Yelp Inc

NYSE:YELP

Earnings Call Transcript 2022-Q2

[Operator]

Hello, and welcome to Yelp's Second Quarter 2022 Earnings Call. My name is Maxine, and I'll be coordinating today's call. [Operator Instructions]

I will now hand you over to your host, James Miln, Senior Vice President, Finance and Investor Relations, to begin. James, please go ahead when you're ready.

[James Miln, SVP of Finance and IR]

Good afternoon, everyone, and thanks for joining us on Yelp's Second Quarter 2022 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 a shareholder letter on our Investor Relations website and with the SEC, and hope everyone had a chance to read it. We'll provide some brief opening comments and then turn to your questions.

Now I'll read 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 risks 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, Co-Founder, CEO and Director]

Thanks, James, and welcome, everyone. Our second quarter results show that our product-led strategy is delivering just what advertisers need in a time of economic uncertainty, ad products that connect them with a large and high intent audience that provides measurable performance advertisers spent at record levels with Yelp in the second quarter.

Net revenue increased by 16% year-over-year to a quarterly record of $299 million. I'm extremely proud of our teams across Yelp for consistently delivering against our strategic initiatives and continuing to make Yelp a leading platform for consumers to connect with great local businesses.

Underlying this strong top line performance, our initiatives drove record use of our products in the second quarter. Paying advertising locations surpassed pre-pandemic levels to reach 569,000, while average revenue per location also reached a new record. Advertising revenue from services businesses increased 14% year-over-year to a high of $174 million, driven by strength in the Home Services category. Even amid shifts in U.S. consumer spending, users continue to turn to Yelp's trusted content when making important spending decisions for their homes. We believe that we still have a long runway in this large category.

Advertising revenue from restaurants, retail and other businesses grew 18% year-over-year, largely driven by an increase in paying advertising locations. Our Multi-location channel was a strong contributor to the continued recovery in our RR&O in the second quarter, with revenue growth of approximately 30% year-over-year. Our expanded portfolio of ad products and attribution solutions is helping Multi-location advertisers reach our valuable high-intent audience, both on and off Yelp.

Our performance in the second quarter demonstrates the power of our owned and operated ad platform. We have consistently executed against our strategic initiatives and transformed our business. The opportunities ahead remain significant, and we are better equipped than ever to drive long-term profitable growth.

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

[David Schwarzbach, CFO]

Thanks, Jeremy. Net revenue increased by 8% from the first quarter and 16% year-over-year to $299 million, $9 million above the high end of our outlook range. Underlying this strong performance, we achieved record average revenue per location and grew paying advertising locations by 4% from the first quarter and by 8% year-over-year to a record 569,000.

As Jeremy mentioned, we also drove growth across our broad set of categories. Ad revenue from Services businesses grew 14% year-over-year and 40% from the second quarter of 2019. RR&O ad revenue continued its recovery, increasing 18% year-over-year, while our RR&O paying advertising locations reached a record.

Ad clicks increased from the first quarter, but declined by 11% from the prior year period, which had benefited from significant reopening tailwinds, amplified by elevated consumer spending. At the same time, advertiser demand remained robust. Average CPC increased by 32% year-over-year while remaining consistent with the first quarter. Our product and engineering teams have continued to deliver value to advertisers by optimizing our ad system, including improving click quality. As a result, we matched the record NTC retention rate we delivered in the first quarter.

Turning to expenses. Yelp's product-driven model generates strong cash flow, and we believe our growth strategy will drive profitable growth over the long term. For example, we continue to invest in marketing to drive businesses to our fully digital Self-serve channel in the second quarter. As a result, we delivered another record in Self-serve customer acquisition and drove channel revenue growth of approximately 30% year-over-year. Even with these investments, net income increased 90% year-over-year to $8 million, while adjusted EBITDA increased by 6% year-over-year to $67 million, $12 million above the high end of our outlook range as all of our revenue outperformance flowed through to the bottom line in the quarter.

As we've invested behind our initiatives, our distributed operations have enabled us to more fully access talent both across and outside of the United States. This has also provided us with the opportunity to drive leverage and reduce stock-based compensation as a percentage of revenue over time. In the first half of the year, we realized approximately $9 million of expense savings related to our previously executed office space reductions. In July, we subleased a portion of our New York office space. We expect the reductions we have executed to date will yield an aggregate of approximately $25 million to $27 million in annual GAAP expense savings through the end of the related subleases and leases.

Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy. In the second quarter, we repurchased $50 million worth of shares at an average purchase price of $31.75.

Turning to our outlook. Our second quarter results have tightened our growth expectations for the year. In the third quarter, we anticipate net revenue will increase in the second quarter to be in the range of $300 million to $310 million. As a result of our strong second quarter performance, we are raising our full year net revenue outlook to a range of $1.18 billion to $1.2 billion.

At a fundamental level, we believe both our strategy and execution are working well. We are acquiring more customers and delivering value to them. In the second quarter and through July, we continued to see strong demand by advertisers. At the same time, we recognize that the U.S. economic environment continues to be challenging, increasing the uncertainty of any forecast. We believe our current outlook balances the continued strength we have seen in advertiser demand with a macro outlook that assumes a modestly recessionary environment in the second half of the year.

Turning to margins. We expect adjusted EBITDA to increase from the second quarter to be in the range of $65 million to $75 million for the third quarter. This range reflects a small increase in total expense compared to the second quarter, primarily driven by sales and marketing. As we have shared previously, we operate with a focus on ROI. We are currently seeing attractive performance marketing rates. To the extent that we can increase our investment productively in these channels, we may do so over the course of the quarter. This potential investment may increase our marketing expenses further in Q3. Overall, we continue to expect margin improvement in the second half of the year with adjusted EBITDA expected to fall between $265 million and $285 million for 2022.

In closing, Yelp's second quarter results reflect the consistent execution of our team with our product-led initiatives, again delivering new highs against the backdrop of the volatile macro environment. We believe our broad-based local ad platform positions us well as we enter the second half of the year, providing us with continued conviction in our ability to drive long-term shareholder value.

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

[Operator]

[Operator Instructions] Our first question comes from Shweta Khajuria from Evercore ISI.

[Shweta Khajuria, Evercore ISI]

Let me try two, please. So Services ad revenue was up 14% year-over-year, and Request A Quote were down 10% year-over-year. So could you please help us think about the dynamic there? So if consumers are maybe out and about traveling, et cetera, but you're still continuing to drive this ad revenue in this segment, could you please help us tie that together.

And then the second question is audiences revenue is growing very nicely. How should we think about that opportunity and the road to that revenue being more meaningful for the overall business?

[Jeremy Stoppelman, Co-Founder, CEO and Director]

Shweta, this is Jeremy. I'll take the first one here. So as you noted, Services ad revenue was up to the tune of 14% year-over-year. And I think that really speaks to the very strong demand that exists from services providers, especially within Home Services, we see that looking out at the macro environment, obviously, consumer dollars are shifting around. And some of these services businesses, especially in 2021, had -- they were really busy. And so I think as they came into 2022, they were looking for high ROI channels to invest, to keep the trucks rolling, so to speak. And so that demand showed up.

On the Request A Quote side, we continue to innovate there. We've got Request a Call, which you may have noticed we added into the mix, which continues to reduce friction. When a consumer is calling, that's considered by business owners to be a super high-value lead. It allows the consumer also to communicate very complex projects, which we think is important and some of the highest value leads that we can drive to businesses. We're also up, it's noteworthy from Q1. So sequentially, seeing volume up, and we remain above 2019 levels. And so maybe for the second part of your question around Yelp Audiences, Jed, you can hop in for that one.

[Jed Nachman, COO]

Sure thing. We continue to be really pleased with the adoption of our Yelp Audiences product. It continued its strong performance in Q2, up more than 100% year-over-year and reaching a $30 million run rate. That said, it still represents a very small percentage of our total ad revenue. Ultimately, we're striving to provide products to national advertisers that are up and down the funnel on and off of Yelp, and Yelp Audiences allows us to do that.

Ultimately, we can tap into budgets off of Yelp that we hadn't been able to before. Yelp Audiences also opens up the opportunity for brand and nonlocation-based advertisers such as CPG and direct-to-consumer companies to reach our intent-driven audiences. It also allows brands to market to our audience in their own voice with different creative, et cetera. So ultimately, we're focused on building it out as a valuable product for our customers and plan to continue to scale that offering.

[Operator]

Our next question comes from Justin Patterson from KeyBanc.

[Justin Patterson, KeyBanc]

Great. Jeremy and David, you've also looked at the macro environment, but I'm curious what you think makes Yelp more immune from just a lot of the SMB pressures we've seen going out there today versus say in prior years? And how should we think about just the persistence of products certain growth going forward?

