Yelp Inc. (YELP) Q1 2020 Earnings Report, Transcript and Summary

Good day and welcome to the Yelp's First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to James Miln, Vice President of Financial Planning and Analysis. Please go ahead.

Good afternoon, everyone and thanks for joining us on Yelp's first quarter earnings conference call. Joining me today are Yelp's Chief Executive Officer, Jeremy Stoppelman; Chief Financial Officer, David Schwarzbach; and Chief Operating Officer, Jed Nachman. We published a shareholder letter on our Investor Relations Web site and with the SEC about an hour ago. I hope everyone had a chance to read it. We will provide some brief opening comments and then turn to your questions. Now, I will read our Safe Harbor statement. We will make certain statements today that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. In addition, we are subject to a number of risks that may significantly impact our business and financial results. Please refer to our SEC filings as well as our shareholder letter for a more detailed description of the risk factors that may affect our results. During our call today, we will discuss adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles. In our shareholder letter released this afternoon and our filings with the SEC, each of which is posted on our Web site, you will find additional disclosures regarding these non-GAAP financial measures as well as historical reconciliations of GAAP net income to both adjusted EBITDA and adjusted EBITDA margin. And with that, I will turn the call over to Jeremy.

Thanks, James and welcome everyone. At the beginning of the year, we like everyone else could not have imagined where we would be today as a community. The global pandemic has disrupted any sense of normalcy for the world, and we've been witnessing the impacts on consumer behavior in real-time. While the physical distancing measures and shelter in place orders have inevitably dealt a significant blow to many local businesses, this crisis has reinforced for us the critical role that it all plays and we'll continue to play connecting people with great local businesses. We moved quickly to take steps to navigate our business through these unprecedented times. To protect the safety of our employees and do our part to help flatten the curve, we took early and swift action to migrate our workforce to work from home. As a company with thousands of employees, I'm proud of the operational agility and speed with which our team has been able to adapt to this new work from home environment given a difficult circumstances. We prioritized efforts to help our consumers and local businesses stay connected with Yelp trusted content during this time. Our product team move fast to create new features for businesses to showcase relevant offerings, such as virtual estimates, or whether they offer delivery or takeout during COVID-19. These new attributes have been rapidly adopted by business owners with more than 120,000 active locations by the end of April. In addition, as part of our efforts to support local businesses, on March 20, we announced a $25 million relief initiative primarily to support local restaurants and nightlife businesses, which have been particularly devastated by COVID-19. We also took the difficult but necessary steps to reduce our workforce and expenses to help maintain financial stability in the quarters to come. From a balance sheet perspective, we ended the quarter with $491 million in cash, cash equivalents and marketable securities and no debt. We believe we have the financial strength and liquidity to weather the uncertainty of the pandemic under a range of scenarios, allowing us to continue to focus on the health and well being of the Yelp community, our employees, consumers and local businesses. In summary, we entered this pandemic on the back of strong performance over the preceding quarters and into the first two months of this year. Despite the negative impact of the COVID-19 pandemic in March, our first quarter revenue was $250 million, up 6% compared to the first quarter of 2019. We've started quickly to health crisis and made the decisions we believe were necessary to preserve our financial liquidity and maintain our operational capability. By doing this, we believe the Yelp will emerge uniquely positioned to help local economies through the recovery, both partnering with our existing advertisers and helping grow new ones. With that, I'd like to turn it over to David.

