Yelp Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 11 speakers on the call.

Operator

Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Yelp Inc. Q1 2024 Earnings Conference Call. Please note that this call is being recorded.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn today's call over to Josh Willis, Yelp Investor Relations. Please go ahead.

Speaker 1

Good afternoon, everyone, and thank you for joining us on Yelp's Q1 2024 earnings conference call. Joining me today are Yelp's Chief Executive Officer, Jeremy Stoppelman Chief Financial Officer, David Schwarzbach and Chief Operating Officer, Jed Nachman. We published a shareholder letter on our Investor Relations website and with the SEC and hope everyone had a chance to read it. We'll provide some brief opening comments and then turn to your questions. Now, I'll read our Safe Harbor statement.

Speaker 1

We'll make certain statements today that are forward looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events. In addition, we are subject to a number of risks that may significantly impact our business and financial results. Please refer to our SEC filings as well as our shareholder letter for a more detailed description of the risk factors that may affect our results. During our call today, we may discuss adjusted EBITDA, adjusted EBITDA margin and free cash flow, which are non GAAP financial measures.

Speaker 1

These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles. In our shareholder letter released this afternoon and our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding these non GAAP financial measures as well as historical reconciliations of GAAP net income loss to both adjusted EBITDA and adjusted EBITDA margin and a historical reconciliation of GAAP cash flow from operating activities to free cash flow. And with that, I will turn the call over to Jeremy.

Speaker 2

Thanks, Josh, and welcome everyone. As we approach 20 years of helping people connect with great local businesses, I am proud of the impact Yelp has had on the many communities we serve. We continue to lean into our strategic focus on services categories and we have already seen momentum in our efforts to deliver the best home services experience for consumers and pros. In the Q1, net revenue increased by 7% year over year to $333,000,000 Net income was $14,000,000 reflecting a 4% margin and adjusted EBITDA increased by 19% year over year to $64,000,000 representing a 19% margin. These results reflect our efforts to improve profitability even as we continue to invest in our strategic growth initiatives.

Speaker 2

While businesses in our restaurant, retail and other categories continue to face a challenging operating environment in the Q1, home services was again a standout performer with approximately 15% year over year revenue growth. Advertising revenue in our services categories grew 11% year over year. Request to quote projects increased by approximately 20% year over year in the Q1, reflecting early positive results from our acquisition of services projects through search engine marketing, as well as continued strength from organic consumer demand. In key categories like movers, we have seen significant increases in request to quote projects and ad clicks as well as a meaningful decline in average CPCs. These promising results were largely driven by our paid project acquisition efforts and as a result, we plan to continue investing to capture more of the large market opportunity in services.

Speaker 2

As we continue to execute against our robust product roadmap, we introduced more than 15 new features and updates in April. One standout in services is our new LLM powered Yelp assistant. This conversational AI can more accurately interpret a consumer's needs, collect relevant project information in a user friendly way and deliver an even more targeted lead to service pros. We also see a broad set of opportunities to bring our trusted content to consumers in new ways. This includes our Yelp Fusion AI API, a new LLM powered solution enabling partners to tap into Yelp's trusted content.

Speaker 2

This tool enhances discovery on third party platforms through natural language search across our broad range of categories, including both services and RR and O, expanding Yelp's reach and utility across the web. We believe these new offerings, along with dozens of other AI powered initiatives on our roadmap, will transform how consumers and businesses connect on Yelp. In summary, Yelp's Q1 results marked a solid start to the year and I continue to be excited about the depth and breadth of our robust product roadmap, particularly in services. Overall, we remain confident in our strategy to drive long term profitable growth and shareholder value. With that, I'll turn it over to David.

Speaker 3

Thanks, Jeremy. In the Q1 of 2024, we saw net revenue increase by 7% year over year to $333,000,000 Our net income for the quarter was $14,000,000 or $0.20 per share, improving from a net loss of $1,000,000 in the Q1 of 2023 and reflecting a 4% margin. Adjusted EBITDA increased by 19% year over year to $64,000,000 which was $12,000,000 above the high end of our outlook range, representing a 19% margin. This growth was driven by solid performance in our services categories. Advertising revenue and services increased by 11% year over year to $203,000,000 led by strength in home services, where revenue grew by approximately 15% year over year.

