growth at attractive margins. In terms of the second quarter itself, one thing that's really important to underscore is that the leverage that we see from our investment in product and engineering, we see that flowing through to the bottom line. So, we saw a very strong contribution from the additional revenue that we produced.

We think that is a strong indicator of how we can drive leverage in the future. It's another reason why we are increasing our investment in product and engineering. In the second quarter, we also did see goodness across a number of areas that were very encouraging, including bad debt from our advertisers, where people are paying at higher rates, but we've also taken steps to increase those rates.

We also were somewhat behind on hiring on our local sales team. And so that contributed as well. We're working to make up for that as we move here through the third quarter. And so overall, we obviously feel like we delivered a very strong quarter for Q2. And that put us in a position to raise the guidance for the full year.

[Jason Bazinet, Citi]

Great, comprehensive [ph] financial, thank you.

[Operator]

[Operator Instructions] Our next question will come from Trevor Young with Barclays.

[Trevor Young, Barclays]

Great, thanks. Two if I may. First one, the average CPC being down 20% year on year, that's probably a bit noisy given the 2Q ’20 comp dynamic. Could you maybe help us understand how CPC is trended Q-on-Q directionally and just how that's impacting the non-term budgets and retention of a good flag debt as a benefit last quarter?

And then second one, bigger picture, you gave some helpful commentary a few questions ago about the improving product innovation cadence, which seems to be showing up in features like the showcase ads and the Yelp Connect. What is the pipeline of new ad formats or products look like from here? And where should we expect investments to show up in terms of the consumer funnel versus products versus attribution? Do you have a lot of work left to do on the attribution front? Or is it more on the product front? Thank you.

[David Schwarzbach, CFO]

Trevor, this is David. I will address the first and I'll turn it over to Jeremy to address the second question. And just to step back for one moment, one of the things that continues to be fundamental to the strategy that we set for ourselves is to deliver additional value to advertisers. That's something that we had started focusing on something like two years ago.

And just before COVID, we were seeing real progress, the way we think about driving that is to deliver more clicks at lower CPCs. And there are a number of ways that we do it, particularly through the ad tech platform that we've built, and the match in between consumers and businesses. So, that's the overall dynamic that we focus on and operate against and innovate against.

In terms of where CPCs are, you're right in the second quarter of last year's CPCs did increase because of COVID. And while we did see in the second quarter in comparison was a significantly lower number. That being said, CPCs have continued to trend down. And we believe that we are continuing to increase the value that we're delivering on the CPC side combined, of course with that increase in clicks.

So, when we put those together, what we have found through quite a bit of analytics is that we do see higher retention rates. And that showed up in the retention rate that we saw in the second quarter, which was exceptionally strong. So, net-net, we're pleased with the overall performance. It's in line with quarters after the second quarter of next year in terms of our expectations.

And we're looking forward to continue and drive that down even as we increase click for advertisers to deliver value. With that I'll go ahead and turn it over to Jeremy.

[Jeremy Stoppelman, CEO]

Sure. I'm going to talk about our product and engineering investment in ads. So first up, as you alluded to there, there has been a robust pipeline of innovation and work going into our ad delivery system, improving our matching and it's a really deep well. We think there's a multi-year pipeline of great ideas that will make us more efficient. And by becoming more efficient, essentially creating inventory out of thin air.

And so, that can show up in terms of lower prices, and more value to our advertisers. So, we love that it's a very high ROI area for us to invest. And to the extent that we have great ideas to support it, we're going to keep pouring resources in that direction. You mentioned attribution. And a lot of the focus in attribution comes from our multilocation customers. Dome of the most sophisticated the highest vendors, they really want to know what's the cost of driving someone in store, for instance.

And we have great first party data there. And we just improved our modeling that allowed us to cover more locations than previously. So, there has been some really successful product and engineering progress in that area. And it's something that our advertisers on the multilocation side say is really, really important to them. So, we will continue to pour resources there.

Other interesting areas that tie into the ad system is Request a Quote, I guess, is another one worth highlighting, where we've seen 50% year over year growth, in terms of requests. And just building out that functionality, making it as efficient as possible, things like allowing businesses to specify what dates are available to improve the success rate of those advertisers as they're negotiating with their potential customers.

There's a lot of different areas within Request to Quote that we can continue to invest in. So needless to say, we've got a big, big and long roadmap of things coming in the years ahead from ads perspective and our performance perspective. And it all results ultimately, with the goal of improving retention, because the advertisers are happy.