Thanks, Jeremy. Since this is my first earnings call with Yelp, I wanted to share a few thoughts around why I joined the team and share a few first impressions. I'll then move on to our view around the second quarter. At its heart, an advertising business depends on content, consumer interest and reach. Yelp has all three. We have highly valuable content through trusted reviews. We enjoy a strong consumer brand built over the past 15 years, one with appeal that weights towards more affluent households, and we deliver value to advertisers across a broad range of categories from restaurants to home services, these strengths remain true even with the current pandemic. And together they provide the foundation for us to grow as the economy recovers. As I've worked with the team over the past two months, I've seen impressive operational agility in difficult circumstances as we transition to work from home, and then have to take significant actions to reduce expenses. Those actions made with careful consideration reflect the commitment to financial discipline, while also helping to ensure that we continue to drive product innovation and reach business owners through our sales organization that the steps we have taken align expenses to reduce revenue across a broad range of scenarios. As Jeremy said, we also have a strong balance sheet with $491 million in cash, cash equivalents and marketable securities at March 31. We currently have no exposure to corporate securities. We continue to take additional steps to further increase our liquidity, most recently having a revolving credit facility in May, with Wells Fargo for $75 million. While we are mindful of dilution, we've indefinitely postponed share buybacks given current conditions. Taken together, I am confident in our ability to weather the current storm from a liquidity perspective and to emerge well positioned for growth. Now, I will turn to our thoughts around Q2. While, we are not in a position to provide our usual guidance for this quarter, or the full year given the current uncertainties, we continue to closely monitor business performance and make decisions to ensure our financial strength. As described in our shareholder letter, we've seen a steep decline in traffic, fewer people going out to eat and shop, couples with broad based shelter in place orders have resulted in an extraordinary number of local businesses closing or operating at limited capacity. This in turn has understandably led to many of our advertisers cancelling, pausing or reducing their spend on Yelp. In California, New York, two of our strongest regions, and two are the first states to order residents to shelter in place, we began to see both traffic and advertiser budgets begin to stabilize in the second half of April. While we are still closing our books for April, we expect revenue to decline by approximately 35% compared to April of 2019. It is important to recognize that our revenue may be lower in May and June due to a number of factors. While we are seeing some easing of consumer restrictions, it remains a very challenging environment for small local businesses and we may see more of our advertisers pause, reduce or cancel budgets. To support many of these businesses, we may expand upon our relief initiatives and this could have a direct impact on both our advertising and services revenue. With recent changes to our sales force, we may not be able to maintain productivity levels as time passes and we continue to work remotely. In addition, the rates of recovery and consumer behavior and user engagement will impact revenue. Through the fulfillment of ad budgets and the cost per click we deliver, both of which remain uncertain. On the cost side, we expect a reduction in GAAP expenses of approximately $70 million compared to Q1. This excludes a one-time restructuring charge between $4 million and $5 million for the year. It's important to recognize that our cost basis is driven predominantly by our headcount as revenue recovers we plan on restoring more employees to full time. As a result, we anticipate our expenses will rise in the second half of the year. As we see improvement in business performance, we plan to selectively reinvest in our business. We will be guided in that reinvestment by opportunities to drive profitable growth over the long-term across channels, categories and geographies while maintaining our financial discipline. With that operator, please open up the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Colin Sebastian of Baird. Please go ahead.

Great, thanks. Good afternoon and hope everyone is there is safe and healthy. Jeremy maybe a little bit early, but beyond managing through the current environment, are you thinking of any longer term changes to the company's strategic priorities or is the goal to get back to the progress that you were making earlier in the year? And then as a follow up on the multi-location, given some of the relative strength we're seeing in national chain restaurants and other businesses, can you talk about maybe some of the relative demand trends from that group and your business, sitting here in early May, and maybe some of the B2B performance marketing that you plan to leverage with that group. Thank you.

Colin, this is Jeremy. I'll take the first half of the question and maybe Jed can hop on with the National question. But as far as changes to our priorities, certainly we're looking at, our product development pipeline to see if there's any things that should be done more urgently in light of COVID-19. We already scrambled the Jets and got out a bunch of features to help make it easier for businesses to communicate with their customers around things like hours changing, how are they handling pickup and delivery and so forth. We've actually seen a lot of success as measured by engagement with some of those features. So we have a COVID-19 banner, for instance, that all businesses can put up on their business page, we had 225,000 of those up. By the end of April, we launched some new business highlights, those are sort of tiles that businesses can put up to highlight specific things about their offering. We put out some special ones related to COVID. And we had 120,000 of them activated by the end of April. Additionally, Yelp connects which is functionality that allows you to post both visual and text information to your page, and then it also gets pushed out to people that are past customers as well as people that might be interested in your business has seen a pretty nice pickup there with 10,000 businesses activated. And so we'll continue to push forward on features like those that are extremely relevant in the short-term. And then there's adjustments, I think to the pipeline over the long-term things that maybe we hadn't considered before that now are more urgent. But I would say, generally, a lot of the things that we were working on are still quite relevant. We've seen a lot of strength and resiliency in local services -- home and local services category, been less impacted overall, and we had an enormous opportunity, which we still have to monetize more believes there. And so many of the projects that we're already working on continue to be irrelevant at driving high value, high quality needs to our advertisers. With that may be Jed, you can hop in on the national chain question.

