Yelp Inc. (YELP) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for your patience. You have joined Yelp's fourth quarter and fiscal year 2017 earnings conference call. [Operator Instructions] I would now like to turn the call over to your host, Head of Investor Relations, Mr. Ron Clark. Sir, you may begin.

Good afternoon, everyone and thanks for joining us on Yelp's fourth quarter and fiscal year '17 earnings conference call. Joining me today on the call are CEO, Jeremy Stoppelman, and CFO, Lanny Baker. Our Chief Operating Officer, Jed Nachman, will also join us for Q&A. 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 earnings 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 and adjusted EBITDA margin, which are all non-GAAP financial measures. In our press release issued this afternoon and our filings with the SEC, each of which is posted on our Web site, you will find additional disclosures regarding these non-GAAP financial measures as well as the historical reconciliations of GAAP net income to adjusted EBITDA, and GAAP net income margin to adjusted EBITDA margin. And with that, I'll turn it over to Jeremy.

Thanks, Ron, and welcome, everyone. In pursuit of our long-term strategy, we laid out three priorities for 2017. Driving usage and engagement, increasing transaction activity and expanding our go to market strategy. Over the year, we achieved each of these important objectives. We delivered a 20% year-over-year increase in app usage by introducing engaging product features such as personalized recommendations and by adding a more robust performance advertising capability to our marketing mix. We also made significant strides in transactions in our most important categories, restaurants and home and local services. Our long term partnership with Grubhub, a leader in the online food ordering and delivery space, will significantly upgrade our consumer experience by increasing the number and quality of deliverable restaurants across the country. In home and local services, we more than doubled the number of requests sent via Request a Quote compared to 2016. Finally, we expanded our go to market strategy, achieving what we expect will be sustainable gains in our ability to attract and retain advertisers which fundamentally strengthens our core business. We grew revenue in the self-serve channel by nearly 50% in 2017 with more targeted marketing and by providing advertisers greater flexibility over their ads and how they purchase them. Scaling our clients success initiatives was another important objective going into 2017. Developing our teams and processes around both account retention and client up selling, improved revenue retention levels year-over-year. Combined, these initiatives contributed to healthy account additions of 7500 or higher in each of the last three quarters. We also took advantage in strong sales rep retention, ending the year with 800 more sales reps than last year. The execution of these three strategic objectives in 2017 throughout revenue growth of 20% excluding the impacts from the sale of Eat24 and the acquisition of Nowait and Turnstyle. We also increased reported adjusted EBITDA by 30% compared to 2016. In 2018, we are continuing the execution of our long-term strategy and have prioritized four important objectives. Driving monetization, generating strong usage and engagement, strengthening our competitive position in restaurants and building out our home and local services offering. To drive increased monetization, we are building upon our achievements in self serve and client success. Self serve's convenience and flexibility in turn helped to track thousands of new advertisers in 2017. Our client success efforts helped improve revenue retention rates significantly. Thanks to the success of these initiatives in generating increased demand and improving retention, we have begun to offer advertising with flexible terms to our sales force. We believe this will stimulate file activity, remove friction from our selling process and yield more revenue. While it's early, client response to the greater flexibility has been promising, particularly for advertisers where a 12 month contract wouldn’t make sense. Our second priority is continuing to drive usage and engagement. Yelp is built on unique content that consumers trust and that starts with our over 148 million reviews of local businesses. In addition to introducing engaging new product features and leveraging performance marketing to attract more users, we are also focused on ensuring the quality and integrity of our content. We have always been serious about consumer protection. In fact we only recommend three quarters of the reviews we receive to help ensure that consumers can rely on Yelp's ratings and reviews when they are evaluating local businesses. Recently we have taken a strong public stance against review solicitation and abuses by reputation management companies and the industry has begun to follow our lead. This effort is vital to protecting the review ecosystem that brings consumers to Yelp and fosters loyalty and trust. Our third priority is strengthening our competitive position in the restaurants categories which brings millions of users to Yelp every day. To do so, we are expanding the number of transactions enabled restaurants. In 2018, the Grubhub partnership is expected to nearly double the number of restaurants available for online ordering and we have ambitious plans to grow the number of bookable restaurants through Yelp reservations and Nowait. Over the last 12 months, we have more than tripled the number of businesses connected to Yelp reservations, Nowait, and Yelp Wi-Fi to more than 14,000 locations. Which generated approximately $11 million in subscription revenue in 2017 while creating a more engaging restaurants experience. To make even more of these connections, we are improving the functionality of Yelp reservations and Nowait and weaving these and Yelp Wi-Fi into our core user experience. Our final priority is building out our offering in home and local services. Since its launch just over two years ago, Request a Quote has been met with an enthusiastic response from consumers and service professionals. Consumers are generating more than 1 million requests each month and the majority of requests are receiving responses in under an hour. Request to quote is also driving our largest and fastest growing revenue category, home and local services. By leveraging our existing cost of click ad model, Request a Quote is generating $18 million in annualized revenue based on December results. To unlock the full potential of these high converting leads, we are working on the next generation of monetization features. We are focused on better matching consumers with businesses and are exploring a take rate product that will allow us to participate in the gross merchandize value running through Request a Quote. In summary, our team's focused execution helped us finish the year in a position of strength. User growth remains strong and we increased net account additions by healthy rate. We also signed an exciting long-term partnership with Grubhub, closed the sale of Eat24, doubling our initial investment, and acquired Nowait in Turnstyle to strengthen Yelp's restaurant offering. I am proud of our team's accomplishments in 2017 and look forward to executing against our strategy in 2018. With that, I will turn it over to Lanny.

