Yelp Inc
NYSE:YELP
Earnings Call Analysis
Q3-2023 Analysis
Yelp Inc
Yelp has proudly reported yet another quarter of impressive performance, marking its 10th consecutive period of double-digit revenue growth. The platform's devoted efforts in streamlining product initiatives and execution have led to a robust 12% increase in net revenue year-over-year, totaling a record-setting $345 million.
Fueling Yelp's financial success further is the exceptional growth in advertising revenue, particularly from the services sector, rising by a notable 14% from the previous year. This figure is buoyed by an exceptional 20% year-over-year increase in home services advertising. Restaurants, retail, and other categories also contributed to the upside with a healthy 10% year-over-year growth.
Yelp's efficient sales channels have borne fruit, with self-serve revenue climbing by an impressive 25% year-over-year and multi-location revenue inching up by 10%. These channels combine to contribute over half of Yelp's advertising revenue, signifying vast potential for growth moving forward.
The third-quarter achievements are not solely top-line focused; Yelp has seen its net income increase magnificently by 539% compared to the previous year, translating into a substantial 17% margin. Adjusted EBITDA is also up by 30% year-over-year to a record $96 million, denoting a remarkable 28% margin, all indicators of a profitable and growing business.
In a strong display of confidence, Yelp has raised its full-year revenue outlook. The company now anticipates revenues to range between $1.332 billion and $1.337 billion, which would reflect a $10 million increase at the midpoint from previous estimates. Adjusted EBITDA expectations have also been elevated to between $319 million and $324 million for the full year.
Yelp's growth trajectory is also being powered by a suite of product and technological innovations. Focused on enhancing customer engagement and conversion flows, initiatives such as improved ad purchasing pathways and data-driven product recommendations are set to fortify the self-serve channel further.
Another affirmation of Yelp's solid market positioning is the strong demand from its SMB segment, which promises sustained growth across its retail and self-serve channels, as well as among sophisticated enterprise customers. Yelp's ability to generate highly targeted leads is seen as a defining strength as the company prepares to leverage its product-led strategy to capture forthcoming market expansion opportunities.
Yelp's commitments in ad tech enhancement have been instrumental, with investments in the sector yielding high returns. The company plans to continue the trend, harnessing technologies like large language models (LLMs) to drive innovation in ad tech, further strengthening the effectiveness of its advertising platform.
In a strategic move, Yelp has infused its 'Request-a-Quote' feature with innovations such as mass phone number integration and improved login processes, enhancing the user experience and driving sequential growth in project volumes, which could become another growth avenue for the business.
Looking forward, Yelp has outlined clear financial guidance for the coming quarter. Revenue is expected to be in the range of $337 million to $342 million, with adjusted EBITDA forecasted to be between $85 million and $90 million, laying the groundwork for sustained progress into the next periods.
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Hello, and welcome to the Yelp's Third Quarter 2023 Earnings Call. [Operator Instructions]I'll now turn the conference over to James Miln, Senior Vice President, Finance and Investor Relations. Please go ahead.
Good afternoon everyone, and thanks for joining us on Yelp's third quarter 2023 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, 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. We'll make certain statements today that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. In addition, we are subject to a number of risks that may significantly impact our business and financial results. Please refer to our SEC filings, as well as our shareholder letter for a more detailed description of the risk factors that may affect our results.During our call today, we'll discuss adjusted EBITDA, 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 website, you will find additional disclosures regarding these non-GAAP financial measures as well as historical reconciliations of GAAP net income to both adjusted EBITDA and adjusted EBITDA margin, and 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, James, and welcome everyone. Yelp delivered its 10th consecutive quarter of double-digit revenue growth, a testament to our product initiatives and consistent execution. We grew net revenue by 12% year-over-year to a record $345 million. We delivered this performance while also expanding net income margin by 14 percentage points, and adjusted EBITDA margin by 4 percentage points from the prior year period.Profitable growth was generated across the business as our teams continued to innovate and execute against our product roadmap. This resulted in record advertising revenue in both of our broad categories, Services and Restaurants, Retail, and Other.Services was particularly strong, with advertising revenue up 14% year-over-year, led by approximately 20% year-over-year growth in home services. At the same time, our RR&O advertising revenue growth remained robust, up 10% year-over-year. With record advertising demand in the quarter, our efforts to deliver more value to advertisers has clearly resonated. The product improvements we've made to enhance our ad formats and ad systems drove more high-quality clicks to our customers in the third quarter. In fact, ad clicks returned to year-over-year growth, increasing by 9% from the prior-year period; a marked improvement from flat year-over-year growth in the second quarter. At the same time, year-over-year growth in average CPC moderated compared to the second quarter, at 4%.We also made progress against our initiative to drive sales through our most efficient channels. Self-serve revenue increased by 25% year-over-year, while multi-location revenue increased by 10% year-over-year. At a combined 51% of advertising revenue, we continue to see significant opportunities to grow each channel in the years ahead.In summary, Yelp delivered another great performance in the third quarter. As our product-led strategy continues to strengthen our business and our team executes against our plan, we have even more conviction in the durability of Yelp's consistent growth. Looking ahead, I continue to see tremendous opportunities for innovation and profitable growth, and remain focused on generating long-term shareholder value.With that, I'd like to turn it over to David.
