Yelp Inc (YELP) 2019 Q2 法說會逐字稿

Good day, and welcome to the Yelp's Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would like to now turn the conference over to Ronald Clark, Head of Investor Relations.

Please go ahead.

Good afternoon, everyone, and thanks for joining us on Yelp's second quarter earnings conference call.

Joining me today are Yelp's CEO, Jeremy Stoppelman; CFO, Lanny Baker; and COO, Jed Nachman.

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 shareholder letter for a more detailed description of the risk factors that may affect our results.

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

In our shareholder letter released this afternoon and our filings with the SEC, each of which is posted to our website, you will find additional disclosures regarding these non-GAAP financial measures as well as historical reconciliations of GAAP net income to both adjusted EBITDA and adjusted EBITDA margin.

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

Thanks, Ron, and welcome, everyone.

Yelp had a solid second quarter.

We grew revenue in line with our outlook, and we exceeded our expectations for adjusted EBITDA when we reached record level in this quarter.

Strong bottom line growth, combined with a meaningfully lower share count, thanks to our stock repurchases, drove a 30% year-over-year increase in earnings per share in Q2 on a fully diluted basis.

We also made substantial progress in our business transition.

New business offerings are resonating with customers and beginning to generate incremental revenue.

Active paying locations for 2 new products, Verified License and Business Highlights, surpassed 25,000 in the quarter.

We improved ad revenue retention in each successive month in the first half by providing our advertisers with more value for their money.

Paid ad clicks increased 42% year-over-year, driving down average CPCs by 25% in the second quarter.

We also saw increased ad spend from large advertisers with revenue from multi-location clients up 21% year-over-year driven by compelling store visit economics, new ad products and expanded client coverage.

As of the end of July, the ad budget dollars that clients declines have awarded us to spend on Yelp were up by 10% over last year.

This measure historically served as a close proxy for future ad revenue growth, and we have seen budget grow steadily since the start of the year.

The tangible progress we have made creates underlying momentum in our business and reinforces our confidence in the potential for accelerating revenue growth and achieving our revenue and margin targets for the year.

Although we're just a few quarters into our business transition, we are encouraged by the early results our team has achieved.

I'm proud of their focus and execution and look forward to sharing more about our continued progress in the quarters to come.

And with that, I'll turn it over to Lanny for some additional color on the work that we're doing.

Thank you, Jeremy.

As you just said, we had a solid second quarter, and we've made progress that positions Yelp to accelerate revenue growth in the second half, and that's reflected in our third quarter and full year 2019 business outlook.

Before we open up the call to questions, I'd like to briefly highlight a set of second quarter and first half trends that reflect important evolutions in Yelp's strategy, in our go-to market and in our business model.

First, changes in our go-to-market strategy, particularly around multi-location customers and self-serve have begun to generate revenue growth without the expansion of our local advertising sales force.

Second, a shift in our product development focus is delivering new offerings and greater value for business owners, which, in turn, is contributing to renewed growth in customers and revenue.

Third, product improvements and our customer succession initiatives are reducing customer churn and improving revenue retention, even as more and more of our advertisers are now on non-term contracts.

Fourth, experiences like Yelp Reservations and Yelp Waitlist are propelling mobile app usage and consumer engagement on an organic basis, which is allowing us to scale back on user acquisition spending.

And finally, improvements in customer acquisition and revenue retention, combined with purposeful expense management, are contributing to margins and balance sheet strength, which we've deployed to repurchase roughly $400 million in stock and reduce shares outstanding by a mid-teens percentage year-to-date through June.

These are very intentional and important accomplishments of the first half of 2019, and they are fundamental components of the long-term plan we outlined earlier this year.

Although we are still in the midst of what's a transitional year, our goals are very clear, the team is very focused and our momentum is building.

That brings me to my personal news today.

I plan to step down from my position at Yelp to accept an executive role at another company in early September.

This is an unexpected opportunity and one that I feel very compelled to pursue.

