Yelp Inc.
Q3 2020 Earnings Call Transcript

Published: 5 Nov 2020

[Operator:]

Good day, and welcome to Yelp's Third Quarter 2020 Earnings Conference Call. . At this time, I'd like to turn the conference over to James Miln, Vice President of Finance and Investor Relations. Please go ahead.

[ames Miln:]

Good afternoon, everyone, and thanks for joining us on Yelp's third quarter 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 the shareholder letter on our investor relations website and with the SEC about an hour ago. I hope everyone had a chance to read it.

[Jeremy Stoppelman:]

Thanks, James, and welcome, everyone. Yelp's third quarter results demonstrate our business' considerable resilience. Although we clearly remain in the midst of a pandemic, in the third quarter, we were excited to see significantly improved business performance from the second quarter and signs that our long-term strategy is working. Third quarter net revenue grew by 31% from the second quarter as both consumers and local businesses turn to Yelp as their trusted resource for adapting to the new normal. This revenue, coupled with strong expense management, enabled us to deliver a 24% adjusted EBITDA margin, demonstrating our ability to perform under the most challenging and circumstances. Traffic and engagement trends showed robust improvements in the third quarter. Overall page views and searches increased by approximately 40% from the second quarter, while App Unique Devices rebounded by $4 million from the second quarter to $32 million. Consumers turned to Yelp for our trusted content and added more than 5 million reviews in the third quarter. Our balanced ratings and high-quality reviews continue to differentiate us from competitors.

[David Schwarzbach:]

Thanks, Jeremy. As Jeremy highlighted, we were pleased to see improving trends across both consumer and business metrics in the third quarter. Net revenue increased by $52 million from the second quarter to $221 million in the third quarter resulting in a 16% year-over-year decline and a net loss of $1 million. Ad budgets improved steadily throughout the quarter, highlighted by our home and local services category, which grew by a mid- single-digit percentage compared to the third quarter of 2019. In addition, nonterm advertiser retention improved by more than 25% compared to the third quarter of 2019. The returning to the year-over-year retention gains we saw back in February. And many of our multilocation advertisers returned to spend in the third quarter after receiving relief in the second quarter, which drove a 34% quarter-over-quarter increase in paying advertising locations to over $500,000. This strong revenue performance, combined with a leaner cost structure and favorable expenses enabled us to deliver $53 million of adjusted EBITDA and a 24% adjusted EBITDA margin, even as we continue to invest in sales, marketing and products Expenses were more favorable than expected in the quarter, driven primarily by lower-than-anticipated headcount.

[Operator:]

. Our first question today will come from Shweta Khajuria from RBC Capital Markets.

[Shweta Khajuria:]

Let me try two, please. First, on home and local. So you said 20% of leads we monetized. Could you talk about the opportunity there? Where can that percentage go, how does that compare to industry? And how are you positioning yourself today for post-COVID growth in that category, whether it is converting restaurant traffic better for home and local or the products that you've introduced like special offers and nearby jobs? That's first. And then the second one is a high-level question on recovery. Understood that there are a lot of uncertainties, shelter-in-place, vaccine, stimulus. How are you thinking about the recovery curve and to speak? Post vaccine, do you think that the advertising dollars will snap back in with a quick recovery? Or will that be a slower curve?

[Jeremy Stoppelman:]

So this is Jeremy. I guess I can kick it off on the home and local question. Here. As you noted, we're at 20% monetized leads, so we continue to improve there. 20% is not that much in our view. We think there's an opportunity to continue to better merchandise things like Request-A-Quote, improve our matching. We've expanded the number of categories, that Request-A-Quote has questionnaires for. And all of that is continuing to drive more monetization. So we see a lot of headroom there. But also, we think that it's a great product, and so we should see growth over time in that category. You also mentioned some of the innovations that we're driving in the home and local segment, things like nearby jobs. And we've really seen that resonate in the early days of its release with newer businesses. So they might not be able to compete on -- purely on reputation alone, but they can compete on important dynamics like pricing and their responsiveness. And so that's very promising. That's something that we're going to continue work on into 2021, refining both pricing and the way it works and drives more leads for local businesses, especially newer local businesses. On the recovery side, as you can kind of see from our results and traffic, as the economic activity picks up, we do see fairly correlative recovery alongside that. So I would imagine in a post-vaccine world, as people get more comfortable as panic continues to subside as people get out and do more things. We will see -- we will participate in that robust recovery. The exact time frame, I think, is anyone's guess at this point. But if you look at our business, quite a bit of it now is driven by this home and local services segment, which has been really solid for us throughout the year. And from a traffic standpoint, it's consistent with 2019. And so we feel really good about the opportunity ahead of us for our business. And we're not really relying on, say, restaurant traffic coming back to create the growth that we need to have a good start to 2021.

