YELP - NYSE

Good afternoon and welcome to the Yelp Inc. Q4 2023 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions] Thank you. I will now turn the call over to James Miln, Senior Vice President, FP&A and Investor Relations. You may begin your conference.

Good afternoon everyone, and thanks for joining us on Yelp's fourth quarter and full year 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 may discuss adjusted EBITDA, adjusted EBITDA margin, and free cash flow, which are non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with Generally Accepted Accounting Principles. In our shareholder letter released this afternoon and our filings with the SEC, each of which is posted on our 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 a historical reconciliation of GAAP cash flows from operating cash flows to free cash flow. And with that, I will turn the call over to Jeremy.

Thanks James and welcome everyone. Yelp delivered one of the strongest financial performances in our company's history in 2023. We set multiple records as local advertisers continued to see the value of Yelp's high-intent audience. Net revenue increased by 12% year-over-year to a record $1.34 billion in 2023. Net income nearly tripled year-over-year to $99 million and adjusted EBITDA grew to $330 million, delivering a strong 7% net income margin and a record 25% adjusted EBITDA margin. These results demonstrate the quality of execution by our teams as they delivered against our product-led strategy. We rolled out nearly 60 new features and updates over the last 12 months to help consumers more effortlessly connect with the best local businesses. Our initiatives to grow quality leads and monetization and services continued to pay off in 2023 as advertising revenue from services businesses grew 14% year-over-year to a record $793 million. We believe that Yelp gained market share in 2023 by continuing to differentiate the product experience to better connect consumers with trusted pros, which enabled us to deliver more valuable leads to services businesses. We monetized approximately 30% of leads in services, an increase of approximately 5 percentage points from 2022. The home services category remained particularly strong in 2023 with year-over-year revenue growth of approximately 20%. Since 2019, revenue from this category has compounded at an annual growth rate of nearly 20%. We also saw improved consumer demand in the fourth quarter, with request to quote requests growing by approximately 5% year-over-year. Advertising revenue from restaurants, retail and other businesses increased by 10% year-over-year to a record $483 million. Average revenue per location grew every quarter throughout 2023 to reach a record level in the fourth quarter, driven by increased spend across our breadth of offerings up and down the funnel. David will talk more about fourth quarter results in RR&O, where we saw weakness in the back half of December due to macro impacts that have continued into the new year. In 2024, we plan to invest more in our services categories where we see a greater near-term opportunity, particularly within home services. In 2023, we worked to enhance the consumer experience with new discovery review and services features. We introduced AI-powered visual search, a more engaging and interactive review writing experience, and Yelp-guaranteed, which helps consumers confidently connect with trusted service pros. While our overall traffic levels remained about flat in 2023, we continued to grow the trusted content that attracts our large and valuable audience. Yelp users contributed 22 million new reviews in the year to reach a total of 287 million cumulative reviews, up 8% from 2022. Our ad system continued to deliver valuable clicks to advertisers in 2023 by efficiently matching consumers with advertisers. Ad clicks returned to year-over-year growth, increasing 5% as we executed against our roadmap of ad system initiatives. Average cost per click increased by 9% year-over-year as a result of robust advertiser demand for Yelp's valuable high-intent clicks. We were encouraged by the combination of increasing ad clicks and moderating CPCs in the second half of the year, which typically has a positive impact on retention. We also made progress on our initiative to drive sales through the most efficient channels, self-serve and multilocation. Together, these channels represented approximately 50% of advertising revenue in 2023. Self-serve revenue increased by approximately 20% year-over-year and multilocation revenue grew by approximately 15% year-over-year. Investments in our strategic initiatives have established Yelp as a leading resource for consumers to confidently search for and discover great local businesses across a broad range of categories, and we plan to build on this position by investing in a portfolio of product and marketing initiatives designed to drive deeper engagement and profitable growth. In 2024, the services category will be the major focus of our product-led strategy. We believe we have an opportunity to build Yelp into the best place for consumers to connect with trusted service pros. While we have made great progress already, we plan to evolve our product offerings by further reducing friction for consumers and pros so they can more seamlessly coordinate throughout the hiring journey. By investing in our robust product roadmap and services, we plan to continue to enhance the experience for consumers while driving more quality leads to advertisers, both on Yelp and through search engine marketing. Over the coming quarters, we expect to scale our SCM efforts across all-home services categories and believe they have the potential to accelerate overall project growth over the long term and drive more valuable leads to service pros. In addition to continuing to raise the bar on services product innovation, we plan to execute on our strategic initiatives to deliver even more value to both consumers and advertisers across Yelp's broad set of categories. Our advertising teams are actively testing ways to more effectively monetize our motivated down funnel local audience, both on the Yelp platform as well as increasingly off-Yelp. We also plan to continue to drive profitable growth through our most efficient channels, self-serve and multi-location. Our team is repeatedly shown that our focus on our product-led strategy can drive durable growth, and we plan to build upon this momentum in 2024. With that, I'd like to turn it over to David.

