Yelp Inc (YELP) 2015 Q2 法說會逐字稿

Hello and welcome to the second quarter 2015 Yelp Inc.

earnings conference call.

My name is Joe and I'll be the operator for your call today.

(Operator Instructions)

Please note that this conference is being recorded.

And I would now like to turn the call over to Ms. Wendy Lim.

Ms. Lim, you may begin.

Good afternoon everyone and thank you for joining us on Yelp's second-quarter 2015 earnings conference call.

Joining me on the call today are CEO Jeremy Stoppelman and CFO Rob Krolik and COO Geoff Donaker will join us for Q&A.

Before we begin, I'll 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 revisions 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 financial results.

Please refer to our SEC filings as well as our financial results press release for a more detailed description of the risk factors that may affect our results.

During our call today we will discuss adjusted EBITDA, non-GAAP net income, and non-GAAP EPS which are non-GAAP financial measures.

In our press release issued this afternoon and our filings with the SEC, each of which is posted on our website, you'll find additional disclosures regarding these non-GAAP financial measures and a reconciliation of the historical net income to adjusted EBITDA and non-GAAP net income and GAAP EPS to non-GAAP EPS.

And with that I'll turn the call over to Jeremy.

Thanks Wendy and welcome everyone.

In the second quarter we posted financial results in line with expectations and continue to make progress on our goals.

Revenue grew 51% year over year to almost $134 million.

While this year has not gone as smoothly as we anticipated, I'm confident as ever about our future, particularly about the success of our apps and mobile advertising products.

With the strength in our core business we continue to believe that we can be a $1 billion revenue company by the end of 2017.

Internet usage trends continue to evolve with desktop traffic declining and the shift to mobile accelerating.

Increasingly consumers are turning to ask for everything from social media to news to local search.

According to a 2014 COM course study, people in the US already spend more than half of their online time in mobile apps and we only expect this to increase.

As one of the first apps in the Apple App Store in 2008, we were an early leader and built upon the success.

In the second quarter we became one of the top 40 apps overall in the US and as user growth accelerated to 51% year over year to about 18 million.

I want to take a moment to clarify how we think about traffic in the impact of the shift to app.

We've always measured desktop and mobile website unique visitors using Google Analytics, which is inherently limited due to its cookie-based tracking.

For example, accessing Yelp.com from a computer at work, from a smartphone while on the go, and again from a different computer at home would count as three web unique visitors.

App usage, however, is measured internally based on the number of unique mobile devices accessing the Yelp app giving us confidence that the number of unique devices is a close approximation to the number of people using our app.

We're particularly excited about the increase in our app users because the vast majority come to Yelp directly and tend to be our most active users.

We continue to see growth across the Yelp ecosystem with the app users driving a significant portion of our engagement.

For example page views grew approximately 40% year over year.

Calls and clicks for directions and maps grew about 20% year over year and new reviews and photos together increased by about 40% year over year.

And for all three of these metrics approximately 70% of activity came from the mobile app.

Recent comScore reports show that Yelp had as of 2015 approximately 30% reach among US Smartphone users.

While this suggests that Yelp was a definitive leader among local search and discovery apps, it also means that we have significant room to grow.

In the second quarter we conducted advertising tests on TV and radio in select markets and the early results were promising.

Earlier this year we outlined our plan to invest approximately $30 million on marketing, primarily weighted towards the back half of 2015.

As previously communicated we will ramp up our marketing efforts and expect to spend approximately $20 million of that $30 million in the third and fourth quarters of this year.

Our TV advertising campaign will highlight the many different uses for Yelp such as finding a mechanic, golf instructor, or restaurant.

While we don't anticipate an impact on specific metrics in the near term, we expect our advertising programs will benefit awareness and therefore consumer usage over the long term.

Given that the vast majority of local advertising dollars are still spent offline, we have a tremendous opportunity.

To address this we've invested in building a world-class sales force and creating advertising products that deliver high ROI business centers.

I'm proud of our sales team, which in addition to ramping up on our CPC product, demonstrated resilience at productivity recovered in Q2 after the territory changes in Q1.

Our sales force has historically sold impression-based advertising until last September when we rolled out a new packaged CPC product.

Transition to performance-based advertising has moved quickly as our team now primarily sells CPC.

As of the second quarter 46% of local advertising revenue was generated from CPC advertisers and we expect the shift to continue.

Our mission is to connect people with great local businesses.

Consumers are increasingly relying on our 83 million reviews when choosing where to spend their money making Yelp the ideal place for local businesses to advertise.

To better leverage Yelp's strengths with consumers of local businesses, we've decided to phase out brand advertising by the end of the year.

We believe that eliminating brand advertising, which we also refer to as our display advertising product, will benefit the company over the long-term.