[Trevor Young, Barclays]

That's really helpful. Thank you both.

[Operator]

[Operator Instructions] Our next question comes from Justin Patterson with KeyBanc.

[Justin Patterson, KeyBanc]

Great, thank you very much. Two if I can. First for David, you've made a lot of progress on margins over the past few months. As we get back to just kind of a normal world at some points here, let's see what Delta brings. I would love to hear about how you think about just the balance between revenue growth and margin expansion going forward? So, that's question one.

And then question two, Yelp audiences looks like a really interesting product, would love to hear a little bit more about just all of the opportunities around monetizing that data over time. Thanks so much.

[David Schwarzbach, CFO]

Justin, thanks for the question. I’ll speak adjusted margins to begin with and how do we think about revenue versus margin performance. And it starts for us with ROI, when we look at investment opportunities and that's across product and engineering, sales and marketing, we're always looking for and we do this in a very disciplined manner, is to ensure that we're going to see a return from those investments.

And as Jeremy's mentioned just a moment ago, we do see a broad set of opportunities that we can invest in. So, we're going to do that. And in particular, we continue to see 2021 as an investment year for us. And we really do see this shift to focusing on product and engineering as providing longer term leverage for us. If Yelp in the past was very dependent on growing by adding local sales headcount, we are in a new era, in which we see product and engineering is driving that. And we see that showing up in self-serve, we see that across retention in the metrics like CPC and clicks.

We also do want to drive margins over time. And we want to do that in a way that doesn't undermine that long term sustainable growth. So, as we move through this year, and then when we get to the fourth quarter earnings call and start to talk about ’22, we'll elaborate on the balance that we're striking between those. Overall, very pleased with our ability to deliver a great strong quarter in the second quarter.

[Jeremy Stoppelman, CEO]

And I can handle the audience question. As we kind of stated earlier, really, this does represent an opportunity for non-location-based advertisers to participate in the Yelp ecosystem, albeit not on Yelp. And it makes sense to kind of put it in the tactical terms. If we know someone has gone to a bar as an example, that's probably a pretty attractive advertiser or consumer for Budweiser to advertise to.

And you see the same in multiple categories across CPG, or insurance or kind of name it, folks that traditionally haven't been able to go and buy on Yelp, because we are location-based ad platform within the Yelp walls. And so, we are in our early days here. This is a product that has just kind of come out of testing. We're happy with the results thus far.

I would bring it back to kind of what our core business, however, which has also been really, really strong, and we see the opportunity to purchase CPC advertising on Yelp is a really large one for multi-location businesses. And when you look at the overall landscape, and certainly there's some behemoths out there in terms of ad spend, you can talk about a Google or Facebook, we represent a great opportunity for a lot of these businesses to kind of diversify, spend and get a really high ROI.

And we've been really I think one of the reasons we've been focusing on attribution as an example, is that, we tend to do very well. And so, we will continue to kind of invest in that core product as well. And we're excited about the Yelp audiences’ potential over time, albeit it's pretty early days.

[Justin Patterson, KeyBanc]

Great, thank you.

[Operator]

Our next question comes from Brian Fitzgerald with Wells Fargo.

[Unidentified Analyst]

Hi, this is Will on for Brian. How do you see the correlations between self-serve and home and local segments recovering? And is the tight housing market creating any unique dynamics for home services business?

[Jeremy Stoppelman, CEO]

I guess I can try and tackle the question. From a macro view, the housing market, how's that affected home local services. I mean, I think over the past year, we've seen pretty robust activity in the home and local services segment. And in fact, Q2 here home and local for Yelp was up 35% year over year, and up 45% if you look back against Q2 2019, just to kind of take COVID out of the picture.

So, as there has been a lot of people moving around and trying to deal with COVID, there's been a lot of home and local activity as they bought new homes, you've seen some of the activity show up on Zillow. And then also obviously, people trapped at home because of all the stay-at-home orders and whatnot beings. If you're spending time at home, you're probably sitting there staring at your garden, thinking about starting up a new project that maybe you've turned a request to quote.

And so, there has been robust demand there. And I also think that the move to work from remote work, distributed work or from home, that's here to stay. A lot of people, certainly our employees included but discussing it with other CEOs and looking at the landscape, other companies lots of people are going to be working at home and so I think that bodes well for the long term trajectory of the home and local category.

[Brian Fitzgerald, Wells Fargo]

Great, thank you.

[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.