Thanks Jeremy. I will now turn to our fourth quarter results. Fourth quarter net revenue increased by 11% year-over-year to $342 million, at the high end of our outlook range. Net income increased by 36% year-over-year to $27 million, representing an 8% margin. Adjusted EBITDA grew by 19% year-over-year to $96 million, representing a 28% margin, up 2 percentage points from the fourth quarter of 2022. Robust advertiser demand for our valuable high-intent ad clicks drove this strong performance. Total advertising revenue increased 11% year-over-year to a record $327 million in the quarter, reflecting strong growth in average revenue per location, while overall locations remained approximately flat for the year. Advertising revenue from services businesses increased by 14% year-over-year to $203 million in the fourth quarter. At 62% of our advertising revenue, services was the main driver of our revenue growth and our product roadmap provides multiple growth levers for the category on and off-Yelp. Advertising revenue from restaurants, retail and other businesses increased by 7% year-over-year to $124 million in Q4. This represented a 3 percentage point deceleration from Q3. Turning to expenses, this past year was a clear demonstration of how disciplined investments in our product-led strategy can drive profitable growth. We ended 2023 with the total headcount of approximately 4,700, down modestly year-over-year. At the same time, full-year net revenue increased by 12% year-over-year. This contributed to a record adjusted EBITDA margin of 25% for 2023, an increase of 2 percentage points year-over-year. As we turn to 2024, we will continue to be disciplined in our allocation of resources while remaining focused on opportunities to acquire services projects through search engine marketing. Overall, we plan to hold our headcount approximately flat in 2024. We also remain focused on increasing the quality of adjusted EBITDA. We have taken significant action to shift our compensation mix between stock and cash. We expect the number of shares subject to employee equity awards granted in 2024 to be approximately 65% lower than in 2023. While it is important to note that the expected benefit of this action to expenses will be largely offset by cash compensation increases in 2024, we expect the stacking impact of this reduction in stock-based compensation to begin to have a positive impact on our GAAP profitability in subsequent years. We remain committed to lowering stock-based compensation as a percentage of revenue to less than 8% by the end of 2025. Returning capital to shareholders through share purchases remains an important element of our overall capital allocation strategy. Our capital allocation strategy consists of three main elements. First, maintaining a healthy cash balance to fund our operations; second, retaining capacity for potential acquisitions; and third, returning excess capital to shareholders through share repurchases. Since we began our share repurchase program, we have repurchased nearly $1.4 billion worth of shares, including $200 million in 2023. As of December 31, 2023, we had $82 million remaining under our existing repurchase authorization. We plan to continue repurchasing shares in 2024 subject to market and economic conditions. To support these ongoing repurchase plans, in February our Board of Directors authorized us to repurchase an additional $500 million worth of shares. Turning to our outlook. As Jeremy shared, we have a strong portfolio of initiatives to drive revenue growth. We continue to believe in the significant long-term opportunities ahead and our team's ability to capture them. As we exited Q4 and moved through January, we saw weakness across our RR&O categories. We believe this broad-based softness reflects a variety of factors, including a slowdown in consumer traffic from severe weather and widespread respiratory illnesses, as well as margin pressure for businesses from higher input costs. In contrast, services performed in January. Taking these risks and uncertainties into account, we expect net revenue will be in the range of $330 million to $335 million for the first quarter. For the full year, we expect net revenue will be in the range of $1.42 billion to $1.44 billion as our services initiatives gain traction. Turning to margin, we expect expenses to increase from the fourth quarter to the first quarter, reflecting our cash compensation adjustments and incremental marketing investments, particularly for acquiring services leads through SCM. We also expect a seasonal increase in expense, primarily driven by payroll taxes and benefits. As a result, we anticipate first quarter adjusted EBITDA to be in the range of $47 million to $52 million. For the full year, we anticipate adjusted EBITDA to be in the range of $315 million to $335 million, reflecting in part our shift from equity to cash compensation. We currently estimate that our effective GAAP tax rate before discrete items for 2024 and beyond will be in the range of 24% to 28%. In closing, we are proud of our performance in 2023, which was filled with record results and product innovation. We intend to continue to execute on our product-led strategy with a focus on services in 2024, while maintaining financial discipline to deliver long-term shareholder value. With that Operator, please open up the line for questions.

