Yelp Inc. (YELP) Q2 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Yelp's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] 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 second quarter earnings conference call. Joining me today are Yelp's CEO, Jeremy Stoppelman; CFO, David Schwarzbach; and COO, Jed Nachman. We published the shareholder letter on our Investor Relations website and with the SEC about an hour ago and hope everyone had a chance to read it. We'll provide some brief opening comments and then turn to your questions. Now 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 publically 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'll 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 website, 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. Our second quarter results demonstrated the resilience of our business in spite of the significant headwinds faced by local economies following the emergence of COVID-19. Yelp's diversified mix, categories, geographies and sales channels helped us adapt to the rapidly changing environment, resulting in our traffic and revenue improving over the quarter. I am proud of the speed and confidence with which our teams confronted one of the most challenging periods in our history, due to our disciplined actions on expenses in a face of uncertainty coupled with solid revenue performance. We added $35 million of cash and cash equivalents to our balance sheet. While we began the quarter with a significantly smaller workforce operating in a fully remote environment, we adapted our product, efforts and operations to support our users connecting with their favorite local businesses in a socially distant world. We provided new tools for local businesses to connect with our consumers, allowing them to post custom messages to update their service offerings to include virtual options and to list health and safety measures. We also continued to make progress on important strategic initiatives, including home and local services, which has long been our largest and often fastest-growing category. We continue to increase the percentage of monetized leads through additional improvements to our ad system, including better matching and request-a-quote. Revenue in the subcategory home services grew slightly compared to the second quarter of 2019. We remain focused on evolving our go-to-market to improve our sales efficiency over time. Throughout the quarter, our local sales team maintained a consistent level of productivity even while working remotely. We also delivered a new profile product, Yelp Logo, and scaled our connect offerings. Our continued investment in self-serve helped drive strong acquisition in the channel, which reached near record levels of advertising starts in June. The pace of economic recovery remains uncertain and will not be uniform. We have confidence in our strong balance sheet and our proven ability to operate with flexibility in this environment. This month, we are pleased to return many of our furloughed employees and restore reduced salaries for our teams. This sets us up well to reestablish our growth momentum and capture demand as the economy recovers. With that, I'd like to turn it over to David.

Thanks, Jeremy. When we spoke to you back in May, the economic outlook for local businesses was highly uncertain. However, in late May, as local economies began to reopen and consumers and local businesses were adapting to the new normal. We saw both traffic and CPC advertising budgets begin to recover. In June, we continue to see steady improvement in ad budgets and retention, benefiting from a strong rate of return from customers who had received relief in April and May. We ended the quarter with $169 million in net revenue, a 32% decline compared to the same period last year, and then that loss is $24 million. In April, we took several actions to reduce our operating costs to better position Yelp to weather this unprecedented period, including the difficult decision to reduce our workforce. Our actions contributed to a $71 million reduction in operating expenses from the first quarter in line with the $70 million that we communicated in May. Coupled with our solid performance and revenue, we delivered positive adjusted EBITDA of $11 million in the quarter and further strengthened our balance sheet. Our cash balance rose from $491 million at the end of the first quarter to $526 million at the end of the second quarter, principally through our positive operating cash flow and the release of restricted cash. Restructuring costs in the quarter were $3 million as a result of the restructuring plan announced on April 9, 2020. Though these costs include severance, payroll taxes and related-benefit costs for a workforce reduction affecting approximately 1,000 employees. While we exited the second quarter with increased confidence and an additional $35 million of cash on our balance sheet, economic uncertainty remains high. Therefore, in lieu of a formal business outlook, we are providing additional insight into recent business trends. As a result of improved business performance in June, including the return of spend from many customers who received relief in April and May revenue in the month declined by 25% compared to June, 2019. While we are encouraged by our performance in June, we saw consumer demand begins to plateau in July as the recent resurgence of COVID-19 cases led many states to pause or reverse that based reopening measures. As we look ahead in the absence of a vaccine or effective therapeutics, we expect to see continued fluctuations to business openings, enclosures as communities respond to local outbreaks, which may impact the pace at which our revenue recovers. Our strong balance sheet gives us more flexibility even in the face of this uncertainty. On the cost side, we anticipate third quarter operating expenses may increase by as much as $30 million compared to the second quarter. In addition to restoring reduced salaries, we are also returning furloughed employees to full time over a four-month period ending in October, many of whom are trained sales reps. We are also mindful of various uncertainties, including employee healthcare costs and our provision for doubtful accounts. With that, operator, please open up the line for questions.