Speaker 3

Investments in Request A Quote drove an approximately 20% year over year increase in Request A Quote projects, underscoring the effectiveness of our product led strategy and early progress in our efforts to acquire projects through paid search. Advertisers also responded positively to our improved matching services in the Q1 as reflected by a 6% year over year increase in paying advertising locations in these categories, even as our overall paying advertising locations decreased by 4% year over year. Advertising revenue from our restaurants, retail and other categories grew a modest 1% year over year to $114,000,000 in the quarter. This reflects the challenging operating environment facing businesses in these categories characterized by elevated input costs, inflationary pressures and an inability to pass along higher cost to consumers. Additionally, we may be seeing impacts from trends associated with off premise dining and delivery.

Speaker 3

Multi location revenue increased by approximately 5% year over year in the Q1 also attributable to softness in our R and M. We are actively working on enhancing the request a quote experience to enable more multi location services businesses to benefit from this valuable feature. For example, we are in the process of launching an API that aims to streamline the tracking of leads and enhance conversion rates for enterprise customers by connecting directly to their customer relationship software. Our ad system continued to deliver valuable clicks to advertisers in the Q1. We saw an 8% year over year increase in ad clicks across all categories, while average cost per click declined by 1% with more substantial decreases in services, reflecting the increased value we delivered to these advertisers in the quarter.

Speaker 3

We believe our improved ad formats and lower CPCs contributed to year over year increases in our retention rate for non term advertisers budgets in the Q1. Improvements to the ad purchase flow, along with enhancements in our advertiser marketing, drove another record quarter for customer acquisition in our self serve channel. Self serve channel revenue has increased at a compound annual growth rate of approximately 25% since the Q1 of 2021. We also continue to identify opportunities to work with other platforms like Facebook and Firefox to tap into searches with local intent that start off of Yelp with the goal of matching our advertisers with an even larger high intent audience. Turning to expenses, in our Q1, we continued to be disciplined in our allocation of resources, while focusing on opportunities that have the potential to drive incremental returns.

Speaker 3

This resulted in an improvement of our adjusted EBITDA margin by 2 percentage points year over year. We also reduced stock based compensation expense to 13% of revenue, a 2 percentage point decrease from last year and believe we are on track to reduce it below 8% by the end of 2025. We continue to expect the number of shares subject to employee equity awards granted in 2024 to be approximately 65% lower than in 2023. Returning capital to shareholders through share repurchases continues to be a key element of our capital allocation strategy. In the Q1, we repurchased $62,500,000 worth of shares at an average purchase price of $40.95 per share.

Speaker 3

As of March 31, 2024, we had $519,000,000 remaining under our existing repurchase authorization. We plan to continue repurchasing shares in 2024, subject to market and economic conditions. Turning to our outlook, as Jeremy shared, we are confident in our strong portfolio of initiatives to drive long term growth. We expect net revenue will be in the range of $350,000,000 to $355,000,000 for the Q2. For the full year, we are reaffirming our guidance and expect net revenue to be in the range of $1,420,000,000 to $1,440,000,000 as our services initiatives gain traction.

Speaker 3

Turning to margin, we expect 2nd quarter cash expenses to increase from the Q1, largely driven by incremental marketing investments, particularly in paid project acquisition. The early positive results from our paid search program have given us the confidence to expand our investments in this area, which we believe can drive project growth over the long term. We now expect to spend $40,000,000 or more on Services project acquisition in 2024. As a result, we anticipate 2nd quarter adjusted EBITDA will be in the range of $70,000,000 to $75,000,000 We are also narrowing our 2024 adjusted EBITDA guidance to $315,000,000 to $325,000,000 to reflect this increased investment. Prices in our cost per click model are set through an auction as compared to the cost per lead model.

