Yelp Inc. (YELP) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2018 Yelp Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s call Mr. Ronald Clark, Head of Investor Relations. Mr. Clark, you may begin.

Good afternoon, everyone, and thanks for joining us on Yelp's fourth quarter earnings conference call. Joining me today are CEO, Jeremy Stoppelman; our CFO, Lanny Baker; and our COO, Jed Nachman. 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 from those statements. 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 most recent Form 10-K or Form 10-Q and our other SEC filings as well as our shareholder letter released this afternoon for a more detailed description of the risk factors that may affect our results. During our call today, we'll discuss adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. 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 to GAAP net income to adjusted EBITDA and GAAP net income margin to adjusted EBITDA margin. And with that, I'll turn the call over to Jeremy.

Thank you, Ron, and thanks everyone for joining us today. As you have seen in our shareholder letter posted on our investor relations website, we have reported solid fourth quarter results with revenue and adjusted EBITDA both exceeding our outlook range. We will discuss those results in today’s call, but before we do we would like to provide a broader update on the business and share some important announcements with you. On the IR website, you will also find an investor presentation with detail on where we believe our business is heading as we start a new fiscal year, which Lanny and I will walk you through. Turning to the first slide, Yelp was founded with one overarching mission to connect people with great local businesses. And as we execute our strategy to drive growth over the long-term, that mission remains at the core of everything we do that guiding principle is translated into tremendous value for both consumers and business owners. For example, since we started 5 million business owners have come to Yelp to claim their presence, enabling them to promote and drive traffic to their businesses. We drove leads to more than 540,000 paying advertising locations on a monthly average basis in the fourth quarter. Consumers have written more than 175 million cumulative reviews of businesses on Yelp demonstrating their enthusiasm for our platform. Our mobile app is a leading local resource for 33 million average monthly app users in the fourth quarter and our restaurants services Yelp Reservations and waitlist accommodated 22 million diners in December more than 1.7 million of whom came directly and remotely via Yelp. We also delivered 20 million service requests to local businesses in 2018 via Request-A-Quote including a monthly average of 1.5 million in the fourth quarter. These metrics demonstrate the great progress we're making in connecting consumers to businesses directly, which I will talk more about on the next slide. As I just mentioned, our mission is to connect people with great local businesses. Slide 2 shows how this works. We've developed a unique position as a trusted source for local life. Our product save consumers time and money and bring real convenience. For business owners, we provide a platform to help showcase their local businesses and we connect them to our large audience of purchase oriented consumers with advertising products that help expand, reach and enhance consumer engagement. And while Yelp has served as a valuable resource for both consumers and business owners since our founding, we've come a long way since then and even since our IPO. Reflecting on our history, Slide 3 describes how we've transformed Yelp from a simple business directory and review site to a trusted comprehensive mobile first local platform. We've gone from a consumer experience that was web-based and centered around listings and reviews to a mobile experience that provides consumer significantly more insight and interaction with businesses. On the business side, we've moved from impression-based advertising services to performance-based advertising products and are now delivering millions of transactions every month including orders, bookings and quote requests. In the earliest days, Yelp was all outbound telesales and almost exclusively focused on selling to small and midsized local businesses. Today, we have an array of sales channels that includes self-served partners and client success teams who are addressing not just local SMBs, but also national enterprises. I'll talk more about that in a moment. And as we have improved the consumer and business experience, we have achieved a corresponding impact on our financial results. Annual revenue grew from just over $80 million in the 12 months prior to our IPO to over $940 million in 2018. But as I think about the transformation Yelp has undergone over this time, it is not what we have achieved that most excites me, it is knowing that we still have a significant opportunity ahead of us. Turning to Slide 4, I want to talk a little about where we're going from here and layout at a high level the transformation we were pursuing to make Yelp an even stronger and more valuable company. Think of these as the guiding principles or pillars of the new strategies we are pursuing, new directions we are taking the business in order to drive shareholder value. First, we're elevating our focus on our advertisers and business owners. Second, we are building a more diversified, modern and efficient go-to market strategy by integrating product and product marketing with our people driven sales efforts. Third, we're establishing long range targets for growth, profitability and a return of capital to our shareholders. We will go into more detail on our plan to capitalize on each of these initiatives shortly. So those three pillars are where we're going. How do we see that creating shareholder value? First, we are focused on delivering renewed double-digit revenue growth starting in 2020. Second, we intend to drive margin expansion and optimize our cost structure. Third, we plan to continue establishing effective partnerships to help accelerate our strategy. Fourth, we plan to continue to return capital to our shareholders by buying back stock with the board having just doubled our authorization. And lastly, we are refreshing our valuable and experienced board of directors with the three highly qualified directors that we announced today. Let's first look at how we plan to deliver renewed double digit revenue growth on Slide 6. Importantly, we see 2019 as a transition year