[Operator Instructions] Your first question comes from Colin Sebastian with Baird. Please go ahead.

Thanks guys. Good afternoon and congrats on the year. I guess first off, with advertiser demand driving the majority of growth on the platform. How much of an impact are you expecting from the search marketing initiatives in terms of driving new users or traffic? And is that factored in the outlook for the top line growth for the year? And then secondly, monetizing 30% of leads today, that's a nice step up from 25%, and I guess I'm curious what a reasonable goal is as you make these improvements in the services category and maybe to contextualize that a bit you know what are the two or three most important initiatives there to unlock that value? Thank you.

Hi, Colin, this is Jeremy, I'll take a stab, I'll take both of your questions here. We do have strong advertiser demand, as you said, particularly within services, and you know we've made continued progress with Request-a-Quote, and as you mentioned we've made significant progress with respect to monetizing connections. What SCM allows us to do is tap into really a greenfield for us opportunity, where there aren't a lot of leads out there that could benefit our advertisers and introduce new users to the platform. And we really haven't played in that space. There's businesses that do hundreds of millions, many hundreds of millions of dollars in revenue in this area and we've really not approached it. And partially that's because we've been building to this moment working on Request-a-Quote in particular, and we've made incredible strides there. And now we've really wired it up, we've got all the plumbing, we're out in the market, we are buying leads, we in fact upped our spend level by $5 million. And so, we're really excited about what SCM could mean, particularly for services. I think it is important to note that overall services is a relatively small amount of traffic, compared to the overall picture. So, we do think there is going to be a positive benefit in introducing new people to the platform, and those users very well may be - extremely valuable, because they're coming in for a services request, which is by definition much more valuable than say restaurant searcher. So, we do think there's a potential benefit there. But again, because it's high value down funnel leads in the services category. The numbers aren't going to really dramatically shape the overall traffic picture. And then for your second question, you were asking about monetized connections, noting that we had moved that up in '22, it was 25% and in '23 we saw 30%. We are really happy with the progress there. I think that speaks to the success that we've had investing in the ad platform. We have a significant investment going into '24 in that area and then also improvements within Request-a-Quote both in the flows, converting more users into projects, and then matching those projects successfully with advertisers. How far can we push that percentage? I don't know exactly what the ceiling is, 30% doesn't seem that high, it does feel like there is significant headroom there. And so, we're going to keep pushing on that to see how high can we push that without of course compromising the consumer experience, that's really important to us as well.

And Colin, it's David, just to follow-up, sorry Colin. Yes, just to follow-up on your question with regard to that outlook, obviously it's still relatively small spend. We obviously are increasing that, during the first quarter by $5 million, compared to the fourth quarter, but overall that still a small amount, as Jeremy mentioned. So as we move through the year, we'll provide more updates on the performance there, but we certainly reflected in our guidance the risks and uncertainties as we see them, understanding that the total level of spend on this is still very modest.