Speaker 3

In the past, we have found that when we deliver more clicks for a given amount of advertising budget, average CPCs decline. In turn, as advertisers see more value, they generally increase spend over time. However, there is typically a significant lag between a decline in CPC and an increase in ad budget. Given the dynamics of this interaction as well as the fact that we remain at an early stage in our paid project acquisition initiative, we have not reflected any potential related revenue in our guidance for 2024. In closing, Yelp's Q1 results reflect our multiyear focus on product innovation and the application of AI across our business.

Speaker 3

We are proud of our team's ability to execute against our strategic initiatives, particularly the work being done to unlock even greater value for consumers and service pros. We have continuing confidence in our ability to innovate, grow and drive shareholder value over the long term. With that operator, please open up the line for questions.

Operator

Thank you. We will now begin the question and answer Our first question comes from Jason Kreyer with Craig Hallum. Please go ahead.

Speaker 4

Thank you. This is Cal on for Jason. First question from me. I'm just wondering any learnings, anything new in Q1 that you saw as you continue to ramp that paid search budget? And what opportunities do you see for further efficiencies as you continue to ramp up?

Speaker 2

Hey there, Cal. This is Jeremy. I think I can take that. We were really pleased as we expanded our paid budget there. This is a moment we've been building towards over a multiyear period, really leaning into services and in particular request to quote.

Speaker 2

And it seems like it's paying off. Q4, we had some test budget and Q1 was really about getting that to more significant scale. And I think if you look at our project volume, you could see that the needle has been moved. And I would say a portion of that is our paid efforts. And then of course a portion of that is leading into product and engineering enhancements and features.

Speaker 2

And I think the results, the early results are really looking great. 20% year over year project volume, clicks, ad clicks are up, CPCs are down, especially in these categories where we've added paid budget. And I think from a headroom standpoint, we're just getting started. It's still early for us. There's a lot of optimizations that we can continue to make friction that we can take out.

Speaker 2

And then of course there's the amount of budget that we can put into it. So I think we're on the offense on this one and really excited to see how it plays out across the year and in the years ahead.

Speaker 4

Great. And then last one for me. Just wanted to touch on the Yelp assistant. Could you provide some more color on what you're seeing as far as reducing that consumer friction? I know it's early, but just curious what you're seeing in terms of reducing that friction point and increasing those conversion rates?

Speaker 2

Sure. I can take that one too. LOMs are really important part of what we're doing. And we've been of course incorporating AI capabilities for many, many years. I think Yelp Assistant reflects something that just frankly wasn't possible a few years ago.

Speaker 2

It's a really exciting way for consumers to interact with Yelp. When they have a project in mind, they can talk to a friendly assistant that guides them through the process, collects all the relevant information and then ultimately ask them if they'd like to submit that project and get multiple quotes on it. We've added it to the project tab as a first step within the app and we're seeing great results there. It does seem to resonate with consumers and we'll be evaluating and testing different entry points all over the mobile web, desktop web as well as app to make sure that we're able to leverage it to maximum.

Speaker 4

Perfect. Very appreciated. Thank you.

Operator

Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

Speaker 5

Thanks so much for taking the questions. Maybe 2 if I could. We saw the announcement with perplexity and just kind of curious if you could give us some sense of how that relationship might evolve and grow and what the scope might be for additional type partnerships when you think about the rise of AI as consumer facing to an increasing amount in the years ahead. The secondary comment you made about competition for ad dollars in the local space with some of the delivery providers and the like. Can you go a little bit deeper on what you're seeing there in terms of teasing out either the cyclicality versus maybe some of the competitive dynamic that was putting some pressure on that business?

Speaker 5

Thank you.

Speaker 2

All right. I can take a stab at the first question there. Maybe Jed can jump in on the second one. So excited to see the Perplexity partnership happen. They're obviously early innovator trying to push search forward.