for Yelp as we continue the repositioning of our business and strategy that we began in 2018 with the goal of creating a more valuable company for our consumers, our customers, and especially our shareholders. We expect revenue growth in 2019 to be slower than in 2018 and our five year average as we make this shift and we believe this is the right thing to do for long-term shareholder value and we have confidence in our ability to return to strong double-digit revenue growth in succeeding years. Additionally, we are well positioned to capitalize on the large opportunities available in the local advertising markets. Local advertising is $150 billion market annually. Today, Yelp is tapped into a small, but growing fraction of that market, generating nearly $1 billion in revenue from local advertising. With over 20 million local business locations in the United States today, our paid advertising locations in the fourth quarter accounted for only 3% of the potential market. It's clear that we have considerable runway and upside opportunities ahead of us. Moving to Slide 7, a key element of driving this revenue growth is a handful of initiatives tailored to help connect consumers and businesses, winning in key verticals, expanding our product portfolio, driving more value to customers, capturing national market share and enhancing our customer experience. We expect these initiatives to help generate mid teens percentage revenue growth in the long-term. We'll go into each of these in more detail on the next few slides. Starting with winning in key verticals on Slide 8, we're focused on continuing to press our competitive advantage by addressing our clients’ operational needs with innovative solutions that build upon our strengths in key verticals. For example, in restaurants, our most traffic category, we're developing a comprehensive consumer experience to cement Yelp as the go-to app for diners and the best-in-class partner to restaurants. Our investments and proprietary booking experiences, Yelp Reservations and Yelp waitlist have already accelerated our penetration in the category by tripling diner seated via Yelp in the fourth quarter of 2018 compared to the fourth quarter of 2017 and we expect to see continued high growth rates for these products in the long-term. The strong user growth we're generating in restaurants is also propelling monetization across other categories. In home and local services, our largest and fastest growing category in terms of revenue, we are leveraging products to accelerate category monetization. For example, Request-A-Quote is generating over a million leads each month for service providers. In the fourth quarter, consumers submitted 1.6 million projects, a 41% year-over-year increase, which generated 4.4 million leads for service providers. Request-A-Quote annualized attributable revenue in the fourth quarter more than doubled to 38 million from the annualized run rate in the fourth quarter of 2017. Looking ahead, we're working to dramatically increase the proportion of leads sent to advertisers across this category. To accomplish this, we intend to surface the best lead opportunities to highly responsive and highly rated advertisers and providing our advertisers with more ways to promote their business. We're also working to boost consumer project submissions with product marketing and the phone call attribution flow we have successfully deployed in the restaurant vertical. Moving on to our product portfolio to deliver more value and drive monetization as well as to meet the needs of every business, we are expanding our product portfolio to include more products at more price points. Yelp Verified license is a great example since launching the offering to advertisers in November at a monthly price point of $30 per month, uptake with more than 3000 clients adding this feature to their advertising packages. In addition to driving incremental high margin revenue, this lower price offering is exhibiting high retention rates and materially improving overall retention for the cost-per-click advertisers that have adopted it. We believe that providing more products at different price points will give new clients and trial users even more ways to derive value from Yelp. Delivering more paid leads to businesses is another important goal for us. One of the ways we're doing so is by providing more value at more attractive prices to yield greater trial conversion, advertiser satisfaction, and ultimately retention. Our experiments indicate that a 10% reduction in CPC across the platform would yield an approximate $8 million boost in annual revenue through higher retention. Providing advertisers with more for their budgets helps to drive monetization by increasing customer lifetime values. Turning to Slide 9, capturing national is another important priority for us as earlier. National advertisers accounted for the majority of the $150 billion spent on local advertising in 2018. We plan to drive continued momentum in 2019 and beyond by expanding upon our successful go to market strategy and offering more solutions to meet the needs of large advertisers. We also plan to grow our national and multilocation sales force in 2019 and focus their attention specifically on the top 250 restaurant and retail advertisers. On the product side, we are extending our attribution offerings, creating new and engaging ad units to drive consumer purchases and providing tools for national advertisers and channel partners to track and manage their campaigns. We believe TV positioned us to capture a large share of the national and multilocation opportunity. Of course, consumers remain at the center of our business and the power of Yelp stems from a large and growing audience. To maintain strong growth in our app usage and deepened user engagement, we remain focused on our consumer product. Specifically, we're adding more ways to personalize our user experience. For example, we're enhancing recommendations by incorporating personal consumer insights such as dietary preferences that mobile users have already shared with us. We're also focused on incorporating more only on Yelp experiences like Yelp waitlist in the years ahead. We believe that executing these strategic initiatives will position us for strong growth in the years to come. Over the next five years, we expect revenue to grow at an average annual growth rate in the mid teens with revenue from SMB is growing at a low teens annual percentage rate and high teens for our national customers. Now I'll turn it over to Lanny to share more about our focus on margins.

