Yelp Inc (YELP) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience.

You've joined Yelp's Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Head of Investor Relations, Mr. Ron Clark.

Sir, you may begin.

Good afternoon, everyone, and thanks for joining us on Yelp's Second Quarter 2017 Earnings Conference Call.

Joining me today on the call are CEO, Jeremy Stoppelman; and CFO, Lanny Baker.

Our Chief Operating Officer, Jed Nachman, will also join us for Q&A.

Before we begin, 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 earnings press release for a more detailed description of the risk factors that may affect our results.

During our call today, we'll discuss EBITDA, adjusted EBITDA and adjusted EBITDA margin, which are all non-GAAP financial measures.

In our press release issued this afternoon and our filings with the SEC, each of which are posted on our website, you will find additional disclosures regarding these non-GAAP financial measures as well as the historical reconciliation of GAAP net income to non-GAAP net income, EBITDA and adjusted EBITDA, as well as GAAP net income margin to adjusted EBITDA margin.

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

Thanks, Ron, and welcome, everyone.

Second quarter financial results reflect a healthy core business.

We grew revenue 20% from last year and increased operating income and adjusted EBITDA margins by several percentage points from both the year ago and previous quarter.

Consumer engagement is as strong as ever with substantial traffic increases across platforms.

App unique devices grew 22% year-over-year to 28 million.

Our multichannel sales effort delivered impressive results.

Self-serve contributed its largest quarter in both revenue and new accounts.

Our revenue retention efforts also yielded sustained improvement throughout the quarter.

Looking beyond the financial results, we made great progress against our long-term objectives.

We successfully integrated 2 promising acquisitions, Nowait and Turnstyle.

And today, we announced an important partnership with Grubhub, which includes Grubhub's agreement to purchase our Eat24 business.

These agreements capitalize on the success of Eat24 and strengthen the value proposition of our largest transaction category.

Throughout the quarter, we continue to invest in product and marketing to fuel long-term growth and monetization.

We also continued to generate significant cash flow, further strengthening our balance sheet and competitive position.

The progress we're making is guided by Yelp's clear mission and strategy.

The first element of our strategy is leveraging the unique advantage of our large audience of frequent users looking for information on restaurants.

With tens of millions of reviews and a wealth of local data such as up-to-date menus, health inspection scores and high resolution photos, the restaurant category produces about half of our traffic.

To drive even more traffic and engagement, we're delivering a host of useful features beyond reviews, including reserving tables, standing in line remotely, ordering food, accessing WiFi and even enjoying cash back.

While we're now generating over $100 million in revenue annually in the restaurant category, its value to Yelp is far more impactful and we're committed to extending our category leadership.

For example, acquiring and integrating Nowait into the Yelp app not only helps to drive engagement among existing users, it also allows us to market Yelp to the more than 30 million diners who got in line through Nowait in the second quarter.

Likewise, growing the number of Yelp Reservations restaurants in our key markets by nearly 30% over the last year helps attract users and generate repeat usage.

Integrating Turnstyle to create Yelp WiFi opens up a huge opportunity to bring users back to great local businesses and showcase Yelp's incredible content at those locations.

And we expect our recently announced partnership with Grubhub to increase the number of local restaurants on Yelp enabled for online food ordering to approximately 75,000.

The second element of our strategy is funneling users in our highly trafficked categories like restaurants to our less trafficked but more highly monetized categories, such as home and local services, automotive and health.

In these categories, where purchase decisions have larger implications and transparency is often much lower, consumers value Yelp's content leadership, which gives them confidence about how to spend their time and money.

Service providers in these categories already recognize the value of Yelp's purchase-driven traffic.

Home and local services is our largest monetized category, now contributing over $200 million in advertising revenue on an annual basis.

It's also one of the fastest growing.

To increase Yelp's value both to consumers and business owners, we continue to extend our product experience beyond search and discovery.

Request-A-Quote is a great example of how we're driving up usage and engagement within the home and local services category.

Consumer uptake is strong, with growth in the number of requests accelerating to nearly 50% in the second quarter over the prior quarter.

We're also seeing high response rates from business owners, with 24-hour responses climbing to 80% of all submitted requests.

One of our key learnings from the popularity of Request-A-Quote is how valuable this new type of connection is, both to consumers and businesses.

In summary, I'm encouraged by the progress we made in the second quarter.

Operating execution and consumer engagement were strong, and we continue to generate significant cash flow while investing in high priority areas.

We believe the partnership we forged with Grubhub will help accelerate our strategic objectives while generating an attractive return on our investment in Eat24.

We are confident that we have the blueprint and resources to expand upon our leadership position and capture the opportunity in the local category.

Our board shares this vision.

And accordingly, they've authorized us to invest up to $200 million of company's cash reserves in repurchasing Yelp stock.

I'm excited about our future as we set the stage for a bright 2018 and beyond.

With that, I'll turn it over to Lanny.

Thank you, Jeremy.

