Yelp Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 8 speakers on the call.

Operator

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 I'll now turn the conference over to James Milne, Senior Vice President, Finance and Investor Relations. Please go ahead.

Speaker 1

Good afternoon, everyone, and thanks for joining us on Yelp's Q3 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 a shareholder letter on our Investor Relations website 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.

Speaker 1

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.

Speaker 1

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 a historical reconciliation of GAAP cash flows from operating activities to free cash flow. And with that, I will turn the call over to Jeremy.

Speaker 2

Thanks, James, and welcome, everyone. Yelp delivered its 10th consecutive quarter of double digit revenue growth, to our product initiatives and consistent execution. We grew net revenue by 12% year over year to a record $345,000,000 We delivered this performance while also expanding net income margin by 14 percentage points and adjusted EBITDA margin by 4 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.

Speaker 2

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 R and O advertising revenue growth remained robust, up 10% year over year. With record advertising demand in the quarter, our efforts to deliver more valued 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 3rd 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 Q2.

Speaker 2

At the same time, year over year growth in average CPC moderated compared to the 2nd 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 3rd 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.

Speaker 2

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. 3rd quarter net revenue increased by 12% year over year to $345,000,000

Speaker 3

$3,000,000 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 5 39 percent year over year to positive $58,000,000 representing a 17% margin. Adjusted EBITDA increased by 30% year over year to a record $96,000,000 $7,000,000 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 and record average revenue per location across categories.

Speaker 3

Paying advertising locations were relatively flat compared to the Q2 of 2023, decreasing 2% year over year to $561,000 In services, ad revenue increased by 14% year over year to a record $206,000,000 In RR and O, ad revenue increased by 10% year over year to a record $124,000,000 Turning to expenses. 3rd quarter expenses decreased from the 2nd quarter and increased by 3% year over year. As we have 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 Q3, we increased adjusted EBITDA margin by 4 percentage points year over year to a record 28%, while SBC as a percentage of revenue remained flat, reflecting high quality incremental margin.

Speaker 3

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 compensation throughout the organization. As a result, we plan to shift a 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 $20,000,000 and cash expense would have increased by the same amount.

Speaker 3

Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy. In the Q3, we repurchased $50,000,000 worth of shares at an average purchase price of $41.08 As of September 30, 2023, we have $132,000,000 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.

Speaker 3

We now expect full year revenue will be in the range of $1,332,000,000 to $1,337,000,000 reflecting a $10,000,000 increase at the midpoint compared to our previous outlook. Turning to margin, we now expect adjusted EBITDA will be in the range of $319,000,000 to $324,000,000 for the full year, reflecting a $7,000,000 increase at the midpoint compared to our previous outlook. We currently estimate that our effective GAAP tax rate to 4 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 3rd 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.

Speaker 3

With that, operator, please open

Operator

up the line for questions. Thank you. One moment please for your first question. Your first question comes from the line of Jason Kreyer of Craig Hallum. Your line is open.

Speaker 4

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 SEM, and then maybe if you can just talk a little bit more about what you saw as you deployed those SEM test budgets and Maybe what your expectations are as you spend more there into Q4?

Speaker 2

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, there are continuations of a theme on the product side.

Speaker 2

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 and clicks. We have an improvement in the photo selector that leverages AI. We made some ad UX improvements to existing ad units.

Speaker 2

And then on the consumer side, we also I've been working on the mobile website 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, the second part of the question Okay. Go ahead.

Speaker 2

Sorry.

Operator

You mentioned

Speaker 1

that at the end

Speaker 2

of the quarter, do you want me to talk about something else?

Speaker 4

No, go ahead.

Speaker 2

Okay, great. Yes, you mentioned SEM and how that's going. Obviously, very early days. We're just sort of getting things up and running in kind of the test budget phase. I would say it's Going well so far, but again, early.

Speaker 2

We are excited about this opportunity, especially as we look into 2024 Beyond, there are companies that have predicated their entire business model on SEM, 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 brought across so many different categories and has such strong brand recognition. So I think that gives us a unique take on this space.

Speaker 2

And that gets me even more excited about the growth opportunities. I guess back to your original source of your question was like Is that Centimeters driving this click percentage? I would say, it's not a material contributor, no.

Speaker 4

Okay. That's very helpful. I wanted to just ask a follow-up on competition. During the quarter, Google made Some changes and started to restrict anonymous reviews. I think you guys have already done that for quite some time.

Speaker 4

But I'm just curious if you think that had any impact on consumer behavior?

Speaker 2

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 sign of the industry that Folks are waking up how important trust is.

Speaker 2

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, 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 of that is finally really paying off And leading more and more folks to understand that Yelp is a standout when it comes to trust.

Speaker 1

Thank you.

Operator

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

Speaker 3

Maybe 2 on the services space. 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.

Speaker 2

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.

Speaker 2

I think Yes. 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 quote, we saw it bucked the seasonal trend And we were seeing project volume up from Q2.

Speaker 2

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 The an additional element of our growth, going into 2024. So I think between our organic traffic, the SEM opportunity, Our strong brand and our strong product execution, I think we're really set up well for services growth.

Operator

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

Speaker 5

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 2 self serve 25% Multilocation 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.

Speaker 5

I'm hoping you could talk about what you are seeing in the macro

Speaker 2

Hi, Corey. This is Jed.

Speaker 6

I can take the first question In terms of channels, we were pleased with the performance of both self serve as well as multi look. I guess starting on the multi look 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 So, in line performance with what we saw in Q2. And those are our most sophisticated advertisers.