Thank you, Jeremy. Our financials story aligns with the strategic and operational one, Jeremy just described. Improvements in revenue retention in 2017 combined with sales force and sales channel expansion, contributing to advertising revenue growth of 20% for the year. Meanwhile, investment in Yelp reservations, the acquisition of Nowait and Turnstyle, which we rebranded as Yelp Wi-Fi, and establishing the partnership with Grubhub, elevated our transactional capabilities. Adjusted EBITDA grew 30% from 2016 to 2017, reaching a record $156 million. Adjusted EBITDA margins expanded by about 2 percentage points year to year and we ended 2017 with over $845 million in cash and marketable securities and no debt. Heading into 2018, the growth of our mobile app and our record increase in the number of new businesses claiming their page on Yelp in 2017 provides leading indicators of the broadening appeal of our product offering. Other key business metrics are also encouraging. Compared with a year earlier, we ended 2017 with sales force growth up, revenue churn down and advertiser account growth improved. Our business outlook for 2018 anticipates revenue growth of 18% to 22% over 2017, adjusted for the sale of Eat24 in the fourth quarter of '17. We expect to grow adjusted EBITDA by a high teens rate in 2018. I will get into the outlook details in a few minutes but first let me briefly review fourth quarter and 2017 results. Fourth quarter revenue of $218 million was $2 million above the high end of our expectations, driven by stronger local advertising revenue and higher than expected revenue per order from Eat24 in the transition to Grubhub. Advertising revenue of $208 million in the fourth quarter was up 18% year-over-year with the self serve channel growing fastest, followed by national then local. Paying advertiser accounts grew by 7600 from the third quarter to the fourth quarter, reaching $163,000 for the fourth quarter, up 21% from fourth quarter 2016 on an easier year ago comparison. As we have indicated previously, we turned a corner on local revenue retention at the end of the first quarter of 2017. In each successive quarter, we built a wider gap between 2016 and 2017 revenue retention levels. In fact, December was the most improved month of the year and the gains in revenue retention were important contributors to fourth quarter and full year ad revenue growth. Turning to non-advertising revenue. We generated transaction revenue of $5 million in the fourth quarter of 2017 and $60 million for the full year. Both of those numbers include revenue from Eat24 for periods prior to its sales on October 10. For the fourth quarter, approximately $2 million in transaction revenue came from Eat24 prior to sale. For the full year of 2017, Eat24 contributed $54 million in transaction revenue prior to sale. Quarter by quarter revenue figures for Eat24 are shown in a table at the end of our fourth quarter earnings release. One final point of clarification. We are temporarily recognizing a small amount of extra revenue per order from the Grubhub partnership. This relates to the pass through of certain Eat24 payments processing fees and amounted to roughly $1 million in additional revenue and $1 million in additional cost of sales during the fourth quarter. We expect to see a final $1 million in revenue and $1 million cost of sales from this source in the first quarter of 2018. After that, we will continue to generate transaction revenue under the standard terms of our five year partnership with Grubhub. Finally, other services revenue for the fourth quarter was $4.6 million, reflecting an increase in the number of restaurants and local business who will become customers of Yelp Reservations, Nowait and Yelp Wi-Fi marketing. On the expense and profitability side of the fourth quarter, total expenses were up 16% year to year with gross margins up about 1 percentage point quarter on quarter, primarily reflecting the sale of Eat24. Operating expenses were $196 million for the fourth quarter as sales and marketing costs rose 19% year to year and product development expenses grew by 30% year to year. Meanwhile, we reduced G&A expenses year to year. Depreciation and amortization was roughly flat and stock based compensation was up 6% over the fourth quarter of 2016, reflecting purposeful management of these items. Where expenses rose more quickly in the fourth quarter, the primary factor was an increase in employee numbers. We grew our advertising sales force by roughly 250 people during the fourth quarter and at the end of the year we had 3300 people in ad sales and customer success. Up 32% from the year end 2016. Although this investment increased sales and marketing expenses relative to revenue in the fourth quarter, we now entered 2018 with a larger team focused on ad revenue growth and additional resources to funnel towards our other sales teams. To be clear, we remain strategically committed to growing our self serve, national and partner sales channels and we expect to capture an increasing proportion of our opportunity via these avenues in coming years. At the same time, the effectiveness and economics of our core local sales rep model are compelling and we view our multichannel strategy as a competitive advantage that is an and question rather than an either/or. Adjusted EBITDA for the fourth quarter was $41.6 million, at the high end of our business outlook range. As anticipated, adjusted EBITDA margins were down year to year in the quarter, reflecting the hiring and investments I spoke of a moment ago. During 2017, we took steps to rein in stock based compensation and slow the rate of growth in Yelp's share count. At the end of 2017, we have repurchased and retired $13 million of Yelp stock under a $200 million share repurchase authorization granted in July. Our fully diluted share count averaged $89 million during the fourth quarter, up 5.5% from the same quarter of 2016. We have managed our share repurchase authorization conservatively thus far and we plan to be opportunistic about repurchases in 2018. With the strength of our balance sheet, we feel well positioned to