Yelp Inc.
Q4 2019 Earnings Call Transcript

Published: 13 Feb 2020

[Operator:]

Good day and welcome to Yelp’s Fourth Quarter Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Ronald Clark, Head of Investor Relations. Please go ahead.

[Ronald Clark:]

Good afternoon, everyone and thanks for joining us on Yelp’s fourth quarter earnings conference call. Joining me today are Yelp’s CEO, Jeremy Stoppelman; our Interim CFO, James Miln; and COO, Jed Nachman.

[Jeremy Stoppelman:]

Thanks, Ron and welcome everyone. At the start of 2019, we launched this long-term strategic plan designed to deliver faster growth and improve Yelp’s structural economics. In the first year executing our plan, we accelerated revenue growth from 5% in the first half to 10% in the second half. We also expanded adjusted EBITDA margins to 21% in 2019 from 19% in 2018. These results reflect an ongoing transformation of our business model, which we believe is laying the foundation for sustainable profitable growth in years to come. The initiatives we pursued in 2019 delivered accelerating year-over-year revenue growth from the first to the second half of the year, while reducing our reliance on the local sales force, which was 10% smaller by the end of the year. Three facets of our long-term strategy were particularly impactful in driving 2019 to profitable growth. We improved retention of non-term advertisers’ budgets by a mid-teens percentage by delivering them more leads. We grew ad revenue from multi-location customers 22% by driving store visits to national advertisers in delivering compelling new advertising format. We also accelerated revenue growth in the self-serve channel to 30% in 2019 by introducing new product offerings across a range of prices and optimizing our claiming and checkout processes. These initiatives generated double-digit year-over-year revenue growth in the first quarter laying the foundation for a strong 2020. In fact, at the start of February, year-over-year growth in cost per click advertising budgets historically a reliable indicator of future advertising revenue, exceeded 10%.

[James Miln:]

Thanks, Jeremy. As Jeremy noted, the drivers of our profitable growth, stronger retention and the mix shifts to the multi-location and self-serve channels have improved our business economics and enabled us to reduce local sales headcount by 10% in 2019, while accelerating revenue growth from the first to the second half of the year. We believe the evolution of our business model has been significant and will allow us to continue to improve profitability in the years ahead. In our investor presentation, now on our Investor Relations website, you will find more detail around our growth strategy and revenue initiatives. I would like to take a moment to outline the three drivers of our path to greater profitability shown on Slide 21 of that presentation. First, our sales channel mix is evolving, away from dependence on adding sales headcount to drive revenue growth. By increasing growth in our most profitable channels, multi-location and self-serve, we expect our margin profile to improve. Second, we will look to our investments in new offerings and delivering greater value to advertisers to drive revenue retention improvements. We successfully executed this initiative in 2019 and plan to do so again in the year ahead. We believe there is significant opportunity to grow our bottom line over time by improving retention and benefiting from a greater percentage of our revenue coming from existing customers. Third, we are continuing to look closely at our corporate expense base and location footprint and see strategic opportunities for margin leverage over the next few years. In 2019, we greatly reduced our sales footprint in San Francisco and relocated significant portions of our G&A organizations from San Francisco to our Phoenix office reducing some recurring operating expenses. We are now expanding our engineering footprint in Toronto to tap into a strong pool of technical talent, while reducing our reliance on the high cost San Francisco Bay area. We expect the sales mix shift, retention gains and expense discipline we achieved in 2019 to help drive profitable growth again in 2020 and bring us closer to reaching our long-term target. Beyond revenue growth and margin expansion, we are focused on providing value to our shareholders through prudent capital allocation. We’ve had a robust, multiyear capital return program in place since 2017 and in 2019, our share repurchase program helped drive a 12% reduction in outstanding shares. As Jeremy noted, in January, our board authorized a $250 million increase in our share repurchase program, bringing the total authorized to nearly $1 billion since 2017. We will continue to allocate capital wisely with the two objectives supporting our strategy and increasing shareholder value.