Sure. So, in terms of the national chains, they're obviously still operating in a local economy, and they've been hit in varying degrees, depending on the segment and category. Obviously, restaurants are still trying to find their footing in this new world. And when we talk about multi-location, it's kind of everything from mid market, all the way up to kind of your largest national chains. And then you have to break it down further into kind of QSR versus dining in options. And so there's a very broad range in terms of how this has impacted, obviously pickup and delivery are dynamic that is it within restaurant segments specifically. We are seeing a bunch of increased interest on that, although I don't think as a rule, most of these large enterprise accounts have really figured out what strategy they're going to move forward with. And it's a complex problem, given varying rules and regulations in different states and different cities. So, the most important thing is, we're just aligned with them side by side as they're making their plans to kind of come into a recovery posture and making sure that when they do turn on the spigots in terms of advertising budgets that were right there with them.. I would say on the services side, this is an opportunity we still see folks on the consumer side are still need services. And on the business side, they're still buying advertising and so we're fully alongside on the services side too, because that's going to tend to have a faster recovery that you can have.

The next question comes from Cory Carpenter of JPMorgan. Please go ahead.

Thanks for the questions and appreciate the color on April trends in the shareholder letter. We're just hoping you could expand some on what you're seeing across sales channels and categories over the last month. Maybe, I don't know if it's possible to quantify but how far ahead in New York and California, maybe in other geographies? And as a follow-up, just as the economy starts to reopen, and you touched on it some what's the B2B performance marketing? Maybe just more color on your strategy to drive reengagement? Thank you.

I could take the one on categories and segments, over [audio gap] in terms of channels and categories, the services indicated has not been hit as hard as the restaurant side both from a traffic and from a revenue perspective. We were certainly encouraged by April seeing at least a leveling-off of the decline. And very the important, our sales force productivity we could have expected, we did a huge transition to work from home, [audio gap] any dips in productivities in aggregate, we're on an [audio gap] productivity there. Obviously, you start to look at categories like health and beauty that are impacted as well. And as the restaurants obviously taking a big hit. But, overall, I would say the strength is in the services side of the business both from a retention and a production perspective.

So Cory, this is David. I mean advertiser reengagement, part of the investment in a sense that we made is we provided relief to our business. First, that we announced was an opportunity to engage with them and bring them back allowing them to pop. So one of the things that we're focused on [audio gap] them to come back [audio gap]. On the b2b marketing side, [audio gap] invested heavily in performance marketing, we haven't had to that being said as we see opportunities there to drive traffic [audio gap].

The next question comes from Dan Salmon of BMO Capital Markets. Please go ahead.

Great, good afternoon, everyone. Thanks for taking some questions to the restaurant category specifically and maybe for Jeremy or Jed, you noted continuing to maintain the high level of investment? Can you just remind us and what-- I think if we step back not then in the multiple categories of multiple location that the general view that they should rebound, more than traditional sort of local restaurants, independent restaurants, so just maybe remind us what are some of the key [audio gap] the national business and in particular, your views on whether that may be able to accelerate [audio gap]. May be for David, just welcome to your first call but and we'll jump right into one about, with buybacks being halted, how we should think about expectations? What are some of the key milestones your look [audio gap] more on that as well, thanks.

I can take the first one on national in terms of the investment. I would start with, when we talk about continuing to invest in that segment, we largely put the enterprise sales team in place and the interest and the [audio gap] and so those relationships continue today, even where some of those folks have cut down on initial [audio gap]. We've got to take a look at delivery and pickup as a huge opportunity for these. [Audio gap] it's not the panacea that would totally drive that segment in terms of a quick rebound I think most folks are just trying to kind of keep their head above water. Obviously, in store [audio gap] given this environment and folks sheltering in place. So [audio gap] when is the Yelp audience platform where we kind of look at -- folks who have intent to pick up and deliver and can access them and other places around the internet product that has seen some uptick recently as a result. But in general, it's just making sure that we're providing the kind of the core blocking and tackling so when folks decide they need to start to spend and various states and cities start to recover that we're right alongside them.

[Audio gap] in terms of share repurchase one thing of course, that's over the course of last year, we brought in nearly $0.5 billion of stock. And so, it's much too early to [audio gap] share repurchases today. We've been extremely focused on liquidity. And as we mentioned, we believe with 491 million at the end of the first quarter, we're extremely well positioned. We just added the credit facility with Wells, we're taking other steps. We are mindful of dilution but it's much, much too early for us to consider moving back to a position where we're engaged in share repurchases.

The next question comes from Michael Ng of Goldman Sachs.

