Yelp Inc. (YELP) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2012 Yelp Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer-session. (Operator Instructions) At this time, I would now like to hand the call over to your host for today, Mr. Todd Friedman, Investor Relations. Please proceed.

Thanks, operator. Good afternoon everyone, and thank you for joining us in Yelp’s second quarter 2012 conference call. Joining me on the call today is CEO, Jeremy Stoppelman; and CFO, Rob Krolik. Before I turn the call over to the company, 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. 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. Please refer to our SEC filings as well as our financial results press release for a more detailed description of the risk factors that may affect our results. During our call today, we’ll discuss adjusted EBITDA. In our press release issued this afternoon and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding this non-GAAP financial measure and reconciliations of net loss to adjusted EBITDA. And with that, I’ll turn the call over to Rob.

Thanks, Todd and welcome to today’s conference call. It was a strong second quarter and we are happy to share our results with you. For today’s call, I will cover the financial pieces and then Jeremy will give a brief review of recent highlights before we take your questions. Please note that we have posted a few slides on our Investor Relations webpage that accompany this webcast. Let me start with the results from the second quarter of 2012, we achieved record results in all of our key metrics including revenue, which grew 67% year-over-year to $32.7 million. We were particularly pleased to report adjusted EBITDA of $1.6 million, which was well ahead of guidance. Adjusted EBITDA benefited from the strong revenue performance. There are four key operating metrics that we had previously provided as they underpin our strategic and financial success. They are one, the number of reviews contributed to our site; two, the number of unique visitors; three, the number of plain local businesses and four, the number of active local business account. Each of these grew significantly in the quarter. Reviews grew 54% year-over-year to 30.3 million as we added almost 2.7 million reviews in the quarter. Our average monthly unique visitors grew 52% year-over-year to roughly 78 million, which is 7 million from the first quarter. Approximately 24% of these uniques are accessing our mobile site. Claim local businesses hit 791,000 up 75% year-over-year, and up 91,000 from the first quarter. And active local business accounts grew 113% year-over-year to almost 32,000. These financial results and operating metrics demonstrate that playbook continues to deliver growth across all of our markets. And we are especially encouraged by the large numbers of cities with growing communities where we have not yet started selling advertising. To provide some additional…

Thanks, Rob. As Rob discussed our financial results highlight the underlying power of the Yelp model, by focusing almost singularly on cultivating rich, authentic local content, we’ve created a site that is rapidly becoming the de facto local search engine for connecting consumers to create local businesses. It’s been exciting for me to watch Yelp grow over the past eight years into the trusted resource we’ve become today. Last month that evolution took an important step when we officially launched our London sales office. The office is now operating in 17 countries, but London marks our first sales office outside North America. As part of this initiative Jed Nachman our Senior VP of Revenue moves to London. Jed will stay there for some time to ensure that the same principles that have made Yelp a trusted resource for local advertisers in the U.S. stays through to our new customers overseas. Driving forward with our international expansion plans, we launched six new international cities in the second quarter including a big focus in the Nordics to go along with the two domestic cities. We are now active in 90 Yelp markets around the world and we believe there are more than 1,000 cities like this leaving ample room to continue launching new markets. Growth also will come from extending our distribution network through strategic partnerships and affiliations. Apple recently announced at its Worldwide Developer Conference that it intended to integrate Yelp branded content in the Siri and the new Apple Maps application on iOS 6, with links that would take users directly to Yelp. We were also very pleased to announce this quarter the Bing Local Search experience is now powered by Yelp. These types of partnerships strengthen our types of consumers, which ultimately drives more value to local businesses. We…

(Operator Instructions)

Operator, we’ll move to the first question?

And our first question comes from the line of Mark Mahaney with Citi. Please proceed. Mark Mahaney – Citi: Thanks. A couple of questions, first Rob in that near term financial question that EBITDA upside would you attribute all of that to the revenue upside or were there any maybe greater than expected cost efficiencies that you think are sustainable going forward. Secondly, broader picture about the rate at which you add new cities – a rate at which you had new markets around the world, how do you think about the ideal – how do you decide what the ideal growth of that is? How do you figure out what’s too fast, or too slow? How much of that are you just following the growth that set by users? How easy is that to figure out the optimal growth with that? Thanks.

Thanks, Mark. Let me take the first one, this is Rob. As it relates to the second quarter on the upside in EBITDA that transpired, I would say, that a vast majority of that was driven by the revenue. So, we’re up about probably couple of million dollars from our guidance in revenue and a lot of that dropped to the bottom line.