Perfect. Thank you.

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

Thanks so much for taking the questions, maybe two on the services space. You said in the letter and in your remarks that services, is going to be a major focus of the product-led strategy, can you give us a little more color of, how you're thinking about the product roadmap in services? And the second piece of it was you appear to be sort of gaining share broadly in the services landscape, talk a little bit about the momentum you have in services coming out of 2023, how that might inform that product roadmap, and I should be thinking about competitive or market share dynamics in 2024? Thanks.

Thanks, Eric, I'll take a stab at that one as well. We're really pleased with our performance in services. Revenue there was up 14% year-over-year. We actually had Request-a-Quote, requests were up 5% year-over-year in Q4, home services in particular 20% year-over-year. And then, as I noted earlier, monetized connections over the year took a jump up to 30%. So, all of that is reflecting, I think, some of the great work the team is doing, again with the ad tech stack, but also with Request-a-Quote. You may have noticed our winter product release. We had a whole number of features and functionality that we were showcasing with ad and in there we continued Request-a-Quote improvements. We enhanced the projects tab, we continued to work on merchandising Yelp guaranteed. We've actually added both phone and SMS intermediation. And so, consumers can now make a phone call to a business or text with a business, and Yelp is standing in the middle to maintain their privacy. So they're not getting barraged from inbound phone calls they don't want, they can turn them off at any time. And so, this is the type of work that we're doing to make Request-a-Quote really stand out. I think, as you alluded to, it does appear that Yelp continues to gain share in this area. And I think in 2024 this is a real focus for us. It feels like we have good momentum in this area, the business is really working, and that leads us to SCM. There is a significant opportunity on the SCM side. As I mentioned earlier, there's multiple companies doing hundreds of millions of dollars, at least in revenue off of these leads. And I think Yelp comes into this with a unique perspective, both I think an incredible consumer experience, but then also the horizontal nature of Yelp. If we can introduce someone to Yelp during a services request, I think there's also a good opportunity for us to educate that person about using Yelp in the future and coming back for that second, third or fourth request. So, we're really excited about opening up the SCM opportunity. Obviously, we've got some incremental spend going into Q1 and the early signs are positive, so we'll keep you posted on that.

Thank you.

Your next question comes from Jason Kreyer with Craig-Hallum. Please go ahead.

Yes, thank you, guys. Just on the RR&O weakness you called out kind of in December, January. Just curious if you can give any transparency on why that's unique to the RR&O side, and then what are your expectations as far as recovery there? What did you embedded guidance or what do you think happens over the next couple of months on that front?

Hi, Jason, I can take the first, this is Jed, obviously as Jeremy mentioned, overall the business - we were pleased with the performance in the business in the fourth quarter, particularly in home services. And while that remained resilient, we did see some weakness in our RR&O categories in December, particularly in late December, and that trend has continued into January. I think we have a situation in, which input costs continue to be very high for restaurants, and we believe that's driving some conservativism on marketing spend. I think also there's an inflationary effect on consumers in terms of the frequency of dining. So particularly in restaurants, we're seeing that. That being said, restaurants continue, to be a really important part of what we're doing going forward. Obviously, we're making a lot of investments on the services side, but all the stuff that we're doing on the consumer side, is also impacting restaurants as well. When I think about the growth drivers for RR&O, it's really about continuing that focus on trusted content, and improving that customer experience. We have just released the new homepage feed and we're using LLMs, to improve that customer experience. For what it's worth, we don't believe this macro pressure is in a permanent state, but we do see some conservativism in terms of how marketers, are looking at that spend. And we have a lot of investments in store for the future across consumer, and we talked about ad tech before - across consumer. As well as ad tech and multi-location Yelp audiences off-Yelp, we believe there's an opportunity as well. So you know, for RR&O in general, we are very bullish on over the long-term and are facing just some weakness coming into January.