[Operator Instructions] And your first question comes from the line of Shweta Khajuria from RBC Capital Markets. Your line is open.

Okay. Thank you. I'll try two, please. First one is on locations declined 31% year-over-year. Could you provide a little bit more color on that? So are these businesses that are shut down for good or are they just closed because of COVID? Second, on location, how fast do you think is that recovery in terms of bringing those locations back on to the platform post COVID? And third, on the same locations question, what percent of these businesses are multi-location restaurant chains versus local SMBs? Thank you.

Shweta, it's David. Thanks so much for your question. So in terms of the reduction in locations, what we believe is the case is that a) considerable number of these will be temporary. It's important to be mindful that over the course of the quarter, we did provide relief to many businesses and that relief took place across the entire three months. So when those businesses begin to spend with Yelp again, they will show up again in paying advertising locations. But it's important to be mindful of that over the course of the pandemic and the impact on the economy, there are quite a few businesses that are not going to reopen, but we don't have a great sense yet for that distribution even by category. In terms of how do we think paying advertising locations will recover over time, the pace of that recovery, we think, is very much tied to the pace of the overall recovery. And I think it is actually very important to consider that continued fiscal support from the federal government is going to have a big impact. So again, unfortunately we wish that we had better insights over – how it will play out over the next several months. But one of the things that we did do through the relief efforts is established strong relationships with many of these business owners. And they have – what we did see when that relief was ending in the June time frame that they did come back to us. So we feel good about where we positioned ourselves with those business owners. In terms of local versus multi-location percentage, I will need to get back to you on that. Jeremy, I don't know if you want to comment a little bit how you see the longer-term for advertising locations.

Sure. I would say what we saw is coming off of the bottom of the panic around the virus. We did see as markets reopened a recovery happening. And so that's encouraging for the long-term because as economic activity continues to pick up more widely, we believe that we will also see activity on Yelp picking up more widely. And so while in the short-term that means categories like restaurants are likely to be retail or likely to be more impacted. Home and local for instance has been quite robust and actually is an area where we continue to put a lot of our investment even prior to the COVID pandemic. So we do feel optimistic that in the long-term, we'll see a robust recovery as the virus fades.

Okay. Thank you, Jeremy. Thank you, David.

Sure. Thanks.

Your next question comes from the line of Cory Carpenter from JPMorgan. Your line is open.

Great. Thanks for the questions. I had two. So just first, I hope you could expand a bit on the trends you're seeing quarter-to-date. You mentioned in the shareholder letter, traffic started to plateau in July, but any additional color you could provide in terms of trends by vertical or geography would be helpful? And then on the product side, you went through a number of initiatives in the letter, just curious how we should think about your key priorities and roadmap in the second half of the year? Thank you.

Sure. Hi Corey, this is Jeremy. So talking first about traffic trends, as we saw – as I mentioned on the previous question, we saw some recovery as markets opened up as there was more economic activity, people moved around more. And so while that did slow as virus cases rose, we do think over the long-term that as pandemic does ultimately get under control, we're going to continue to see a robust recovery of activity and then, therefore, traffic. And then on the product side, we had been investing pretty heavily in home and local services and specifically things like request-a-quote or ad system increasing the percentage of monetized leads. We continue to make progress on that front and we continue to rollout new updates that are having impact. In addition, we have mentioned in the letter, some newer products that are showing considerable life. So for example, Yelp Connect, which allows businesses to push out updates to their page, but then those also get sent out to former customers, people that have expressed interest in their business, and that's really resonating in thousands of businesses have started paying for that functionality, which we initially gave as part of the relief package. It was included as part of the relief package that we're doing as the pandemic hit. Also, we recently rolled out Yelp Logo, which is something that we had heard from our customers, it was really important to them to look professional to be able to brand themselves and put their logo front and center on their business page. And we've seen pretty solid uptick as we've just launched that feature. So needless to say, we've got a lot of capability in our product and engineering team as today a capability that we maintained over this period, and they continue to drive really innovative and impactful functionality for business owners and for helping people to connect with great local businesses.