manage dilution while preserving strategic flexibility. Let me now turn to our operating plan and our business outlook for the coming year. Based on the products, sales and customer success groundwork laid in 2017, we believe Yelp is positioned to achieve strong growth in advertising accounts and advertising revenue in 2018 and we expect increased profitability within the core Yelp advertising business again in 2018. As Jeremy indicated, we are giving advertisers more control over their ads and we have begun to offer contract terms that are more dynamic without multi-month or annual term commitments. Business owners have responded favorably to these and other changes and we have begun to see an uptick in new advertiser acquisition. We plan to move cautiously, recognizing that changes such as these are likely to increase trial purchases and may prompt greater on and off activity amongst some of our advertisers. At the same time, our experience and our analysis indicated that the sales productivity and revenue benefits of moving in this direction will be clear net positives for the business. Furthermore, we believe our expanded customer success function has the capacity to respond to changes in revenue retention that may emerge. You will see some of our caution expressed in a wider range of expected revenue outcomes within our 2018 business outlook. Turning to the next piece of our plan for 2018, we intend to invest in Yelp Reservations, Nowait and Yelp Wi-Fi with the objective of increasing user engagement and transaction activity within the restaurant category, as well as generating additional subscription revenue. These strategic investments are expected to initially dampen adjusted EBITDA growth and margin expansion in 2018 while solidifying our competitive position and setting up stronger financial growth in the long term. To grow these businesses and increase the value they bring to the Yelp user experience, we are going city by city to build local density. The sales people taking these products to market are separate from the advertising sales team we report on each quarter and we plan to staff these teams from the ranks of our core Yelp ad sales team over time. We expect to incur operating losses in these businesses of $20 million to $25 million in 2018 and this is reflected within our business outlook for the year. Finally, we expect to grow advertising revenue in the home and local category faster than in other categories in 2018, partly as a function of the heightened appeal of Request to Quote. Our experiments to develop a take rate model for our Request to Quote, will move rapidly throughout the year. However, we have not incorporated a revenue contribution from take rates into our current 2018 outlook. Taking these items together, we expect full year 2018 revenue in the range of $935 million to $965 million. On an apples to apples to basis, excluding Eat24 from the 2017 base year, we expect revenue growth in the range of 18% to 22% for 2018. On a reported basis, revenue growth is expected to be in the 10% to 14% range for the year. Going one level deeper, we currently anticipate ad revenue growth in the high teens to 20% range for 2018, fueled by the recent growth of our local sales force, the launch of our new Washington DC office and another year of strong gains in the self serve channel. On the transaction line, revenue is expected to be in the $10 million range for 2018 with the bulk of that coming from the Grubhub partnership. We expect Grubhub's supply of orderable and deliverable restaurants to be integrated into Yelp by midyear. Other services revenue is expected to grow in the mid 30% range year over year to roughly $20 million for 2018. Based on our current plans and business outlook, we expect overall operating expense growth in the low to mid teens for 2018 versus 2017. Product development and sales and marketing are expected to drive the vast majority of expense growth in 2018 and both of these are driven by headcount. We expect depreciation and amortization to be 5% of revenue in 2018 and stock based compensation is anticipated to be approximately $150 million. For the full year of 2018, our business outlook is for adjusted EBITDA of $175 million to $187 million, including the investments I mentioned a moment ago. At the midpoint, this range should represent 16% growth over 2017. Although we anticipate positive pretax income in 2018, our tax provision should remain small in the coming year and we do not expect material benefit from the change in corporate tax rates this year. Turning to the first quarter of 2018, we currently anticipate revenue of $218 million to $221 million. Adjusting for the disposition of Eat24, the outlook range implies revenue growth of 22% year-over-year on a comparable basis. We expect adjusted EBITDA of $29 million to $32 million for the first quarter of 2018 versus $29 million in the first quarter of 2017. As with the full year, investments in our restaurant strategy will reduce operating leverage as will the recent growth in our sales headcount during the first quarter. Looking into future quarters, we anticipate that the sales force expense effect will reverse itself as reps come up to normal production curve. Other details of our first quarter outlook are laid out within the earnings release published today. Wrapping up, we concluded 2017 with encouraging business momentum and having made tangible progress against our primary strategic objectives. With the growth of the Yelp mobile app to nearly 30 million unique devices per month, we have extended our leadership in local and expanded the highly engaged community of consumers and businesses connecting with each other on Yelp. As we go into 2018, we expect to capitalize on our accomplishments of the prior year in areas such as customer success, performance marketing, sales hiring and product innovation to deliver strong and consistent revenue growth in the coming year. We also plan to evolve our tactics and pursue new investments in 2018 that we believe will deliver financial and strategic benefits long into the future. And with that, we will take your questions.