[Operator:]

Thank you. Our first question today will come from Dan Salmon of BMO Capital Markets. Please go ahead.

[Dan Salmon:]

Hey, great. Good afternoon, everyone. Thanks for taking the questions. Maybe Jeremy, just in light of having the 2020 outlook now and seeing that growth still towards the bottom end of double-digit top line comparing to your mid-teens target that you are focused on over the long-term, could you just review us on what you see as being the top two or three elements to help us see that acceleration up there? I mean, on a high level, we know the multi-location business growing versus the local, but just maybe within that what are the two or three things you are focused on this year most to get you there? And then just maybe just a little bit more expansion on the new CFO hiring, you mentioned a unique combination of both financial and operational background, just maybe you could talk a little bit more about whether that means some different responsibilities that you see David coming in and taking? Thanks.

[Jeremy Stoppelman:]

Sure. Thanks for the question, Dan. So looking back at 2019, there was a real fundamental shift in our business model. We went from contract model with local advertisers driven by local sales headcount to one that is really led by product and engineering, better retention as well as the multi-loc opportunity, multi-location and enterprise opportunity. And so with that growth you get high - you get high revenue growth – higher revenue growth and you also get higher profitability. And in 2019 in the first half we saw a 5% growth accelerating to 10% growth in the second half. So that we think that we're well on our ways to an continued acceleration in 2020. I guess I would also like to point out that about 10% of our leads on Yelp right now are being monetized. So we feel like we have an incredible runway to continue accelerating revenue and profitability just by capturing more of the leads and directing them to our successful clients. And so that is a big part of what gives us confidence in 2020. On to your second about David Schwarzbach, our new CFO, really we were attracted to his experience at eBay, growing the North American Marketplace business. We also like what he was up to at Optimizely with an operational role there. We still see it as a CFO role here at Yelp. So I don't think there is a change in job description, but we like his financial acumen and operational experience, both I think are going to be helpful in 2020 and beyond.

[Dan Salmon:]

Great. Thank you.

[Jeremy Stoppelman:]

Sure.

[Operator:]

And our next question will come from Shweta Khajuria of RBC Capital Markets. Please go ahead.

[Shweta Khajuria:]

Great. Thank you. Could you please talk about your new product pipeline verified licenses and business highlights? These are great, just as you think about 2020, how – what’s your conviction around things that you are working on and any context there? Second is on SEO challenges. I know this is asked just about in every quarter, but when we look at app download growth that is decelerating, just thoughts on if you are seeing in app engagement grow? And if you're measurement of not only just app devices but internally do you measure other metrics that speak to growing engagement within app that offer you upside – that offer you cross-selling opportunities? And then the third is on just overall retention, it’s the balance of clicks and CPCs. Where do you see this go long term 2020/2021? Thanks.

[Jeremy Stoppelman:]

Sure. So I guess, I will take the first two questions here. As to products that are coming in 2020, I think it's along the same lines of doing more of what we did in 2019 is a big part of it. One of the most impactful things that we did was really improve our ad system targeting and batching serving the right ad to the right consumer at the right time. Ultimately that is going to drive a connection to the business that is successful and delivers value, which results in better retention. And so we have deep well of projects designed to continue improve that matching system. There is also more that we will do on the ad user experience. We have got a modern look coming in the app and site that we will continue to roll out to improve the consumer experience. We've got a new business owner – look and feel to the business owner experience. And then also making sure the pricing is right for the type of business based on category as well as whether they are a new business or an established business, it's been around for a while. So we have got a whole host of exciting things coming in 2020 that I think will continue to accelerate revenue and drive retention improvements. And then, your second question was around MAUs – app MAUs, what's going on there. Big change that we made last year was backing off on some of our consumer marketing which was paid installs. And so we drove that down which increased profitability and we are leaning more on our restaurant investment in Yelp Reservations and Waitlist which drives millions of downloads and it's going to continue to grow at a rapid clip. We also see puts and takes from Google. You mentioned SCO, that’s still a factor although we believe we are less dependent on Google than certainly we have been in the past. And early last year, we actually saw benefits from some Google algo changes and in Q4, we saw some headwinds in that regard. So there is ups and downs. But we have a number of different levers. And I guess backing up to the fact that we have 10% of our leads monetized, we feel like we have plenty of inventory and opportunity with the traffic that’s on the site today. And Comscore has us at about 100 million monthly users right now. And then on to retention, CPCs – well, is there a question there?