Okay. Thank you.

Our next question comes from the line of Colin Sebastian from Robert Baird. Your line is open.

Thanks very much. Good afternoon, everyone. Within home services, I'm wondering how much of the rebound in activity there is reflective of people adjusting to work-from-home and refurbishing their homes more broadly, which could be a bit transitory as offices reopened versus how much of that's related to specific product improvements like Jeremy, the ones that maybe you mentioned, that could have more of a sustainable impact longer-term? And then, David with traffic plateauing in July, should we assume given the mix of CPC that that's consistent with the sort of the advertising revenue impact. And if that's the case, just trying to put a finer point on what we might expect in Q3? If we assume June monthly revenue trends continued through the third quarter, it seems like the sequential improvement in revenues would roughly equal the increase in operating expenses. So wondering if that's a fair way to assess the current situation? Thank you.

Hi, Colin. This is Jeremy. I'll take your first question there on home services. Do we believe it's sustainable? Yes, obviously it's very hard to predict the future in this very unique situation of the pandemic. But I would say within home services, there's a lot of different categories and while some of them maybe optional building that new deck, maybe optional things like getting yourself back into your house if you need a locksmith or if you’re toilet clogged, you got to get that fixed. And obviously, people are spending a lot more time in their homes. So I think that is driving some of this robust demand for home services. So in my opinion, I would say, yes, it's sustainable, but time will tell, and obviously, it's a very dynamic situation.

And just Colin, it's David, to follow-up on your second question. A few thoughts there. First of all, one of the things that we have been very focused on is investing as we see the recovery pickup. And so in terms of just starting with the operating expenses and the furloughed folks that we bought back, it's really our perspective that we want to be in a position to continue to participate in – as Jeremy has really emphasized. We want to participate in that demand around home services in the near-term. But over the longer-term that is the foundation for us to see revenue growth. In terms extrapolating from July revenue or from the – July traffic or from the improvement in revenue in June, again, we'd caution you and that's for a couple of reasons. The first is, as you know traffic is important for us, but through the matching algorithm, there's a variety of adjustments that take place. And so you can't match those one-to-one, but in general, what we did see and what we're very cautious about is that the uptick in cases has been obviously extremely widespread. And so as we think about this current quarter, but the rest of the year, we continue to believe that we will participate as caseload declines and as the overall economy recovers, but we're not yet prepared to provide a more specific view on July or Q3 performance.

Okay. That's all. Very helpful. Thank you, guys.

Your next question comes from the line of Mike Ng from Goldman Sachs. Your line is open.

Hey, good afternoon. Thanks for the question. I just have two. First, can you talk about how the composition of the sales force for the company maybe different relative to pre-pandemic? Will your sales force be meaningfully more focused on in multi-location versus individual small businesses? And then the second question is, could you talk about your plans for ongoing relief and offering free advertising product in 3Q versus 2Q? I really appreciate you laying out some of those numbers for the second quarter. Will that turn into recognized or paid revenue in the third quarter? Thank you.