The industry trend towards increasingly disruptive display advertising is at odds with our focus on the consumer experience, particularly within the app.

Direct brand advertising sales is in decline while programmatic advertising has its own challenges with privacy implications, ever declining CPMs, and lower ad quality.

For example, ads that play video or audio intrude upon the consumer experience increasing load times and data usage on Smartphones.

We believe that prioritizing the consumer experience while delivering highly relevant, native local advertising will provide us with a strategic long-term advantage.

Given that our brand advertising is a percent of total revenue has declined from 25% in 2010 to 6% in the second quarter of 2015, now is the right time for us to reallocate those resources to our highly differentiated core business.

While we recognize there is a near-term impact on revenue and adjusted EBITDA, we believe this is the right decision for the long-term success of the company.

Eleven years ago, I founded Yelp to empower consumers.

We've transformed how people connect with local businesses and I'm as passionate as ever about this goal.

I was recently reminded of the positive impact Yelp has in the daily lives of consumers when I discovered Liholiho, a new restaurant in San Francisco in a neighborhood that I rarely visit.

After reading the rave Yelp reviews and realizing that I can conveniently book a reservation online using SeatMe, I went out of my way to dine there.

The experience was fantastic and consistent with the glowing comments shared on Yelp by the hundreds of dedicated urban adventurers that comprise the Yelp community.

Consumers are increasingly utilizing apps and our rich content and great consumer experience enable us to capitalize on this shift.

We saw accelerating growth in app unique users in Q2 and we look forward to expanding on the success we've seen today.

We're building the company to operate independently over the long term and I've never been more excited about what we can achieve.

Before I turn the call over to Rob, I would like to take a moment to thank Max Levchin, Chairman of Yelp, who has decided to step down from the board to pursue other interests.

Given the demands on his time, we have mutually agreed this is the right time for him to transition off the board.

Max provided the seed capital to start Yelp and I am forever grateful for all of his contributions and wish him all the best going forward.

And now I'll turn the call over to Rob for the financial details.

Thanks Jeremy.

Please note that we have posted a few slides in a data sheet on our Investor Relations webpage that accompany the financial portion of the webcast.

In the second quarter revenue grew 51% year over year to $133.9 million and adjusted EBITDA grew 32% year over year to $22.7 million.

For the second quarter local revenue was $107.9 million up 43% year over year.

Beginning this quarter we will break out transactions revenue which consist of a Eat24, platform transactions, Yelp deals, and gift certificates.

In Q2 transaction revenue totaled $11.3 million compared to $1.2 million in the second quarter of 2014 primarily reflecting our acquisition of Eat24 in the first quarter of 2015 which contributed about $10 million to revenue and made up the vast majority of transaction revenue in the second quarter of 2015.

I would like to touch on transactions for a moment.

We're investing in our platform for the long term, putting in place the building blocks for transactions to occur on Yelp.

The recent acquisition of Eat24 and the internal development of the Yelp platform to facilitate transactions has been successful and are growing.

That said, we expect local advertising revenue to continue to be our core business and the driver of growth for the foreseeable future.

We expect local advertising will account for about 90% of our target revenues in 2017.

Brand advertising revenue was $8.3 million down 8% year over year.

As Jeremy discussed we'll be phasing out our brand advertising product over the course of the year to focus on the consumer experience and local advertising.

We'll continue our direct brand sales and programmatic advertising efforts and expect approximately $10 million in revenue through the rest of the year.

Given that brand is relatively high-margin, lower brand revenue will have disproportionately large effect on adjusted EBITDA which is reflected in our lower outlook for full year 2015.

Other revenue, which now consists primarily of revenue from partnership arrangements, increased 128% year over year to $6.4 million, primarily reflecting our partnership with YP, which has contributed about $3 million in revenue in the quarter.

International revenue contributed about 2% of total revenue in the second quarter.

Gross margin was 90% in the second quarter compared to about 93% in the second period last year.

Cost of revenue increased due to investments we made in our hosting centers and testing infrastructure and we expect it to be approximately 10% for the remainder of the year.

Total sales and marketing expense was approximately 51% of revenue in the second quarter compared to approximately 54% in the same period last year.

Sales headcount in the second quarter grew approximately 30% year over year.

Our sales training and development program is top-notch and other companies have taken note.

Coupled with the strength in the tech sector particularly in San Francisco, we have not grown the sales team as quickly as planned.

As a result, we expect sales headcount growth up 30% in 2015 rather than our previous expectation of 40%.

Product development expense was approximately 20% of revenue compared to 17% in the second quarter of last year reflecting our continued focus on innovation.

G&A expense was 14% of revenue compared to 15% of revenue the second quarter of last year.