[Operator Instructions] Our first question comes from the line of Mark Mahaney of RBC Capital Markets. Your line is open.

Okay. Two questions please. First on this take rate transition or experimentation with Request a Quote. So what's the timing like on that? Is that something that you are going to feel your way through or are you already set on when you are going to roll that monetization model out and then if you think the EBITDA margin ramp this year, you went through a couple of reasons why the EBITDA margin expansion this year and '18 is going to be a little bit somewhat depressed. Is the way to think about the model is that 200 bps that you did in '17 kind of a normal Yelp EBITDA margin going against your long-term range of 35 to 40. Was that depressed itself or is that greater than what we should normally expect. Like how do we think about what a normal EBITDA margin should be like in order to get to your long-term margin expansion? Thanks a lot.

This is Jeremy, I will take the first half and Lanny will take the second half of your question there. So with Request to Quote, we continue to be really excited about the growth there. We saw volume up about 100% year-over-year. And as you know, we have been planning around with monetization. December we exited with an $18 million run rate using essentially our existing ad products, CPC based product. And we are looking for ways to potentially capture more of the GMP that’s flowing through Yelp. And so take rate seems like an interesting proposition. We have some experiments that we are just at the beginning stages of, so it's something that we will keep working on throughout 2018 and we will keep you posted.

On the margin front, Mark, there is sort of two main components. There is the core Yelp advertising business where just looking at that business in isolation, if you were able to do that, it would -- I think you would see 40% to 50% of the revenue growth year-over-year dropping down to the bottom line. And so that’s sort of main central engine of Yelp. Our core advertising product has very attractive incremental profitability and can drive certainly the margin expansion that you talked about and maybe even a little bit more year-over-year. Balanced against that, our investments that we make and sort of the timing at which those investments return back to us. Two come to mind right away. One is this investment that we are making in the restaurant category, where restaurants are very central to the value proposition of Yelp. They are central to our model, they are central to our strategy. And we plan to make a pretty significant investment in those business, Yelp Reservations, at Wi-Fi and at Nowait this year, with a view that that sets us up for a significant larger subscription revenue business down the road. It drives new and repeat users to the business, it closes some of the loop on attribution. There are a whole lot of very important strategic benefits. And so we are in a position where we can sort of balance the growing profitability of the core business to be able to make those really important strategic investments. Request to Quote is an interesting one on the other side where we are making product investments to build what we have got today at Request to Quote and to take it to the next level. But that also could be one that turning on the take rate could have very attractive margin characteristics. So I guess what I would say in answering your question is that we think we can make steady consistent margin progress. The core business has that 40%, 50% incremental margin characteristic to it when it's a matter of whether there are investments we are making around that.

Thank you. Our next question comes from Paul Bieber of Credit Suisse. Your question, please.

First off, can you provide a little bit more detail on the key areas of investment in the restaurant category. I think there are $20 million to $25 million of incremental investment, implies that you are investing in more than sales people. And then just a quick follow up on capital allocation. Can you provide us just with your strategy in how you think about M&A opportunities in this environment given the large cash balance. Thank you.

Sure. Let me talk first about the investments we are making at those very important businesses. The bulk of the investment is in sales and marketing. There is product work in those areas for sure but the bulk of the incremental investment is really sales people to take those products out to local businesses, aiming for business density in specific geographies where there starts to be sort of a bit a network effect where the benefits to the user really become tangible. The benefits to the businesses once the users are there for Reservations or for Waitlist, really start to mount. We have seen that in San Francisco. We have seen that in other cities that we have focused upon. And so we are going to be making concerted efforts in concentrated places there. It will be mostly sales and marketing. On your second question in terms of capital allocation. We are fortunate I think, when we look at our mobile app user compared to the number of people who use Yelp on the desktop, we see a lot of room to continue to grow our mobile app user base. When we look at the number of restaurants that we have, the subscribers of the businesses I just mentioned, at counting, totaling them all up, we are at 14,000 today. We think there is a much bigger market in total and bigger market for each one of those services over time. It's another internal investment we can make. And then we continue to see positive returns investing in our core local ad product. So we are at a place where there still seems to be, and we believe there is, a tremendous amount of organic internal growth opportunity. And so as we look at capital allocation, it's a high bar. Relative investing and in acquisition versus investing to further strengthen what we have got. We keep an active eye on the market. We have specific priorities that we are thinking about, that would drive user growth. That would add new components to our model, that would add monetization in certain categories where we see real high monetization capabilities. But we don’t have anything else to say beyond that on the acquisition front at this point. And in the meantime we also have a share repurchase program to put us in position for being opportunistic and sort of doubling down on our own investment in Yelp.

Thank you. Our next question comes from Matthew Thornton of SunTrust. Your question, please.

