Yelp Inc. (YELP) Q3 2023 Earnings Report, Transcript and Summary

Hello, and welcome to the Yelp Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I'll now turn the conference over to James Miln, Senior Vice President, Finance and Investor Relations. Please go ahead.

Good afternoon everyone, and thanks for joining us on Yelp's third quarter 2023 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 the shareholder letter on our Investor Relations Web site and with the SEC, 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 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'll discuss adjusted EBITDA, adjusted EBITDA margin, and free cash flow, 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 historical reconciliation of GAAP to cash flows from operating activities to free cash flow. And with that, I will turn the call over to Jeremy.

Thanks, James, and welcome everyone. Yelp delivered its 10th consecutive quarter of double-digit revenue growth, a testament to our product initiatives and consistent execution. We grew net revenue by 12% year-over-year to a record $345 million. We delivered this performance while also expanding net income margin by 14 percentage points, and adjusted EBITDA margin by four percentage points from the prior year period. Profitable growth was generated across the business as our teams continued to innovate and execute against our product roadmap. This resulted in record advertising revenue in both of our broad categories, services and restaurants, retail, and other. Services was particularly strong, with advertising revenue up 14% year-over-year, led by approximately 20% year-over-year growth in home services. At the same time, our RR&O advertising revenue growth remained robust, up 10% year-over-year. With record advertising demand in the quarter, our efforts to deliver more value to advertisers has clearly resonated. The product improvements we've made to enhance our ad formats and ad system drove more high-quality clicks to our customers in the third quarter. In fact, ad clicks returned to year-over-year growth, increasing by 9% from the prior-year period, a marked improvement from flat year-over-year growth in the second quarter. At the same time, year-over-year growth in average CPC moderated compared to the second quarter, at 4%. We also made progress against our initiative to drive sales through our most efficient channels. Self-serve revenue increased by 25% year-over-year, while multi-location revenue increased by 10% year-over-year. At a combined 51% of advertising revenue, we continue to see significant opportunities to grow each channel in the years ahead. In summary, Yelp delivered another great performance in the third quarter as our product-led strategy continues to strengthen our business and our team executes against our plan, we have even more conviction in the durability of Yelp's consistent growth. Looking ahead, I continue to see tremendous opportunities for innovation and profitable growth, and remain focused on generating long-term shareholder value. With that, I'd like to turn it over to David.

Thanks, Jeremy. Third quarter net revenue increased by 12% year-over-year to $345 million, $3 million above the high-end of our outlook range. We were pleased to see the full amount of this outperformance flow through to the bottom line. Net income increased by 539% year-over-year with positive $58 million, representing a 17% margin. Adjusted EBITDA increased by 30% year-over-year to a record $96 million, $7 million above the high end of our outlook range, and representing a 28% margin. Top line growth was driven by an increase in advertiser demand as reflected in record average revenue per location across categories. And advertising locations were relatively flat compared to the second quarter of 2023, decreasing 2% year-over-year to 561,000. In services, ad revenue increased by 14% year-over-year to a record $206 million. In RR&O, ad revenue increased by 10% year-over-year to a record $124 million. Turning to expenses, third quarter expenses decreased from the second quarter, and increased by 3% year-over-year. As we've stated previously, we continue to expect headcount will be approximately flat year-over-year by the end of 2023. We also remain focused on enhancing the quality of adjusted EBITDA by reducing stock-based compensation as a percentage of revenue to less than 8% by the end of 2025. In the third quarter, we increased adjusted EBITDA margin by four percentage points year-over-year to a record 28%, while SBC as a percentage of revenue remained flat, reflecting the high-quality incremental margin. To reach our target, we are focusing our product development hiring efforts outside of the United States, particularly in the U.K. and Canada, as well as adjusting our overall mix of compensation throughout the organization. As a result, we plan to ship the substantial portion of our equity compensation to cash compensation in 2024. If we had made these compensation mix changes in 2023, SBC would have decreased by approximately $20 million, and cash expense would have increased by the same amount. Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy. In the third quarter, we repurchased $50 million worth of shares at an average purchase price of $41.08. As of September 30, 2023, we have $132 million remaining under our existing share repurchase authorization. We plan to continue repurchasing shares throughout the remainder of the year, subject to market and economic conditions. Turning to our outlook, following our strong Q3 results, we are raising our outlook range for the year. We now expect full-year revenue will be in the range of $1.332 billion to $1.337 billion, reflecting a $10 million increase at the midpoint compared to our previous outlook. Turning to margin, we now expect adjusted EBITDA will be in the range of $319 million to $324 million for the full-year, reflecting a $7 million increase at the midpoint compared to our previous outlook. We currently estimate that our effective GAAP tax rate, the four discrete items for 2023 and beyond will be in the range of 22% to 26% as a result of recent guidance provided by the IRS. In closing, Yelp's third quarter results demonstrate our ability to sustain double-digit revenue growth, while expanding margins. Amid continued macro uncertainties, our product-led strategy has continued to strengthen Yelp for the long-term, giving us even greater confidence in our ability to drive long-term profitable growth. With that, operator, please open up the line for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Jason Kreyer of Craig-Hallum. Your line is open.