GAAP net loss was $1.3 million and GAAP EPS was negative $0.02 in the second quarter.

Non-GAAP net income which consists of net income excluding stock-based compensation and amortization was $9.4 million in the second quarter.

Non-GAAP EPS which is non-GAAP net income divided by our fully diluted share count was $0.12.

We generated approximately $18 million in cash flow from operations in the quarter and finished the second quarter with $368 million of cash, cash equivalents, and marketable securities on the balance sheet.

Before I turn to our outlook, I want to go through our operating metrics for the quarter.

Cumulative reviews grew 35% year over year to approximately 83 million.

Unique devices accessing our app grew 51% year over year to approximately 18 million on a monthly average basis.

Average monthly mobile unique visitors grew 22% year over year to approximately 83 million.

Average monthly desktop unique visitors was down 3% year over year to approximately 79 million.

International website traffic was down 3% year over year to approximately 30 million unique visitors on a monthly average basis while international reviews were up 39% year over year.

Local advertising accounts grew 40% year over year to approximately 97 thousand.

Claim local businesses were approximately 2.3 million up 34% year over year.

Our customer repeat rate which we calculate as the percentage of existing local advertising accounts from which we recognize revenue in the immediately preceding 12 month period was 77% for the second quarter of 2015.

Now I will turn to our outlook for the third quarter and full year 2015.

For the third quarter we expect revenues in the range of $139 million to $142 million representing a 37% year-over-year increase.

We expect adjusted EBITDA for the third quarter to range between $12 million and $15 million which reflects the impact of our marketing spend of approximately $10 million in Q3.

We also expect stock-based compensation to range between $16 million and $17 million and appreciation and amortization to be approximately 5% to 6% of revenue.

For the full-year 2015 we are lowering our outlook and expect full-year 2015 revenue to be in the range of $544 million to $550 million or approximately 45% growth over 2014.

Approximately two thirds of our lower expectations for full-year 2015 revenue is due to lower than expected headcount and approximately one third is related to the phase out of our brand advertising product.

For the full year we expect adjusted EBITDA to range between $72 million and $78 million.

We expect stock-based compensation to range between $62 million and $64 million and appreciation and amortization to be approximately 5% to 6% of revenue.

For modeling purposes in the third quarter and full year we expect our weighted-average basic share count to be approximately 75 million and weighted-average fully diluted share count to be approximately 82 million.

As Jeremy said, we're making decisions today that we believe will benefit us over the long run and we've continued confidence in our business.

Engagement has never been higher and we're diversifying our traffic streams as more consumers are engaging with us directly.

We look forward to doing to deliver great value to the consumers that use Yelp and our local business advertisers as we capture the large opportunity ahead of us.

I'll now turn the call over to the Operator to open up the call for questions.

(Operator Instructions)

Lloyd Walmsley, Deutsche Bank.

Thanks for taking the question.

Just wondering if you guys can give us a bit more color on any changes you've done since last quarter sales force reorg and then what you think is the best way to think about productivity in the quarter and going forward.

It looks like the sequential add in terms of local ad revenue of about $9.3 million was still a bit lower than what you guys added sequentially last year.

Should we look for that to start to improve going forward as productivity comes back?

What's the best way we should be thinking about that and tying headcount to numbers?

Hi Lloyd, this is Geoff.

A couple things.

First about the sales force reorg.

I think there you were referring to our territory rollout from January and February that had inferred back in March.

Really no follow on after that.

Generally speaking, productivity at an individual tenure level has increased back to historical norms since that period of time.

So that's generally a good thing.

Now as Jeremy mentioned we have not grown the sales force quite as quickly as we had expected to, so we're on about a 30% pace now rather than the 40% pace we had earlier expected.

And that is a variety of factors but mostly competition in the marketplace and particularly here in San Francisco bay area.

Now because of that when we bring in a new -- those rookies perform at a different level so you have a different mix in terms of productivity and that's what you're seeing in terms of net adds as an example our net new revenue into the business.

And that will carry over time.

But broadly speaking, at a level at about six months in or a year in folks are performing generally speaking as they have historically.

(Operator Instructions)

Gene Munster, Piper Jaffray.

Good afternoon.

You talked about decisions that will benefit Yelp over the long term and I just want to be on the same page in terms of what some of those decisions are.

You talked about traffic, diversification, improving awareness through advertising to get lift, maybe shifting some of the headcount, eliminating the display within mobile.

Are there any other key areas that you're focused on in terms of decisions to benefit the company longer term?

And then separately any thoughts on international?

It was down 3% year over year, but the reviews are up 39% if I heard that correctly.

What you attribute the gap to?

Thanks.

Sure, this is Jeremy.