[Operator:]

Okay. Our next question today will come from Dan Salmon of BMO Capital Markets.

[Daniel Salmon:]

We've seen some recent reports of just sticking with a question about home and local services, some recent reports about Google testing more auction-based, more bid taste -- more bid-based bidding options, excuse me, versus sort of straight leads for home and local. I'm just curious have you guys seen or heard anything in the marketplace about that? Do you have a view on it? And then of course, there were some other reports about the Department of Justice digging in on Google a little bit more. Jeremy, you've obviously had some views to share on that in the past. Would you care to update those now?

[Jeremy Stoppelman:]

Sure. I can try and take a stab at these questions here. So first, on the home and local side, you mentioned Google products. I think they are testing some sort of leads product, as I understand, and maybe that's what you're referring to, and it's moving to an auction model like the rest of their system. I actually think -- my understanding is most of their system is the CPC system and whatnot is already auction based. But I can't really answer specifics. I don't know their product pipeline. But from our perspective, home and local has been kind of a key area of investment. For us, we've been driving higher percentage of monetized leads, but we've been trying for the last few years really up -- the value we deliver to advertisers. I think that's shown up in our business metrics and our retention. And innovation continues. So with the launch of nearby jobs, we've got a new product offering out there for those. They maybe don't want to buy CPC ads for one reason or another, but want to get in there and see the value that you help can provide and start responding to customers. And so we're not sitting on our hands, watching the market change around us, we're trying to lead the change as well. On the other question about DOJ antitrust -- the DOJ's antitrust case. Our view has always been, we're happy to talk to regulators. We've been on this for about a decade or so, and we haven't been shy about expressing our views. We're absolutely encouraged that there's bipartisan support for an antitrust investigation into Google, DOJ, kind of got started. We understand state AGs are also working on something. And so I think that's -- it's a healthy thing. We're certainly supportive. We're happy to share our views with anyone who comes and ask about it. And so we'll continue to do that.

[Operator:]

. Our next question today will come from Sergio Segura from KeyBanc.

[Sergio Segura:]

On nearby jobs, it sounds like you guys are off to a strong start. Do you see more opportunity selling to existing advertisers or onboarding new ones? Given the success of the product and Request-A-Quote, where do you see further opportunities for product innovation?

[Jeremy Stoppelman:]

Yes. So as you noted, nearby jobs is off to a solid start. We're excited to see that. It's something we've been working on for a little while now. I don't think we're -- we fully know exactly how it fits into the wider picture. I think we're kind of in the early days. So it's a fixed price product right now. We are seeing some resonance with new businesses, but I think primarily because of these new businesses not having essentially a fully built out reputation with Yelp because of course you see Yelp is about reviewing and so forth, it's a great way to introduce themselves to potential customers and try to differentiate. On other dimensions that customers care about, like are you responsive, are you getting back to me, is your price super competitive, et cetera. But that said, this product, in my mind, there's no reason why it shouldn't work for existing customers as well. So I think it's on us to continue to experiment with those pricing models, merchandising, the leads that are put into that flow, there's a lot of different dimensions for us to optimize in the coming years. So we're excited about the overall opportunity there.

[Operator:]

. There are no further questions. Ladies and gentlemen, at this time, we will conclude our question-and-answer session, and this also will conclude Yelp's third Quarter 2020 Earnings Conference call. We thank you for attending today's presentation, and you may now disconnect your lines.