Thanks, Jeremy. Even as we drive top line growth, margin expansion and optimizing our cost structure are major areas of focus. On Slide 10, you'll see that we planned to do this by driving growth in our most efficient and margin accretive sales channels, reducing local sales hiring and driving rep productivity, relocating sales out of San Francisco to save $10 million plus per year once that move is completed later in 2019, optimizing consumer marketing spending to save $15 million in 2019 and reducing other corporate expenses where it makes sense. Over the last five years, we've grown adjusted EBITDA six fold from $29 million in 2013 to $183 million in 2018, increasing margins by more than 6 percentage points to 19.4% in 2018. Despite expected slower revenue growth in 2019 as we execute our business transformation initiatives, we expect to achieve another two to three points of margin improvement this year. And as the impact of the strategic initiatives takes hold, we also expect to achieve adjusted EBITDA margins between 30% and 35% over the long-term. Moving on to Slide 11 as we think about the core pillars of our plan to deliver long-term value to our shareholders, we're focused on ways to enhance and accelerate our strategy. And while we've outlined several ways we'll grow the business organically, we also plan to accelerate our strategy with effective partnerships that create great consumer experiences while generating attractive economics for our company. Yelp has already seen the benefits of successful partnerships through our long-term deal with Grubhub, which has doubled the number of orderable restaurants on Yelp, and it is generating more profit per order than the prior model that we had in place. This partnership has lead to faster and more profitable growth from food ordering on Yelp and we will continue to look for more opportunities just like this. Today, we have dozens of partners from SMB resellers to enterprise data and analytics partners. We've signed multiple significant partnerships in the last several months, including with Visa, GoDaddy and Google. We believe there's significant value to expanding through partnerships and we're working to unlock additional opportunities in the future. And even beyond revenue growth and margin expansion, we're focused on creating shareholder value through capital allocation. We're fortunate to have a highly cash generative business model and a very strong balance sheet. We're also confident about Yelp’s long-term potential, so share repurchases is another key element of our strategy. Beginning in 2017, we returned access capital to shareholders through sharer purchases. And in late 2018, we completed our first $200 million buyback authorization. In December 2018, we had announced a new $250 million share repurchase authorization and our board of directors has now increased that authorization to $500 million. Looking into the future, we'll continue to allocate capital carefully with the two objectives, propelling strategy and increasing shareholder value. We also have some exciting news about our governance and leadership that Jeremy will share it with you.