Yes, when we are talking about the long term, I think part of what we were focused on with that particular statement is with regards to the brand business and our decision to discontinue that and focus really on the local ad products going forward.

Yes, that's really about improving the consumer experience.

The ad quality of the brand itself is a lot lower than our native ads.

And we've seen a decline from about 25% of our revenue coming from brand to 6%.

So it felt like our resources would be better spent focused on the core business and so we're making a long-term decision there.

Of course there is other aspects of investment that we make when we're thinking about the long term.

Part of that obviously is continuing to hire as aggressively as we can with the sales force and it's also making large investments in product and engineering R&D expense.

And so I think you can see the numbers there and see that we're really trying to build world-class consumer experience and have a local search product that blows everybody else away.

And on international, yes, you are right that content does continue to grow rapidly and I think that's a function of the community [playbook] continuing to work well for us in cities all of the world.

Now website traffic internationally is down.

That's right, we mentioned 3% decline in website traffic and that is mostly a function of SEO and things that effectively we see Google having done with their algorithm there.

The good news is that as with the rest of our business we do see the app traffic growing very nicely in all of our markets.

And given that is now a majority of all user activity, the good news is that app traffic does continue to grow for us in cities all over the world, not just domestic.

Mark Mahaney, RBC.

Thank you.

Two questions.

First the local ad account looks like it's had nice increase -- I guess it's the first time in three quarters we've seen it grow year over year.

Geoff is that the recovery a little bit in the sales force productivity?

Does that explain that or any color behind why local ad -- the LAAs the growth there picked up?

And then the other question I wanted to ask on the sales force -- we've been focused on the negative derivatives from the uniform bubble.

I don't think it reflects or impacts you.

I think it impacts a lot of companies.

But what do you do about that?

If you've got much greater competition for engineers and sales force and compensation is rising, is there a way to work through that storm or do you just have to ride it out?

Hi Mark.

This is Geoff.

And yes, let's start with local active accounts.

You asked -- is that really a function of sales force recovery and productivity recovery?

There's probably some of that, but as we said historically we don't actually manage to that LAA number; rather that's an outcome of both the great work that our sales force is doing, as well as self-serve advertisers that come in, some of which are actively directed by us and some of which is just organic -- folks finding us and signing up.

So while we are pleased to see that number is going up really we do manage the business by revenue and that's how our sales force is compensated.

So I can't point anything specific that we did to drop that LAA number this quarter versus the previous one.

Back to the unicorn bubble question.

We certainly are feeling those impacts.

What are we doing?

I think we're trying in general to take that goldilocks approach we've always struck of trying to maintain a high-quality bar on hiring and retention and promoting from within.

And we've been really delighted by general strength in our ranks across the sales force and the product engineering group.

I think for the most part it's something that we just have to ride out.

That having been said, you can see that cost in a couple of these areas have gone up, in particular product and development as a percentage of revenue has continued to creep up.

And that's just function of compensation in the marketplace.

So we will do what we can to hold the dam on that whole thing and ride it out as you said.

Kevin Kopelman, Cowen and Company.

I just had a couple of questions on Eat24.

Could you give us a sense of what the year-over-year growth looked like on a pro forma basis in the second quarter?

And is there any change on your full-year outlook for Eat24 versus when you did deal?

Thanks.

Yes, for Eat24 we saw about a 73% growth in revenue in the quarter from a year-over-year standpoint.

And we're not necessarily getting a specific guidance related anymore to Eat24 since it's incorporate into our full-year outlook.

Brian Nowak, Morgan Stanley.

Great, thanks for taking my questions.

I have two.

The first one is on the $1 billion revenue targets.

Could you just help us understand a little bit how -- if there's any strategies that you see changing on the local side to really improve the growth trajectory of that business to get to that billion or are there other businesses that you see filling the whole from brand?

I mean how should we think about Eat24 over that period versus local?

And then the second question on the hiring and the number of sales people hired.

I guess high level if we think about what changed over the last three months from when you thought you could still hire about 40% more salespeople versus now?

Has turn gone up?

Has it been hard to hire new people?

Could you just break down gross versus net additions?

Thanks Brian.

This is Rob.

I will take the first one in terms of the $1 billion.

Some ways to think about it is we're giving full year guidance of about 45% year-over-year growth this year.

We expect over the next couple of years to achieve a [cater] of about 35% to 40%.

So that is one way we look at it.

And then in response to the brand, we actually had modeled out brand as effectively flat over the next few years.

So going from I think in this quarter was 6% going in the next couple of years to probably half that.

So, it's a pretty small piece of the pie that would actually go away.

And, yes, I mean the other businesses, specifically the transaction business, would more than make up for that.

It's growing at a fairly nice rate.