While these kinds of changes rarely occur with perfect timing, in this case, the progress that we've made in recent quarters, the strength of Yelp's long-term plan and the capacity of our team to continue to execute give me great confidence this is an appropriate time to make a change.

I'm immensely thankful to Jeremy, to my own team here and all of the employees and directors of Yelp for what's been an incredible experience.

I have tremendous excitement about Yelp's future, and I look forward to seeing the team work to fully capitalize on the sizable opportunity ahead.

With that, operator, can we please open up the call for questions?

(Operator Instructions) The first question comes from Shweta Khajuria with RBC Capital Markets.

Oh, I'm sorry.

The first question comes from Lloyd Walmsley with Deutsche Bank.

Looks like you guys saw some stabilization in the revenue per account metric this quarter.

Maybe could you guys just spend a little of time talking about whether or not this was a function of larger national accounts becoming a larger share of the mix versus being like a stability in the core SMB same-store advertising dollars.

Thanks, Lloyd.

It was a combination of both.

As we said a year ago, when we made the transition to non-term contract, we thought that it would temporarily depress the average revenue per customer in the SMB marketplace, and it did that.

And we also said a year ago that by the time we cycled through a year, we would flatten out, and it has done that.

And as well, as we've grown the enterprise and large national accounts, which revenue from those customers tends to be quite a bit bigger than the SMBs, that is also blending up the average revenue per account the way you're looking at it.

Got it.

Got it.

And maybe just another one, if I could, on the product side of things.

Seems like you guys are doing a lot on the advertising product front, but I just want to hear more about what you're doing to boost consumer engagement.

I've seen products out of Google launching a Request-A-Quote beta, and you have TripAdvisor moving to the feed-based interface.

So maybe if you'd just kind of give an update on how you guys are thinking about either bringing more folks into the Yelp Platform or getting folks to engage more on the Yelp platform.

Sure.

I can take that, Lloyd.

This is Jeremy.

We've been investing heavily for a number of years on the restaurant services side, so with Yelp Reservations in no way creating a only-on-Yelp experience, and that's really been a success.

It's grown Yelp seated diners really quickly.

It's up about 166% year-over-year, and that's driving engagements.

It's driving downloads, and it's something, frankly, you can only get on our platform so you can really save time, which we think is valuable and loved by users.

Additionally, we continue to invest in the product generally.

We started rolling out personalization very recently, so you can put in things like dietary preferences or whether you have kids and we can tailor results.

So while it's true that Google continues to copy our features a few months, potentially after we innovate.

We continue to roll out new and exciting things for people, and we see great engagement.

I guess the last note on that is we have been able to pull back on some of our marketing investment in driving downloads because of our success with distribution through other channels like Yelp Reservations in the way.

The next question comes from Shweta Khajuria with RBC Capital Markets.

Okay.

Lanny, first of all, congratulations, and all the best, and good luck with your new role.

Looking forward to speaking with you in the next capacity.

Two questions, please.

One on the multi-location and national accounts.

So the annual revenue retention there, would those businesses exceeded 100% in the quarter?

Could you talk about, first of all, the sales growth in that segment?

Last quarter, it was over -- I believe it was 35%.

What was it this quarter?

And second, what drove that retention?

Is it the sales force efforts?

Is it the product improvements, combination of both?

Could you talk to that?

And then the second is can you please update on the size of the 3, so the local, self-serve and multi-location and national?

I know you've shared that in the past.

Could you please update us on that?

Sure.

Shweta, this is Jed.

I'll take the first one, and Lanny will take the second one.

In terms of the multi-lo growth and our top segment, which would be kind of the national enterprise segment, we've grown that segment about 30% since the beginning of the year in terms of headcount.

Obviously, there's a ramp to that.

It's not a longer sales cycles on the enterprise side, but we feel really comfortable in our positioning in terms of that growth.