I will provide more detail on the second quarter results and our updated business outlook, and I also want to discuss the Eat24 transaction and Grubhub partnership in a little bit more detail.

Yelp delivered solid second quarter execution with $209 million in total revenue and revenue growth of just over 20% versus the prior year.

Overall expenses grew 16% year-to-year, and operating margins and EBITDA margins each expanded by 4 percentage points compared to 1 year ago.

Net income was $7.6 million or $0.09 per share for the second quarter.

Year-to-date, cash flow from operations is $76 million.

And while we've invested $51 million to complete 2 acquisitions this year, Yelp's cash and investment balances rose to $530 million as of June 30.

In the core Yelp advertising business, we added roughly 8,700 paying advertising accounts during the second quarter to reach a total of 148,000, up 18% from the year ago quarter.

New advertiser starts were healthy, led by self-serve.

Advertiser revenue retention improved in the second quarter, with the most significant contribution coming from our client partner team's retention efforts and package upgrades.

During the second quarter, the Yelp advertising sales organization (technical difficulty) approximately 200 people to reach a total of over 2,750 at June 30, a 15% increase year-over-year.

We are tracking toward a mid-teens percentage increase in our sales staff for the year, and we are planning to open up what will be our fifth sales office early in 2018.

Second quarter sales rep productivity was consistent with the first quarter of 2017 and with historical performance.

We're in our peak hiring season right now, and we expect the influx of new reps to bring average rep productivity down temporarily in the second half of this year as we've seen in prior years.

Advertising revenue of $187 million was up 19% year-over-year, fueled by account growth in self-serve and increases in revenue per account in local and self-serve.

National revenue was up 20% year-to-year with account numbers growing 30% year-over-year in the quarter.

Looking beyond advertising, transaction revenue rose 19% year-over-year to $18.4 million for the second quarter.

At Eat24, order volume and take rates both improved year-over-year.

Food orders from the Yelp transaction platform grew nearly 50% year-over-year, which is 3x to 4x faster than Yelp's overall traffic growth, demonstrating our users' purchasing appetite as well as our ability to drive transaction volume via product integrations and promotion inside the Yelp platform.

Subscription and other revenue jumped year-over-year and quarter-to-quarter, thanks to the acquisitions of Nowait and Turnstyle and an acceleration in revenue growth at Yelp Reservations into the high 50% range year-over-year.

Although these businesses are small contributors to overall revenue, just under $4 million in total for the quarter, they are important components of our restaurant strategy.

Each one is propelling user engagement in our most popular category, and collectively, they increase restaurant category monetization as we add locations.

Turning to expenses.

Gross margins were in line with the first quarter and year ago as cost of revenue rose 20% year-to-year.

The key drivers here are server hosting and credit card processing fees.

Sales and marketing expense rose 11% year-to-year to $105 million in the second quarter of 2017.

At that level, sales and marketing expenses were just over 50% of revenue in the second quarter, down from the 54% to 55% range in the first quarter and the year ago quarter.

This improvement reflects lower brand advertising spending and lower sales commissions in the most recent quarter.

Product development expenses were $42 million for the second quarter, up 27% year-over-year and about $2 million higher than in the first quarter of 2017.

The acquisitions of Nowait and Turnstyle added about $1.5 million of development expense in the quarter, and new hires accounted for the majority of product expense growth.

General and administrative costs were consistent with the first quarter and rose 11% year-to-year to $26 million, providing 1 point of margin improvement on a year-to-year basis.

Depreciation and amortization was $11 million, up 24% year-over-year.

We had higher other income this quarter due to interest on rising cash balances and reported taxes were inconsequential.

EBITDA was $17.5 million for the second quarter, up $10 million from a year ago in the same quarter.

Stock-based compensation was $25 million in the second quarter and adjusted EBITDA was $43 million, up $28 million -- up from $28 million in the comparable year ago period.

In the quarter, just over 40% of year-over-year revenue growth flowed through to increase adjusted EBITDA; and Yelp's adjusted EBITDA margin was 20.5% for the quarter compared to 16% a year ago.

Based on the second quarter results, we are updating our business outlook for the year, and we're also providing an outlook for the third quarter of 2017.

The outlook we're providing today includes Eat24 as an ongoing part of Yelp for the remainder of the year and does not include any revenue or income from the proposed partnership with Grubhub.

We anticipate updating our outlook as appropriate based on the timing and outcome of regulatory review and completing the proposed transaction.

In the interim, Yelp will continue to operate Eat24 as we have previously, and we note that uncertainty around the transaction could have an impact on near-term results.

We now anticipate revenue for the full year of 2017 to be in the range of $855 million to $865 million, which equates to year-over-year revenue growth of 21% at the midpoint of the range.

Our outlook for adjusted EBITDA for the year is in a range of $143 million to $153 million, which would be a year-over-year increase of 23% at the midpoint.

The revised outlook reflects progress we made in the first half on revenue retention as well as caution about sales rep production as we expand the team and shift resources into newer areas.