Speaker 6

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 and have in fact begun to do so. But overall, we're really pleased with kind of the demand out in the marketplace. And the products are resonating with our most sophisticated advertisers on the Multilog side. We continue to make progress on our attribution capabilities, our off Yelp audience, Our off Yelp offerings resonate in the marketplace, new ad formats.

Speaker 6

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. 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 serve, that 25% growth year over year really, really healthy, now makes up about half of our Acquisition or SMB, and have 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 In product suggestions for folks to kind of drive more out of their self serve spend.

Speaker 6

And then of course, we've also You use paid marketing in a really effective way and have had opportunities to kind of drive a lot of growth on the self serve channel through that as well. So They continue to remain very core strategic pillars for us moving forward, and I look forward to them to continue to drive growth in the future.

Speaker 3

Hey, Corey, it's David. Just to follow-up on the macro question. First of all, obviously, super pleased with our performance in the 3rd quarter between 12% growth and the 28% adjusted EBITDA margin, which Put us in a position to raise the guide to $13.32 to $13.37 on the top line and $10,000,000 above the midpoint of Our previous guide in on adjusted EBITDA, dollars 3.19 to $3.24 which is $7,000,000 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 provide it taking into account the risks and uncertainties that we see.

Speaker 3

On the revenue side, The implied guide for the Q4 is $3.37 to $3.42 which is in line with the 3rd quarter And on expenses, it implies $84,000,000 to $89,000,000 which is also in line with what we guided on the Q3. I do 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 related to them like vacation and healthcare expense. So we've reflected that in the guidance that we've provided for the remainder of the year.

Operator

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

Speaker 5

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 their spend, Just how much runway do you see to continue capturing a greater percentage of their advocates? Thanks.

Speaker 6

Yes, I can take that one, Sergio. I believe you're probably referring to where we saw Detail of PALS, overall, largely due to a few multi low customers that did not spend in the 3rd 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 slight to quality in terms of our advertisers and quality revenue. And as you can tell from the kind of 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% EBITDA margins.

Speaker 6

Those are that's kind of the profile of the folks who did not advertise in the Q3. But we feel really Positive about kind of 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.

Speaker 6

We see it across our Repsol channel. We see it across our self serve channel. And we see it across our most sophisticated enterprise customers. The product led strategy is really resonating with these customers. And Ultimately, Yelp is in a pretty unique position to deliver highly targeted leads across a broad base of businesses.

Speaker 6

So we Feel like we're well positioned to kind of capture growth going forward.

Speaker 5

Great. Thank

Operator

Your next question comes from the line of Shweta Kajuria of Evercore. Your line is open. Okay.

Speaker 7

Thank you for taking my question. Jeremy, if you were to point to perhaps 2 to 3 Specific product or product features that you believe will drive meaningful top line growth Next year, in terms of sustainable double digit growth rate or potentially even acceleration, which ones would you point to that

Speaker 2

Hi, Shueta. 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 would just be our consistent execution and the way that we operate these days. We have an annual planning process.

Speaker 2

We're just at the tail end of that. It's gone incredibly well. It generates sort of 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 staff 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 sort of most obvious areas of continued investment as well as excitement, Yes, I have to point to of course Ad Tech.

Speaker 2

That's been the gift that keeps on giving. All of the projects that we pretty much have invested in, in that area have really paid off. It's a 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, continued impact. And 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.

Speaker 2

I think other areas to watch out for, LOM, it's 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 LLMs all throughout the products as well as ad tech, Yes, helping the business owner, helping on the consumer side as well. We've got this new SEM area that we've been talking about that we're excited about.

Speaker 2

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 side. We just returned to investing there.

Speaker 2

We saw some impact by adding neural nets to the home feed. We made some improvements on mobile web as well as desktop web. And again, that one is early days. So everywhere I look, I see a lot of opportunity, I see 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.

Speaker 2

And so we're not going to hold back. We're going to try our best to keep the momentum going into 2024 and beyond.

Speaker 7

Okay. That's helpful. If I could please ask a 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 spent?

Speaker 7

Is it at this point, almost everybody in the U. S, I would imagine, knows about Yelp and Probably has downloaded it. So how often they come back, what are some success metrics that you are tracking?

Speaker 2

Yes, certainly engagement is a component of that and we pointed to some success there this quarter with home feed as well as mobile web and desktop web. We've also had a lot of wins on the contribution side, driving more reviews, allowing consumers to attach additional content like photos and video to the reviews, which has 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.

Speaker 2

Yelp is not a place where we just want you to check out photos of your family or 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 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.

Speaker 2

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 2024.

Speaker 7

Okay. That's great. Thanks, Jeremy.

Operator

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

Speaker 1

Hi. This is Stan Velika 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 that quote volumes were down. Anything you can tell us about How overall click volumes versus pricing trended in home services specifically?

Speaker 1

And then Has request been a leading indicator for the health of that category? And basically, how are you thinking about that?

Speaker 2

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.

Speaker 2

And 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 guaranteed nationwide and we're moving into other categories.

Speaker 2

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 trends. 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.

Speaker 3

If I can just step back in for a moment going back to my earlier answer, just in case I misspoke on the Slide guide for the Q4 of 2023, the implied guide is $337,000,000 to $342,000,000 on revenue and $85,000,000 to $90,000,000 on adjusted Just wanted to make sure to clarify that in case I misspoke earlier.

Speaker 1

Great. Thank you very much.

Operator

There There are no further questions at this time. I will now pass the call over to Jeremy, the CFO, for closing remarks.

Speaker 2

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

Operator

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

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