Speaker 2

And I think the important takeaway is that when a company trying to deliver a great search experience is in need of great local content, they turn to Yelp. And so that's exciting validation for us. Certainly, there's a lot of activity in the AI space in general and the data licensing space in general. And our door remains open. We're having lots of conversations and we do as a reminder have a pretty sizable data licensing business with a whole variety of different partners in a whole wide array of different industries.

Speaker 2

We do see AI licensing is a potentially new area. And in fact, we just released in our spring product release the Yelp Fusion AI API, which delivers a conversational search experience essentially. So that's new to the market. Conversations are happening and we're excited to see what innovators do with that, green yield content all over the web and into interesting new AI applications.

Speaker 6

This is Jed. I can take the second question on competition. Certainly in the Q1, we saw some continued pressure in the restaurant that through some of the inflationary pressures to the consumer, that those days have ended. And then a marginal impact from the broader industry shifts to off premise certainly when you look at some of the delivery platforms and kind of the pay to play that happens on those platforms. At the margin, we believe there's some of those dollars going over to those platforms.

Speaker 6

But largely, it's a macro impact. At some point, we do believe that R and O will come back. We don't really have the conviction as to the specific timing given the market conditions. Timing is hard to tell. We are well positioned, however, to take advantage when some of the underlying economic drivers improve.

Speaker 6

We're staffing against the opportunity, as well as continuing to innovate via the product side. And in the meantime, stepping back broadly, we're laser focused on the opportunity and services and believe that we're in a really strong position to take share. Specifically around the enterprise, we believe that we're somewhat under penetrated and have really started to implement initiatives and invest in services for the enterprise, including better ways to integrate with the CRM and lead management systems on the client side in order to drive more RAQ adoption and that's certainly going to be impacted by our new services project acquisition strategy as well.

Speaker 3

Thank you.

Operator

Our next question comes from Sergio Segura with KeyBanc. Please go ahead.

Speaker 7

Great. Thanks for taking the questions. We had 2. So the high end of the EBITDA guide was lowered after EBITDA this quarter was above expectation and then the revenue outlook for the year was also unchanged. I guess can you just walk us through what gives you confidence in stepping up the investment for this year without seeing those revenue returns that is contemplating your outlook for 2024?

Speaker 7

That's the first question. And then second on R and R and O, you talked about some weakness you saw last quarter. I guess how did the softness play out versus your expectations? And then a month into this quarter, how are trends in that segment relative to what you saw in the Q1? Thank you.

Speaker 3

Hey, Sergio, it's David. Thanks for the question. So first, obviously, we have the increased spend in Q1. We went from $2,000,000 at the end of Q4 to $7,000,000 dollars And what we saw in the categories where we are buying projects with Movers as an example is that we saw significant increases in projects. We saw significant increases in clicks and we saw meaningful declines in cost per click.

Speaker 3

Now in the past, when we have been able to deliver more value in the way that we think about values, more clicks at better pricing, which is what we are seeing in movers in the Q1, In time, we see that ad budget increases, but it takes time because the mechanism for us is very much through the auction system where we're adding consumers and then those advertisers seeing higher quality leads, more valuable leads for the price that they're paying and then they adjust their budget over time. Now obviously, we want to drive good economic returns, but the timeframe between when you actually spend and when that shows up in budget has been elongated in the past. But I just want to underscore broadly when we've done this in the past, we have seen it show up in ad budget. So we'll look forward to sharing with you updates obviously when we get to the Q2 call and the Q3 call. In terms of the guidance, because of the strong early results that we saw in the Q1, we wanted to provide insight into how we were going spend through the year and the fact that we did intend to absorb some of the EBITDA into paid project acquisition.

Speaker 3

I do want to underscore that we think overall the broad efforts that we've made over the past several years to drive efficiency still continue. And just as a couple of important points, we obviously achieved a 25% adjusted EBITDA margin. In 2023, if you look at Q1 expenses, they're only up 1% compared to Q1 of last year. So in Q4 this year, overall expenses up just 1% compared to Q1. We think that we've given ourselves capacity to make this type of investment.

Speaker 3

But again, I just want to underscore that we continue to drive efficiency in order to give ourselves this type of operational flexibility.