From a profitability perspective, we've raised the full year adjusted EBITDA outlook based on first half results as well as a decision to shift some brand marketing spend in light of momentum and performance marketing.

For the third quarter of 2017, our business outlook is for revenue in the range of $217 million to $222 million, or a year-over-year increase of 18% at the midpoint of the range.

We anticipate adjusted EBITDA of $32 million to $35 million for the third quarter, with adjusted EBITDA margins expected to be lower than the second quarter based on local sales hiring and investments to accelerate the growth of Yelp WiFi later this year and into 2018.

We've included a couple additional items in our business outlook, as we normally do.

Specifically, we anticipate that depreciation and amortization will equate to approximately 5% of revenue in the third quarter and for the full year of 2017.

Stock-based compensation is expected to be in the range of $25 million to $26 million for the third quarter and $102 million to $104 million for the full year.

And finally, we expect the basic share count to be in the range of 80 million to 82 million for the third quarter and full year.

As mentioned earlier, we're very excited about the announced partnership with Grubhub and the pending sale of Eat24.

We expect that bringing Grubhub's restaurant network on to the Yelp transaction platform will add over 30,000 new restaurants for food ordering on Yelp and will connect Yelp with the industry's leading food delivery service.

We believe that Yelp's cash flow per completed food order will increase under the terms of the partnership.

The sale of Eat24, subject to regulatory reviews and customary closing conditions, will allow Yelp to focus resources and attention on what we do best: driving purchase-oriented traffic to great local businesses.

And the $287.5 million sale price provides a better than 2x return on the purchase price of Eat24 in February 2015.

After taxes and transaction costs, we anticipate that net proceeds will be in the range of $250 million.

Wrapping up, I'd like to reiterate Jeremy's comments about Yelp's strategic position and growth prospects.

As the usage metrics demonstrate, Yelp serves an important need for millions of people every month, and user engagement is increasing as Yelp becomes more mobile and more transactional.

We believe we're building a unique consumer and company advantage by coupling leadership and dining with relevance across everything in local.

As the performance of our business owner metrics suggest, we have significant runway to attract new advertisers, and our efforts to introduce new products and elevate service levels are showing tangible early results.

Finally, we believe Yelp's financial performance reflects an attractive financial engine that's being managed to produce healthy revenue growth today, rising levels of profitability, while at the same time funding important investments and long-term growth.

We're poised to strengthen our position in the rapidly expanding food-ordering category in partnership with Grubhub, and we believe that even after the repurchase of a portion of our equity under this new repurchase program, Yelp will continue to have the capital resources needed to expand our presence in the local category and on the Internet.

Thank you.

And with that, I'd like to turn the call over for your questions.

(Operator Instructions) Our first question comes from the line of Mark Mahaney of RBC Capital Markets.

Okay, congrats both on the fundamentals and particularly on the deal.

That's a great return.

Could I ask Jed to comment a little bit on the jump up in the paid advertising accounts, that 8,000 to 9,000?

I think that's the second highest number you've ever had.

So what allowed -- just any color behind what caused you to run at that level?

Is that a sustainable level?

And then, is there anything you could say about the Grubhub relationship and the future -- the strategic relationship in the future as to how the unit economics will work without getting into specific numbers?

But is there -- they'll get their gross revenue and they'll give you a revenue share each time there's a food order transaction?

Any color on that would be great.

This is Jed.

On the PAAs, paid advertising accounts, we had a really good quarter on churn and that has a really nice effect on PAAs.

Sales productivity was kind of in line with historical levels, so not up or down as a result of that.

And we also saw a record number of ads in the self-serve channel.

The growth rate kind of stayed in line with Q1 and was really healthy.

As our base of business grows, that churn number has a big effect on kind of net adds.

And so I think a lot of that strength was there.

In terms of its sustainability, we're really happy with kind of what -- the progress we've made on the retention side so far this year.

Our LCP team, local client partner team, continues to perform, really, in a solid way.

Our recovery efforts for those clients that are trying to cancel have really started to bear fruit.

We did beat our own internal expectations in terms of churn, and so we're still a little bit cautious in terms of kind of planting the flag on a sustainable rate going forward.

But we're happy with the way we ended the quarter and obviously, we'll continue to kind of work on that direction.

Mark, on the partnership economics, it is -- Yelp will receive a fixed fee per transaction per order that we deliver to Grubhub that's completed.

And relative to our own historical economics, we think the per order rate in the partnership is going to look very attractive relative to what we've done in the past.

It gives us the ability to deliver to Yelp consumers delivery for great restaurants with -- leveraging the Grubhub network rather than bearing those costs in the Yelp P&L.

You're right about revenue recognition.

We will receive just a per order fee on each transaction.

And they will, as they customarily do, account for the transaction and their take of that.

Our next question comes from Brian Nowak of Morgan Stanley.

Just to go back to the churn.

Is there anything you could talk to that led to the outperformance and the improvements in churn in the quarter that you can kind of replicate going forward?

And then also, could you just talk to what drove kind of qualitatively the strength in self-serve in the quarter?