Perfect. Thank you, guys. So, just in regards to the return to growth in clicks, I'm curious, is part of that due to the test budgets that you've started to deploy in SCM? And then maybe if you can just talk a little bit more about what you saw as you deployed those SCM test budgets and maybe what your expectations are as you spend more there into Q4?

Hi, Jason, this is Jeremy, I'll take your question here. We were really pleased to see clicks return to growth, up 9%. Looking into the causes there, there's a few things that we've been doing that are continuations of a theme on the product side. Ad tech has been an area where we've been investing significantly. And we noted in the letter there was some better pacing, so that contributed to creating additional inventory in clicks. We have an improvement in the photo selector that leverages AI. We made some ad UX improvements to existing ad units. And then, on the consumer side, we also have been working on the mobile Web site as well as desktop web. Saw some increased engagement from that. So, there's a number of things we've been doing to drive additional value to advertisers, and they really paid off in the quarter. So, we were delighted to see that. I guess as far as the second part of your question --

[Multiple Speakers] Okay. Go ahead. Sorry.

[Indiscernible] further or do you want me to talk about something else?

No, go ahead.

Okay, great. Yes, you mentioned SCM and how that's going. Obviously, very early days, we're just sort of getting things up and running in the test budget phase. I would say it's going well so far, but again early. We are excited about this opportunity, especially as we look into 2024 and beyond, there are companies that have predicated their entire business model on SCM, which is an area within services that we've historically not played. Yelp has been driven almost entirely by organic traffic. And we think we'll continue to find a ton of value on the organic side, but we see an opportunity in SCM. Part of that is our unique position. Yelp is relevant to consumers on a daily basis, whereas some of the other players that have operated in this space, really they don't have an excuse to be talking to consumers all the time, whereas Yelp is broad across so many different categories and has such strong brand recognition. So, I think that gives us a unique take on this space. And that gets me even more excited about the growth opportunities. I guess back to your original source of our question was like is SCM driving this click percentage. I would say it's not a material contributor, no.

Okay, that's very helpful. I wanted to just ask a follow-up on competition. And I know, during the quarter, Google made some changes and started to restrict anonymous reviews. I think you guys have already done that sort for quite some time. But I'm just curious if you think that had any impact on consumer behavior?

Thanks for the question on that. Certainly we see our content as a real advantage. We've always leaned into trying to have the most trusted local review content possible. We've never allowed simple anonymous star ratings. We always found it frustrating, frankly, that Google with its monopoly position would pretend like those are reviews and mislead consumers. Certainly I see that as a positive side of the industry that folks are waking up to how important trust is. And then, I guess I would just point you to an FTC paper that came out that really highlighted how Yelp has, what we think is the best rating and review system in the industry, you know, really balanced ratings across the different star levels and something that really differentiates us. And I think consumers especially now are waking up to the fact that not all content and not all rating systems are created equal. We've always had that belief, but I think our belief in that is finally really paying off and leading more and more folks to understand that Yelp is a standout when it comes to trust.