Speaker 6

And this is Jed. I can take the second question. Yes, in terms of R and R, our R and O weakness in the Q1, it was a continuation from what we started to see in the Q4 and as we mentioned in the Q4 call. And in terms of moving into the Q2, our expectations are reflected in the guide. I think it's important to mention too that we're seeing the R and O impact in both local as well as on the multi look channel and obviously multi location would take the brunt of that given the revenue mix.

Speaker 7

Very helpful. Thank you, both.

Operator

Our next question comes from John Colantoni with Jefferies. Please go ahead.

Speaker 8

Thanks for taking my questions. Wanted to zoom in a little bit on the SEM efforts. I think return profiles in general across SEM sort of are often dependent on repeat behavior since that initial paid click isn't profitable. For Yelp specifically, would you characterize the initial return profile and payback of SEM? Or how would you characterize the initial return profile and payback of SEM?

Speaker 8

And how those KPIs translate into revenue and profitability in the near and long term? Thanks.

Speaker 2

Hi, John. This is Jeremy. I can take that. Yes, as we're ramping projects, paid projects here, we do believe we have a unique take, a unique approach to this space. Yelp

Speaker 3

obviously has

Speaker 2

a really strong brand. We're very cross category. And so unlike other players that maybe have invested significantly in this space, we have the reason to talk to consumers for a wide variety of different use cases. And so I think that does give us a very unique advantage in continuing that conversation. And I think certainly to provide outsized economics, you're right, we're going to have to drive repeat behavior.

Speaker 2

Right now, it's obviously very early. We just got out of a test quarter in Q4 and we're ramping in Q1. And so what we're looking at and working with is sort of very early data. But I think we can say for sure that the early metrics are looking good with projects being up 20%, with ad clicks being up as well and CPCs being down. So that's what we wanted to see out of the gate.

Speaker 2

And then I guess the other thing I'd point to is that Yelp historically has been very product and engineering driven. We invest a lot in R and D. And I think that allows us to provide a consumer experience across our app, across the web, across mobile web that will be and frankly is unparalleled in the space. I think Yelp Assistant is a fantastic example of that. No one else has anything like that in the space period.

Speaker 2

We are the innovator there. And I think you can expect to see more goodness just like that in the future.

Speaker 9

Thank you.

Operator

Our next question comes from Josh Beck with Raymond James. Please go ahead.

Speaker 9

Hi. This is Geeshan Patel on for Josh Beck. Thanks for taking our question. Any color you can share around consumer engagement and the impact around monetization of services? And what metrics are you tracking or managing towards in terms of improving lead gen results?

Speaker 2

This is Jeremy. From a on the services side, we've obviously been investing significantly in our product. I think a great example of that as I just talked about is Yelp Assistant, where we're trying to be really innovative there. And the response we're seeing from consumers is positive. It's within the project tab in the app.

Speaker 2

We continue to invest in streamlining our request to quote functionality, making that easier for folks to use. I also think it's important to reflect on the business owner side of the equation. I think there's a lot of opportunity there as well, Thinking about making it even easier for businesses to reply and provide good correspondence back to consumers, whether it's quotes or improving the responses, I think is going to be a really great opportunity for us and one that also lends itself to AI improvements as well. So we'll keep you posted as we continue to make improvements. But we've come a long way and I think that's reflected in the excellent project performance, request quote projects being up 20%, shows we're doing some things right.

Speaker 2

And again, part of that is the paid projects that we're driving and part of that is the continued innovation and streamlining of our services, features and functionality.

Speaker 3

And I can add, this is David. On the monetized connections front, there are 2 things happening. 1 is we continue to make improvements and drive increased monetization of connections and we continue to make progress on that in the Q1. And as we acquire leads through paid search from Off Yelp traffic, you are going to see that metric move because you're adding obviously, when we bring someone in, we want to see clicks to make the economics work. So you're going to see both the numerator and the denominator increasing and that's going to increase the percentage there.