Sure, so this is Jed.

What led to the improvement?

A lot of these efforts that we're seeing the benefits of really started a year ago.

And outside of the blips that we saw in Q1, we've been really focused on being operationally sound as it relates to churn.

And so we hit things like recovery rates and response times to clients and all the kind of fundamentals around customer success.

And we're also watching it very closely.

It's one of the key levers in our business and people are on it every single day.

So there's not one thing I can point to that really was within quarter that made that kind of a difference.

I will say that if you look out into the future as well, some of the investments we're making in kind of our peripheral properties and whether that's Yelp Res, Yelp transaction platform, even with the Eat24 deal and Yelp WiFi, those will hopefully be able to also paint a picture for our local business owners around the effectiveness of Yelp ads.

And so that's kind of your upside in the out years around showing that ROI.

And then the second question, strength in self-serve.

Yes, our claims were up over the course of the quarter.

We were 750,000-plus over the course of the last year in claims, and performance marketing also had an impact there.

And so -- although most of the activity around self-serve still comes from kind of organic traffic into the marketing pages, we're really pleased with the progress on the performance marketing side as well.

Our next question comes from Mark May of Citi.

I have 2, if I could.

Margins have been strong and rising for the last few quarters, and now we have the Eat24 transaction that seems like it will also benefit your margins over time.

Does -- can you just step back a little bit and talk about how you're thinking about the business?

And is this -- are these kind of -- are there some intentional things that you guys are doing with an effort towards trying to improve the profitability of the business in the short to medium term?

And then in terms of -- you talked about right now is a busy time for sales hiring.

What is the expected growth in net sales reps in the second half of the year, I guess, on a year-on-year basis?

Sure.

It's an interesting question on margins.

There's always a question of trade-off between -- which we see and we believe in, revenue growth and profitability.

And what we're trying to do is strike a healthy balance between healthy revenue growth today and improving profitability over time and ultimately, the most cash flow in the future, the highest cash flow dollar value.

So in terms of actions that we're taking to improve the profitability of the business, we've been talking about the importance of performance marketing, the importance of self-serve, the importance of our national channel.

All of these things are, I think, structural improvements to what is already a very profitable core Yelp business model.

And so what's happening in the business today is the core Yelp business is not only gaining scale and, therefore, becoming more profitable, but we're making some moves within our go-to-market that I think are adding to the profitability characteristics of that business.

And then meanwhile, we're making investments in the future revenue growth.

So there's an investment going on at Yelp Reservations and another one at Nowait.

And more investment, not huge dollars, but we're making investment behind Yelp WiFi.

All of these things are products, they're market opportunities, they're customer bases that we see as well within our opportunity set and they connect to the core Yelp mission in such a clear way.

And so we're balancing those 2 things, making prudent investments in the long term while also showing that -- sort of letting some of the profitability of the core Yelp business flow through to the bottom line.

Yes.

Mark, I'll take the headcount question.

We continue to be on track for kind of headcount growth in the mid-teens for the year.

It's still expanding the LCP team aggressively and are, in fact, opening up a new sales office that will come online at some point in Q1.

We are still diversifying our go-to-market strategy and product strategy in ways that ultimately might decouple revenue from headcount growth.

But that does not mean in any way that we don't believe in the long-term efficacy of the current sales model.

We still see fantastic financial characteristics and we'll continue to invest in that headcount.

And then, I guess, one last point, it's important to keep in mind that we're staffing some of these other areas of our business like WiFi and like Yelp Res kind of from our local sales organization.

So it's a balance there in terms of how fast we can kind of grow those sales teams based on taking away from the mother ship.

Our next question comes from Lloyd Walmsley of Deutsche Bank.

Just had a couple, if I can.

First, on Request-A-Quote.

Can you give us an update on kind of the monetization experiments you've been running and maybe give us some color on what your approach on go-to-market is in the more successful tests?

What you're seeing from customers who are engaging there?

And then second one, on self-service, can you talk more specifically about that direct marketing spend around there and how that's performing around acquisition costs and what you're seeing in terms of spend levels and retention on the users acquired from direct marketing on self-service?

Sure.

Hey, Lloyd, this is Jeremy.

I'll take the first part there.

Request-A-Quote.

The product is really on fire in a good way, where quarter-over-quarter, we saw north of 50% growth, which is just astounding.

So consumers love it.

It's driving a lot of value to business owners.

We're still in the early innings on the monetization side.

It is really valuable inventory in the home and local services category.

So we're able to capture some of that right off the bat.

It's feeding into the ad system and, in fact, this segment of the business is growing at a faster clip than the overall ads business.

So we're expecting some value, but we've got a whole lot of product ideas coming over the next few quarters.

We'll keep you updated, but early signs are great.

And in terms of the performance marketing that we're doing at self-serve, let me shed a little bit of light on that.

As Jed said, there were 750,000, or just about, 744,000 businesses that claimed their presence for the first time on Yelp in the last 12 months.