Hi Mark, this is Jeremy. On the new markets question, rolling out faster versus slower, how do we think about that and which markets are attractive? We start by looking at, of course GDP, what’s going on in that country on a per capita basis and then also we want a population, so the bigger the population, the better dense cities obviously have been a great fit for us. And then we’re trying to add as many of those markets as possible and we said earlier, there – we think there is about a 1,000 of them out there and we’re in 90 today. But to reach them, we’ve got to build a team. We got to send community managers into those cities. We need management, infrastructure and so forth. So, we’re really striving for that Goldilocks temperature, just not too fast, not too slow, just right. And so what you’ve seen as far as our city expansion is a pace that we think is rapid, but yet not too hard where we stretch ourselves too thin. Mark Mahaney – Citi: If I could throw one last question in, it’s obviously a very significant percentage of your activity that comes via mobile devices, but the level of engagement to that activity, what people do via mobile devices, do you see that as – do the trends show that that’s materially different than how people interact with Yelp on their desktops?

We do see more highly engaged users so – which isn’t that dissimilar from what we see on the website. So if somebody navigates straight to Yelp by typing Yelp into the browser, they’re going to be a more engaged user and similarly when someone downloads our app and starts using it directly, they’re much more engaged. So they’re going to view more businesses than someone who say casually found us through Google, say we’re looking for a particular restaurant or so forth. And then also on the contribution side, someone who comes directly to us is much more likely to contribute content and we’ve seen a lot of success there, particularly we get a number where over 50% of our photos are now coming from mobile devices and that’s just one element, we also get lots of tips, check-ins and other data as well. Mark Mahaney – Citi: Thank you, Jeremy. Thank you, Rob.

Sure.

And our next question comes from the line of Heath Terry with Goldman Sachs. Please proceed. Heath Terry – Goldman Sachs: Great, thanks guys. I was wondering if you could give us a sense as you talk about mobile and the improvement that you’re seeing there, what kind of adoption are you seeing on the merchant side for the analytics that you’ve begun to offer – the new analytics package you rolled out at the end of March and to what extent are they able to recognize or appreciate the conversion rates that you’re seeing in mobile?

I don’t think that it massively changes the game for us, we’ve always tried to give business owners as many pieces of data about how people are interacting with their business whether they were making phone calls, clicking on websites and so forth. And so our mobile roll out has just added a bunch of data to that. For example, on mobile apps, we can actually track when someone clicks – the call – hits the number and actually tries to call that business. And so, we’re just continuing to push that in front of the business owner and they’re able to do whatever ROI calculation makes sense for them and it varies based on businesses obviously, some take phone calls from new customers, other’s phone calls are completely irrelevant. So, it’s really a case-by-case basis. Heath Terry – Goldman Sachs: And have you seen engagement with those analytics improving since the new package was launched?

I don’t know that we’ve closely looked at the metrics. Our business is diving deeper. I mean, a lot of its pushed out to businesses. There is a weekly email that goes out to business owners that have unlocked their free page or unlocked their free tools and so, if they get that email, those metrics have just appeared. So, I haven’t actually looked at any click through rate data to see if that’s materially changed. Heath Terry – Goldman Sachs: Okay great, thank you.

And our next question comes from the line of Jason Helfstein with Oppenheimer. Please proceed. Jason Helfstein – Oppenheimer: Thanks. I’ll go for three questions. So, in the quarter, we saw really that the growth more driven by adding new businesses. You sacrificed some monetization. I think that was on purpose to try to just work on bringing the cost of entry down for new customers. So, just talk about how that’s going and if you expect to see the same type of strategy in the back half of the year? The second is just going back to the city question; you guys were on track to beat last year’s total, last year you added 22 cities, this year arguably on track to do, I don’t know, 25, 26, something like that. Can you talk about perhaps a target for next year, may be just do you expect the pace to continue at the same level? And then lastly, can you give us an update on some of your partnerships? A lot of announcements in the quarter. When do you expect any of those to have an impact on revenue? Thanks.

Hey Jason, let me answer your clarifying question on the adding new businesses. Can you repeat that because I don’t think I’m clear on – Jason Helfstein – Oppenheimer: Sure. So, active business accounts is up –

113%. Jason Helfstein – Oppenheimer: Active business account is up 113%.

Okay. Jason Helfstein – Oppenheimer: However like – if you do like revenue per – it was down 11%, so 791, which was down 11% per new business, so. So basically, we are seeing less revenue per new business, but you guys are really accelerating the number of businesses being added. And I think in the past we just talked about that as part of a strategy to just try to find the right price point to bring new vendors on the platform.