[Jeremy Stoppelman, Co-Founder, CEO and Director]

Justin, I think I can take the lead on that one. Our business has shown really great durability. I think why is that? Well, I think it's the ROI that our customers are seeing. We rely on primarily our own first-party data. When somebody is searching for a locksmith on Yelp, they actually -- they need to transact. They need to find a locksmith. And so that's a great opportunity for advertisers to get in front of that consumer and make their pitch. So we're down funnel. It's high performance.

And the other thing I'd point to is the breadth of Yelp. We have highly trusted content across a wide array of categories. And often in these tough macroeconomic environments, certain categories may take a hit and then other categories perform better. So that -- I think that speaks to our resilience as well.

And then stepping back even further, you look over the last few years, especially 2020, we've been really pressure testing. We've been put through the rigor. In 2020, ad revenue took a steep decline briefly, and we came roaring back. And I think that speaks to the second part of your question, which is just the product execution. Our team has really, in my opinion, never been better. We've been executing on our strategy, leading into the areas of growth that are in front of us, improving the ad system, driving more to Self-serve, leaning into Multi-location. And I think the performance that you see in this quarter really reflects the extent of the execution we've had over the last few years.

[Operator]

Our next question comes from Colin Sebastian from Baird.

[Colin Sebastian, Baird]

Maybe a big-picture question to start. When you see the compounding benefits of increasing advertising locations with higher revenue per location, I'm curious if that's a dynamic that you're expecting or you think continues sort of in perpetuity? Or will it sort of moderate or shift a bit as you add more locations, which I guess, impact monetization per location, if you have any thoughts on that? Then I have a follow-up.

[Jed Nachman, COO]

Sure. Colin, I could take the first one or the only one thus far. We saw PALs grow beyond pre-pandemic levels to a record of 569,000 paying advertising locations while also achieving another record in average revenue per location as we continue to deliver more value to our advertisers. And long term, we're ultimately focused on both. We think that there's a very large TAM out there that we can go after in terms of new acquisition. But we also feel that we can continue to drive more value for our advertisers, thus driving up kind of ARPU. Obviously, these metrics can fluctuate quarter-to-quarter, especially for our RR&O categories, but we believe that the opportunity lies in kind of that land and expand, driving in new customers as well as driving that average revenue per location.

[Colin Sebastian, Baird]

Okay. And then I guess this is really more of a follow-up. But Jeremy, you mentioned Request a Call. There seems to be a lot of focus even with some of the larger platforms on click-to-call or messaging ad formats with local businesses and with your own. I mean do you think these are incremental to your existing ads, maybe unlocking more paying locations, for example? Or are they potentially cannibalistic with things like Request A Quote?

[Jeremy Stoppelman, Co-Founder, CEO and Director]

Yes, I can take this. Thanks for the question. You speak to some of the messaging aspects that are out there driving leads for small businesses. And that was, frankly, the point of Request A Quote as we designed it, started. It was a very simple messaging service, and it's evolved to be increasingly sophisticated asking the right questions, reducing friction, trying to drive quality leads to businesses. And there's been a really great channel for us.

The other piece that, I think, is really helpful is that when you get a message, it's very clear it's for Yelp. So you have that attribution built in. And with Request a Call, we absolutely were paying attention to some of the metrics you might imagine around, hey, is this going to take away from Request A Quote. And what we found is we were able to implement it where it's really additive. It's driving additional value. It's reducing friction. And we know that calls are some of the most highly valued leads for our SMBs, and so we're able to bring it into the ecosystem in a way that really work for us and create kind of a 1 plus 1 equals 3.

[Operator]

[Operator Instructions] Our next question comes from Trevor Young from Barclays.

[Trevor Young, Barclays]

Great. On the gross margin side, I can appreciate that the deleverage is coming from infrastructure investments as well as ad fulfillment costs associated with audiences. Can you help size the impact of each of those relative to the 2-point compression year-on-year?

And then bigger picture, how far along are we in both the infrastructure investments as well as the rollout of audiences so that because I maybe expect gross margin stability at some point?

[David Schwarzbach, CFO]

Trevor, it's David. Thanks so much for the question. Just in terms of the 2 points that you're focused on to begin with, a significant portion of that is coming from the YA syndication costs. We are seeing modestly higher expenses on the infrastructure side who are simply delivering Yelp. As you know, we have a very strong margin there in the first place. And I think it's important, though, to look at Yelp Audiences in the broader context of -- and the way that we look at is the overall profitability of a given national advertiser. And this is a national advertiser product, Yelp Audiences.