To help us drive our long-term strategy, today we announced the election of three new members to the Yelp board. As we previously announced, the Yelp board and our Nominating and Corporate Governance Committee initiated a process late last year to evaluate our board composition and identify new director candidates and skills to help drive our strategy forward. I'm thrilled with the results of that process. The board has appointed Sharon Rothstein, George Hu and Brian Sharples, who will join the Yelp board effective March 1st of this year. All three of them are experienced business veterans and bring a wealth of practical hands on knowledge and skill sets to Yelp including scaling operations, sales and marketing, product and monetization. Their experience and oversight will be critical as we continually enhance our strategy and execution. Sharon is a seasoned leader having served in senior roles at several consumer facing companies over the course of her career. Her global cross channel marketing and product expertise will be of significant value to us. George has a dynamic background as a product and operations executive at leading Internet based companies with a focus on business product. And he brings to us his experience in product development and distribution operations, marketing and partnerships. Brian is a successful Internet executive with experience at large marketplace in ecommerce companies. We're excited to work together with Sharon, George and Brian as we pursue our long-term goals and work to create significant shareholder value now and in the future. I also want to thank three of our current directors, who will step down at the end of the month. Peter Fenton, Jeremy Levine and Geoff Donaker have been a valuable in their service to me and to Yelp. We wish all three of them well. With that I'll turn it over to Lanny to walk you through the financial results and share some details about our business outlook and long-term financial targets.

Thanks, Jeremy. In the fourth quarter of 2018, we grew revenue by 11% from the year ago period to $244 million. Excluding the impact of the sale of Eat24, which closed in October of 2017, revenue growth would have been 12%. Advertising revenue was $235 million in the fourth quarter of 2018, a 12% increase over the fourth quarter of 2017. Transaction revenue went from $5 million to $3 million owing primarily to the sale of Eat24. And other service revenue was $6 million in the fourth quarter of 2018, up from $5 million in the fourth quarter of 2017, a 23% increase driven by growth at Yelp Reservations and Yelp Waitlist. We grew adjusted EBITDA 27% year-over-year to $53 million helped by managing expenses. As a percentage of net revenue, adjusted EBITDA was 22% almost 3 percentage points higher than in the prior year’s quarter. Roughly 45% of the year-over-year growth in fourth quarter revenue flowed through to increase adjusted EBITDA. For the year, net revenue grew 11% to $943 million or 18% excluding the impact of the sale of Eat24 with advertising revenue up 17% to $907 million. Transaction revenue was $14 million. Other services revenue of $22 million increased 45% from the full year of 2017. We grew adjusted EBITDA 16% year-over-year to $183 million. As a percentage of net revenue, adjusted EBITDA was 19%, an improvement of nearly 1 percentage point over 2017. Turning to Slide 16, let me take you through our financial outlook for 2019 and our financial targets for the next several years. As Jeremy mentioned, we expect 2019 to be a year of transition for Yelp as we execute on our core strategic initiatives. And we're excited by what is to come in the years ahead and confident about our ability to drive significant growth in the long-term. For the first quarter of 2019, we expect revenue growth in the 4% to 6% range and adjusted EBITDA margins to increase by 1 to 2 percentage points year-to-year. Overall, we expect to achieve revenue growth of 8% to 10% for 2019 and expect to exit 2019 with revenue growth in the double-digits. We expect revenue growth to improve and accelerate in the second half of 2019 as product sales and retention initiatives take hold over the course of the year. We expect to improve adjusted EBITDA margins by between 2 and 3 percentage points for the year with full year adjusted EBITDA growing high teens to mid 20% for the year 2019. We will be reducing local sales headcount growth and we will lean more heavily on self-serve for SMB customer acquisition. We'll also lean on product enhancements for improved SMB customer retention. Meanwhile, we expected to deliver another year of healthy growth in the national and multilocation customer segment. We expect an increase in our paying advertising locations propelled by growth in national and new product momentum. Looking further forward, we believe we will return Yelp to double-digit annual revenue growth in 2020 and that revenue will grow at a mid teens rate on average over the 2018 to 2023 timeframe. We're also providing new long-term profitability targets, including 2 to 3 percentage points of margin expansion annually and a long-term adjusted EBITDA margin target of 30% to 35%. In getting to that level of profitability, our biggest source of financial leverage is in sales and marketing where we see opportunity to pick up more than 10 points of margin improvement over the projection period as we evolve our go to market. I'll now turn it back to Jeremy for closing remarks before we open it up for your questions.