At an account level, we're seeing existing clients who continue to spend more, and we're also bringing in new clients.

I would say it is a combination of both that is driving growth in that segment.

And I guess I'll -- Lanny on the next one.

Sure.

In terms of the revenue composition, one thing we included in the shareholder letter is a breakdown of revenue within the multi-location category.

Hopefully, you've seen that, and I'll just send you there to understand exactly what the multi-location category is composed of.

Our advertising dollars continue to be roughly 25% from the multi-location side of things, the rest coming from local SMB.

And in terms of the grand total, little -- low double digit, a little bit more than 10% of the revenue from the self-serve channel.

Though I'd point out that the rep sold local business and the self-serve are really one segment of customers.

The next question comes from Tom Champion with Cowen and Company.

Lanny, congratulations, and best of luck going forward.

It's been great working with you.

I'm curious if you could elaborate a little bit on the product improvement and maybe other factors that are improving churn.

Any additional detail there would be really helpful.

And then just -- if you could provide any more context on these new products like Verified License and Business Highlights and I guess Portfolio.

Just any additional thoughts on the adoption rate there and maybe if there is a broader catalog of additional products of a similar vein.

And if so, what time line we might expect that rollout to take place on?

Hi, Tom.

This is Jeremy.

I think I can handle these questions here.

So your first one was around churn improvement and what's driving that.

I think an important factor there is that we're driving more value to our customers.

And in particular, we're doing that by reducing cost per click, and so that means more leads for less money.

And so over time, business owners realize that they're getting value.

They feel that value.

They see it in their business owner dashboard, and so we think there's more to do there.

We will continue to invest in ad targeting and so forth.

There's also an element of now that we've had non-term contracts for some time.

There's are customers that have aged, and so that's a really great factor as well.

We've been able to retain folks, and that ultimately compounds over time and helps drive revenue momentum.

So we're pretty pleased with how things are going there on the churn side right now.

You mentioned some of our new profile products, Verified License, Business Highlights, Portfolios being the most recent.

We really see that as a way for business owners to tell their story, have a greater voice.

We've heard that from our customers, just in our user research, and we think this is the first step.

There's ways to expand these to other categories, to tweak and adjust them as we continue to get feedback from our customers.

We do have more in the pipeline but nothing to announce so far.

From an adoption standpoint, we are attaching them as we sell our ads through our various channels, but then we're also -- there is a standalone portion as well, where business owners that maybe just want to stick their toe in the water and spend at an entry-level price point can do that, too and we're seeing some of that activity.

So very encouraged where we're headed with these profile products.

I think it's a deep well that we'll be able to tap into.

The next question comes from Lee Horowitz with Evercore ISI.

Great.

And congratulations, Lanny.

Looking forward to working together in the future, and best of luck.

I guess real quick on some traffic trends.

A couple of your competitors have called out some SEO headwinds around Google pushing some of its own products, yet your traffic trends look really strong in the quarter.

And I was wondering if you can maybe elaborate how traffic may have unfolded in the quarter in relations to SEO specifically.

And then one on capital allocation.

Now that you're kind of halfway through your share repurchase program, thinking through the rest of the year and perhaps into next year, is this the new normal in terms of the way you guys are looking to buy back share and reduce the share count?

Hi, Lee, this is Jeremy.

I'll take the traffic question.

Maybe capital allocation, Lanny can pick up in just a second.

So we have seen some movements in volatility on the desktop side, but the good news is we've been investing and diversifying our traffic sources for many, many years, several years, and we've also invested quite heavily in having a closer relationship with our consumer, particularly through mobile app.

And something like 70%, I think, is about the level of engagement overall that we get on the mobile app side.

So just a lot of activity happening on that platform where we have more control.

So you're right.

We are happy with our consumer engagement and traffic levels despite any kind of SEO fluctuations that have happened.

We continue to feel good about where we're at there.

Yes.

From a capital allocation perspective, at the start of this year, the Board of Directors authorized a $500 million repurchase, of which, at the end of June, we'd completed about $400 million, leaves us, at that point, about $100 million to go.

And we'll we plan to continue to execute on that prudently.

I think Yelp's business generated $57 million of cash from operations in the second quarter.

We currently have $450 million of cash and marketable securities on the balance sheet, so we'll continue to look at share repurchases and ways to return capital to shareholders.

That's part of our long-term plan.

So no media comment on right now, but we make good on the commitment we made earlier this year, and we'll evaluate it as once we complete the program that's currently in place.

(Operator Instructions) The next question comes from Andrew Hargreaves with KeyBanc.

Just wondering if you could kind of give a little more granularity around the sales force efficiency improvements and sort of expectations going forward.

And I'm just sort of trying to -- well, I'm trying to quantify, but you can be qualitative with how much is self-serve.

How much is larger accounts?

How much is product?

Just anything you can add around that would be great.

Sure.

Andy, this is Jed.

Really, it is a combination of really 4 things.

I would start with a product that's kind of the star of the show with the release of Business Highlights and Verified Licenses and now Portfolios and particularly on the Business Highlights side.

We've -- it's been a great reason for folks to get out into our customer base or potential customer base, pick up the phone.

They're really resonating in the marketplace.

We've seen really strong product market fit.

The first place we've started, given it's a new product, just kind of in our existing channels.

And so that's existing customers who have kind of self-provisioned into these additional features, and so we're seeing strong growth out of that.

As well as attaching the Business Highlights to CPC programs that are -- through our sales channels and our self-serve channels.

So that is kind of thing number one.

We're also seeing that productivity number due to multi-location.

That segment is obviously growing very quickly and has really nice characteristics and is contributing to overall productivity.

Customer retention as well.

When you kind of look at that number, if we're able to retain customers more, that's going to increase rep productivity.

And then finally, we've now got the first kind of wave of veteran reps.

We put a big focus on making sure that we keep our most tenured sellers in their seats.

I mean we've been really successful with that, thus far, and they've kind of grown up in a noncontract world now.

We're getting to the point where we have folks who have been in their seats through the entire transition, and so we feel like we're really at a sweet spot in terms of the local sales size.

And obviously, we're going to continue to improve on the efficiency side.

Okay.

And then on Verified License, Business Highlights, these types of products, is this an incremental sales channel that you can upsell?

Or is it is more that they've kind of called on these guys, and this is just a better tool for monetizing them because they're never going to kind of pay up for some of the more premium stuff?

Yes.

I mean I think, initially, in our initial success when you kind of look at the 25,000 who are in place by the end of June, it's largely been by attaching to either existing customers or within our flow.

And so -- but we do think, long term, there is a huge opportunity to kind of develop a relationship with these customers over time and plant the seed.

And so not all local businesses are ready to kind of sign up for the $300 to $400 a month of local advertising, and that may be due to the stage of their business where they are in terms of sophistication on marketing.

But it allows us to develop that relationship with them and build some trust.

And so we are kind of at the early stages of exploring that and plan on really driving towards that segment over time.

The next question comes from Justin Patterson with Raymond James.

Great.

And I'll echo the others on the call of wishing you the best of luck going forward, Lanny.

With respect to the products, we've noticed that ad load has been increasing more on the side in the app.

Philosophically, could you talk about how you think about the balancing ad load versus maintaining a contextually relevant user experience?

Justin, this is Jeremy.

I'll take that one.

We've been very thoughtful about the consumer experience over many years.

And if anything, I would say we've had pretty minimal ad load.

And certainly, that's been the feedback over the years from The Street.

But the way that we look at it is frequency.

And about half of our traffic and engagement is within restaurants, and so you'll see a lighter ad load, and that's strategic and also the reality that we have a lot of inventory in that area.

And we did recently experiment with a little bit higher ad load.

We went from 2 ad slots to 3 for high-frequency category, and then we've actually turned it back down to 2. In some of the low-frequency service categories, you are seeing higher ad loads.

And what we find is that consumers are really just looking for someone that can solve their problem.

And so if you're looking for a locksmith and that locksmith has good reviews and they happen to surface when you search for a locksmith once in a blue moon on Yelp, we think that's a great matching experience for both the business and the consumer.

In addition to that, we actually gathered consumer sentiments, so we are regularly pulling users of the Yelp app and Yelp site and trying to understand is ad load affecting their experience.

And so we are keeping track of that, and we'll be able to watch it over time.

The next question comes from Elliot Alper with D.A. Davidson.

Great.

Building off a previous question on customer adoption on some of these new services, wanted to hear any thoughts on the process and time line for new customers to understand and integrate into these new platforms or onto their platform.

Secondly, kind of as you refocus your sales headcount, how are you prioritizing these new products versus current clients and bringing on new accounts?

Sure.

So I can -- let me take the back half of that question first.

This is Jed.

Really, if you look at a product like Business Highlights, it's really universal across our client base.

And so we want to get it out into our existing customers as fast as possible, and also where possible, attach it to folks who are coming brand-new on to ads.

Those are the most obvious channels to kind of start with.

And then as we can put more marketing muscle and product marketing behind kind of the stand-alone for folks who may not be in a position to kind of go out and buy ads, we believe that's an opportunity.

So it's a little bit of everything in terms of getting that product out into the channel.

It's all sold, obviously, by the same sales force, so -- And then in terms of adoption, I guess I'll take a shot at the first one.

We're doing a great job on the product marketing side.

And one of the big differences between the world of term contract and non-term contract is folks are engaging with our business owners account in a much deeper way, and so we have the opportunity to kind of market to them as we add more products.

And so when you see something like Portfolios or Business Highlights or Verified License, if someone qualifies, we're able to get them not only with kind of human beings walking them through but also through our business owners account.

And you'll continue to see that kind of rollout.

The next question comes from Brent Thill with Jefferies.

This is Stan on for Brett.

We saw that you reduced your sales headcount in Q2 again.

Are you still on track to realize the efficiencies expected at the start of the year?

Any more color on cost controls in general?

Sure.

Yes.

We are on track to realize the expense reductions that we had outlined earlier this year.

As we said, some of them will be operational.

Some of them will be in marketing.

Some of them would be efficiency gained in changing or evolving our go to market.

And as we've seen, we've seen really strong cash flow leverage through the first 9 -- or 6 months of this year.

And the full year outlook continues to show margins moving up year-to-year.

So that's coming from revenue growth as well as managing expenses.

The last question comes from Lloyd Walmsley with Deutsche Bank.

Just another quick one for me.

At high point of 3Q guidance seems to be implying that 4Q will accelerate from 3Q into a tougher comp to kind of get to that midpoint of the full year guidance.

Can you walk us through the drivers for that acceleration?

Like what gets you confident for that sequential acceleration in the back half of the year?

As we look at the ranges that we've put out for this year, they reflect the same things we've been talking about, really, from the start of this year.

Probably the most important driver is the momentum we have in the multi-location and enterprise category with both the expansion of sales force and new products.

Behind that, the very powerful effect at improving customer retention, which, as Jeremy said, compounds through time.

And then finally, the introduction of new products that are admittedly a relatively small revenue stream today, but they're growing pretty quickly based -- as you could see from some of the numbers we talked about today.

Those are the things that, as you stack them up, give us confidence about the outlook that we provided.

Got it.

And maybe just one quick housekeeping question.

Any update on the run rate for Request-A-Quote?

Yes.

Request-A-Quote continues to do well.

Projects is up nearly 40%, and Request-A-Quote annualized revenue is tracking at around $46 million, which is up, I believe, a little over 50%.

Well, thank you very much, everybody, for participating on the call today.

There are no more questions, and we will complete the call.

The conference is now being concluded.

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