Obviously display was actually negatively impacting our business from a growth rate perspective.

So all that said, maybe some ways to think about it is I think local ad revenue over the long term being about 90% of our business because that's what we're focused on.

About 10% is going to be the transactions and other pieces of the business.

And then from a sales force standpoint, while we're looking at it is we expect maybe a 25% or so growth in our sales force over the next two years compounded.

And so that would allow us to get to that $1 billion number.

And that is the question about what changed over the last few months and why did we take down our growth rate expectations for the sales force from 40% to 30%.

It's just given us more time to watch the competitive marketplace play out and test a couple of different changes.

One is that over the last few months we have changed our commission curve a little bit to allow reps to participate earlier in their careers in commission here and see what sort of effect that would have.

The other thing is just three more months of hiring and figuring out what sort of hiring numbers we could expect to see while keeping our talent bars as high as we've ever had.

And so I guess I should say three more moments of experience has led us to believe that this new 30% number is the right target to shoot for while maintaining the terrific quality bar we've always had.

The other thing we've done in a not so distant path is over in Chicago office and that's been a helpful ballpark to hiring and now that we've got four domestic offices that we're able to hire into.

It helps to offset specifically high competition in any one office as we're seeing right now in San Francisco.

Stephen Ju, Credit Suisse.

Thanks.

Geoff or Jeremy, so I'm wondering how actively you're selling the Eat24 product.

If your sales people who are selling the local product are also marketing Eat24 as well?

And Rob, of the 46% of advertisers who are buying CPC-based advertising -- that means we can share in terms of where their op levels are versus the average.

And any other color you can share even if it's on a somewhat anecdotal basis of the 270% ROI that local advertisers are deriving that you guys talk about in the press release.

Thanks.

This is Geoff.

I will try to answer both of your questions and Rob can chime in if I think I missed something.

So first off on Eat24 right now that's being sold separately.

The Eat24 team prior to acquisition had their own sales force.

We've augmented that with some folks who are homegrown here from Yelp as well as some additional hiring that's been done over the last couple of months.

But it is a product that's sold separately today from the Yelp ad team.

You can imagine in time there may be cross-selling opportunities there as we are both reaching out to restaurants and other local businesses, but we haven't actively explored that much to this point.

As for the question about ARPU, in general I think the right way to think about this is that with a shift towards package CPC from our historical CPM product.

There really hasn't been any material change in ARPU.

There actually hasn't been much change in ROI either since that's another sort of part of your question.

In general, this is just a big math project that enables us as service advertisers in the different ways they may want.

Some advertisers prefer to pay on an impression basis and many today prefer to pay on a CPC basis.

And that's the shift towards the packaged CPC product has been an important thing to do given just market dynamics and what advertisers these days are expecting.

But fundamentally in terms of the math of what they receive in terms of the ROI for them as well as how much they pay for advertising, those numbers are approximately the same as they've been over time.

As for the question about ROI, the way that's being calculated and there is a slide in our updated investor deck that shows you a glimpse of that.

Effectively what is happening there is we take the dollars that are being spent by the average advertiser for Yelp ads and then look at the number of leads that are being generated by those ads.

So this would be like calls or clicks for directions.

And multiply that by the average revenue in each category that advertisers have told us through past survey that they derive from a new customer.

So that's where we're coming up with the revenue as well as the cost equated for that ROI.

Jason Helfstein, Oppenheimer.

I'm sorry Mr. Jason Helfstein, if your line is muted, please unmute it for us.

And I'm sorry sir, we're not able to hear you.

We'll have to go to the next question.

Heath Terry, Goldman Sachs.

Great, thanks.

I was wondering if you could give us a sense of whether or not the issues around the sales force are going to lead you to try to accelerate to more of an automated sales, platform self-serve at least in parts.

I know your CPC products have started to take over some of that responsibility, but do you see a model for Yelp evolving that is less sales reliant as it becomes more difficult to repopulate the sales force?

Hi Heath, it's Geoff.

So let me just start with, we are enormously happy with our sales team and the productivity that we're seeing from what you might call it a telesales program.

We've added a new slide to our investor deck as page 13 now that you can find online.

And you can sense that in the first year of an advertiser relationships, we are actually able to double our investment and that investment is defined by all selling and support costs.

It is great we were able to double that first year and then subsequent business from that individual account has been extraordinarily profitable in years two and three and so on as well.

So and that is a fully loaded telesales program.

Certainly to the extent that we are able to do things in a more automated fashion in the future, that's always great and there are a couple of things they we're actively experiencing with where for instance there's an inbound team that receives calls from advertisers who find Yelp online and want to get some help with the self-service.

We have some other selling teams who are assisting what we call representative-assisted self-serve.

And so that is a partially-automated solution.