To summarize, we believe there's significant opportunity ahead for Yelp and we believe we have a strong foundation in place for this year and beyond. We have built a trusted comprehensive mobile first local platform that is truly at the center of local commerce. Now, we're advancing our platform to create even better consumer and business owner experiences and drive long-term value for our shareholders. We're implementing a plan that we expect will renew our double-digit revenue growth, drive margin expansion, and optimize our cost structure and accelerate our strategy through effective partnerships. We are also planning strong capital returns through our increased share repurchase program and we have appointed three new highly qualified and experienced directors to our board. We still have much work to do. However, the opportunity ahead remained significant and I'm confident that we have the right plan in place to deliver value to our shareholders over the long-term. And with that I'll open the call up to take your questions.

Thank you. [Operator Instructions] Our first question comes from Mark May with Citi.

Thank you. Thanks for taking my questions. First, Lanny, I think you mentioned 12% pro forma growth in Q4, and you're guiding to 4% to 6%. I’m just hoping maybe you can talk more about what is driving the near-term slowdown in revenue growth. And then secondly, some of the large tech platforms like Google continue to evolve their offerings and presentations. Are you – is Yelp seeing any incremental headwinds on the business from these changes? Thanks.

Sure. Thanks Mark. In terms of the fourth quarter to the first quarter, I’d say the biggest changes that we saw greater than anticipated seasonality in ad budget in December in the local business. We had a very strong fourth quarter on the enterprise side, but on the local side it was a little bit more seasonal in the last month of the quarter. So we started January lower in terms of the budget and the base of advertisers than we anticipated. And that starts with sort of smaller growth rate year-to-year for the first quarter. We've had an encouraging start to the year both in our self-serve channel and in our reps sold channel. January was one of the better months in terms of new starts, new budget brought in several quarters, so a nice seasonal acceleration coming off of December. But because we lost some budget in that seasonal period, it puts us a little bit down for the first quarter relative to where we thought we would be. We'll get back we believe on that double-digit growth track we've talked about previously before the end of the year, but it will be – this will be a year where you'll see growth – we believe we'll see growth accelerate throughout the year.

And on the other question around Google and distribution, we continue to see the app growing at a healthy rate, 14% year-over-year with $33 million average devices on a monthly basis. And we also – we feel great kind of ending the year with – as we exited the year, we actually had our best growth rate since Q1 2018 and December was actually our biggest user gain in 18 months. So we feel pretty good about where we're at with distribution. I mean Google has been there since we kind of got started and we continue to stay focused on building our app and growing our distribution by engaging with consumers.

Thanks.

Thank you. Our next question comes from Mark Mahaney with RBC Capital Markets.

Okay, two questions please. I think Lanny you talked about optimizing consumer marketing spend in 2019 and saving $15 million. Some color then on what was the inefficient spend in 2019? Or are you shifting to more efficient channels? Just talk about where – what was the – what are the challenges you were trying to optimize – you’ve decided to optimize? And then, Jeremy, I know you talked about these several different factors that could cause revenue growth to accelerate. Are there one or two of those factors that you think should be more powerful than the others and causing that acceleration over the next year or two? Thank you.

