Yelp Inc. (YELP) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2012 Yelp Earnings Conference Call. I would now like to turn the conference over to your host for today, Ms. Stacie Bosinoff. Please proceed, ma'am.

Good afternoon, everyone, and thank you for joining us on Yelp's Third Quarter 2012 Conference Call. Joining me on the call today is CEO, Jeremy Stoppelman; and CFO, Rob Krolik. Before I turn in the call over to the company, I'll read our Safe Harbor statement. We will 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 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. 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 will 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 a reconciliation of net loss to adjusted EBITDA. And with that, I'll now turn the call over to Jeremy.

Thanks, Stacy, and welcome, everyone. We had a great quarter fueled by the rich, authentic local content created by Yelpers around the world. The growth we're seeing today represents the power of the Yelp model. With increased numbers in content and traffic to our site, the value we provide to local businesses and advertisers continues to rise. The opportunity before us is enormous and we're just getting started. The growth strategy is simple: leverage our platform to become ubiquitous across all devices; expand our geographic presence through existing and new markets; and serve our growing base of local business customers. I'm happy to say that this quarter we've executed in each of these areas. On Mobile, we are fortunate enough to have great partners like Apple that help distribute our brand in powerful ways. Last month, iOS 6 became available for download, and we are very pleased with the integration with Apple Maps and Siri which prompted an increase in app downloads. Although it's still early days since the launch, we are happy with the results so far. On average, our app was used on over 8 million mobile devices per month in the third quarter, up 64% year-over-year and approximately 45% of all Yelp searches are now conducted on our Mobile apps. We believe that the migration towards Mobile ultimately leads to greater monetization as ads are better paired with the user's exact location. As a reminder, we've been showing local ads on the mobile web for some time now and have found that the click through rate on Mobile web is significantly higher than that on desktop. We will begin extending local ads to our Mobile apps soon and expect to have them fully rolled out by the end of the fourth quarter. We also continue to expand…

Thanks, Jeremy. We had a great third quarter and we're happy to share our final results with you. Please know that we have posted a few slides on our Investor Relations web page that accompanies the financial portion of the webcast. Let me start with the results from the third quarter. We achieved record results in all of our key metrics with both revenue and adjusted EBITDA ahead of guidance as pre-announced last week. Revenue grew 63% year-over-year to $36.4 million. This equates to 65% year-over-year growth in the first 9 months. Adjusted EBITDA was $2.2 million and benefited from the strong revenue performance. Moving on to the 4 key operating metrics. Reviews grew 49% year-over-year to 33.3 million as we added almost 3 million reviews in the quarter. Our average monthly unique visitors grew 37% year-over-year to roughly 83.5 million, which is up approximately 5.2 million from the second quarter. Approximately 25% of these uniques are accessing our Mobile web. Claim local businesses hit 889,000, up 68% year-over-year and up 98,000 from the second quarter. Active local business accounts grew 82% year-over-year to 35,500. These financial results and operating metrics demonstrate that our Playbook continues to deliver growth across all of our markets, and we are especially encouraged by the large number of cities with growing communities where we have not yet started selling advertising. To provide some additional color, let me walk down the P&L starting with the revenue mix. As a quick reminder, we break revenue into 3 categories: one, Local which includes enhanced profile pages and performance and impression-based advertising; two, Brand which includes display advertising; and three, Other which includes Yelp Deals and other commerce-related revenue. For the third quarter, Local revenue was $28.5 million, up 81% year-over-year; Brand revenue was $5.9 million, up 28%…

[Operator Instructions] And your first question comes from the line of Neil Doshi with Citi.

Quick question on Mobile. Can you provide any indication as to how Mobile app pricing is relative to that of desktop pricing, and any traction that you're getting on the mobile advertising side? And then secondly, in terms of the monthly revenue per advertiser, we've seen that decline on a year-over-year basis. I guess, at what point do you expect that to stabilize or maybe start to grow?