And then of course there is fully automated self-service as well.

But you might imagine as we have always seen a revenue generated from advertisers who are purely self-serve and it has been far lower than when they are actually working with one of our professional sales reps.

Which is why we continue to invest in sales force.

Okay great.

Thank you.

Paul Bieber, Bank of America Merrill Lynch.

Hi, thanks for taking my questions.

Two quick questions.

I was hoping you can share what you've learned from the sales process and then secondly can you provide some color on how the CPC model is impacting pricing in some of the more mature markets?

Hi Paul.

So I guess I will take your question on the CPC pricing.

Yes, the beauty of having moved to an auction-based pricing system for both CPC and CPM over the last couple years is that prices really are determined by the marketplace.

And that market can change over the course of a month.

It all depends on the level of competition within any given geography and category.

And certainly there are cases where we see really tight pricing and CPCs rise dramatically and then other periods of time where traffic grows quickly and CPCs are able to fall quickly and advertisers can get a great deal for a period of time.

So that is the beauty of the per month basis that we've moved to over the last couple of years.

And then Rob, would you get the first question?

Yes, it was what did we learn from our sales process changes using the territory changes?

Okay, yes, maybe you're thinking of the territory changes there Paul.

Yes, I think the big lesson learned there was just that the continued importance of piloting and testing things in small isolation before we roll them out to the entire sales force, which is something that we do quite regularly.

But I think we just moved a little too quickly on the territory changes at the beginning of this year so that was definitely a lesson learned.

Colin Sebastian, Robert Baird.

Thanks.

First of all I was hoping maybe you could add some color regarding the M&A process -- it was in the headlines.

If you could comment on what we should read into that as it relates to the strategic plan.

And then secondly I haven't gone through the updated investor deck yet, but just wanted to clarify if there any changes to the long-term financial targets that you had previously laid out.

Thank you.

Hi Colin.

I'll take the first half of that.

We don't comment on M&A so I can't give you really any color there.

But rest assured we do -- we pursue our fiduciary duties and so to the extent (inaudible) that were put forward, we will review that as we have to.

And with regards to the long-term financial target model, it actually has not changed.

So we're still expecting adjusted EBITDA long-term target margins of 35% to 40% and we've laid that out in a nice way.

We're comparing it over the last few years including even when we went public.

Brian Fitzgerald, Jefferies.

Thanks, guys.

Can you give us any differentiation around pricing in US versus Europe versus Asia?

Understanding that each market kind of works differently and independently as you mentioned.

And then, additionally, how many local accounts do you have that are based outside the US?

Hi Brian.

I think the punch line to this is our business is overwhelmingly in the US today and that's really to focus I think our energy.

And then question as far as LAAs and revenue go, we don't sell anything in Asia or Latin America yet.

And in Europe we do sell and I think that while prices do vary to my earlier point around market dynamics, you could expect that there is less competition in most cases in those European markets since business coordination there.

International revenue is still a percent of the overall mix as a result I think you can assume something (inaudible) on LAAs, although we don't have a specific number for you there.

Blake Harper, Topeka Capital Management.

I had one question about Eat24 as you've looked at the ad products that you are getting.

If there was any change in the thought process there about how you would monetize or market Eat24 and if any of the partnerships that you have on the platform or your acquisition of SeatMe in the past has led you to how you think about -- taking all that into account, think about the product there of Eat24 and so forth,.

Thanks for your question, Blake.

On the Eat24 product, today that is a pretty different product been SeatMe, as well as the Yelp ad product.

It pays for itself and advertisers or customers of Eat24 really only pay transaction fee when they are sourced new take out or delivery orders.

So, in some ways it's a pretty straightforward sell.

If you want additional take out or delivery orders, sign up with us and we will send you orders either online [into forts or a back], and you pay us commission on each one of those.

SeatMe, of course, is a reservation-based product.

And you might imagine that there are some restaurants who use both SeatMe for table management, as well as Eat24 to generate new take out orders.

And so at some point we might bring those pucks together, but today there's not a ton of demand for that, they do tend to be different kinds of customers.

And then last but not least, the concept of ongoing advertising and online presence on the Yelp site is really what people are getting from our main sales force selling the Yelp advertising product.

And so again, there is cross-selling opportunity down the road, but these are fairly specialized products that each of which tends to require a warrant, a specialist to deal with it.

Ron Josey, JMP Securities.

Hi, this is [Shratna] for Ron, I have a question on app usage.

It looks like app usage grew accelerated 51% year over year.

Anything specific driving that?

And can you talk to how you are attracting app users?

And then on the marketing plan, we will be looking for TV ads, but have you thought about app install ads other platforms as well?

Thank you.

This is Jeremy.