Sure. On the marketing front, Mark, we've been doing digital marketing with in search and retargeting to drive user engagement and user downloads. And as we have started to build features into the – integrate features into the Yelp all like food ordering and reservations and waitlist, we're finding organic ways to drive user growth that are very attractive relative to buying the traffic from somebody else. We'd much rather have it be product driven usefulness of Yelp bringing the people who have the app on their phone back more frequently. And there is upside between our monthly app user number and the installed app users. If we can create more reasons for people to use it more often weekly and even daily. So as those product things start to come into play, it's allowed us to take some efficiency back from the marketing channels rather than being any one channel in specific.

On the second part of your question, a couple of things that I'm excited about on the revenue side of things. We continue to see a momentum with national enterprise. 2018 was pretty good there. And particularly what's happening there is attribution studies both first party with our own data and with independent third parties for validating the – what Yelp can deliver for this segment. And so that seems to be helping there. We also have a big opportunity with so many business relationships coming in to drive retention and we're really focused on doing that through product and engineering, delivering more value for essentially same spend, so trying to drive more leads to our advertisers. And I think, you're going to see some changes in the product, particularly around merchandising and how do we expose advertisers in a prominent way that drives the more leads.

Okay, thank you.

Thank you. Our next question comes from Doug Anmuth with JPMorgan.

Thanks for taking the questions. First, I just wanted to ask about the opportunities that you see in other partnerships. You talked about Grub and how it's doubled the restaurant count. I'm curious how you think about other verticals, home services in particular, just given the volume of quotes of lead requests that you had through the year and especially in 4Q. And then second just going back to the comments there on the national side, it looks like you're going to increase the sales team there 20%. So just curious kind of if you could talk more about that opportunity and what really kind of justifies increasing the sales force that much on that side as you kind of pair back somewhat on the SMB side. Thanks.

So taking the first question there around partnership. I think we take a very pragmatic approach and we've long been open to partnering in just about every vertical. So if you go back actually to the IPO, we launched Yelp Platform, which allowed pretty much anyone that serviced SMBs to come to Yelp and through APIs tap-in and reach consumers. And so we have dozens of partners on the platform outside food delivery, where we have a number of partners, not just Grubhub. We also are active in the beauty category; Vagaro for example, is a successful partner on the platform. In home services in particular, we remain open to the idea that that there are things to be done there. And so, we'll continue to look at that. And we do have some partners actually in the home and local services category already. But that said, monetization continues to be quite robust. So with Request-A-Quote in particular, the attributable revenue grew over 100% while the actual projects grew 41%. And so while we're really happy with the continued success of that feature, we are monetizing it better and better over time.

Yeah, I can take – this is Jed. I can take the national question. It's obviously been a bright spot for the company over the course of 2018, consistent traction over the segment. Growing 29% year-over-year in 2018 and then accelerated, in fact, each of the last four quarters. The opportunity here is really large. The top 100 advertisers in retail and restaurants represents somewhere in the neighborhood of a million locations and north of $10 billion in ad budgets and we're at the very front end of that in terms of attacking that. I think in the fourth quarter we transacted with about a third of those top 250 clients, but a segment of those were still very early in the stage in terms of our relationship with them, so with the opportunity to kind of do the land and expand model. So really right now we've got to focus on building out the team, so we get enough coverage to kind of cover all of those accounts. So that's one big focus for 2019. And then we'll need to continue to evolve the product for national clients, additional investment in attribution products, both the third party, independent third parties, as well as our own first party data, which is starting to gain a little bit of traction in the marketplace. We're also adding some additional ad units for that segment. An example would be limited time offer ads that kind of campaign-based national clients will go and do kind of flights over a two or three months period of time I think the special shake out of Mcdonald's or a special coffee out of Starbucks. So, those are really important initiatives for us over the course of this year. And so, in general, we've got to build out the team, make sure we've got the coverage and continue to improve on the product and tools for that segment.

Great, thanks for the color.

Thank you. Our next questions come from Justin Patterson with Raymond James.

Great, thank you very much. Productivity was mentioned a couple of times as an area of improvement. Could you tease out what you're doing there in more detail? And then related to that, obviously non-term contract was a big focus this year, talk a little bit more at a high level, what your biggest learnings were there and how you hope to smooth out that pace of paying account ads. Thanks.