Sure. Hey Mike, this is Jed. I'll take the first one, and then maybe David can jump on for the second one. In terms of sales force composition, obviously, we made the very difficult decision early on in the quarter two or maybe it’s late third quarter to both furlough folks on the sales team as well as have some permanent reduction in force. We're really – and by the way, the team rallied and responded into a completely remote work environment and productivity within the local sales team. It was consistent with what we had seen in the past. We're really happy and proud of the team for kind of turning on a dime on that one. And based on the results that we saw in the second quarter, we felt comfortable bringing back our furloughed employees. And that's a real advantage for us. These are trained employees who kind of can come in and hit the ground running and are real assets for Yelp, and we believe we're correctly positioned right now to take advantage of the second half of the year, and that the sales force is for what its worth right-sized. We're not going to comment on kind of where we are in 2021 as an example from a sales force perspective. But I will say that as even prior to the pandemic, when we talked about reducing the sales force over time, they certainly accelerated that. And we're going to continue to lean into the channels that are high leverage channels, and those are self-serve and the multi-loc opportunity, which both are really, really important for the long-term viability of Yelp. And by the same token, we're always going to need some version of a sales force. There are local businesses out there that need to be talked to in order to kind of understand the products that we have. We feel like we're coming to the market these days with a really nice suite of products, the addition of connect, and the addition of logos has been a real boon for folks to be able to talk about that on the phone, and we're excited about kind of the future on those products. So bottom line is we feel like we’re right-sized with a local sales force today, we're going to continue to invest in self-serve and in the multi-loc business as well.

Hi, Mike. Just to talk a little bit about relief. We first announced $25 million, so far it's coming at about $32 million and that's split half and half between direct revenue relief both on the ad side as well as on the restaurant SaaS side and then paused or free products. So accounts that would be paused over this period of time or where we provided free products. And what we expect is that there is a few million dollars more to go in Q3 principally around paused SaaS restaurant product. As you would imagine, obviously, with some of the openings reversed and dine-in being eliminated in some locales, those restaurants don't have immediate need of the product. What I do really want to underscore is that this investment overall has worked well for us. And what we did see in June was where we had paused for customers or where we had encouraged them to pause and set a restart date, we were very pleased by the number of advertisers who came back to us. And so if it's needed, if we see a need in the market to further invest in that area, then we're not going to hesitate to do that because we're seeing the ROI.

Great. Thanks, Jed. Thanks, David.

Your next question comes from the line of Dan Salmon from BMO Capital Markets. Your line is open.

Hey, good afternoon, everyone. Thanks for taking a couple of questions. First, self-service as a channel, home-service as a category, both performers was there. There's some causation to that correlation, in other words did the home services category particularly help drive self-service? So just be interested to hear about that. And then second, on multi-location, what I'm trying to ask is if you think the pandemic has helped or hurt your long-term push thereby, which I mean many of those restaurants are able to stay open, pivot to delivery, to pick up and focus on that. Have you been able to help them with that pivot such that in a sense to maybe build that goodwill, where maybe that push can be accelerated as things get back to normal? I would be interesting to hear about that too. Thanks.

Hi, Dan. This is Jeremy. I'll take a stab at the first one, whether self-service and home services were connected. I'm not aware of a causation between those two. I think, self-service, we did see healthy starts, near record levels of advertising starts in June and some strength in that channel. On the home services side, I mean, frankly, I think it's a consumer activity that's driving the strength or the robustness compared to other categories, which is just the people at home. There's a lot to be done. There's a lot of wear and tear and so consumers are showing up. The demand is there and businesses are happy to pick up that demand. And so we're just enabling successful matching and we've been investing in things like request-a-quote and our advertising system to drive those leads to our advertisers.

Dan, I can take the second one. Dan, in terms of multi-loc and how the pandemic is affecting that segment. First of all, obviously, multi-loc, as a whole is a very diverse segment. We operate in all categories. When we think about things like restaurants, specifically, even there, there is a kind of a bifurcation in terms of the types of multi-loc restaurants. So you have your QSR and fast casual, which throughout the quarter, we're able to make a pretty fast pivot to pick up in delivery. Our goals were to be there right alongside with them and help them in anyway kind of navigate that. If we could drive, help them drive that business that was going to be really important. Then you look at kind of the casual dining sector and/or fine dining sector, and in-restaurant dining has obviously been hit really, really hard. And so I would say it's a combination of both in the near-term. Over the long-term, I've been really impressed with how a lot of these multi-location restaurants have pivoted their business. And certainly, we're not back to full steam yet in terms of folks dining out. But this is not something they're taking casually in terms of – and I suspect some of the trends that you see happening during the pandemic will in fact continue past the pandemic, once we get a therapeutic or a vaccine in place. But I think, they're kind of taking it week-by-week and month-by-month as well. I think one of the advantages that we have right now kind of hitting that market is that we can be very local in terms of how people react. It's not a national television campaign that's got to go out to everybody when somebody is not having capability to kind of serve people across the country. So you can pick markets or the Southeast. And as things are closing and opening, they can get very specific around how they're marketing out to those segments. So overall, we believe the TAM is there for restaurants going forward, and that when we come out of this thing, we may even come out stronger. But in the meantime, we're still going to see some volatility and every restaurant operator is handling it in different ways and putting priorities on different things.