Looking at app usage growth, you're right, we did accelerate this quarter to 51% year over year, we're delighted to see that.

I think it's a function of a lot of different sources working for us.

It's obviously the App Stores drive some organic demand, and then mobile web users also is a source of new app users as people get exposed to Yelp repeatedly and ultimately decide to download the Yelp app.

We've seen really strong engagement there and we continue to invest quite a bit in improving the app experience.

In then in terms of the question about TV versus other kind of marketing, we have experienced with and continue to run app install ads online.

That is definitely part of $10 million we've spent so far this year in marketing.

That having been said, at this point it remains a small percentage of our total app downloads and new app users.

Organic drive though, overwhelming majority of new app usage.

But as we look for and find opportunities to drive additional app usage through downloads at reasonable prices, we are certainly happy to do that.

Timothy Chiodo, UBS

Thank you.

I want to say it was last year, maybe Q3 or Q4, you mentioned that within the sales force you had reached peak levels in terms of the percentage of rookie sales force members.

I just wanted to see if you could give us an update on where we sit there in terms of the mix of those considered rookies versus the more experienced sales reps on the team.

Thank you.

Hi, Timothy.

While we don't have a specific percentage to share on that today, what I can tell you is that rookies as a percent of sales force remains quite high today.

I don't know how to that compares to Q3 of last year, but given our growth rates off an increasingly large base, we are continuing to hire very quickly in all of our markets.

And as a result, there's an awful lot of what we would call historically rookies, or folks under six to nine month tenure in the system.

And so as a factor when you're looking at things like productivity and trying to do the math.

As that mix is changing and remains towards the rookie side of things, of course that's going to be a factor on productivity.

Chris Merwin, Barclays

Thank you.

I just had a follow up on the ROI question from earlier.

I know you've always focused on helping merchants understand ROI with products like your ROI calculator and Yelp platform.

But when you talk to merchants, do you find that they do in fact have a clear understanding of the ROI in Yelp, and what else can you do to help clarify that ROI for your advertising customers going forward and possibly reduce customer churn as well?

And just a second quick one on marketing, you talked about $30 million in the plan for this year.

I guess majority of which will come in the back half.

But how do you settle on that number?

And in particular longer-term as you think about growing traffic, is $30 million the right number, or given all the competition in the various verticals and local, could that potentially grow over time?

Thanks.

Sure, Chris.

Starting with the ROI, certainly there is a wide range of understanding and level of paying attention among merchants out there.

Some I think have a great understanding using both our tools and their own of what sort of ROI they are getting from their Yelp advertising spend.

And others less so, which is why we continue to iterate on the product and tools, you mentioned in the revenue estimator and whatnot.

We are adding more versions of an ROI calculator into the tools later this year.

And then as advertisers are spending increasingly on a CPC basis, spend some time, get them the ability to adjust pricing if they choose to.

Although historically, that has been a small percentage of our advertisers.

As to the question around marketing, how do you get to $30 million number?

In a lot of ways, this is, again, our attempt to take a Goldilocks approach of moving as fast as we think we appropriately can.

But given that we're coming from spending a smaller amount last year, we think that we can invest $30 million this year wisely and give it a good shot between both TV and online and other forms of advertising.

If we see the kind of list that we saw in our test in the first half of this year, I think we may very well be pleased with it and choose or propose investing even more in 2016.

But it's really too early to tell.

We are going to have to see how the back half of this year goes.

Steve Jones, Wells Fargo Securities

Thanks for taking the questions.

I had two quick ones related to CPC and CPM.

First, as a local advertisers roll off the CPC campaign, can you actively try to convert them to CPCs, or are looking to renew them on CPM?

And secondly, can you comment on her approach overseas?

Was wondering the sales team, besides the CPM or CPC in conversations with local advertisers.

Hi, Steve.

Point of clarification.

Typically, when advertisers roll off their initial contract terms, we don't actually go back and sell them a new contract, rather, they just roll month-to-month in most cases.

So, that is the common expense.

There's no active program to try to convert people either to CPC or to CPM.

They just tend to be in their existing contract, and if they have a question and reach out to one of our account managers, we can certainly always switch their program, but that's not an active focus.

In terms of the international team, particularly those in Europe, they are selling more or less the same product and price range that we are in the US, which is primarily these days a package CPC product, although they sell CPM as well.

Got it.

Thanks so much.

Matthew Thornton, SunTrust

Thanks for taking the question.

Two if I could, and I apologise if these were already answered earlier.

First, I was wondering if you had disclosed or would be willing to disclose what the total unique visitors were in the quarter.

And then just secondly, I was trying to get a little more color on brand and the decision to shutter brand in the quarter.

Obviously you exited last quarter and talked about much better pipeline and talked about opening up the mobile inventory to the program and channel.