Thank you.

Your next question comes from the line of Eric Sheridan of Goldman Sachs. Your line is open.

Thanks so much for taking the questions. Maybe two on the services space, you know, you've shown a lot of momentum in the services side of the revenue in the last couple of quarters, how should we think about the momentum in that business and the competitive landscape and aligning sort of investments behind growth against what you see as the potential or pool of opportunity set that sits in front of you, given the momentum as we exit this year and move into next year in services? Thank you.

Eric, I think I can take that one as well. We're very happy with performance in the services space. I guess, I would just point folks to revenue up 14% year-over-year in services. And then, if you delve further into home services, up 20% year-over-year in Q3. So, we feel really good about that. I think from our vantage point, it feels like we're continuing to take market share from other players as far as what's driving that and how do we continue the momentum? I think it's the product-led innovation. We launched -- Yelp guaranteed nationwide in Q3. That's going well. And we have more category expansion coming through the end of the year here. Request, "We saw it buck the seasonal trend, and we were seeing project volume up from Q2." So that's great. As we've talked about in recent quarters, there's been other innovations that have really streamlined things improving the login flows, taking out friction, mass phone numbers. This quarter we introduced dynamic landing pages as part of our SCM effort to tap into all that inventory that is new to us that we think is going to be an additional element of our growth going into '24. So, I think between our organic traffic, the SCM opportunity, our strong brand and our strong product execution, I think we're really set up well for services growth.

Thank you.

Your next question comes from Cory Carpenter of J.P. Morgan. Your line is open.

Thank you. I wanted to ask the self-serve and multi-location channels. There's been a little bit of kind of gaping out of the growth of those two self-serve 25%. Multi-location slowed down a bit. Could you just talk about the dynamics impacting those two categories? And then secondly, just on macro, I know you called out in 4Q that you're incorporating macro uncertainties but hoping you could talk about what you are seeing in the macro landscape right now. Thank you.

Hi, Cory. This is Jed. I can take the first question in terms of channels. We were pleased with the performance of both self-serve as well as multi-loc. I guess starting on the multi-loc side it grew at approximately 10% a healthy growth rate. And more importantly obviously that channel is made up of some sub-channels as well, with enterprise being the majority and the largest one there. And in fact, that business saw in-line performance with what we saw in Q2. And those are our most sophisticated advertisers. And so, that demand continues to be very strong. We did see some slight weakness in the mid-market channel, and we've identified some areas that we can take action on it and have, in fact, begun to do so. But overall, we're really pleased with the demand out of the marketplace, and the products are resonating with our most sophisticated advertisers on the multi-low side. We continue to make progress on our attribution capabilities, our off-Yelp offerings resonating in the marketplace, new ad formats, and ultimately when you look at folks in this type of macro economy, they want -- we are very down funnel way for them to spend money and receive quality leads. So, we're happy with where we are on the multi-location side, and of course, we have a deep product pipeline that we are looking forward to going down that path in the future. In terms of self service, that 25% growth year-over-year, really, really healthy, now makes up about half of our acquisition were SMB, and I've made a host of product improvements there. When you look at the conversion flows for both purchasing ads, claiming a business page on Yelp, recommending in product suggestions for folks to drive more out of their self-serve spend. And then, of course, we've also use paid marketing in a really effective way, and I've had opportunities to drive a lot of growth on the self-serve channel through that as well. So, they continue to remain very course strategic pillars for us moving forward, and look forward to them to continue to drive growth in the future.