Thanks, Jeremy. Third quarter net revenue increased by 12% year-over-year to $345 million; $3 million above the high end of our outlook range. We were pleased to see the full amount of this outperformance flow through to the bottom line. Net income increased by 539% year-over-year to positive $58 million, representing a 17% margin.Adjusted EBITDA increased by 30% year-over-year to a record $96 million; $7 million above the high end of our outlook range, and representing a 28% margin. Top line growth was driven by an increase in advertiser demand as reflected in record average revenue per location across categories. Paying advertising locations were relatively flat compared to the second quarter of 2023, decreasing 2% year-over-year to 561,000.In Services, ad revenue increased by 14% year-over-year to a record $206 million. In RR&O, ad revenue increased by 10% year-over-year to a record $124 million.Turning to expenses, third quarter expenses decreased from the second quarter, and increased by 3% year-over-year. As we've stated previously, we continue to expect headcount will be approximately flat year-over-year by the end of 2023. We also remain focused on enhancing the quality of adjusted EBITDA by reducing stock-based compensation as a percentage of revenue to less than 8% by the end of 2025. In the third quarter, we increased adjusted EBITDA margin by 4 percentage points year-over-year to a record 28%, while SBC as a percentage of revenue remained flat, reflecting the high-quality incremental margin.To reach our target, we are focusing our product development hiring efforts outside of the United States, particularly in the U.K. and Canada, as well as adjusting our overall mix of compensation throughout the organization. As a result, we plan to shift the substantial portion of our equity compensation to cash compensation in 2024. If we had made these compensation mix changes in 2023, SBC would have decreased by approximately $20 million, and cash expense would have increased by the same amount.Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy. In the third quarter, we repurchased $50 million worth of shares at an average purchase price of $41.08. As of September 30, 2023, we have $132 million remaining under our existing share repurchase authorization. We plan to continue repurchasing shares throughout the remainder of the year, subject to market and economic conditions.Turning to our outlook, following our strong Q3 results, we are raising our outlook range for the year. We now expect full year revenue will be in the range of $1.332 billion to $1.337 billion, reflecting a $10 million increase at the midpoint compared to our previous outlook. Turning to margin, we now expect adjusted EBITDA will be in the range of $319 million to $324 million for the full year, reflecting a $7 million increase at the midpoint compared to our previous outlook. We currently estimate that our effective GAAP tax rate, before discrete items, for 2023 and beyond will be in the range of 22% to 26% as a result of recent guidance provided by the IRS.In closing, Yelp's third quarter results demonstrate our ability to sustain double-digit revenue growth, while expanding margins. Amid continued macro uncertainties, our product-led strategy has continued to strengthen Yelp for the long term, giving us even greater confidence in our ability to drive long term profitable growth.With that, operator, please open up the line for questions.
[Operator Instructions] Your first question comes from the line of Jason Kreyer of Craig-Hallum.
So, just in regards to the return to growth in clicks, I'm curious, is part of that due to the test budgets that you've started to deploy in SEM? And then maybe if you can just talk a little bit more about what you saw as you deployed those SEM test budgets and maybe what your expectations are as you spend more there into Q4?
Jason, this is Jeremy, I'll take your question here. We were really pleased to see clicks return to growth, up 9%. Looking into the causes there, there's a few things that we've been doing that are continuations of a theme on the product side. Ad tech has been an area where we've been investing significantly. And we noted in the letter, there was some better pacing, so that contributed to creating additional inventory in clicks. We have an improvement in the photo selector that leverages AI. We made some ad UX improvements to existing ad units. And then, on the consumer side, we also have been working on the mobile website as well as desktop web, saw some increased engagement from that. So there's a number of things we've been doing to drive additional value to advertisers, and they really paid off in the quarter. So we were delighted to see that.I guess the second part of your question, [indiscernible] the SEM further or do you want me to talk about something else?