Sure. Let me tackle the productivity one first. This is a year that we're going to keep headcount in the local segment relatively flat. We believe that that kind of opportunity is in fact to increase productivity with the existing footprint of the sales team we have in place today. Taking a little pause on the growth in that segment will allow us to really season the sales force. We have been growing at such a rapid pace that we haven't been able to really benefit from having folks in their seats for a long time and learning the job. And so that's going to give us this opportunity over the course of this year. You will see a natural productivity increase just based on the seasoning of the sales force into this year. We're getting a lot tighter on performance management as well, given the fact we don't have to add as many people into the local sales force. And I think one area to watch out for is verticalization. We haven't done a ton of that up until this point, but we believe there's a lot of opportunity to kind of go deep into certain verticals as it relates to our go to market channels and…

And on the non-term contract transition, I'd say a couple of the big learnings have been number one, it has very much opened up the funnel and it has gotten us a bunch of trial of the Yelp products that really is completely different than what we'd ever seen before. And, there's – as I said a moment ago, there's – it definitely has a fact of – we're seeing a little bit more seasonality in the business now that we've been through December, but that’s the seasonality kind of goes both ways. January was the best month that we've ever seen for prior advertisers turning their advertising back on. So the – our relationship with our customers and with the marketplace is becoming more dynamic. Another thing that we've really seen and that represents a pretty attractive opportunity for us, we're very focused on this year, is that the sensitivity to CPC prices really has brought to the fore when advertisers are thinking about their commitment with Yelp on a much more frequent weekly or monthly basis rather than a term – a full year of a term. And we have, we believe, a lot of leverage to drive and manage CPCs in a way that will be a pretty favorable for advertisers. There is a lot of the lead volume that flows through Yelp free to businesses, which represents a really attractive opportunity for us to better manage CPCs. What we've learned is that a one point – sorry a 10 percentage point change in CPCs, as Jeremy mentioned earlier, is worth $8 million in terms of retention. That lower CPC leads to higher lifetime values by having customers stay with us for a longer period of time. So those are probably at a high level of three big takeaways from transition.

Great, thank you.

Thank you. Our next question comes from Lloyd Walmsley with Deutsche Bank.

Thanks. I have two if I can. First, just wondering if you can give us a sense for how aspirational we should think about the long-term targets. The five year growth looks like nicely above where you're guiding for 2019 would be a terrific outcome. So just trying to understand the context for what looked like ambitious targets. And then I guess just related to that, can you give us a sense for just some of the changes you're planning with leaning into self service and kind of slowing the headcount growth and sales and what gives you the confidence that you can scale that that self-serve side of the business? Any color you can give there would be great. Thanks.

So, let me – I'll start with my thoughts on the long-term targets. As said on the call earlier, the local advertising market is $150 billion, more money is moving online. Our user base is growing at a 14% rate year-over-year. As we mentioned, we think we've got a product that is becoming increasingly useful and we are very focused on gaining life share across everything that consumers are doing locally. We've found real momentum in some of the key advertising categories like home services. It's our biggest category. It's our fastest growing category. Request-A-Quote and its participation there have clearly helped to accelerate the growth of that business. And so as we look at the size of the market, the momentum that we have with users, the amount of untapped opportunity that just sits in the – just huge value that Yelp drives for free to local businesses is at a super high level, feels like a really healthy driver of opportunity that doesn't make it too hard for us to believe that those mid teens long-term growth rates are reasonable. I think as we step and look at – start to break that down from where we are today, the enterprise opportunity, the national opportunity feels like one where we're probably high teens to 20% growth rate opportunity over the next four, five years and we expect we can drive SMB growth in the low teens when you put those two together, that's part of the formula for that mid teens long-term growth rate on revenue. I'll let Jeremy talk a little about what we're doing in self-serve because it's really product driven.