Hey, Cory, it's David. Just to follow up on the macro question. First of all, obviously, super pleased with our performance in the third quarter between 12% growth and the 28% adjusted EBIDTA margin, which put us in a position to raise the guide to 13.32 to 13.37 on the top line, and it's $10 million above the midpoint of our previous guide and on adjusted EBIDTA 319 to 324 which is $7 million above the midpoint of our previous guide for the year, so, overall, obviously very pleased with that level of performance. As usual, whenever we give guidance, we provided taking into account the risks and uncertainties that we see. On the revenue side, the implied guide for the fourth quarter is 337 to 342, which is in line with the third quarter. And on expenses implies 84 to 89, which is also in line with what we got on the third quarter. Do you think it's important to underscore on the expense side that expenses can move around between quarters? And there are certain items that have some volatility to them like vacation and healthcare expense. So, we saw reflected that in the guidance that we've provided for the remainder of the year.

Your next question comes from the line of Sergio Segura of KeyBanc. Your line is open.

Great, thanks. Curious if any common traits you would point to for the advertisers that turned off advertising spend in the quarter, and then relatedly for the advertisers that remain on the platform and continue to increase your spend, just how much runway do you see the continued capturing a greater percentage of their advocates? Thanks.

Yes, I can take that one, Sergio. I believe you're probably referring to where we saw detailed pals overall largely due to a few multi-low customers that did not spend in the third quarter. I would say the profile of those customers is a lot of locations with not a lot of spend. And we've been talking about this, like the quality in terms of our advertisers and quality revenue. And as you can tell from the wallet share gains with overall multi-low growing at 10% year-over-year and the company growing at 12% year-over-year, and particularly in such an efficient manner with 28% EBIDTA margins, that's the profile of folks who did not advertise it in the third quarter, but we feel really positive about where we are moving forward from a pal's perspective. Ultimately, we are concentrating on both expanding the total number of paying advertising locations as well as continuing to drive wallet share, and that's reflected in the record average revenue per location that we saw in the quarter. And I believe the second part of the question was what do we see in terms of demand going forward? I mean SMB right now demand is very strong. We see it across our retail channel. We see it across our self-serve channel and we see it across our most sophisticated enterprise customers, the product lead strategy has really resonated with these customers. And ultimately, Yelp is in a pretty unique position to deliver highly targeted leads across a broad base of business and so we feel like we're well positioned to kind of capture growth going forward.

Okay, great. Thank you.

Again, if you have a question, you may press star one on your telephone keypad. Your next question comes from the line of Shweta Khajuria of Evercore. Your line is open.

Okay, thank you for taking my question. Jeremy, if you were to point to perhaps two to three specific products or product features that you believe will drive meaningful top line growth next year in terms of sustainable, double-digit growth or potentially even acceleration? Which ones would you point to that excite you the most and why?

Nice. Shweta, thanks for the question. As we look ahead here, there's a lot of things I think to be optimistic and excited about. The first we just offer consistent execution and the way that we operate these days. We have an annual planning process. We're just at the tail end of that it's gone incredibly well at generate for all the best ideas from Product Engineering and everywhere else, and then really tries to focus in on ROI. We have limited resources so we want to start the very best most innovative projects that are going to help connect people with great local businesses and drive more value to our advertisers. When I look at what are the areas, the certain most obvious areas of continued investment as well as excitement, I have to point to of course ad tech that's been the gift that keeps on giving. All of the projects that we pretty much have invested in that area have really paid off at this very high ROI area for us. We continue to try and add staffing as the ideas bubble up, so I think you'll see continued innovation there, continue to impact when certainly you saw that this quarter with better pacing, photo selector improvement as well as some ad UX, innovation all work to drive clicks up 9% which was fantastic. I think other areas to watch out for LLM still early days. We've already banked some wins but I think there's a deep well there. We're just getting started. We have a lot of initiatives that will layer in LLM all throughout the product as well as ad tech, helping business center, helping on the consumer side as well. We've got this new SCM area that we've been talking about that we're excited about. We launched dynamic landing pages this quarter that's tied to that. There's a lot of work to do, but we're already out there testing and we're excited about the early trends so we'll keep you posted on that. And then, finally I think there's still plenty of opportunity to innovate on the consumer's side. We just returned to investing there. We saw some impact by adding neural nets to the home feed. We made an improvement on mobile web as well as desktop web and getting that one is early days. So, everywhere I look, I see a lot of opportunity, a lot of excitement and I see a team that's able to execute. We've been really consistent now 10 quarters of double-digit revenue growth. And so, we're not going to hold back. We're going to try our best to keep the momentum going into '24 and beyond.