No, go ahead.
Okay, great. Yes, you mentioned SEM and how that's going. Obviously, very early days, we're just sort of getting things up and running in kind of the test budget phase. I would say it's going well so far, but again early. We are excited about this opportunity, especially as we look into 2024 and beyond. There are companies that have predicated their entire business model on SEM, which is an area within services that we've historically not played. Yelp has been driven almost entirely by organic traffic. And we think we'll continue to find a ton of value on the organic side, but we see an opportunity in SEM. Part of that is our unique position. Yelp is relevant to consumers on a daily basis, whereas some of the other players that have operated in this space, really they don't have an excuse to be talking to consumers all the time, whereas Yelp is broad across so many different categories and has such strong brand recognition. So I think that gives us a unique take on this space. And that gets me even more excited about the growth opportunities. I guess back to your original source of your question which is, is SEM driving this click percentage? I would say it's not a material contributor, no.
Okay, that's very helpful. I wanted to just ask a follow-up on competition. And I know, during the quarter, Google made some changes and started to restrict anonymous reviews. I think you guys have already done that, sort of, for quite some time. But I'm just curious if you think that had any impact on consumer behavior.
Thanks for the question on that. Certainly, we see our content as a real advantage. We've always leaned into trying to have the most trusted local review content possible. We've never allowed simple anonymous star ratings. We always found it frustrating, frankly, that Google with its monopoly position would pretend like those are reviews and mislead consumers. Certainly, I see that as a positive side of the industry that folks are waking up to how important trust is. And then, I guess I would just point you to an FTC paper that came out that really highlighted how Yelp has, what we think is the best rating and review system in the industry, really balanced ratings across the different star levels and something that really differentiates us. And I think consumers especially now are waking up to the fact that not all content and not all rating systems are created equal. We've always had that belief, but I think our belief in that is finally really paying off and leading more and more folks to understand that Yelp is a standout when it comes to trust.
Your next question comes from the line of Eric Sheridan of Goldman Sachs.
Maybe 2 on the services space. You've shown a lot of momentum in the services side of the revenue in the last couple of quarters. How should we think about the momentum in that business and the competitive landscape and aligning sort of investments behind growth against what you see as the potential or pool of opportunity set that sits in front of you, given the momentum as we exit this year and move into next year in services?
Eric, I think I can take that one as well. We're very happy with performance in the services space. I guess, I would just point folks to revenue up 14% year-over-year in Services. And then, if you delve further into home services, up 20% year-over-year in Q3. So we feel really good about that. I think from our vantage point, it feels like we're continuing to take market share from other players. As far as what's driving that and how do we continue the momentum, I think it's the product-led innovation. We launched Yelp Guaranteed nationwide in Q3. That's going well. And we have more category expansion coming through the end of the year here. Request-a-Quote, we saw it buck the seasonal trend, and we were seeing project volume up from Q2. So that's great.As we've talked about in recent quarters, there's been other innovations that have really streamlined things, improving the log-in flows, taking out friction, masked phone numbers. This quarter, we introduced dynamic landing pages as part of our SEM effort to tap into all that inventory that is new to us, that we think is going to be an additional element of our growth going into '24. So I think between our organic traffic, the SEM opportunity, our strong brand and our strong product execution, I think we're really set up well for Services growth.
Your next question comes from the line of Cory Carpenter of JPMorgan.
I wanted to ask the self-serve and the multi-location channels. There's been a little bit of kind of gaping out of the growth of those 2: self-serve 25%; multi-location slowed down a bit. Could you just talk about the dynamics impacting those 2 categories? And then secondly, just on macro, I know you called out in 4Q that you're incorporating macro uncertainties. Was hoping you could talk about what you are seeing in the macro landscape right now.