Neil, this is Geoff Donaker, COO, here with the group. And I'm going to try answer both of your questions there. So your first question was Mobile ad pricing. And one of the things that we've talked about in Germany as referenced in the past, is that today, our current Mobile ads as they exist on the desktop are also running on the Mobile site which is our HTML 5 site. And they work just the same as they do on the desktop. And therefore, pricing is the same to the end advertiser. We would expect that to continue when we roll these ads onto the Mobile app which we've said will happen by the end of this quarter, this fourth quarter. So what you can expect is that lots of new inventory across all categories will come online as that happens, but you wouldn't see any immediate pop in the metrics since, by and large, our local advertisers are paying on a flat rate subscription kind of a model, at least for the lines here of advertising revenue. You also asked another question, which is the monthly advertising revenue per advertiser question. And so on that point, I would just note that you're really looking at a couple of different factors. And as we're rolling out new products for advertisers such as the Yelp Deals and Yelp gift certificates, you're seeing a different blend of revenue paid per advertiser as they pick up different kind of products. So ultimately, I would suggest not really focusing on that ratio at this point, which is again revenue per advertiser, but rather just focusing on, as we do, the gross number of advertisers that we bring in as we're really in an acquisition mode around advertisers over the next couple of years.

And your next question comes from the line of Brian Pitz with Jefferies.

It's Sutchon [ph] sitting in for Brian. A couple of questions. First is on -- I think, I don't remember if you guys talked about this on the Deal call, but how much of Qype's traffic comes from search engines and how much comes organically?

This is Jeremy. So I don't have the exact breakdown but I think it's safe to say, the traffic pattern looks a lot like Yelp, which is the majority of traffic driven by search engines, particularly Google.

Okay, cool. And then on -- and a few more questions on Brand. You just got -- I think, I don't know if I heard this incorrectly, but did you guide branded revenues down -- flat to down, for the fourth quarter and if so, what was the sort of a -- at least versus our expectations that seemed that was all surprising. So I just -- what was the kind of the thinking behind there? And then third, how many of your cities currently contribute to revenue, to local revenue at least?

Sutchon [ph] it's Robb. I'll take that Brand question. Yes, we did guide flat to down year-over-year in Q4. We're experiencing some of what we call execution challenges in that part of the business that we're working through. As I've said, where our priority is continuing to be on Local revenue which is growing a healthy 75% year-over-year in Q4 and displays a fairly small part of our business. We're comfortable with the business going forward. So that doesn't mean that we're going to ignore but it is facing some challenges in Q4. And then your other question was?

How much -- how many of your cities currently contribute to the local revenue?

Yes. So I have to do quick math on that. I think that there's probably 60 U.S. cities or Yelp markets as we call them. And I would say a vast majority of those really connect with revenue. We just started monetizing overseas and there's about -- I don't know, 45 or so...

It's actually 43 international markets.

Yes, 43 international markets that, what I'd say at this point, at least in Q3 or 9 months September ending, weren't very much contributing at all to our revenue as of yet.

And your next question comes from the line of Jason Helfstein with Oppenheimer & Co. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: Two questions. Have we seen anything different from Google as a competitor with the acquisition of Frommer's and then kind of given they're not on Apple, presumably now there's more of a focus on their own business there. And then secondly, can you just give us a sense of what you're thinking about next year from an investment standpoint? Any color you can give us as far as where you plan on investing and perhaps like how that investment might compare to this year?

This is Jeremy. I'll take the first part of that question, maybe Rob can pitch in for the second part. So specifically with Google, we've been competing with them successfully for several years now and while we take them very seriously, we also feel very comfortable with our strategic position. And I think things keep getting better and better obviously. We have the Qype acquisition which accelerates things, if all goes well in Germany, which is a key market for us and the U.K. And then there's also of course, the Apple partnership, which I think is a marquee partnership for us and we're very happy about. Every year, as you look back, there's an announcement or two by Google in the space. I mean, Local is a enormous market. We're really a tip of the iceberg. And so it's not surprising that they continue to invest in that area because of its enormous potential. But really, the things that they've done in the past haven't had a big impact, and that's why every year there's sort of a big announcement that this time it's different and I think that's some of what you're seeing with whether it's Zagat or Frommer's. It's trying to re-energize something that's been struggling for a long time.