And to now turn around and shutter that product, just curious what happened inter-quarter there.

Thanks a lot

Hi, Matthew.

Why don't I take the first question and Jeremy can talk to the brand change.

On unique visitors, one of the things that we're trying to do to help investors better understand our traffic mix is differentiate these different animals.

In terms of website unique visitors, on the desktop we had 79 million, on mobile it was 83 million.

And on terms of app unique devices, about 18 million.

Now, important to understand that apple -- the app unique devices is really apples and oranges from those unique visitor numbers.

Unique visitor numbers tend to be cookies, which you can have many cookies per person, whereas the unique devices is a device.

Which is why Jeremy, in the prepared remarks, also on a slide they you might find useful in the investor deck, slide 9, we've tried to break out some other ways to look at the ecosystem in a slightly more apples to apples manner.

And I think when you look at it this way, what you can see is both the ecosystem does continue to grow a rapid rate, as well as you can see that the app's actually powering about 70% of all activity.

Over to you, Jeremy.

Yes, on a brand question, just touching on it real quick, it's really a long-term investment in the consumer experience.

So, if you look at how much real estate these brand ads are taking up, it's actually quite large and the CPMs end up being quite low.

And if you look to the future of where our business is headed, 70% of our page views are now coming from the app, and the units on mobile get even worse.

And so it ends up slowing down the experience where we feel like over time, this is unacceptable.

If you look at it from the revenue standpoint, if you go back to say 2010, we had about 25% of revenue was coming from this product, and that's now declined to 6%.

It feels like now is a good time to actually make that commitment to improve the consumer expense.

And when we move -- branched out by the end of year and also reallocate those resources, we do have some real resources dedicated toward that product and we will be able to move those into more productive places going forward.

Youssef Squali, Cantor Fitzgerald.

Thanks for this is actually Naved Khan for Youssef, just a couple of questions.

If I look at the revenue for some of your oldest cohorts, a pretty marked deceleration in the second quarter.

What could possibly be driving that?

And then I had a follow-up.

In terms of the cohort revenue, we do give in our investor deck information around the cohort.

Our cohort revenue tends to be fairly volatile.

It can go up and down if we don't sell into each market depending -- we don't direct our salesperson to sell into a cohort market specifically.

We don't really manage the business that way.

It's really a way for you to see that we are, say, generating x-millions of dollars from a particular cohort.

And in a market like San Francisco or LA or New York, maybe $7 million or $8 million in a particular quarter, so call it $30 million on an annual basis.

And if you think about what that market represents in terms of pad dollars, it is probably hundreds of millions of dollars.

It's more of a way for people to get their arms around what the ultimate market opportunity.

And so the quarterly fluctuations are not as meaningful as maybe they would be in our local ad revenue.

Okay.

And then a follow-up question I had was on the long-term goal of getting to $1 billion.

How should we think about it in terms of US versus the non-US revenue?

And then just on the international, what you see as the key gating factors as still keeping these revenue opportunities in check right now?

Let me take the long-term.

In terms of our $1 billion goal, we're thinking that we would be able to hit that in 2017.

In terms of the components of that, it's really localized revenue takes up the lion's share, approximately heading towards 90%., and then the other parts of the business will make up around 10%.

We haven't broken that out US versus international.

But you can imagine that the vast majority of that will be US, given how -- where our international business is.

That's that we feel like long-term, international will be a bigger component.

But I think for the next medium term, next few years, US will be the lion's share.

And then in terms of the international approach in general, why hasn't that gone even faster?

It's funny, I think internally we have quite a different way of looking at that, which is we might have invested in trying to sell in international or monetize international a little too early.

And so if anything, I think we may have wanted in retrospect to have waited until our brand and our site and apps were even better established before bothering trying to billow our sales force over there.

I give a lot of credit to the sales team that is in Europe, we've made good progress there.

But definitely starting from a standing start just a couple of years ago, and that's a hard thing to do.

We had the benefit in 2005 through 2008 in the US of starting with a very small team of five or six people that then slowly grew.

And we tried to jumpstart Europe with about 100 people and then with the Qype acquisition.

And so if anything, I think we made it a little hard on our team and ourselves there by trying to go a little bit too big too fast.

I think what you'll see there from us in the future is a slightly more modest expectation, continuing to slow grow as appropriate and take that goal to approach.

This concludes the question-and-answer session.

I would now like to turn the call back over to Mr. Rob Krolik for closing remarks

Thanks, everyone, for joining us on the Q2 earnings call, we will talk to on the Q3 call in a couple of months.

Thanks

Thank you, ladies and gentlemen.

This does conclude today's conference.

Thank you for participating, and you may now disconnect.