Cory, this is Jed. I can take the first question in terms of channels. We were pleased with the performance of both self-serve as well as multi-loc. I guess starting on the multi-loc side, it grew at approximately 10%, a healthy growth rate. And more importantly, obviously, that channel is made up of some sub-channels as well, with enterprise being the majority and the largest one there. And in fact, that business saw in-line performance with what we saw in Q2. And those are our most sophisticated advertisers. And so that demand continues to be very strong. We did see some slight weakness in the mid-market channel, and we've identified some areas that we can take action on it and have, in fact, begun to do so.But overall, we're really pleased with kind of the demand out of the marketplace, and the products are resonating with our most sophisticated advertisers on the multi-loc side. We continue to make progress on our attribution capabilities. Our off-Yelp offerings are resonating in the marketplace, new ad formats, and ultimately when you look at folks in this type of macroeconomy, they want -- we are very down-funnel-way for them to spend money and receive quality leads. So we're happy with where we are on the multi-location side, and of course, we have a deep product pipeline that we are looking forward to going down that path in the future.In terms of self-serve, we have that 25% growth year-over-year, really, really healthy, now makes up about half of our acquisition were SMB, and have made a host of product improvements there. When you look at the conversion flows for both purchasing ads, claiming a business page on Yelp, recommending in-product suggestions for folks to kind of drive more out of their self-serve spend. And then, of course, we've also used paid marketing in a really effective way, and have had opportunities to kind of drive a lot of growth on the self-serve channel through that as well. So they continue to remain very core strategic pillars for us moving forward, and look forward to them to continue to drive growth in the future.
Cory, it's David. Just to follow up on the macro question. First of all, obviously, super pleased with our performance in the third quarter between 12% growth and the 28% adjusted EBIDTA margin, which put us in a position to raise the guide to $1.332 billion to $1.337 billion on the top line, and it's $10 million above the midpoint of our previous guide and on adjusted EBIDTA $319 million to $324 million which is $7 million above the midpoint of our previous guide for the year. So, overall, obviously very pleased with that level of performance. As usual, whenever we give guidance, we provide it taking into account the risks and uncertainties that we see.On the revenue side, the implied guide for the fourth quarter is $337 million to $342 million, which is in line with the third quarter. And on expenses, implies $84 million to $89 million, which is also in line with what we got in on the third quarter. I do think it's important to underscore on the expense side that expenses can move around between quarters and there are certain items that have some volatility to them like vacation and health care expense. So we've reflected that in the guidance that we've provided for the remainder of the year.
Your next question comes from the line of Sergio Segura of KeyBanc.
Curious, if any common traits you would point to for the advertisers that turned off advertising spend in the quarter, and then relatedly for the advertisers that remain on the platform and continue to increase your spend. Just how much runway do you see to continue capturing a greater percentage of their ad [ ventures ]?
Yes, I can take that one, Sergio. I believe you're probably referring to where we saw [ detailed polls ] overall largely due to a few multi-loc customers that did not spend in the third quarter. I would say the profile of those customers is a lot of locations with not a lot of spend. And we've been talking about this flight to quality in terms of our advertisers and quality revenue. And as you can tell from the kind of wallet share gains with overall multi-loc growing at 10% year-over-year and the company growing at 12% year-over-year, and particularly in such an efficient manner with 28% EBIDTA margins. Those are -- that's kind of the profile of the folks who did not advertise in the third quarter, but we feel really positive about kind of where we are moving forward from a polls perspective.Ultimately, we are concentrating on both expanding the total number of paying advertising locations as well as continuing to drive wallet share, and that's reflected in the record average revenue per location that we saw in the quarter.And I believe the second part of the question was what do we see in terms of demand going forward. I mean SMB, right now, demand is very strong. We see it across our [ reps-sold ] channel, we see it across our self-serve channel and we see it across our most sophisticated enterprise customers. The product-led strategy has really resonated with these customers. And ultimately, Yelp is in a pretty unique position to deliver highly targeted leads across a broad base of businesses. So we feel like we're well positioned to kind of capture growth going forward.
[Operator Instructions] Your next question comes from the line of Shweta Khajuria of Evercore.
Jeremy, if you were to point to perhaps 2 to 3 specific products or product features that you believe will drive meaningful top line growth next year in terms of sustainable double-digit growth or potentially even acceleration, which ones would you point to that excites you the most and why?