I was wondering if you could just expand a little bit about the [audio gap] or I thought it was encouraging to see the acceleration and revenue growth in February to 15%. What drove that acceleration in February? And does that give you confidence that you'll be able to execute against those same initiatives once the pandemic is over? Thank you.

I can jump in on that one. Yes, we were really happy with and looked at that acceleration from January into February, at that 15% range. And I think it was a lot of the work that we had started in 2019. Obviously, we have I think, a 25% year-over-year improvement in retention that was the largest driver there continuing to look to deliver more value to our advertisers per dollar spent was really, really important. And as we saw, kind of -- that was that became very evident that we saw those retention improvements. Sales productivity continued to be in a very, very healthy place over those first few months and even into the first half of March. And I think looking forward, we structurally kind of changed the model and [audio gap] rely on not growing the sales force as much and driving kind of growth, while we had a shrinking local sales force are really leaning into the national opportunity in the self serve opportunity. And so all those things kind of came together over the first couple months of the year and I suspect that we -- I would imagine as we come out of this and we'll continue to lean in on those channels and continue to make improvements on the retention side as well and that is a big driver of that productivity and a big driver of the revenue.

The next question comes from Shwetha Khajuria of RBC Capital Markets. Please go ahead.

A quick one and I'm sorry, if this was covered. But, Jeremy, could you talk about how you think Yelp will be positioned, post-COVID how differently it will be positioned post COVID as you think about self serve, as well as larger advertisers, that you may -- multi-location advertisers and your positioning there? And also in terms of your conversation [audio gap] not be operating right now. But post COVID currently, are you in conversations just so that it is a smoother on-boarding post COVID. Thank you.

Yes, I would say one of the things that we're really focused on is making sure we are top of mind with consumers. Important ways to do that is ensuring that our information is as up to date as possible. So we're spending a lot of time and resources on making sure that things like ours are correct. How is the business handled playing itself during this time? What can you buy from particular businesses? Can we automate some of that, especially for larger businesses, you mentioned national, obviously, it's harder for a business with thousands of locations, to keep everything up to date. And so making sure that we have the resources to help them, stay top of mind with consumers. I think all of that work is going to help keep that connection to consumers. And ultimately, that's what businesses are coming for is valuable leads, getting connected to that consumer that's ready to buy. And so that's where our focus remains is connecting with those consumers to businesses. And then you had a second question, which was, I didn't catch it. Let's see it is post COVID self serve, multi-location, how are we going to change that? I think, we were basically open to all the different channels, we acquire customers through a variety of different means, obviously, local sales to self serve, multi-location is more of an enterprise relationship. And I think we want to be very thoughtful about how we bring on all that new, all that recovering revenue. And so we're going to be looking for the most efficient channels we've gotten better and better at self serve for instance, that's a great place to reacquire customers because we can reach out to them, maybe people that have turned in with one click they can be activated again on Yelp and spending with us to grow their business coming out of COVID. So we are taking steps right now to make ourselves more efficient as we ultimately come out of this pandemic. So we can reacquire any business that we've lost and then also just ideally grow, grow more efficiently and quickly.

The next question comes from [indiscernible]. Please go ahead.

Yes. Thank you very much. It's [indiscernible] Research. Two questions, please. First of all, I'd like to ask about how you see the value of the 210 million cumulative reviews that's traditionally in a number of categories been very important to Yelp's business, but obviously, they will age rather more quickly in this COVID environment. So how do you see that review base going forward as a key asset for the company? Then I guess the second question you cited the increase in provision for doubtful accounts. Could you give us a bit of a sense of how far through that process you are and understanding, how many of your both claimed locations and current advertisers will make it through to the other side, and whether that changes the sort of scope of the business or the nature of the business, in terms of how many of your potential advertisers can weather this storm? Thanks very much.

Richard, I'll take that first half of the question maybe David can take the second one there. But, we do have, as you pointed out an incredibly rich corpus of reviews that is then proven to be extremely valuable and durable. And we can continue to have an engaged community of reviewers, especially our elites worth calling out which are our model users and we have maintained a large community management team that works from home currently and engages with those key community members. What we generally see is contributions to move along with traffic. And so as traffic goes down, you would expect to see contributions as people are experiencing to your businesses will go down. I don't expect all of those 210 million reviews to be worthless anytime soon, I think, obviously. And we all hope that many, many local businesses will survive even if they're on pause for a period of time and their past performance is a pretty good indicator to consumers of how they'll perform in the future. That's why we still continue to get quite a bit of content from our community of reviewers still writing and we're still engaging them with our community managers. And we continue to develop new features and functionality geared towards contributors to make sure that they stay engaged through the pandemic and to the other side when things can come, we hope roaring back. So we are conscious of trying to maintain that connection with consumers. That's top of mind for us, since that's such a key part of our business over the long-term.