Speaker 3

But we are seeing strength in both. And just to say the obvious, if we get better and better at monetizing connections, that makes it all the more valuable to bring additional projects onto Yelp. So there's a positive loop there. So we'll provide more updates as we go through the year on the progress that we're making. And then, of course, we give the monetized connection number annually.

Speaker 3

So when we get to the Q4 call in 2025, we'll give you the numbers there, but both saw strength in the Q1 driven by those product improvements and through the projects that we were purchasing.

Speaker 1

Got it. Thank you very much.

Operator

Our next question comes from Jan Lee with Evercore. Please go ahead.

Speaker 10

Great. Thanks for taking the question. First, I want to just double click on your comment on the CPC. You're leaning into investment. You're seeing conversion, but the CPC is pretty muted.

Speaker 10

Is it just the nature of kind of the current ad market condition? Or is there anything you're doing on your ad tech side that's really improving targeting? And maybe you can kind of talk about what you're seeing in the competitive intensity of this ad bidding in the services sector specifically outside of the day to day volatility? Thanks.

Speaker 3

Yes. Thanks for the question. This is David. So one thing one dynamic at play here is obviously we report the blended change in CPCs. Now obviously that consists broadly of services and restaurant, retail and other and then obviously there are sub categories to each of those.

Speaker 3

And what we have seen, I just want to start with the paid project acquisition piece. What we have seen is meaningful reductions in the subcategories where we are purchasing projects and we're very encouraged by that. But we also saw declines in CPCs greater than the minus 1% in services broadly. That's really coming from the continuous improvement in the ad matching technology, which itself is a combination of better information from the consumer as well as continued improvement in the algorithm, plus obviously having those service pros available to us. So we've made progress on that front as well and we're very pleased.

Speaker 3

I'd just point out overall we went from CPCs growing 4% in the Q4 to -one percent in the Q1. That's still a very meaningful move in aggregate and that is being very much driven on the services side where you have much smaller number of clicks. So super happy with that. In terms of like bidding intensity for these types of projects, obviously, we are targeting a return on those projects and we've been so far pleased by the price that we are able to acquire projects at. And to the point where we're willing to increase spend in 2024 obviously to the $40,000,000 or more.

Speaker 3

So very pleased overall with that. And I think just maybe to as a final comment, when we make improvements as Jeremy has talked about with something like Yelp Assistant and we really get better and better at engaging the consumer, creating a great experience for them. We obviously want to see them come back, but we're also getting more information about the specific job they have that really helps us with the matching. And that increased information translates quite directly into improved CPCs, which in turn results in better cost per lead economics for service pros. So we're happy overall with the progress that we're making.

Speaker 3

And I just underscore there's actually lots and lots of projects underway and a lot of room yet to go on continuing to improve that.

Speaker 10

Great. That's super helpful. And maybe just a follow-up. You shared your general like share buyback expectations. That's really helpful.

Speaker 10

But given you're leaning into investment and it sounds like there's still a lot of like buyback? Is there anything that we should consider in the near term cadence of share buybacks? Any, I guess, near term changes to our capital allocation?

Speaker 3

Thanks for that question. So in the Q1, we did buy back $62,500,000 of stock. We had been quite consistently buying in prior quarters $50,000,000 So we saw an opportunity to in the Q1 return additional capital. And we also in the Q1 generated $66,000,000 in free cash flow and we ended the quarter with $421,000,000 in cash. As you know, we're committed to returning capital in excess of our target cash balance.

Speaker 3

Our perspective on that has not changed and we remain committed to doing that. So I think the I just go back to a comment I made earlier. We think that we have continued to drive real efficiency at Yelp over the past several years. And again, I just point out overall expenses being only up 1% in the Q1 of 2024 compared to 2023 as a reflection of that. So we are creating the capacity to invest at the same time that we're still driving what we think are strong economics for the business.

Speaker 10

Awesome. Thanks a ton.

Operator

There are no further questions in the queue. This will conclude today's conference call. Thank you all for your participation and you may now disconnect.

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Yelp Q1 2024
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