Great. Thank you both.

[Operator Instructions] Your next question comes from the line of Elliot Alper from D.A. Davidson. Your line is open.

Great. Thank you. Similar to the previous question, but as you look at some of the geographies that are farther along in the phases of reopening, what are you seeing as far as consumer reengagement with Yelp as well as the local businesses reengagement Yelp? And then curious on any contacts into the sales force and small business sentiment as it relates to continuing their partnerships with Yelp and utilizing some of the free services offered in the quarter. Thank you.

Hi, Elliot. So on your first question there, as we saw markets have reopen and more economic activity pickup, we did see recoveries that were, what I would characterize as fairly rapid as people left their houses and started transacting with local businesses. So I see that as an encouraging sign that as things do ultimately get back to normal and kind of the medium term as the virus gets controlled and the vaccine is here. I do think that we will see a recovery along with that activity. And that's kind of what we've seen on a market-by-market basis as more activity picks up. More transactions are happening on Yelp more, obviously, more website visits or mobile app activity, more request-a-quote all of those good things.

And I can take the engagement question. Overall, we're really happy with the engagement of local businesses with Yelp product right now, albeit this is a very stressful time for local businesses and certainly, we want to be an advocate for them and a partner along the way. When you look at some of the statistics that we have in terms of folks taking advantage of COVID-related products as an example, it's really robust. We have over 650,000 customized COVID-19 sections at the end of July. You can imagine as a consumer today and as a business owner, it's really important that you have communication channels that are accurate up-to-date and folks really don't know in their day-to-day, which businesses are open? How they're operating? Whether they're operating with health and safety measures in place? And we think we provide a really key critical communication channel for those businesses. And so sentiment as you imagine, it's not exactly a happy non-stressful time for local business owners. So I don't think people are on the phone jumping for joy about the situation. That being said, there is an appreciative sentiment and one of our goals throughout this entire process is to make sure that we're having relationships that it last well beyond this pandemic, and that we're in a position to a) recapture clients that are potentially not spending now and also engage customers that have not used Yelp as a robust way prior. So we're pretty happy with the engagement thus far.

Great. Appreciate it.

Your next question comes from the line of Brent Thill from Jefferies. Your line is open.

Yes. Thanks for taking my question. This is [Dan Alico] for Brent. Pre-pandemic high-frequency categories like restaurants use to drive traffic to your high-value categories like services. Now this dynamic has changed the data. What can you do to increase traffic to the higher revenue categories in the current environment?

Hi there. So yes, we had definitely have relied historically on the high frequency categories like restaurants to drive engagement. And the good news is there's still traffic there. It hasn't gone to zero. But I think what's particularly encouraging is even though over the long-term, we'd love and we will, I think – we certainly believe we will see restaurant traffic back and robust as the virus gets under control. In the meantime, we have seen the home and local category recover from the lows of kind of March and April. And so it's not exactly a restaurants have to be gangbusters for us to have a solid business. I think you can kind of see from the traction that we've seen particularly in home services that people still do rely on Yelp. Obviously, they're coming to restaurants, but they're also coming to us for a whole host of other categories. We are quite diversified from a category standpoint and that's resulted in, I'd say, solid revenue in the home services category, that's growing the business and is giving us the confidence, frankly, that we're going to get through the other end of this crisis and ultimately be well positioned for the recovery.

I got it. Thanks for the color.

Sure. Thanks.

And there are no further questions at this time. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating, and you may now disconnect.