This is David. So there's really two parts to the question. You asked provision for doubtful accounts. And then what are we seeing in terms of advertisers, but really businesses surviving? And just to answer the second first, it's still very, very early. And many of these folks are still working through their survival strategy. And they're obviously also applying for loans. So we ourselves are not going to know for some time yet where that's going to land. So unfortunately, that will be something that we're all going to see as Jeremy said, we hope of course that many survive. In terms of the provision for doubtful accounts, it was significantly higher at the end of the first quarter as you'd expect, as a variety of these businesses took steps to trim advertising or are already in a position where they can no longer pay bills. And so that was definitely elevated. What I'd expect is for us to see a somewhat elevated level for a period of time, but that provision for doubtful accounts really is a monthly item. And so we'll see how that evolves as the overall recovery takes place. I think the duration of that will certainly influence the ability of people to continue to pay or not.

The next question comes from Ygal Arounian of Wedbush. Please go ahead.

Hey guys. This is rod on the line for Ygal. Thanks for taking the question. I wanted to ask on self serve, you talked about it a little bit already and you caught it in the letter that it was seen good strength in February and it's obviously the channel can reaccelerate quickly. But by the same token, I imagine it's also maybe a channel where the pullback is a bit faster. So kind of what's been the impact on the environment itself on self service specifically as it gets in color there and kind of, is it at a level that gives you confidence, maybe depressed, but a level that you can be accelerated quickly and how you bounce up with the changing dynamics of the sales force, you're talking about this a little bit of go in terms of the go forward and kind of -- the users are coming out on the other side, just a little bit color on that would be helpful. Thanks.

Sure. I can start off and if David wants to jump in after, feel free. In terms of self serve versus our [reps retail] [ph], we've actually seen them in line in terms of our percentage and no aberration on either one in terms of a break from trends. So people are still buying, customers are still buying in both channels. Obviously, there's a mixed shift as a result of COVID. But we're really encouraged with the progress we've made on the self-serve channel. And I think I don't have a proxy for that right now, first of all, if you look at claimed businesses, they're up -- we've had significant progress year-over-year on claimed businesses, which shows that businesses are interacting with, what is the self serve platform, and then you look at all of those features that have been adopted as part of the COVID effort, and whether that's business highlights or the special COVID banners, or the connect product, that we're seeing upwards of 10,000 folks who have kind of chosen to kind of use that as well. It really bodes well for self-serve over the long-term. And what you really want in these periods of times is engagement and there might be a subset of businesses that today in April, May cannot afford to go advertise. They're worried about survival and their employees and kind of coming out of this thing and navigating through their various circumstances. But, they're still engaging and understand that Yelp is important platform and an important communication platform for them. And, we've been making improvements both in our kind of platform as well with a new business owner site that is a lot more bridge in terms of the features and functionality and we're really pleased with the engagement that we're seeing this far. So I think it bodes well for coming out of this as continued shift toward self serve. We're always going to have a local sales force and we'll be really mindful of how we grow that kind of coming out of this and make sure that, a) we have enough coverage but also that we continue down the path of trying to get more efficient with the channels that we do have.

Ron, this is David. We didn't quite catch the second part of your question there.

I was just kind of asking how, in terms of like to go forward and coming out on the other side of this, how do you, maybe strike a balance in terms of leaning in to self serve and kind of like the more rapid response versus, the changing dynamics of the sales force, especially given the increased relevance to the sales force, given the current environment, maybe leading into it a bit more heavily. So just kind of going forward, how do you balance two different channels and try to kind of prioritize on the flywheel like, what's the best combination to really emerging out of this is strongest?

I can take a crack at that one too. It's really looking at making sure that we're serving the customer in whichever way they want to get served. And we can see that, some folks are always going to want to have a self provisioning interface and not want to talk to a salesperson. And there are folks that no matter what you do want to get somebody on the phone and actually have them walk them through an advertising program. So I guess going back to my -- kind of last answer, we're going to be able to see that in real-time, although I do believe that self serve is very well positioned coming out of this. And then in terms of the multi-location, we believe we're still very, very early in this opportunity for Yelp. And certainly at this time notwithstanding, when we come out on the other end, it's going to be a really important segment for us.

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.