Yeah, I think with self-serve there is a lot that that we have planned particularly with product marketing, so helping business owners understand. Why they should claim their page and beyond that why they should become advertisers. We're introducing or expanding the portfolio of products. So more products available at different price points, a good example of this is Yelp Verified, which is $30 a month and we've sold north of 3000 of those alongside ad packages. And what that does is allow businesses that have licensing to show that they have verified licensing. So it adds value both on their page and then within search results as well. There are opportunities to better merchandise that you can claim your page and that you could self-serve throughout the site, improving the funnel and things like that. So we should be continuing to open up the funnel of self-serve customers coming in. Mobile remains an opportunity where there's a lot of product and engineering going into improve that experience and drive more sign-ups. And, I think the other big bucket is really retention, retention project. So giving advertisers more controls, they stick around longer, drive more profitable revenue. Things like picking which keywords they want to show up in, for example, it can be quite powerful. And then as I alluded to earlier, we're also planning to drive a lot more leads through better merchandising of advertisers, particularly in areas like search results.

Okay, thank you.

Sure.

Thank you. And our next question comes from Brent Thill with Jefferies.

Good afternoon. Lanny, just from the EBITDA margin plan, obviously a pretty aggressive plan given what you've done in the last couple of years. I'm just curious – I think you mentioned sales and marketing give you 10 points of improvement. But what gives you confidence to get to that 30% by 2023? It's a long ways off and you basically have to double now what you've been doing every year going forward. Beyond sales and marketing, is there anything else we should consider to help you get to that 2023 goal?

Brent, as we said in the past, the core inherent operating leverage of the business is pretty attractive. I think in the fourth quarter 40 – again, once again, it’s kind of between 40% and 50% of the revenue growth year-over-year went down to the bottom line. So the core Yelp model has a very high inherent operating leverage to it. And the question has been how are we investing and what are we investing in? And I think as we look over the next three to five years, there's more growth driven by – our desire, our plan and our purpose is to drive more of the growth from the most efficient channels for getting into the market, enterprise channel, self-serve channel partners, while continuing to grow our local rep channel. Those are – that shift in the mix of the way we're going to market is a big driver of that leverage. As you said, it's the primary driver I think between where we are today and getting into the 30s. Alongside that this retention opportunity that we're talking about is a really meaningful one. That 10% reduction in CPCs that yields a high single digit millions dollars of annual value in revenue growth is very, very high margin growth. The way we're going after that is with scalable product initiatives. It's not applying more people, applying more offices to it. So I think there's a shift in our go to market that is toward a – just a fundamentally more profitable way, having built the revenue base that we're at today, having built the product and engineering team that we've got today. We really see an opportunity to shift the focus into driving that efficient business acquisition retention.

Thank you.

Thank you. And our final question comes from Deepak Mathivanan with Barclays.

Hey guys, thanks for taking the question. Can you talk about the sequential decline in paying advertising accounts during the fourth quarter? I know you called out Jan on no contract, but any color on why that's happening at an increasing pace? How should we think about the cadence in 2019 on this as you scale down the sales force investments? And then the second question is, I might have missed this, but what is the self-serve growth rate in 4Q?

Let me – on the first one, the question about the paying advertising accounts, it was – we talked about the seasonal impact that we saw in December on new additions, which as we described has at least for the month of January. Now it's a long year from here, but January has looked pretty promising in terms of the way we've been able to execute and bring new accounts on. For the year, we anticipate growing the number of paying advertising accounts. I think it's important to point out in our disclosure today, we also provided the number of paid advertised locations because as we grow through the enterprise channel, historically that has counted as one paying advertiser and yet it might be hundreds or even several hundreds of locations behind what looks like one advertiser and much bigger advertising dollars. The – we have – on the self-serve growth rate in the fourth quarter, it was in the double digits. It has come down from where it was earlier last year, but, as I said, we've had in January the best new starts in the self-serve channel that we've seen in 18 months. And we're optimistic and encouraged about the moment we've got there.

Okay, thank you.

Thank you. Ladies and gentlemen, thank you for participating in today's question-and-answer session as well as today's conference call. This concludes the program. You may all disconnect and have a wonderful day.