Okay, that's helpful. If I could please ask the follow-up question on that, so on the consumer side, the last point that you were making, what are you looking for on that front? Is it engagement, is it time span, is it -- at this point, almost everybody in the US imagine knows about the Yelp and probably has downloaded it so how often they come back. What are some success metrics that you are tracking?

Yes, certainly engagement is a component to that. We point some success there this quarter with home feed as well as mobile web and desktop web. Yelp have a lot of wins on the contribution side. Driving more reviews along consumers to attach additional content like photos and videos to their reviews which is driven more contributions of those types. So, there's a number of different ways that you could look at it. Certainly the bigger the audience, the more time spent, all of those are good things. But of course, you have to also think about the categories and the types of activity. Yelp is not a place where we just want you to check out photos of your family or a cat stuck in a tree. It's very down-funnel, intent-driven, where we want consumers that are trying to find the very best in their city or the important services to fix a need in their home. And so, we're going to continue to innovate on that. I mean, I guess one area that we didn't talk about was Request-a-Quote where we've really been driving a lot of innovation there. We added mass phone numbers, we improved the login, and we saw projects move up sequentially. So, that's another area, I think, of excitement. And frankly, it's differentiated. Being able to have those conversations with trusted pros, have Yelp guaranteed, backing the interaction, and having the quality review and photo content that we're known for, I think it's a powerful combination going into '24.

Okay, that's great. Thanks, Jeremy.

Your next question comes from the line of Brian Fitzgerald of Wells Fargo. Your line is open.

Hi, this is Stan Velikov for Brian. Thanks for taking our questions. If you look at Home Services that was up nicely in the quarter, but at the same time, Request-a-Quote volumes were down. Anything you can tell us about how overall click volumes versus pricing trend is in Home Services specifically? And then has Request-a-Quote been a leading indicator for the health of that category? And basically, how are you thinking about that?

Hi, this is Jeremy. I'll try and take your question here. So, Request-a-Quote stepping back, I think in the macro services demand has largely been a bit softer than last year. But I think when you look specifically at Request-a-Quote, especially sequentially, what we were able to see is project volume go up, which broke a seasonal trend for us. And so, that is a clear positive what's driving that, I think, is our innovation we have improved the service, we've added mass phone numbers, we've improved the login experience, we added Yelp. Yelp is guaranteed nationwide, and we're moving into other categories. So, there's a lot of positive signs in terms of Request-a-Quote and project volume. And then, I think if you step back and look at Ad Clicks overall, of which Request-a-Quote is a portion they were up 9% year-over-year reversing trend. And so, I think that's another positive showing that the product-led strategy that we have is working. We're creating more inventory, we're driving more leads to our advertisers, and ultimately that's what we're here for is to drive value for advertisers.

If I can just step back in for a moment, going back to my earlier answer, just in case I misspoke on the implied guide for the fourth quarter 2023, the implied guide is $337 million to $342 million on revenue and $85 million to $90 million on adjusted EBITDA, just wanted to make sure to clarify that in case I misspoke earlier.

All right. Great, thank you very much.

There are no further questions at this time. I will now pass the call over to Jeremy, the [CEO] (ph) for closing remarks.

Thanks everyone for joining us on the call. We'll see you next quarter.

This concludes today's conference call. You may now disconnect.