One, Yelp Audience enables us to have a broader conversation with those advertisers, enables us to go after more budget. That's not only captured by Yelp Audience but also in the other products that we offer them. It enables us to talk to advertisers who don't have a natural way to advertise on Yelp today, say, CPG, financial services, OEM automotive companies. And we really like that opportunity as well, and we think that, that gives us a chance to further monetize the audience that we have.

So in terms of where things head from here, you asked essentially where are we in maturity of both Yelp Audiences as well as just the infrastructure of Yelp and cost of revenue. And I would say that we do a tremendous amount already to drive efficiency from a cost of revenue perspective on the infrastructure side. We're actually really proud of the sophistication that, that team applies, but we still have room to run. So that's probably more middle stream in terms of potential improvements, and there's various underlying ways that we operate and manage, particularly AWS that still give us an opportunity to continue to drive that.

On the Yelp Audiences side, as Jed said, we still believe that there's a large opportunity ahead for Yelp Audiences. So we do intend to grow that product. It is going to be a lower-margin product. That being said, we do think that there are sort of in that sense, it's early. But in terms of that cost of revenue component and the margin side, we think that there are significant ways that we can continue to drive efficiency and increase the sophistication in the way that we buy and place those ads in the first place. So I would say that, that's also relatively early.

As we talked about, we scaled this product from just over $15 million run rate in the second quarter of last year to just over a $30 million run rate during the second quarter of 2022. And so we're very much in the scaling phase of this product, and we want to continue to drive that opportunity. Obviously, $30 million is still a fraction of our total revenue and certainly a fraction of the total budget available for product like this.

[Operator]

Our next question comes from Eric Sheridan from Goldman Sachs.

[Eric Sheridan, Goldman Sachs]

Maybe if I could just ask a bigger picture one. I know we've been talking about sort of the bottom of the funnel and audience is closer to the top of the funnel. But when you see more local commerce moving into digital channels across a lot of different avenues as some of the lines blur between off-line retailers and some of these digital platforms, what are you most excited about in terms of the product road map going forward that can align Yelp with increasing levels of digital local commerce? That would just be a big picture question.

[Jeremy Stoppelman, Co-Founder, CEO and Director]

Yes, I mean, when I hear local digital commerce, I guess -- are you talking about some of the DTC innovation that's been happening there? Is that kind of what you're scratching at before I launch into my answer.

[Eric Sheridan, Goldman Sachs]

Yes, elements of DTC innovation, element of retailers tapping into local search and local intent being expressed. So just how you see the road map evolving against some of those consumer change topics.

[Jeremy Stoppelman, Co-Founder, CEO and Director]

Yes. Definitely, we're paying close attention there. And in fact, this quarter, we pointed to a new ad unit, some takeout ads. That's really highly valued by our Multi-location customers and allows businesses to highlight digital purchasing in this particular case, go online, go to their website and make a purchase.

I think also some of our newer product areas like Yelp Audiences is a very natural way for us to engage, especially the DTC side of the equation. And so in that case, you could think about targeting a group like mattress and tenders, people that have searched for mattresses on Yelp, that's suddenly an audience that we can build up. And we can offer up to, say, a Casper or some mattress seller that's interested in driving digital orders. So we are really well positioned to participate as this area continues to flush out. And I would say, in general, we have a broad portfolio on the consumer side in general to continue to drive the audience forward as well as innovate on ads.

[Eric Sheridan, Goldman Sachs]

Maybe if I could just ask one follow-up. Looking out beyond '22, there's so much conversation in the advertising industry about getting measurement attribution right and continuing to build out ad tech stack. How do you guys think about some of the key investments you want to make in your own tech stack to continue to sort of refine measurement and attribution over the medium term?

[Jeremy Stoppelman, Co-Founder, CEO and Director]

Yes. Thanks again for the question. This is an area that has been very high on our list for investments for a number of years, and it's frankly been one of the key drivers of our business. On the Multi-location side, attribution is absolutely critical. We have our own first-party data, Yelp Store Visits. And so that's an in-house product that we're able to offer to Multi-location folks to help them understand the lift that they're seeing from their ad spend. And in general, our ad tech stack is an area where we keep extracting value. We have a very large team there. We continue to have a deep and broad portfolio. We're going to -- we see no end in sight at the current time in terms of what we can drive out of that area of the business.

[Operator]

[Operator Instructions] We have no further questions. That concludes our Q&A session for today.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines.