Yelp Inc (YELP) 2024 Q3 法說會逐字稿

Thank you for standing by.

My name is Brianna, and I will be your conference operator today.

At this time, I'd like to welcome everyone to the Yelp third quarter 2024 earnings conference call.

Please note that this call is being recorded.

(Operator Instructions)

I would now like to turn the conference over to Kate Krieger, Director of Investor Relations.

Please go ahead.

Good afternoon, everyone and thanks for joining us on Yelp's third quarter 2024 earnings conference call.

Joining me today are Yelp Chief Executive Officer, Jeremy Stoppelman; Chief Financial Officer, David Schwarzbach; and Chief Operating Officer, Jed Nachman.

We published a shareholder letter on our investor relations website and with the SEC and hope everyone had a chance to read it.

We'll provide some brief opening comments and then turn to your questions.

Now, (technical difficulty) safe harbor statement.

We'll make certain statements today that are forward-looking and involve a number of risks and then certainties 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 may discuss adjusted EBITDA, adjusted EBITDA margin and free cash flow which are non-GAAP financial measures.

These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles.

In our shareholder letter released this afternoon and our filings with the SEC each of which is posted on our investor relations website.

You will find additional disclosures regarding these non-GAAP financial measures as well as historical reconciliations of GAAP net income or loss to both adjusted EBITDA and adjusted EBITDA margin and the historical reconciliation of GAAP cash flows from operating activities to free cash flow.

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

Thanks, Kate, and welcome everyone.

Yelp delivered record net revenue and strong profitability in the third quarter, led by strengths and services categories net revenue increased by 4% year over year to $360 million.

We also delivered an 11% net income margin and 28% adjusted EBITDA margin through disciplined expense management.

We continue to see a divergence in category performance in the third quarter.

Businesses in our restaurant, retail and other categories have faced a challenging operating environment this year and RR&O revenue declined by 6% year over year in the quarter as a result.

At the same time, our services business where we focused our product efforts saw continued momentum services revenue increased by 11% year over year making it the 14th consecutive quarter of double digit year over year growth.

We saw even stronger performance in the home services category where revenue increased by approximately 15% year over year.

Request to quote projects increased by approximately 25% year over year, primarily as a result of improvements to the request flow.

We achieved this strong growth even as we narrowed the focus of our paid project acquisition initiative and reduced our paid search spend by half from the second quarter.

Zooming in on this initiative, we narrowed the focus in the quarter to target businesses with fewer reviews that often experience difficulty competing with more established advertisers for leads.

We continue to see strong top of funnel metrics in the third quarter including more projects, ad clicks and lower CPCs than in the year ago quarter.

At the bottom of the funnel, while we continue to see positive signals, they were not sufficient to warrant continued investment at the current level.

We will use our learnings to continue iterating on this initiative and in 2025 we anticipate spending at more modest levels.

We also see an additional opportunity to deliver leads to multilocation advertisers who have the capacity to ingest substantial lead volumes.

This aligns with our approach to capture more demand for multilocation services businesses where we have recently increased our product focus and sales efforts.

More broadly, our product and engineering teams continued to leverage AI to further optimize advertisers budgets by displaying the most relevant ad content to consumers.

In the third quarter, ad clicks increased by 2% year over year.

At the same time, average CPC increased by 3% year over year, reflecting a mix shift towards services clicks, which tend to have higher CPCs than RR&O clicks.

We also rolled out a number of user experience and back end improvements to make our search experience even more efficient.

Over the last several years, our focus on delivering the best home services experience for consumers and service crows has driven significant growth in services revenue.

Looking ahead, we see an opportunity to drive additional growth by investing in other key services categories.

Today, we announced that we've agreed to acquire auto services platform RepairPal for approximately $80 million in cash.

We believe this acquisition will accelerate efforts and services by expanding our offerings in the multi-billion dollar US auto services advertising vertical.

In the third quarter, advertising revenue from our auto services category had an annual run rate of approximately $90 million.

In summary, our focus on services continues to strengthen our business and we remain excited by the opportunities ahead to drive profitable growth and shareholder value over the long term.

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

Thanks, Jeremy.

In the third quarter, net revenue increased by 4% to a record $360 million which was within our outlook range.

Driven by our disciplined approach, net income was $38 million or $0.56 per share on a diluted basis, representing an 11% margin.

Adjusted EBITDA reached $101 million, representing a 28% margin, putting us $14 million above the high end of our outlook range.

Continued strength in services categories drove this growth.

Advertising revenue and services increased by 11% year over year to a record $228 million.

As Jeremy mentioned, restaurants and retailers remain pressured in the quarter resulting in a 6% year over year decline in RR&O revenue to $116 million.

A decrease in RR&O locations offset growth in services locations in the third quarter.

This resulted in an overall decline of 7% year over year in paying advertising locations to 524,000.

We remain focused on driving growth through our most efficient channels.

Self-serve was strong and grew approximately 15% year over year in the quarter.

At the same time, multi-location revenue came in approximately flat year over year, reflecting continued softness in RR&O.

Turning to expenses, our third quarter results demonstrate the margin potential of our business with a net income margin of 11% and an adjusted EBITDA margin of 28%.

We achieved these strong results through disciplined expense management.

Through the end of the third quarter, we had spent $24 million on paid project acquisition including $6 million spent in the quarter.

As we efficiently allocate resources towards our best opportunities.

We continue to expect head count will be approximately flat year over year by the end of 2024, excluding RepairPal employees who will be joining us.

In the third quarter, we reduced stock based compensation expense as a percentage of revenue by 2% points year over year, and remain focused on reaching less than 8% by the end of 2025.

We expect these efforts to stack over time, improving the quality of our adjusted EBITDA and benefiting GAAP profitability in the years to come.

Our capital allocation strategy consists of three main elements.

First, maintaining a healthy cash balance to fund our operations.

Second, retaining capacity for potential acquisitions and third, returning excess capital to shareholders through share repurchases.

In the third quarter, we repurchased $62.5 million worth of shares at an average purchase price of $35.07 per share.

As of September 30, 2024 we have $393 million remaining under our existing repurchase authorization.

We plan to continue repurchasing shares through the remainder of 2024, subject to market and economic conditions.

As Jeremy mentioned today, we announced our plan acquisition of RepairPal.

We expect to pay approximately $80 million in cash for this acquisition.

For the 12 months ended August 31, 2024 RepairPal generated approximately $30 million in revenue over the same period, cash and net income were approximately breakeven.

Subject to customary closing conditions, we expect to close by the end of the year.

This acquisition demonstrates our ability to deploy capital from our balance sheet in support of our business strategy.

Turning to our outlook, when we updated our outlook for 2024 in August, we expected continued strength in services and better performance in RR&O revenue in the fourth quarter.

As RR&O advertisers typically increase their spend seasonally.

While services has maintained its momentum, we no longer expect RR&O revenue to increase in the fourth quarter given the persistence of the operating challenges impacting RR&O businesses.

For the full year, we now expect net revenue will be in the range of $1.397 billion to $1.402 billion, a decrease of $18 million at the midpoint.

Turning to margin, we remain dedicated to disciplined expense management.

We now expect to spend approximately $30 million for the year on paid search, given that our third quarter experimentation did not achieve our desired returns.

Going forward, we plan to continue spending on paid search and more modest amounts as part of our overall marketing expense, but no longer expect to break out the specific amount.

We now expect adjusted EBITDA for the full year to be in the range of $341 million to $346 million and an increase of about $14 million at the midpoint despite continued headwinds in RR&O.

In closing, Yelp's third quarter, results reflect the underlying profitability of our business.

We continue to believe in the opportunities ahead to create shareholder value over the long term as we focus our investments in areas that we believe will drive business performance.

With that operator, please open up the line for questions.

(Operator Instructions)

Jason Kreyer, Craig Hallum.

Great.

Thank you.

This is Cal on for Jason.

Maybe first for me, just kind of curious what the opportunity you're seeing in auto services is and why is now the time to push more heavily into this vertical?

All right.

Hey, Cal, this is Jeremy.

I think I can take that.

Yeah, we do maintain capital on our balance sheet as David mentioned earlier.

For tuck-in acquisitions, we're always looking for opportunities and this fits squarely within our services strategy.

If you look at auto, it's one of our top categories within services it's a $90 million run rate annually for Yelp.

And the RepairPal folks are real experts in auto.

So it brings in a lot of deep knowledge about the industry, relationships, repairs, as well as the cost of those repairs.

We think that's particularly useful in products like request a quote and Yelp Assistant where we've seen a lot of success this year.

So helping us, hold the consumer's hand as they describe their issue, get them matched with service providers like auto shops that may be able to help them give clarity around pricing.

We see a lot of benefits for both sides of our marketplace by bringing in their knowledge.

We also see an opportunity to leverage some of our strengths, be it our audience, our SEO capabilities and knowledge, as well as our SEM knowledge.

So it's really a win-win.

We're excited to grow together from this point.

Great.

And then just last for me, just kind of want to follow up on some of the RR&O commentary.

Just curious if there's anything new to call out an RR&O.

If headwinds have gotten better or worse or if this is just kind of a continuation of the trends you've seen throughout the year.

Yeah, thanks, Cal, this is Jed.

I can take that, it's really been the same story throughout 2024 with consistent macro headwinds for businesses operating in the RR&O categories.

Obviously, are no businesses are facing elevated input costs, you look at the cost of labor, the cost of food and consumers are impacted by what has been a compounded, inflationary environment and kind of feeling that squeeze, there are also obviously some on the margin some external factors, delivery fees, et cetera.

It's just one of the many factors that are hitting this restaurant, retail and other category.

We do believe that this is a cyclical moment.

And that we've maintained a lot of really strong relationships.

And ultimately, when this does turn and we're not -- we don't have a crystal ball on that.

We believe we're very well positioned to capture that opportunity.

We continue to invest from a product perspective and invest from a relationship perspective.

Perfect.

Thanks for the color.

Shweta Khajuria, Wolf research.

Hi.

I was wondering if you could talk a little bit more about your guide for the rest of the year.

And you've brought in kind of revenue a little bit and EBITDA has stepped up, it kind of in response and so wondering what specific measures or discipline you're going to be taking, maybe what line items, any color would be helpful there.

Great.

This is David.

So just stepping back on the guidance in terms of revenue.

As I said in my remarks, the on the restaurant, retail and other side, these types of advertisers typically increase their spend seasonally.

And we no longer expect that to be the case.

So that's the dynamic pointing out on RR&O plus what Jed just shared.

And it's worth underscoring though on the services front, we grew 11% in the third quarter and we continue to see strength there.

In terms of the margin components, we believe that our strong expense discipline is showing up.

We believe we're getting more efficient as a reminder, we're planning to hold a head count flat, again here in 2024.

On the marketing front, we saw an opportunity to be more efficient with that marketing spend and we did pull back from what we had previously shared in terms of full year spend on paid search.

So those are showing up.

In addition, we saw some goodness in terms of capitalized software development and there were some other areas like health care expense that ended up being positive in the third quarter.

And just for the overall year, obviously, we're able to increase the guidance as a reflection both of that performance in the third quarter and just the continuing expense discipline, we're very, very focused on ROI and making sure that we're allocating all of our resources, marketing dollars, folks on the team in the right places to drive performance.

Let me just say overall for the long term, we are very, very focused on driving profitable growth.

So when you put all that together, that's what informs the updated guidance for 2024.

Okay.

That's helpful.

Thank you.

And if I could ask one more, could you talk a little bit about what you're seeing in paid search and maybe top of funnel growth for request to quote.

Sure, I can take that.

Yes, we've been working on paid search driving in particular projects to request a quote.

We've learned a ton this year and those learnings will definitely going to improve the product and our efforts.

For the rest of the year as well as into '25 the top of funnel, we're really happy with, we were able to bring in lots of projects.

We think quality projects at reasonable prices, where we saw opportunity was really on driving impact on the advertiser behavior.

We needed to see much better attention, higher ad budgets from those folks.

And anecdotally, it's a little bit hard if you're suddenly getting a bunch more projects, you might not be able to spool up a truck right away.

And so there's some challenges there.

So we have work to do.

So we're going to bring down those spend levels or we have already brought down those spend levels and we're going to keep iterating.

We do believe there is a there, there, we're excited about having validated that there is this pool of leads and then we can bring them effectively at Yelp, but we want to make sure that there is a significant ROI there and one that we're happy with.

So in the meantime, we're not going to spend that money at the scale that we were and we'll flow that through to adjusted EBITDA for shareholders.

Okay.

Thank you.

That's helpful.

Thanks for your time.

Josh Beck, Raymond James.

Yeah, thanks so much for taking the question.

I wanted to also ask about the acquisition in the auto space.

I think you mentioned that it was around $30 million of revenue.

I think your run right there is kind of [$90 million] in that vertical.

So is this something that, you feel like maybe more of a vertical specific approach in some of these verticals that are smaller, for you can kind of really Yelp open up, the opportunity and I don't expect a specific comment, but does this same approach maybe apply to other services verticals as well down the road?

Yeah, I can take a stab at that one.

Yeah, we do -- there is a large number of categories within services.

Yeah, we talk a lot about home services which is growing has been growing at 15%, overall services have been growing at 11%.

We've been happy with that.

But at the same time, we do -- we have reserve capital on our balance sheet for tuck in acquisitions, there's an opportunistic element to all of this in that -- when do you find someone that's a potential acquisition target that really fits with your strategy that has a great team.

And you think there's kind of a Ying Yang win-win relationship that can happen as a result of an acquisition and all of the stars aligned in this case and led to us acquiring RepairPal.

We're really excited about the opportunity, auto is one of the top categories.

And as you said, Yelp already has a significant business there with a $90 million run rate within the auto category.

We do see this fitting in very nicely, bringing in a lot of expertise and intelligence within auto to make us better particularly with request a quote.

And Yelp Assistant being able to bake in some of that pricing for our consumers.

And then on their existing business, as you said, there is a significant business there north of $30 million and we're able to bring our audience potentially to bear to help them.

We have obviously a lot of expertise in SEO and paid search.

So we're excited to see what we can do together going forward.

Okay.

That's super helpful.

And then maybe just a little bit of a of a follow up on the generative search landscape, you've had this relationship with perplexity, any early learnings and I guess guidance on how to think about maybe how that market could unfold and potentially create either traffic generation opportunities for you or just in some ways kind of change the frequency at which consumers see Yelp results.

Sure.

I would say for the first time in a long time, I started to get excited about general search in the sense that there are some new entrants.

There's obviously also anti-trust enforcement in a way that we haven't seen in decades.

And I think you bring those two things together and you create a real opportunity.

There are early players like perplexity that appear to be doing well.

Certainly growing they've been in the news with their big fundraising round and we're happy to be working with folks like that.

Our door is open as far as licensing, we obviously have API is that we can bring to bear for companies that are pursuing this.

So I do think it represents a really interesting opportunity for Yelp.

If you step back and look at what does Yelp have to offer, I think if you're looking for local content in North America, we are an obvious place to knock on the door.

If you're working with LLMs, that trust is going to be an issue, that they can hallucinate even locations, they can [hallucinate hours] all sorts of things.

So you really do want to be grounded in trustworthy content.

And that's one thing that Yelp absolutely excels at be it both location information, things like our attributes but also, perhaps most importantly, reputation information about individual businesses.

So we are excited about the opportunity it's still very early, but our door is open and we're having conversations.

Good to hear.

Thank you.

Sergio Segura, KeyBanc Capital Markets.

Great.

Thank you for taking the questions.

I guess the first on SEM the investment hasn't really translated into the results you envisioned when you started this investment.

So I guess, could you just walk us through, why you believe it played out this way?

And just kind of what did you learn that was different than your original thesis?

Yeah, this is Jeremy.

Yeah, I think when we first stepped in, we wanted to validate, hey, that there is a big pool of leads that we can bring into Yelp and direct to where we need them.

And the good news there is on the top of the funnel, we were able to bring in significant project volume and those projects appear to be a pretty good quality at reasonable prices.

Now, the unique challenge that we have on our side is when it comes to advertisers, they really have to change their behavior for us to drive a return.

So they have to either retain a lot better or they have to be willing in relatively short order to punch to bump up their spending with us.

And while we did see improvements there, especially as we narrowed our focus into the businesses that we thought needed leads the most.

We didn't see a magnitude change that would deliver the return we were looking for.

And the only way of course, for us to figure this out was to run it at the scale that we did.

We do you still think there is real value to unlock there, but we have work to do to unlock the opportunity.

And so we're bringing down that spend so we can continue to focus and iterate.

And we look forward to keeping you informed about the opportunity as it develops.

Got it.

That's helpful, Jeremy.

And maybe if I could sneak a two in one, two short ones here.

One of the drivers you guys pointed out for ad clicks was that SEM investment.

So as you do moderate that investment, should we expect ad clicks to also slow down because of that?

And then secondly, you mentioned CPC increasing due to services mix.

Any commentary on what CPC looks within services.

Is that increasing, staying stable, decreasing any comments around that would be helpful.

Thank you.

Yeah.

So looking your first question there with respect to projects, while we did bring down the paid spend by half, we continued to grow project volume at 25%.

And so how did we do that?

Well, a lot of that is through our product led strategy.

So Yelp Assistant has been delivering for us.

We also continue to do work on the ad matching system which yields efficiencies and we have a deep portfolio of improvements.

So we do believe there's still plenty of room for innovation there to drive ad clicks and create efficiencies on the volume that we have and the traffic volume that we have.

Sergio just to add a few more thoughts here and stepping back for a second.

The overall auction system is designed to optimize the deployment of budget on behalf of advertisers who give us that budget to deploy.

And so we're not specifically targeting ad clicks or CPCs, rather, we're letting the auction find the market clearing price in that category at that time in that geography.

So that's just the fundamental of the way that the system overall operates.

Now, the more traffic that you have, if you're bringing projects and that's delivering clicks, then certainly that's going to feed into the overall system.

And then that impact typically would be if budgets constant for CPCs to decline.

Now, it's obviously under the hood, it's a bit more complicated than all of that.

And what we're focused on most of all is continuing to deliver more value to advertisers.

And so we're continuously working to improve the matching.

One of the things that's so important for us around Yelp Assistant is our ability to get more information using an LLM from customers very quickly with the right questions that feeds right back into the system and enables us to do even better matching.

So we're always looking for ways to drive improvements and while the overall project growth has been up significantly a considerable amount and that is just from the improvements that we're driving and not exclusively from the paid search spend.

So we remain optimistic in the road map that we have ahead to continue to generate projects.

And when we get those projects to direct them to the right advertisers and then of course to deliver value to the advertisers and to the consumers.

In terms of your question about services versus restaurant, retail and other in general, what we do see is strength of demand in the -- on the services front.

And so typically, if you're going to see stronger demand from advertisers, you would expect to see CPCs rise and then there's still that mix shift component as we're able to put in front of consumers projects that are in categories that have a higher payout for that service pro then obviously the clicks are more expensive and we've seen a mix shift there.

So that's going to add to the potential growth in CPC.

So you roll all that together and we're pleased with the way the system is operating.

We're going to continue to execute against the road map and there's a lot more to come.

Okay.

That's very helpful.

Thank you both.

John Colantuoni, Jefferies.

Hi, there.

This is Chris on for John.

I appreciate you taking the question.

Can you help us frame the margin profile of the business after integrating RepairPal.

As we think about adjusting our models for the acquisition.

How should we be thinking about RepairPal investing intensity across the P&L and really their ability to drive upside from break even over time?

Thanks, Chris.

This is David.

So yeah, just to recap $30 million run rate or $30 million in revenue through August for the prior 12 months at a breakeven level and what we obviously aim to do.

But we're going to provide a lot more commentary when we get to the Q4 call.

We haven't -- we just announced the transaction obviously today.

So we still have to close and start working together directly.

But in concept what we want to do, of course, as Jeremy mentioned is to help drive traffic with them.

We have both that experience on the SEO and SEM side.

So that's in a sense, leveraging the investments that we've made in Yelp over time, we can bring that to bear.

We think on RepairPal, we think that can be a positive from both from a revenue perspective and potentially from a margin perspective.

And then they have a lot of expertise that we think can really help with our $90 million run rate, auto business as it currently stands, obviously, request a quote is request a quote and they're really expert in estimating the cost of a repair.

And we think that that could be really additive.

So net-net, we think we're in a great starting point.

We're excited to have the team joining us.

We think they bring a lot to Yelp.

We think that we can bring a lot to RepairPal and we look forward to sharing more with you when we get to the Q4 call.

Great, very helpful.

Thank you.

One more if I may, can you help us dig into the pressure within RR&O by sub segment?

So that is our restaurants driving a disproportionate share of the weakness or are there other buckets of advertisers within RR&O and that have also been weak or maybe performed better than the consolidated number?

Yeah, thanks for the question.

This is Jed.

Overall, certainly we do see the weakness on the restaurant component and that makes it.

But overall in the entire RR&O restaurant retail and other, we are feeling headwinds from a macro perspective and they tend to operate in kind of in the same way from a consumer perspective.

And so, when we look at it, we're really obviously pleased on the services side.

And have -- continue to see kind of broad based strength and one of the things that on services is from a channel perspective, we have the opportunity to go after the multilocation opportunity.

The -- we've made product improvements over the course of the past year.

Our leads in API and improved business owner account to kind of take friction out of the process for those folks who have customer relationship management software.

And we've had very healthy dialogue and pilots to date.

We've also learned a lot from the SEM that we've done over the last year and being able to drive leads to particular customers.

So but going back to your original question on the RR&O its broad based against a restaurant, retail and other.

Okay, super helpful.

Thanks very much.

Robert Coolbrith, Evercore ISI.

Hi, good afternoon.

Thanks for taking our question.

I just wanted to ask, I don't think you talked about it but the changes in the consent regulations under the TCPA from the FCC.

Any sense of a tail into your business from maybe changes in the supply environment for leads and home services online or just any broad thoughts on puts or takes there.

Thank you.

Hey, Robert, this is David.

Thanks for the question.

In general that has not been as relevant for us as it is for other advertisers.

So I can't say that that's been a significant driver.

Okay.

Got it.

Thank you very much.

We have no further questions at this time.

With that, we will conclude today's conference call.

Thank you all for your participation and you may now disconnect.