I guess first one, just on Request to Quote. I would like to peel that back a little more, when you look at the growth, are you seeing it more on the user side, more inbound requests? Or is it more on the advertiser side, more advertisers engaging with the product and responding. And then relatedly, those users that are using the product, are you seeing any data that would suggest they are visiting more often. And again on the advertiser side, are we seeing statistical evidence that those advertisers are showing better retention. And then just a second question, if I could, around the business development. I guess obviously you have got the Grubhub transaction this year which I think is well received. Is there any appetite to do more along those lines or do you see any other opportunities out there along those lines. Thank you.

Matthew, so on Request to Quote, you are asking about whether it's really the consumers driving it or businesses and there uptake. And I would say it's a little bit or a lot of actually both of those. So we are seeing really nice volume growth which is obviously driven by consumers, is up 100% year-over-year. And then another encouraging stat that comes more from the business side is we are seeing really robust responses. So the majority, over 50% of requests get a response from a business in less than an hour. And so we see that as really strong demand from the business side as, hey, these leads are valuable. They are worth responding to. And so I think that bodes well for the functionality overall. We are also seeing that the business in home and local services is growing very nicely. In fact faster than I think just about every other category from a revenue standpoint. And so I think that reinforces the idea that our Request to Quote is driving a lot of value here. And so we are excited about it in the coming year.

The business development thing, I will just go a little beyond what you said on the advertising side on the home and local services category. The review content and the volume of reviewed businesses in home and local businesses is growing 1.3, 1.4 times faster than all other categories. So the investment we are making in the product experience in home and local services seems to really be resonating with both consumers and the businesses that they are contacting. On the BD side, I think what we have said is there is a pretty concrete test that we run every business development kind of through, and that is, number one, is it materially better for the user experience. And when we looked at the Grubhub transaction, the quality of their restaurants, the number of their restaurants, the deliverability of their restaurants meant that bringing that on to Yelp was just sort of unequivocally going to be a better user experience in the food ordering category then we were delivering at the time. The second one is, does that partnership have an opportunity to be sustainably better for Yelp shareholders and we looked at the economics of being in that business, of taking on the challenges ourselves of trying to deliver all those restaurants. If you look at the network that Grubhub had built, their leadership in the category and said, this is a relationship that we are able to really negotiate a win-win for both of us that will be better for our shareholders. So in any other category with any other partner, those are the two gains. It is first and foremost, and it's got to clear the consumer user one first, does it improve the consumer experience? And if it does that, do we have conviction that it can be better for the shareholder, and if so we are very open to those ideas.

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

Two questions, please. In terms of the next step forward with local and home services and the take rate product, is that an area where you will primarily focus on trying to cultivate and develop monetization solution in-house, or will you also be looking for partnership all out? Kind of what you have done with Grubhub and others in the restaurant category. And secondly, in terms of your expectations this year, what is your target for growing the sales force during the year. Thanks.

Hey, Mark. So you are talking a little bit more about home and local service and Request to Quote and take rate. I think we are at the early stages of experimentation here. There is a lot of different levers that we are going to playing with this year. I think your question is still down to, hey, is there a Grubhub like deal opportunity and we get asked that a lot. I think we remain open to business development leads. Lanny had laid out the framework in the previous question of how we are thinking about that. But right now we just see an incredible amount of potential right around our own platform just by building out a product. And so that’s kind of the number one priority. Something falls into our lap, that’s makes us shift gears. That’s always possible and in fact with Eat24, we are very much focused on growing that business and then an opportunity presented itself. So directions can change for right now, all signs point to this product being really nice hit for us and has a pretty clear path to strong monetization, which we are already on with $18 million in annualized revenue attributable back as of December with Request a quote.

This is Jed. In terms of where we are going to peg headcount growth for 2018, it's going to be right, kind of in the mid-teens range -- in the mid-teens range. We saw obviously very strong growth in sales headcount through the back half of the year and that was a purposeful decision when we started to see retention trends that were very favorable compared to historicals. And so at some point in the third and fourth quarter, we kept our hiring plan in place and kind of grew through the original plan. And that was by design. When we mentioned the other business that we are investing in, including the Wi-Fi, Nowait and Yelp Res. And a lot of those folks are picked out of the local sales force and we drop them into those various businesses and sort of come into the year with that buffer and being able to fund them without kind of hitting the core Yelp local business, was really important. Also gets us a nice head start to the year. And finally, we have this Washington DC office and decided to kind of get ahead of the hiring. It's a combination of both new reps as well as veteran reps that we have in that office. So I think we will get back to a mid-teens level over the course of 2018.

Thank you. Our next question comes from Chris Merwin of Goldman Sachs. Your line is open.

So I guess, I think at one point you gave statistics that 80% of Yelp users weren't aware that they can order food on Yelp. So just curious what you are doing to drive awareness among your user base. Is that they can now order food on Yelp and maybe related to that, if you could just tell us what the contribution from the Grubhub partnership. What contribution is contemplated in your 2018 guidance? And then just a second one on sales, can you offer some color there on the pace of hiring? Can you talk about just how the sales force productivity has been trending in general and sort of what your expectations are for productivity for the heads that you are adding now? Thanks.