And if we were going out in the market to try to acquire new Yelp advertisers, there really would be no better place than to advertise to those newly claimed businesses.

And so we have the sort of fortunate benefit today of having this sort of captive and very low-cost pool of potential businesses to market our self-serve channels.

We start there.

And that's about product, that's about messaging, that's about internal and pretty inexpensive marketing.

We've begun to expand beyond that.

And the LTV of a self-serve customer is very, very attractive.

We do some promotional activity to acquire them in the first month, but the returns after that first month are really exciting.

There is a very big gap today between the LTV of a self-serve customer and the acquisition cost of the average paid self-serve customer.

The big challenge for us has been finding a source of volume of these businesses that beats the one that sits right -- resident inside of Yelp in the claim flow.

And so our -- the economics are great.

It's a question of where do we go to find commensurate volume.

And we've got a growing -- some thoughts on that and some things that we've discovered and continue to discover.

But that gives you a pretty good state of where we are.

Our next question comes from Heath Terry of Goldman Sachs.

Just want to touch on the acceleration in user growth that you saw this quarter.

I know last quarter, when that started, you referenced some of the changes at Google.

Wondering if you can break down for us what contributed to the acceleration here?

And then I know the reported number's 12%, but given the old method that you've got, if we look at that, we're getting closer to, like, an 18% number on a like-for-like basis.

Just wondering how accurate that is and how sustainable you think the acceleration is.

And to the extent we're looking at UV numbers like this, if there's any change in the activity or level of engagement for these incremental new users versus your typical user.

Sure, I can take that.

This is Jeremy.

So we're pleased with our user growth metrics, nothing dramatic.

No dramatic changes that we could see.

We do have some success in performance marketing, driving some downloads, for example.

But really across all channels, things are looking good.

There's always fluctuations on the algorithmic side when you're talking about Google, so those are hard to predict and can come and go.

I think what you were maybe referring to is the desktop unique visitors number, where we have some information out about like what the number is and the adjustment that we made.

And in that particular one, we saw some definitive bot traffic that we're trying to pull out and be as transparent as possible so you can get a clear idea of what's going on there.

And would that be -- I know on the -- just the desktop side, it sounds like 27% growth.

But if we look at it for -- sort of try to look at it for the overall business, it looks like it would come out around 18%, which, for a unique visitor number that was low single digits and even close to flat or down the last couple of quarters, that seems pretty dramatic.

I mean, what we're seeing is about 13% year-over-year for desktop unique visitors.

App unique devices is 22%.

That one in particular isn't affected by bots at all, so that's kind of apples-to-apples with what you've always seen.

And then on mobile web, we're seeing 7% year-over-year uniques.

Our next question comes from Douglas Anmuth of JPMorgan.

I was hoping, Lanny, you could provide some color just around the percentage contributions and the growth rates around local, national and self-serve and some commentary there.

And then when you think about national advertisers being among your most savvy, what do you think you can do more there in terms of tools?

And where are you in the progress of rolling those things out when you think about the ability to bid on key words and dayparting, some of those kind of things?

Sure, yes.

I'll give you some of the color that we've provided in the past between our various different sales channels.

The big -- the 2 big contributors to growth sort of proportionately this quarter were the self-serve channel and the local channel.

Self-serve growth was right in the same range as it was in the first quarter and the local channel was in the teens, but that's a -- it's such a big channel for us that, in terms of absolute dollar value contribution, it remains really a big driver for us.

As you said, national growth year-over-year was -- the revenue was up 20%.

The accounts were up 30%.

The sort of stellar part of that business was the franchise side of the national business.

That business kind of breaks down into 3 pieces.

There's franchisees that we sell sort of a master agreement and then you sell into the local franchisees; there are multi-location businesses; and then the big sort of national accounts that you're asking about in terms of the tooling.

And I'll let Jed talk about the national.

Yes.

On the national side, certainly I would call us in more of the second or third inning in terms of where we are for tools in that segment.

Despite that, we still see really strong growth and very healthy retention characteristics amongst that segment.

When you talk about some of the things that will allow us to kind of move forward in that segment and a lot of which are on the road map today, more robust reporting is going to be really important for us.

Right now, as an example, if I'm a national client, I have to go through my account manager to get to some of the more detailed stats around my account.

We're looking to build that into the product over the course of the next couple quarters.

You think about things like having flexibility on how you bid throughout the system and we now have the ability to kind of do tighter targeting in certain situations where folks don't want to go beyond a certain radius, and also target based on competitor as an example.

And so those are 2 of the improvements that we've had recently.

But we're not under the illusion that we don't have a long way to go in terms of getting up to a full suite of products for those national clients.

And it makes sense.

We were later in the game on this national side.

I will tell you that the feedback we've been getting from national clients has been very strong.

And we do have a unique set of data that's very, very valuable to them.

An example of that would be, our data science team being able to kind of pinpoint where is supply -- or where is demand for some of these services.

So if I'm a cell phone repair company, where should I open up my next franchises based on the demand that we're seeing throughout Yelp.