[Shweta Khajuria:]

Well, what’s the trend that you’ve seen and where do you see that go? I mean it is the difference between pricing and the clicks. You’re offering greater value to advertisers and that’s driving retention. Where do you see that go long term? I mean do you think that the difference will narrow over time?

[Jeremy Stoppelman:]

I mean – what we’ve seen is as we drive more value to our advertisers, we do tend to see better retention and so we have a laser focus on continuing to improve matching. In fact in home and local services over the last year, we doubled the number of leads going to those advertisers and that business grew at a healthy teens clip. And so we have got a whole list of projects to continue pushing value to advertisers and we think that’s going to show up in retention in 2020 as well.

[Shweta Khajuria:]

Thanks, Jeremy.

[Jeremy Stoppelman:]

Sure.

[Operator:]

Our next question will come from Justin Patterson of Raymond James. Please go ahead.

[Justin Patterson:]

Great. Thank you very much. Jeremy, I wanted to go back to that stat that you had mentioned a few times, fewer than 10% of leads are generating revenue. How much of that is just intrinsic to the category and simply challenging approved ROI? And then how much of that is solvable with these new products and better sales motion? How many of these leads do you think you can monetize over time and how quickly can you solve that? Thanks so much.

[Jeremy Stoppelman:]

Sure. I mean I was just mentioning how in home and local category we doubled lead last year – leads last year and we think we have a long runway of additional projects to continue driving up the number of leads. I think if you look Yelp from an ARPU standpoint relative to other peers in the space, we are a little bit low and we think we can do better by driving more value to our advertisers and moving that number up. So I don’t have a specific, but I can tell you we’re obviously guiding to continue the acceleration on revenue and profitability and that’s going to be driven by better monetization.

[Justin Patterson:]

Got it. Thanks.

[Operator:]

Our next question will come from Cory Carpenter of JPMorgan. Please go ahead.

[Cory Carpenter:]

Great. Thanks for the questions. Two, if I could. First on products, could you talk about the adoption of some of your newer ad units maybe which are having the biggest impact? And then on sales force with head count expected to be flat in 2020, could you talk about where you expect to see the productivity gains come from and how you are thinking about the opportunity to bundle some of the new ad products together? Thanks.

[Jed Nachman:]

Yes, sure, I can take this one, In terms of the additional products, we – since the inception of some of the initial profile products we have about 70,000 customers who have adopted them. Those are largely getting bundled with our CPC ad product right now and we are thrilled with the progress. We do see these products as a launching point and a really important first step in being able to sell the right products to the right customers at the right price. Traditionally we have been kind of a one size fits all product. Yet local businesses are really different, some are starting out on their journey as local business, some have been around for a while, some are in different geo cats. And so we believe that over the course of 2020, we have the opportunity to really become targeted in terms of how we merchandise those products across that potential customer base. And so there is a, I’ll say, deep well of additional things that we have in the pipeline. We are not going to go on kind of specifics about those. But ultimately, we believe that the TAM is there to be able to kind of hit different points within the life cycle of these local businesses. On the second question around headcount and how can we kind of maintain that productivity with flat headcount going to 2020, obviously in 2019 we got a good start on that process. We were able to – overall sales force headcount was down about 6%, 10% in the local sales force and yet we were able to accelerate revenue throughout the back half of the year, and do so while still driving margins. And so that’s encouraging first step in this process. And when you think about the shift and the mix shift from that local sales kind of add water by local sales headcount instead moving toward multi-loc and self-serve, both of which grew healthily I think multi loc 22% year-over-year and the self-serve at 30% year-over-year. Those are going to have embedded productivity improvements along with the retention improvements. And so part of that productivity equation is not only what can we do on the acquisition side, but what is happening on the back half in terms of LTV and we’re really encouraged with the signals that we are seeing. And then I guess finally, going back to kind of the first part of your question which was additional products. We did have success last year in releasing additional products to the sales force. It gives – tends to give a shot of energy and gives them something to talk about with clients and we believe we will continue to kind of have that opportunity throughout 2020. And I guess I would just end on the drivers on the mix shift moving to self-serve and multi loc are also going to kind of drive the profitability profile as well.