Thanks, Chris. I will start off talking about awareness of food ordering. You know it continues to be an opportunity for us. There are lot of ways that we can educate consumers that are using Yelp. So we have got email channels that we are still building out. We have got search functionality, obviously surfacing food ordering possibilities in more innovative ways within search. There when you open the app, you typically land on nearby screen, so there is some opportunity there. And there is also notifications. So we have got a lot of different tools to play with and we have had success growing volume, leveraging all those. And so we are going to continue to push on that in 2018.

On Eat24, I think we had about $5 million of revenue in the quarter on the transaction line. $2 million of that was from the period where we owned Eat24. So sort of underneath that there was $3 million in transaction revenue. $1 million of that, as I said, was the sort of extra revenue per order that we are recognizing. That’s what we were in the fourth quarter. And except for the coming year, we anticipate that transaction revenue will be in the neighborhood of $10 million. That’s incorporated within our outlook and the bulk of that will come from the Grubhub partnership. Though there are platform partners in there and a few other smaller business lines as well.

And then on the rep productivity question. Basically it's been in line with what we have seen over the course of 2017. Certainly we are going through a transition into more of a flexible, non-contract world. And so you know we are watching that very carefully as we go into 2018. There is certainly a change for the sales force but we feel pretty confident in both the testing that we have seen on our own kind of pilot teams, as well as a bunch of data that we have seen through our own self-serve channel over the years and feel confident that that will move productivity in the right direction. And part of that is that we continue to see benefits out of our customer success team, which we have kind of built muscle up over the last 18 months and feel like we are in a position that we are able to kind of handle a wider funnel than we have previously and ultimately expand the pie for Yelp in terms of the numbers of advertisers that we can interact with.

Thank you. Our next question comes from the line of Brent Thill of Jefferies. Your question, please.

Lenny, I just want to go back to Mark Mahaney's question around EBITDA. The investments this year that you are forecasting are slightly higher than the Street. I just wanted to follow up. I think you mentioned there were two reasons, one was the investment in restaurants and second was Request to Quote. I want to make sure that there wasn’t any other category that we need to consider that’s in that mix.

No. We are making investments in our product team. You see the growth of that line in the fourth quarter. The bulk of that is against the core Yelp product. That would incorporate what we talked about in thee [cost club] [ph]. There is really a, sort of a different sales investment, sales and marketing investment behind those restaurant subscription businesses that we called out.

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

This is Chris on for Lloyd. A few if I can. Can you talk about the performance for cohort from the retention teams early efforts about a year ago. And then are you guys really seeing any of these customers continuing to renew.

I am not totally clear on what you are talking about but I think you might be referring to the retention issues that we had in the first quarter of 2017. That were really, when you trace it back, related to cohort of advertisers we brought on in 2016. Earlier this year, earlier last year in 2017, we shared with you the notion that there were, advertisers brought on in early part of 2016, we never really established the normal level of engagement with the Yelp advertising program. We anticipated that they would churn off and they churned off at the end of the year at a higher rate than we had anticipated and that set us back at the start of 2017. That was a, sort of swamping of the boat that came through at one point in time for a few months. And then what you saw was more of a reversion to the trend line which is Yelp making steady progress improving our account retention. So that issue feels at this point like it's pretty far behind us.

Got it. And maybe just one real quick one on the timing of the Nowait, Yelp Reservation and Wi-Fi losses. Are those going to build throughout the year in 2018 or should we expect those to be relatively even.

I think they are pretty steady across the year.

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

So first, are there incremental ongoing cost associated with Grub integration efforts on the Yelp platform in your 2018 guidance. Should we expect that to sort of wind down over the course of the year. And then second, can you elaborate on the flexible terms for sales force driven contracts you discussed in the prepared remarks. It sounded like it was largely related to specific contract terms. Is there flexibility on the pricing, volumes as well? And is it for any specific category. Thanks a lot.

On the product investment related to transitioning with Grubhub, there is nothing abnormal there. There is an amount of work that’s being done right now. The team is addressing that with purpose. But that to a large degree is happening all the time. We have got initiatives in different categories over the different product, maybe the mobile app and maybe the desktops and we are moving around resources and today there are resources focusing on that integration. You should not expect that those expenses go away, they will be reallocated to the next opportunity and priority that we have when we get done with that work.

Got it. And on the non-term, there is in fact a contract that’s just a non-term contract. You know this is a decision that as we kind of data points back from the market on kind of what our customers wanted in flexibility and control in their advertising products made the day. And then actually looked at our own data on the self serve side where we saw behavior that indicated you are going to get a lot more volume with a less considered purchase. If you think about an advertiser potentially spending $300 or $400 as a commitment versus $3,500 to $4,500 over a 12 months period of time, that’s a much -- we have kind of lowered the hurdle in getting involved with Yelp advertising. And in fact when we looked at the data with our test teams, we can see that overall Yelp is going to be in a much better position, revenue wise with those cohorts flowing through. So really it's a broad based change. We are going to be cautious about the rollout. Given the size of the change and make sure that we are very deliberate in how we get it out to the sales team and so that caution is reflected in kind of where we are on the number side.