And, Jason, I'll take the color on next year. We're not going to give really any guidance for next year as of yet. But one of the things I guess I'd call out is if you look at this year's investment, obviously, the lion's share of the investment is going into sales and marketing. I think year-to-date we spent about $8 million or $9 million in our investment overseas and we feel good about that investment, especially now with the Qype acquisition and we expect that to pay back at some point in the future. So kind of continued investment in sales and marketing. You look at it line by line. Cost of sales has been pretty consistent quarter-on-quarter and obviously, sales and marketing -- or sorry, G&A will become a smaller percentage of revenue as that doesn't need to -- as that is a scaling function. We think we're getting good scale out of sales and marketing, especially if you consider the fact that you take out the investment in overseas and it gets about 50% that we're seeing on a percentage of revenue basis. So we're getting a lot of scale and leverage out of that business.

And your next question comes from the line of James Cakmak – Telsey Advisory Group. James Cakmak – Telsey Advisory Group: Two quick ones, please. The first one, you talked about the successes that you're having with Apple and with the integration there and pretty impressive numbers coming out of that. Can you talk about, Yelp on the other platforms like the Android and maybe differences in behavior that you're seeing or similarities with iOS 4 customers? And secondly, internationally, you've been in London. You had the London sales office. So can you talk about some of the learnings that you have there as you bring on the Qype sales team onboard to that market. I guess is a centralized sales force makes sense there just as it does State side?

This is Jeremy, I'll take the first half in looking at iOS versus android. So, yes, we've got great applications on both platforms, a lot of traction on both platforms. I think we see what everyone else sees which is that iOS users are more highly engaged. I think there's a tendency to use more apps on iOS. But that said, we do have material traffic and users coming from Android so we're very happy with our position there.

This is Geoff. I'll take the second question there on the international sales force. Yes, we mentioned in Q2 we did open up our London sales office and have been hiring there. While still small relative to the overall U.S.-based business today, that's growing nicely for us and we're excited about the future of that office and centralized sales team out of the U.K. and Ireland. Now, you also mentioned the Qype team. Today, Qype has sales offices in London, Hamburg and Berlin. We're excited to welcome those folks into the Yelp family and to ultimately integrate them with kind of the Yelp sales team. You'd imagine that in the future they will all be selling a common set of products, selling into Yelp advertisers. Today, we're of course, leaving that team selling its own Qype products and we'll sort of figure out what the integration looks like in the months ahead.

[Operator Instructions] And your next question comes from the line of Todd Van Fleet with First Analysis.

Jeremy, I just wanted to follow up on the last question in terms of the engagement on iOS. How do you guys measure that engagement? Is that just based on the number of inquiries that you're seeing on those devices versus some of the others? Is it -- are you seeing an increase in the percentage of mobile inquiries coming from iOS 6 devices? Just give us a sense as to how you measure internally that engagement level.

Yes. Primarily -- this is Jeremy again. Primarily what I was talking about was the number of users on each platform. So iOS, there's more people actively using that app on a monthly basis than Android. Both are significant for us, both are material traffic. I don't have any specific numbers on page views per users or search per user to measure that kind of engagement, but I was speaking more generally about our people using apps. So more engagement on the platform, period.

Is that visibility that you think you'll be getting at some point in the future? I'm just curious. I think one of the big reasons to be bullish on the integration effort here between Yelp and Apple is that Apple or the iOS 6 users would ultimately be utilizing Yelp more frequently for their search activity. And I'm just looking for ways to kind of ferret out whether or not that's actually occurring.

Yes. I mean, those are certainly numbers that we have and we will take a look at. I think in general the feeling is that iOS users are more engaged users. When you start talking about some of those other metrics. Although, I haven't personally pulled the data and looked at it. But there does seem to be something perhaps in the demographic mix of who's buying an iPhone versus who's using an Android. But I don't have any more data to give you at this point.

All right. Two quick ones then. Did you guys give the customer repeat rate in the quarter?

Yes. It was 72%, Todd.

I'm sorry, 72%?

Yes. It was up slightly from the last couple of quarters.

Okay, great. And what was the headcount in the quarter?

1,200 -- approximately 1,200 people and a little over half of those are sales.

At this time, there are no further questions in queue.

Okay. Well, thank you very much and we look forward to updating you on our next call. Thanks.

And ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.