And then finally, we actually have gone to market very -- and kind of tested with a few clients, a product called Yelp Local Audiences.

And this effectively allows us to take our data -- intent data that we have on Yelp users and whether that's car intenders or mothers or kind of -- we can do custom segments, and use that data to retarget off of Yelp.

So very early days there in terms of getting that out into the marketplace, and we're testing with a few clients right now, but something that we're encouraged by the early signs on.

Our next question comes from Matthew Thornton of SunTrust.

I wanted to come back to Request-A-Quote for a second, if I could.

Jeremy, I think you said that leads were up 50% sequentially, so very strong.

But I'm wondering if you can talk a little bit about the impact it's having on retention as it relates to the existing clients that are getting this new inventory right now.

But then also engagement, and particularly on the business owner side.

Are you starting to see business owners check their Yelp app a lot more frequently as more leads are coming in?

Any color you could provide around that would be very helpful.

And then, just coming back to national for second, I think the growth was 20%, down from the high 20%.

I think sales headcount is up there pretty nicely, if I'm not mistaken.

Just anything maybe that we should read into that or how we should be thinking about that channel?

Sure.

Hey, Matthew, this is Jeremy.

So for Request-A-Quote, yes, we noted 50% up quarter-over-quarter, which we're pretty psyched about and pretty proud of.

On the retention side, it's something that we're watching.

I think early signs are that it's promising, but we're still collecting data so we don't have a totally definitive read on impact there at this point, but we have reasons to be encouraged.

And then, on the engagement side, from a business owner perspective, this functionality really relies on high engagement from business owners.

If you think about it from a consumer perspective, if you send in a quote request and you don't hear back from anybody, you're pretty disappointed with the product.

And so that's something we've put a huge emphasis on and have had a lot of success driving up that engagement rate.

So I believe at this point, of requests, 80% receive a response within 24 hours.

So, so far, so good.

Really happy to see the consumer satisfaction there and the feedback from business owners is strong as well.

And on the national and multi-location businesses, you're absolutely right.

The headcount that we have in that team selling is probably 50% bigger today than it was a year ago.

And we're not staffing at 50% to get 20% revenue growth.

So we are expanding a team.

It's an opportunity that we think is a lot bigger than where we are today from a revenue perspective.

Those are longer sales cycles.

We're making changes to the product that Jed talked about, and we remain really bullish about that category in the long term.

Our next question comes from Paul Bieber of Credit Suisse.

Just a follow-up on Request-A-Quote.

Should we think about Request-A-Quote as an attribution driver as a way that you can lower the churn rate?

Or should we think about it as a separate revenue opportunity?

And then secondly, can you remind us why EBITDA margins are expected to compress in 3Q versus 2Q?

Sure.

Paul, this is Jeremy.

So is it an attribution driver?

I think, certainly we believe it can be, in the sense that when business owners are getting quote requests, they know exactly who it's coming from.

There's no mystery where that phone call came from since it's not a phone call.

It's an exchange that's happening on Yelp.

It's something that we're obviously monitoring.

We don't have data to report yet, but we think it's quite promising.

As for whether or not it's a revenue opportunity, we're already monetizing by using each of those quote requests as a lead, so it feeds into our ad system so there is some monetization that's already happening there.

And as I noted earlier, that -- the home and local service business -- ad business for us is growing faster than the overall business.

It's about a $200 million-plus revenue contributor at this point, so it's already a big business on the local services category for us.

So it's not the end of the story.

We have a bunch of other product, things in the works on the monetization front.

But so far, so good.

And think about the profitability from the sort of quarterly profitability progression.

Remember that, as we go from the second quarter to the third quarter, we added a lot of new sales people over the course of the quarter.

You can see up by 250 or so over the course of this quarter.

Those people are all now in place and we continue to hire really actively in July and August.

This is sort of our peak time of year.

And so you've got the costs associated with a bunch of brand-new salespeople who are in training and just sort of getting up to speed.

And the costs are there; the revenues are not yet there.

But that's something we've seen before and we feel pretty confident about.

This is also the season where we bring in -- people are coming out of college to our engineering team.

The sort of internship class from last year is starting up as employees today, and so there's just that sort of natural sort of cost flex in the summertime than then evens out with other points.

We're making some additional investments later this year, Yelp Reservations and Nowait.

As we start to put the sales teams together, they're going to the market with both those products.

And then also, we talked a little bit about investments we're making behind Yelp WiFi.

Our next question comes from Brian Fitzgerald of Jefferies.

A couple follow-ups.

Lanny, new advertising starts were healthy driven by self-serve.

Any other notable dynamics you're seeing out of more recent advertiser starts?

Prevalence for mobile engagement, video engagement, product up-sell?

And then second one was just, quickly, with respect to Request-A-Quote monetization.

Have you started testing the elasticity within the verticals?

Is there engineering that needs to be done there to open up the pricing optimization on that front?

Yes, in terms of new customer acquisitions this quarter, there are not any big change in terms of the profile, the nature of those advertisers.