[Cory Carpenter:]

Okay. Thank you.

[Operator:]

Our next question will come from Brian Fitzgerald of Wells Fargo Securities. Please go ahead.

[Omar Dessouky:]

Yes. Hi, this is Omar Dessouky for Brian. Do you see any interesting dynamics in your various verticals? And we think a lot of vendors are engaging with the CPC model. Does it alter the search order in anyway if they’re not a CPC user?

[Jeremy Stoppelman:]

This is Jeremy. Yes, I guess it depends on the context that you are talking about. Request a Quote for instance when you request a quote it’s largely going to paying advertisers so that lead would be routed to paying advertisers whenever possible. If you go through the search experience, there is clearly marked ads and then a organic concept, much like Google. And so if you are talking about the organic listings, those are not impacted by ad status.

[Operator:]

We will move to our next question. Our next question will come from Brent Thill of Jefferies. Please go ahead.

[John Colantuoni:]

Thanks. This is John Colantuoni on for Brent. It sounds like you had strong customer acquisition budget retention so far in the first quarter. Given this dynamic, can you comment on why guidance for first quarter revenue growth is below the full year rate despite an easy year-ago comparison? Thanks.

[James Miln:]

Yes. Thanks John. This is James. So it’s something we pointed out in the letter is that we are seeing more pronounced seasonality in our business. We saw it especially following the move to non-term contracts a year and a half ago. And so this is the first full year of that in place. It’s become a large part of our business. Also multi-location is becoming a larger part of our business and that has very strong seasonality into Q4 and then into Q1. So what you’re seeing from Q4 to Q1 is driven by some of that the mix and seasonality and we build that into our guide. And then as we look at how the year is starting on bouncing back on the local side on those trends in retention and acquisition are looking really good. They compound over time. So you don’t necessarily flow through that revenue immediately, but we feel really good about how those build into our outlook for the year. So that’s all being built into those numbers, and I think we’ve seen January and we see where we are on February and we think that the range is very solid in terms of eight to 10.

[John Colantuoni:]

Great. And I believe most of the early uptake of your recent products like Verified Licenses and Business Highlights were primarily coming from existing advertisers. Can you discuss whether you are starting to see these products bring in a greater share of new customers and how you see these types of offerings helping to drive more ad revenue over time? Thanks.

[Jed Nachman:]

Yes, I can take that one. I guess I wouldn’t say necessarily there all those products are attaching to existing customers. I think a lot of that comes through new acquisition and it increases the value of kind of the ad packages that folks are buying predominantly through the local sales force and the self-serve channel. So we believe that it is opening doors and allows us to kind of juice that productivity as a result of having those additional products. Certainly we look to kind of expand and there is an effort obviously to go and up sell into our existing client base and we do see some nice returns from that. Ultimately we believe these products have the ability to kind of open doors to other segments that may not be ready to go buy a full-fledged advertising program and there is a deep well of things that we can kind of continue to release out to the sales channels in order to get to the sales channels in order to get that done.

[John Colantuoni:]

Okay, thanks so much.

[Operator:]

Our next question today will come from Matthew Thornton of SunTrust. Please go ahead.

[Anthony Duplisea:]

Thanks for taking the question. This is Anthony Duplisea on for Matt. Hoping you could discuss a little bit about the impact of some of the board additions in 2019 and whether there has been any change to how you are thinking about partnerships and/or M&A?