Right. I think part of the number that’s included in active accounts is the deals component. So, there are a number of customers that sign up for deals and are included – and actually sell deals and are included and so, the average price for those may be not in line with our standard subscription packages. So, they could sell a $10 for $20 deal or $50 for $100. So, it’s not in line with the $300. So, that maybe actually what’s driving the number. And what I had is for Q1, we had about $262 when you divide local revenue by the active accounts. And then for Q2, I had $270. So, just up slightly, but I’m happy to talk about it more later. Jason Helfstein – Oppenheimer: Oh, no I was looking on a year-over-year basis, yeah, sequentially.

Okay. Yeah, $299 right last year. And yeah, I think it’s going to – we’re not focused on the average amount anyone pays specifically. We are more focused on grabbing lion share right now. We have an ocean of 10 million to 15 million businesses that we’re trying to go after and whether they sign up for our subscription packages or deals or any other transactions that they can do on a platform. We’re just happy for them to do that; it’s all positive for us. Yeah and then let me take the second question. So, we had 22 cities that we launched Yelp markets in 2010 and 2011 coincidentally. And in 2012, we’re at 20 cities, I believe we launched 8 in Q1 and – 12, sorry and 8 in Q2. We don’t necessarily give a target for next year. It’s something that we constantly evaluate as Jeremy kind of talked about in terms of GDP, internet penetration, all of that into particular city. So, we wouldn’t necessarily give out a target. What I would say is if you kind of look at how we’ve rolled out cities in prior years, obviously I think 2012, in the first quarter, was our high watermark for the year; we did eight this past quarter. So, I wouldn’t expect that we do significantly more in the next couple of quarters. Jason Helfstein – Oppenheimer: Okay.

And then finally on the – yeah, on the partnerships question. We are very excited about some of the partnerships that we announced this quarter, obviously working with Apple as well as Microsoft. I don’t really have any guidance on impact to revenue on the Apple integration in particular, it looks like that hit some time later this year, obviously that’s up to Apple and it’s hard to know exactly what the impact will be, but we’re certainly excited about our relationship and working with them directly. Jason Helfstein – Oppenheimer: Okay, thank you.

Thank you.

(Operator Instructions) And our next question comes from the line of Aaron Kessler with Raymond James. Please proceed. Aaron Kessler – Raymond James: Yes. Hi, guys. Couple of questions. First, can you give us any sense on verticals in the quarter, maybe strength and any softness in any of the verticals that you saw? In terms of also mobile monetization, I believe, you are expecting something over the next – maybe six months or so. Any thoughts at this point on what type of revenue model you’d see there? Should we expect a similar model to the desktop and it’s just – will the – does the advertiser option to opt-in or is it just kind of on both? Thank you.

Thanks, Aaron. Let me take that first one. So, when you look at net revenue on the local side and look at the categories, it hasn’t changed dramatically actually from what we have disclosed previously. So, home and local services from a revenue standpoint came in at in Q2 about 21%. And then restaurants came in about 17% of local revenues in Q2. The next was beauty and fitness at 16% and then health was 10% and shopping – sorry, health was 12%, shopping was 10%. It’s similar to what we have disclosed in the past, so not dramatically different. And then for review businesses, in the S1, we disclosed the percentages it was in the pie and it really hasn’t changed much from that. Shopping is still the number one, what we – for locations of review businesses at 23%.

And then on to the mobile monetization question, we actually already are monetizing a portion of mobile, particularly the mobile web. So, if you go and search for something via your smartphone using Google and find your way to the Yelp site, you’ll see a page that looks just like what we have on our apps and you’ll see an ad there. The performance of that ad unit has actually been higher than what we see on the desktop. And so, we feel very encouraged by that, we feel very confident that our ad unit translates very nicely to the mobile web and mobile apps as well. And so then, it’s just been a technical thing to actually get that implemented. And so, we’re looking at sometime soon for mobile app monetization, we haven’t announced an actual date, but it’s obviously a high priority and something that that we’ll be doing soon. Aaron Kessler – Raymond James: And would mobile still be within the subscription model or would you look at maybe a click-to-call with mobile?

I think we’re open to anything that works well for our business customers. But I think right now, what we’ve already got is something that’s similar to what’s on the desktop, it’s sold on CPM as well as a CPC basis, that’s the obvious first step. But we’ll continue to look at other products as well. Aaron Kessler – Raymond James: Great. Thank you.

Ladies and gentlemen, with no further questions, this concludes today’s question and answer session. We would like to thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.