I will say that when you look at our revenue retention improvements, the single biggest factor is -- this quarter is something really, as Jed said, we've been working on -- working toward, for the course of the last 9 months or so, which is that local client partner team that goes out to advertisers who have been successful, who look like they are growing businesses, where we see incremental opportunity for them to reach new customers through Yelp and we effectively engage them with package upgrades or adding other locations that they may have that haven't yet become advertised.

And so in terms of sort of getting into the -- what's the big change if there is one?

There usually isn't one.

But what's the big change in the account addition?

I will say that the local client partner team and the upgrade activity really is, this quarter, coming into its own.

We're pretty excited about that.

I'll let Jeremy talk about the Request-A-Quote.

Brian, so on Request-A-Quote pricing, it feeds into our ad system.

Our ad system does have essentially an auction model, a bidded model.

And so those prices move based on demand, I think.

Part of what we're doing now, we're sort of at the tail end of bringing that inventory online or the majority of that inventory online.

So right now, it's a minority of the opportunities that we have are counted as ads and therefore turned into paid leads.

But we're -- we'll continue to ratchet that up.

I think the other opportunity for us is also, how does this play into retention for those businesses that are buying leads that are coming in through Request-A-Quote in addition to their other leads?

And so while we don't have a lot of clarity right now on the retention benefits, I think that could also be a value-add as well.

Our next question comes from Ron Josey of JMP Securities.

Just, Lanny, following up on the Eat24 commentary with Grubhub, I think you mentioned cash flow for completed order will increase post the sale.

So I wonder if you plan to raise awareness or market more the food ordering process on Yelp.

And then as a quick follow-up, any insight on gross food sales that are on Eat24 versus on -- or I should say, on and off Yelp?

Sure.

So I can give you the answer to both at one time and say that at that time -- if you look back 18 months ago or so, about 1 in 5 orders that was going through to Eat24 restaurants was coming from the Yelp transaction platform.

Today, that number is more like 1 out of every 3 orders is coming through from the Yelp transaction platform.

And I think in the last 12 months, the volume growth of Yelp transaction platform orders going through to Eat24 restaurants has been north of 50% growth year-over-year.

So -- and all of that's happening with 80% of Yelp users not yet knowing that you can order food on Yelp.

So there is, we believe, a very long runway for us to continue to raise awareness and participate in the growing consumer awareness of the benefits of these -- all these great restaurants being online and companies like Grubhub being able to deliver them.

So with the ability to add -- to take some of our major cities and double the number of restaurants that are available for food ordering and bake into that one of -- the best food delivery infrastructure, yes, we're going to do things to make sure that all Yelp users know about what we think is a pretty material upgrade to the product experience.

Our next question comes from Peter Stabler of Wells Fargo Securities.

A couple questions, starting with Jed.

You guys have talked recently about increasing your exposure to the local reseller channel.

Wondering if you could update us with any color there.

How much has that ramped?

Is it a meaningful contributor?

And is it too early to get a read on what kind of retention you have in that channel?

And then secondly, on Request-A-Quote, I think in the past you've said that you've kind of opened it up to about 50% of inventory.

I wasn't really sure what that referred to.

So if you could offer a little more color on how widely you are monetizing Request-A-Quote in terms of linking it to existing ad contracts.

Sure.

Peter, this is Jed.

So on the reseller channel, just to kind of give you some real-life color on this thing, I think we started out in October with one person kind of testing out the waters and seeing how that channel kind of worked and operated.

I think, throughout the first quarter, we kind of had in the 4 to 6 range in terms of folks that were actually in a pretty defined geography, by the way, during that period of time.

And recently, I would say over the course of the last month or so, we've moved that from kind of 5 to, let's call it, 12 to 15 reps that are kind of calling on that channel.

So the short answer is, it's not material at all for us right now.

I can give you some color that we're continuing to invest and, therefore, the initial signals look good.

And there's a bunch of dimensions there, right?

There's how many of these resellers can you get out to and establish a relationship.

As you can imagine, there's a lot of handholding.

They've been living in a world of Google and Facebook and not Yelp.

And the whole reseller concept in general, you kind of have to be lockstep with them throughout, because they're not as adapted at actually selling Yelp out into their client base.

And so we're spending a lot of time both bringing in new resellers as well as trying to get the number of kind of sell-through clients in each reseller.

And so we're going to continue to invest in that business and at an -- as aggressive pace as possible without kind of breaking and making sure that we learn along the way and don't do it in the wrong way.

I'm encouraged by that channel, and it's one that, over time, I think, could be meaningful for Yelp, but isn't today.

And then I guess, side -- outside of that as well, we've also kind of just opened up a few folks working on specifically on kind of the Madison Avenue agencies and how do we get better coverage on those as well.

We've really been bottom-up through clients in the past and we'll continue to do that as the major focus, but adding on a top-down layer through the agencies in the West, Midwest and on the East Coast is also some of the investment we've been making there.

And Peter, to address your question about Request-A-Quote inventory, how are we using it.