Thank you. Our next question comes from Douglas Anmuth of JPMorgan. Your question, please.

Lanny, I just wanted to go back to the leverage in the core business that you discussed, the 40% to 50% flow through is helpful. I was just curious if you have a comparable number for 2017 to the $20 million to $25 million investments that you are talking about in '18. Thanks.

It was lower investment. Remember, we didn’t own those businesses until -- we didn’t own them at all in the first quarter. And then there is a period of sort of getting them on board, getting them integrated, getting them stabilized before we really were able to shift into gear. We have said, I think last quarter we let you know that the sales force at Yelp Wi-Fi is significant bigger today, probably in order of magnitude there than it was at the time of acquisition. So there have been investment ramping up there but that we number that we called out for this year, and particularly the expenses, because remember the revenues are growing there but the expenses between the revenue generating and the losses that we told you about and the investment that we are making. That’s a big investment.

And just to clarify. The investments that you are talking about for '18, the $20 million to $25 million, did I hear it right? You are saying that’s mostly sales and marketing. I was just trying to understand where those dollars are going across those emerging businesses.

It's sales and marketing.

Thank you. Our next question comes from the line of Tom Champion of Cowen. Your line is open.

Can you talk a little bit about how you compete in home and local as a space, generally, based on the number you gave us last quarter, it seems like a lot of SPs are using Request a Quote. How do you differentiate relative to [indiscernible] and home advisors. And as for PAAs, they came in a little bit stronger than maybe we saw it and I was just curious if there was any particular call out there. Whether it's your larger sales force or product improvements or generally improving economy. Thank you.

Hi, Tom. On the home and local question, how do we compete in this facet. One of the unique things about Yelp is that we are particularly strong in high frequency categories that draw in users, particularly restaurant, food and night life. And so from a customer acquisition standpoint, a lot of those people just show up and we don’t have to spend tons of money, shouting from the rooftops so that you can find a plumber on Yelp. You kind of start in the high frequency categories and then it's on us to educate you over time about what are some of the other categories that might be useful to you. And that’s reflected in the usage as well as content growth. So consumers are really finding their way to these categories and we are seeing a really nice rise in home and local service group use, not to mention the Request a Quote volume. So we feel pretty good about our competitive position, that is playing to our strength and we are kind of building out a new area of functionality. Writing of the backs of something that we were already winning at.

On the paying advertising accounts growth, it was pretty consistent with what we have seen in the last couple of quarters. A year ago we had a pretty soft fourth quarter so the comparison year-over-year was a bit better. There is a contribution in there for sure from our improved customer retention, client success efforts. There is not at this point a big benefit in that number from sort of the rookie hires that we have made over the last few months. Those people are, many of them are in training and just coming up to speed.

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

Two questions for you. So one, you have touched on this a bit about some of the organic initiatives you have had over the last year in terms of driving user growth and user engagement. And it sounds like that is going to continue in 2018. Just curious how we should be thinking about incremental spend, if any, to really drive user growth as well and engagement growth. And then the second question, you did mention commitment to the self serve model in 2018. Can you just talk about some of the things that you are doing there to drive new accounts to the platform and whether those tend to be new to Yelp or you looking to migrate out of the local business or a bit of both. Thanks.

Hi, Brian. I will take the first half there. You know our strong app growth which is about 20% year-over-year, it's driven by things like great notifications that are personalized to you. Continued progress with SCO. But as you alluded to, so the vast majority of the growth we are seeing is organic, but as you alluded to, there is now a performance layer and so there is some marketing spend there in finding sources of paid traffic as well. But we are really careful about spending in a smart way and making sure that those users are high quality and engage with Yelp. It's not just putting points on the board. For vanity's sake, we have also found success with some [BB] [ph] partnership. So going to handset manufacturers and carriers and doing pretty low deals and those have generated high quality users as well.

On the self serve front, looking into 2018, I would say the biggest change driving the self serve is that during 2017 we had a big priority to build a performance marketing capability and sandbox in which we have really developed that marketing capability was focused first on user growth. As we rollover to 2018, we are starting to point that performance marketing capability more in the direction of business acquisition and advertiser acquisition through the self serve channel. That probably starts with driving businesses to claim their page on Yelp. And we are encouraged to see, you know the last 12 months have been the record 12 months in the history of Yelp in terms of businesses for the first time claiming their page on Yelp. That’s a real promising indicator, early indicator of the opportunity we have to drive the self serve channel. As I said, we will be doing more on the marketing front there.

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

I was hoping if you can talk at the cohort level of the Nowait and Turnstyle customers. Are there any notable behavior differences there with respect to advertising, revenue retention? Just anything you can say to help kind of flush out the investment a little bit more. Thanks.