[Jeremy Stoppelman:]

Sure. This is Jeremy. So first question was board impact, yes, we on-boarded three new board members in 2019, it’s been great to have their energy and interest and experience. I think it’s been a positive and that also leads us to 2020 where we have now announced that we are adding Christine Barone to the board and long-time board member Mariam Naficy has retired from the board. And I think it’s a positive to continue to bring in fresh eyes and fresh energy and new expertise. So that’s why we are continuing on that path to continue to improve and refine our board governance and leadership. On partnerships and M&A, we continue to be very open to the idea of partnerships. We continue to have a good relationship with Apple, a good relationship with Grubhub. Conversations are ongoing. And ultimately what we are focused on is providing profitable growth to shareholders as well as delivering a fantastic consumer experience. So when those two things align then we are always happy to do deals. And on the M&A side, we don’t really comment or speculate on M&A. So, we will pass on that one.

[Anthony Duplisea:]

Understood. Thanks.

[Operator:]

And our next question today will come from Ygal Arounian of Wedbush. Please go ahead.

[Ygal Arounian:]

Hey guys. Thanks for taking the question. I may have missed some of this commentary. I had to jump around a few calls. Just wanted to dig into the seasonality a little bit more, those unexpected in December, maybe just try to parse out and understand a little bit better what drove the weaker than expected seasonality in December? What were the factors that kind of led to the bounce back in January just kind of the ins and outs of what were the moving pieces there? And then on PALs, they decelerated somewhat meaningfully from 3Q it was the first time it’s decelerated all year, maybe just if you could talk about PALs and expectations there going forward as well would be helpful? Thanks.

[James Miln:]

Hey, Ygal, it’s James. So I will cover seasonality and I think Jed will be able to talk about the PALs. So yes, we talked about this in the letter. I mean I think it’s important to help everyone understand that we are seeing more profound seasonality as our non-term contract structure has now had a full year and that becomes a bigger portion of our overall business. And we saw some of this a year ago, but it’s a larger piece of our business now and we have also been driving a lot of initiatives over the year to improve seasonality. And so the ongoing improvements we saw in retention throughout the year narrowed a little bit in the final month in December and that was the thing that was not – we did not sort of see in our outlook and made us come in a little bit under where our expectations were. Having said that, as we entered into January, we saw that retention improvement year-on-year actually grow back and expand a little bit as well and so as we said seeing sort of record level of retention and a great performance from our sales team in terms of acquiring new business in January. So, we think that December, January thing is here to stay and probably as that business becomes bigger could also become more pronounced.

[Jeremy Stoppelman:]

Yes and I can take the PALs. Obviously, it’s a combination of both our local and our multi-loc that contribute to PALs, but I would say, specifically within multi-loc, the dynamic is not that multi-loc advertisers come on and add necessarily a bunch of new locations to start spending money on in the fourth quarter, which by the way is a very seasonally high quarter for them in both retail and restaurants. It really typically comes out from a revenue perspective in adding more budget into the existing locations that they have. And so I think you see a little bit of that dynamic happening in terms of PALs. We don’t manage that number specifically on PALs. We are really concerned about how do we drive the most revenue in the most profitable way and so that’s kind of what was happening.

[Ygal Arounian:]

Okay, thanks. That’s very helpful.

[Operator:]

Our next question will come from Sean Henderson of D.A. Davidson. Please go ahead.

[Sean Henderson:]

Hi, guys. Thank you for taking my question. So just one question from me kind of a broader industry question, could you guys provide a little color maybe on any of the effects felt or any impact from the rollout of CCPA and how that’s kind of affecting your advertising business?

[Jeremy Stoppelman:]

Yes, Sean, thanks for the question. First off, we don’t sell any data that’s covered by CCPA to third-parties. And additionally, we have already made the necessary adjustments to comply with CCPAs. So, we don’t see any major impacts to our business at this time.

[Sean Henderson:]

Got it. Thank you very much.

[Jeremy Stoppelman:]

Sure.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session and also conclude Yelp’s fourth quarter 2019 earnings conference call. We thank you for attending today’s presentation and you may now disconnect your lines.