Shweta, thanks for the question. As we look ahead here, there's a lot of things I think to be optimistic and excited about. The first which is our consistent execution and the way that we operate these days. We have an annual planning process. We're just at the tail end of that, it's gone incredibly well that generates all the best ideas from product engineering and everywhere else, and then really tries to focus in on ROI. We have limited resources so we want to staff the very best most innovative projects that are going to help connect people with great local businesses and drive more value to our advertisers.When I look at what are the areas, the -- some of the most obvious areas of continued investment as well as excitement, I have to point to, of course, ad tech that's been the gift that keeps on giving. All of the projects that we pretty much have invested in, in that area have really paid off. It's a very high ROI area for us. We continue to try and add staffing as the ideas bubble up. So I think you'll see continued innovation there, continue to impact and certainly you saw that this quarter with better pacing, photo selector improvement as well as some ad UX innovation, all worked to drive clicks up 9% which was fantastic.I think other areas to watch out for, LLM, it's still early days. We've already banked some wins but I think there's a deep well there. We're just getting started. We have a lot of initiatives that will layer in LLM all throughout the products as well as ad tech, helping business owner, helping on the consumer side as well. We've got this new SEM area that we've been talking about that we're excited about. We launched dynamic landing pages this quarter that's tied to that. There's a lot of work to do, but we're already out there testing and we're excited about the early trends. So we'll keep you posted on that.And then, finally I think there's still plenty of opportunity to innovate on the consumer side. We just returned to investing there. We saw some impact by adding neural nets to the home feed. We made some improvement on mobile web as well as desktop web and getting that one is early days. So everywhere I look, I see a lot of opportunity, a lot of excitement and I see a team that's able to execute. We've been really consistent now, 10 quarters of double-digit revenue growth. And so we're not going to hold back. We're going to try our best to keep the momentum going into '24 and beyond.
Okay, that's helpful. If I could please ask a follow-up question on that. So on the consumer side, the last point that you were making, what are you looking for on that front? Is it engagement? Is it time spent? Is it -- at this point, almost everybody in the U.S., I would imagine, knows about Yelp and probably has downloaded it. So how often they come back, what are some success metrics that you are tracking?
Yes. Certainly, engagement is a component of that. And we pointed to some success there this quarter with home feed as well as mobile web and desktop web. We've also had a lot of wins on the contribution side, driving more reviews, allowing consumers to attach additional content like photos and video to the reviews, which has driven more contributions of those types. So there's a number of different ways that you could look at it. Certainly, the bigger the audience, the more time spent, all of those are good things. But of course, you have to also think about the categories and the types of activity. Yelp is not a place where we just want you to check out photos of your family or a cat stuck in a tree. It's very down-funnel and tech-driven where we want consumers that are trying to find the very best in their city or the important services to fix a need in their home. And so we're going to continue to innovate on that.I mean I guess one area that we didn't talk about was Request-A-Quote, where we've really been driving a lot of innovation there. We added masked phone numbers. We improved the log-in. And we saw projects move up sequentially. So that's another area, I think, of excitement. And frankly, it's differentiated. Being able to have those conversations with trusted pros, have Yelp Guaranteed backing the interaction and having the quality of review and photo content that we're known for, I think it's a powerful combination going into '24.
Your next question comes from the line of Brian Fitzgerald of Wells Fargo.
This is Stan Velikov for Brian. If you look at home services that was up nicely in the quarter, but at the same time, Request-a-Quote volumes were down. Anything you can tell us about how overall click volumes versus pricing trend is in home services specifically? And then has Request-a-Quote been a leading indicator for the health of that category? And basically, how are you thinking about that?
This is Jeremy. I'll try and take your question here. So Request-a-Quote, stepping back, I think in the macro services demand has largely been a bit softer than last year. But I think when you look specifically at Request-a-Quote, especially sequentially, what we were able to see is project volume go up, which broke a seasonal trend for us. And so that is a clear positive. What's driving that, I think, is our innovation. We have improved the service, we've added masked phone numbers, we've improved the log-in experience, we added Yelp Guaranteed nationwide, and we're moving into other categories. So there's a lot of positive signs in terms of Request-a-Quote and project volume.And then, I think if you step back and look at ad clicks overall, of which Request-a-Quote is a portion, they were up 9% year-over-year reversing trend. And so I think that's another positive, showing that the product-led strategy that we have is working. We're creating more inventory, we're driving more leads to our advertisers, and ultimately that's what we're here for, is to drive value for advertisers.
If I can just step back in for a moment, going back to my earlier answer, just in case I misspoke on the implied guide for the fourth quarter 2023. The implied guide is $337 million to $342 million on revenue and $85 million to $90 million on adjusted EBITDA. Just wanted to make sure to clarify that, in case I misspoke earlier.
There are no further questions at this time. I will now pass the call over to Jeremy, the CFO (sic) [ CEO ], for closing remarks.
Thanks everyone for joining us on the call. We'll see you next quarter.
This concludes today's conference call. You may now disconnect.