Hi, Justin. Yes, I think it's too early in the inauguration and growth of these products to have a whole lot to report there. We do think that they are going to be great and there are some signs already on the consumer side. They are driving a lot of value. And that’s a big part of the story for us is being able to skip a line from the Yelp app is really a wild moment from a consumer standpoint. Being able to hop on Wi-Fi at a local business that is Yelp Wi-Fi and get high speed Internet and not flow out your cell phone plan is a great consumer experience. So that’s the starting point. But we definitely see opportunities there to integrate these products into the full Yelp suite and be able to deliver value to advertisers, like how are your ads performing, because we are gathering more data. But that’s kind of further out.

Thank you. Our next question comes from the line of Brad Erickson of KeyBanc Capital Markets. Your line is open.

Just wanted to circle back on the Q4 EBITDA. You have touched on this in bits and pieces but just wanted to get it completely direct. You called out retention being really strong but obviously offset by increased hiring. It seems like you have called up a hiring expectation last quarter. So between I guess the churn, the hiring and any Eat24 margin drag or any other material factors. Can you just kind of unpack the puts and takes that went into the Q4 EBITDA relative to what you guided last quarter.

Well, I think the biggest change there was that we, as Jed said, we made a decision in the third quarter that we affirmed in the fourth quarter to continue to grow the local sales force. As we saw rep retention trending really well. Keeping our gas, our foot on the pedal of hiring people into Yelp. And that drove products, sorry, sales and marketing expenses, sales expenses, higher relative to our original plans. We had a little bit of upside on revenue, we had a little bit more expense there and came out kind of the high end of the EBITDA range when you put those pieces together.

Got it. That makes sense. And then just on the flexible spend. You called out as obviously lowering the hurdle that would invite some, I guess, new pent up demand which is a net positive you said. What are your expectations based on the testing you have done in terms of what will happen to the existing cohort spending as you are allowed those new flexible terms.

I guess you are referring to existing customers that we have that are not in those flex returns. Yes, listen we have a similar type of product out in the marketplace with self serve today and have not seen a lot of corrosion of that as a result. Certainly something we are keeping our eye on and doing that kind of in a very deliberate way but we have not seen that kind of come to bear as of yet. But we are not fully rolled out yet. I don’t believe that there is a full communication between all of our products in terms of if you are self serve user or you come on with no terms. We haven't seen this so far and I don’t anticipate it but certainly something we look.

And I just one point to add to that is that, the customers that we have sold historically on a 12 months contract, when they get to the end of that 12 month contract, they go into a perpetual renewal, month by month, month by month basis. So effectively a pretty large portion of our advertising base -- our most satisfying advertiser base is already on that sort of month to month term. So I appreciate what you are talking about. There could be people who say, I want to be on a different schedule, but as Jed said, we have seen this before that options have been available to them and it's one of the things we have under our watch but I don’t perceive that to be a huge issue sitting in front of us.

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

Two if I may. One for Jeremy. On Request to Quote, as you guys migrate to or experiment with the take rate model, would you anticipate significant changes to the user experience. And then on the second one for Lanny, it looks like ARPU or revenue per paying ad account, ticked down year on year slightly for the first time. I am just wondering if there is any color you can add on the drivers there. Thank you.

Hi, Peter. So your question on Request to Quote, does the take rate direction send us off into any wildly different user experiences. I think there is a number of implications on the product side but I wouldn’t say that they are wildly divergent implications from where we are generally headed. And so there is product and engineering work to be done that’s already kind of underway to continue our experimentation of flushing out this direction. But I would call it sort of natural evolution, nothing, not dramatically different than where we have already been.

On ARPU, let me break it down in three pieces. The ARPU in the local business to the reps was up in dollars but basically flat year-over-year. The ARPU in the self serve channel was flat year to year and the ARPU in the national channel was down 1% or 2% year to year. And that reflects primarily the growth of some of the smaller multi-business and franchise customers in the mix there. So the answer on ARPU is, it's largely a mix shift issue, Peter.

Thank you. And our next question comes from the line of Ron Josey of JMP Securities. Your line is open.

Maybe two quick follow ups. With the flexible ad approach, just wondering why now. I think you talked about market demands yet having, being deliberate in the rollouts. Wondering if this is something you have been thinking about for some time or maybe more of a response to have real demand. And then Lanny on Grubhub, I think I heard you say that the launch would be sort of midyear. I thought after 3Q or during 3Q, you had mentioned 1Q. Just wondering if there is a little delay on the Grubhub integration. Thank you.

No delay on the Grubhub integration, so no.

Yes. And then on the why now question, I think we have a lot more confidence in our customer support function today and both the improvements we have made with the teams itself, however kind of splitting up the work there as well as in-product efforts that have strengthened our retention. So really it's having the capability to kind of handle an expanded funnel and do that in the right way. And the initial results are kind of proven out to be the way we expect them to be. And again, we have a lot of data on that based on self serve and kind of the test cohorts that we have run and now it feels like the right time to move more aggressively in that direction.

Thank you. And ladies and gentlemen, this concludes Yelp's conference. Thank you for your participation and have a wonderful day.