So essentially what we've done is optimize for the consumer experience right now.

And so while we do mix in some advertisers when you Request-A-Quote as part of the options available to you, it's not predominantly advertisers.

And part of that is because we're just learning about how do we target this, how do we make sure it's going to the right people and then also how do we make sure that we have really well-regarded businesses in essentially that marketplace that we're building.

And so it's something we're continuing to tune.

We're testing it on a portion of the opportunities that we get there, but it's not fully rolled out.

I don't believe it's 50%.

Our next question comes from Rob Sanderson of MKM Partners.

Lots of good news for investors today, so congrats on a busy quarter and great execution, guys.

Two questions from me.

We've touched on them already, but I wanted a little more color.

First, on performance marketing efforts.

I presume paid search is the first place.

Any other performance channels that you're dipping your toe into?

And these can be lengthy learning curve channels, so can you give us any color or anecdotes or anything on sort of where you are now versus maybe 2 quarters ago when you started or where you would hope to be in 2 quarters from now?

And then, second question is on the churn improvement.

So customer retentions have always been high in this business, and I think it's become a much bigger focus after the surprise in Q1.

And I'm just sort of curious, like, how that's -- you made so much improvements so quickly and why this wasn't a larger focus earlier as some dynamics change that sort of set the stage differently than maybe in years past.

Sure.

On performance marketing, it is something where it's kind of a channel development game.

You get good at search or you start to feel like you've got some confidence around doing paid search, and then you add social media and then you add video.

We've added things like carrier pre-install type stuff.

We've been -- I'd say, kind of like every 2 to 4 weeks, we've been opening up a new channel.

So where are we today relative to a year -- to prior?

I could tell you that we spent 4x as much on performance marketing today as we did a year ago.

And as sort of scary as that sounds, we also added 400 basis points to the overall profitability of the company.

So we've got an ability to manage this growth at a pretty profitable -- sort of maintaining profitability momentum.

And I think we've made -- it's stunning, the amount of progress we believe we've made internally.

And I think there's every bit as much progress to make in the next couple of quarters as we made in the last 2 quarters.

I think that in particular, on the MAU growth side, we probably made the most progress.

On the business owners side, we've -- as I described that a little bit earlier, we've got a sort of supply of the users trying to find them challenge.

And then in terms of driving folks into some of the sort of transactional turnstiles, we've made good progress there.

But I'd say the biggest progress to-date has been on the app user side, which ultimately in the long term, kind of ironically, is probably not the primary one that we want to go after.

Your second question was about the churn, and I just -- Jed talked about it a bunch I'll -- I would just add that when I look through what drove this quarter's improvement versus the first quarter, it's far less that there were grand new activities undertaken after February.

It's that the things that we've been working on, really since the late spring of last year to improve our overall customer success effort took some time to gain traction.

Yes, we could see they were starting to gain traction as we came through the first quarter, but there are other things going on in the first quarter that just swamped it.

And that's part of the reason why we were surprised.

And I think as we got into the second quarter, we had more traction on things that we've been -- I talked about it earlier, the local client partner group and their ability to drive package upgrades.

Yes, I'd echo what Lanny said, and I would also say that having gone through that first quarter, we're putting a lot more focus on what we're doing upstream.

And yes, churn and reactionary kind of processes to that churn are important.

But we also have to watch what's coming in to the top of the funnel and making sure that our local sales team is actually calling folks that have better churn characteristics.

And there's a lot of stuff we're doing around machine learning to make sure that our reps are armed with the best prospects to call.

And so there's both a mix component as well as an operational component.

And churn has obviously been an important part of our business for years, but that focus, starting in last year, really has started to bear fruit.

And again, we're not through the woods yet on this thing and not ready to kind of call this the steady-state, but we're encouraged.

And our final question comes from the line of Kip Paulson of Cantor Fitzgerald.

Apologies if this has already been addressed.

I'm straddling a couple of calls.

But just one from me on the sales channels, specifically SMB.

Do you think the local advertising or SMB business will slow to high single digits or low teens growth over the next year or so?

Or do you think that the teens rate of growth is sustainable for a longer period of time?

Appreciate any color you could provide there.

Sure.

We're planning to end this year with a mid-teens growth rate in our sales force, and we're planning on opening up a new sales office to keep the -- keep growing the size of our sales channel.

And we're growing the team at that rate, we're opening offices at that rate fundamentally because we think there is an awful lot more opportunity here.

We've got 148,000 advertising accounts.

The number of advertised businesses is greater than that, but we think the runway with 3.8 million claimed businesses is still very, very big.

So yes, we think that the long-term growth for the local SMB advertiser base for Yelp as we improve the products, as we add more users, as the services and experiences become more transactionable, we drive attribution, we do the things that Jed talked about in terms of measurement and tooling.

Yes, we have a -- we believe we've got a lot of runway in that business and there's very high growth yet to come.

Thank you.

And ladies and gentlemen, this concludes today's conference.

Thank you for your participation, and have a wonderful day.