Jason, it's David, sorry Jason. I was just going to say, you know in terms of our outlook obviously, it's very early in the year and we have flowed through the expected performance here in Q1 through for the full year. As we go through the year, we'll obviously have more information and better clarity. There are some components here would certainly seem transitory, and then there are some things just a broader backdrop in terms of inflationary pressures, as Jed mentioned on restaurants. So at the moment, again, the full year guidance reflects our current sense for the risks and uncertainties and what we're seeing here in Q1.

David, maybe a follow-up for you just on the stock-based compensation changes as we get into '24, I'm assuming that's pretty linear throughout the year, but as we get into '25, and obviously you're not going to guide. But I just want to make sure for modeling purposes we get that right, so I want to make sure maybe you can level set, how we should think about stock-based compensation and cash expenses, as we go from '24 into '25?

Thanks for the question. So there are two components that are important to keep in mind, perhaps three. The first component is obviously grants that we've issued in the past on a four-year vest, and so those have to - those will vest quarterly and roll off, that's the first piece. So, that's very linear in terms of timing for those grants. The second piece is the reduction in employee grants that we made as part of the 2024 compensation cycle. The great majority of grants come at the beginning of the year, so that just from a timing perspective will be reflected as you play that out. And the third is, I don't want to lose sight of the fact that, we did have to shift compensation from equity to cash in the near term. So from an overall GAAP EBITDA perspective, we still have expense in respect of the stock-based comp. But for the stock based comp modeling itself, you should expect it to be relatively linear as you go through the year. There's a little bit of up and down because of the timing of grants in prior years, but certainly maybe to just extend this as time goes by, having reduced the grants here in '24 by about 65% is our expectation. Obviously that's going to also be the case in '25, '26, '27. So, I think you can model out steep reduction in employee stock vesting over the next several years.

Thank you.

Your next question comes from Shweta Khajuria with Evercore ISI. Please go ahead.

Why don't you talk about scaling SCM efforts across home services over the following quarters. Are you able to help us quantify that spend in any way?

We did miss the beginning of the question. Can you just repeat it?

Sorry. Yes, just in terms of scaling SCM efforts in the home services subcategories, can you help us quantify that spend for 2024?

Yes, thanks for the question. We were not yet ready to quantify the spend since we're still at the experimentation stage, and as I mentioned, we did increase that spend by about $5 million from the fourth quarter to the first quarter. We're obviously very encouraged by what we saw as we moved through '23, and I really do want to underscore that it has taken a very significant product effort to enable us to not just efficiently buy leads. But also to lead them and to direct them to service pro. So, we think that's all goodness regardless, and we intend to remain financially disciplined around the spend. So, as we continue to prove out our ability to execute on doing this in a financially disciplined way, we would expect to increase spend. In the adjusted EBITDA guide that we've given for the year, there are two components there. One, very significantly reflects this shift from equity to cash compensation, which we talked about on the Q3 call that I think is important to acknowledge. We also have held out some portion of spend in our overall guidance for the year for increasing spend on SCM. And again, as we move through the year, we'll provide updates on how that's going and how much spend we think that we can absorb in a financially beneficial way.

Got it. Thank you.

[Operator Instructions] Your next question comes from Sergio Segura with KeyBanc. Please go ahead.

Great, thanks. I have two. So first, a follow-up on the percentage of monetized leads and services. Wondering if you guys see still a lot of low-hanging fruit there to pick? Or maybe is that jump that you've made to 30%? Will that be a little bit tougher going forward? And then the second question is on Yelp audiences, I know it's really early, but have you seen any impact from Chrome beginning to deprecate the third-party cookie? Or would you expect any impact as the year progresses? Thank you.

Hi there, Sergio. This is Jeremy. I think I can hop in here. So, as you mentioned, we have reached 30% monetized connections, up from 25% the year before. That's a great leap. We're proud of that. I think we'd point to wins on the ad tech side as well as Request-a-Quote for helping us achieve that. Again, where the ceiling is, it's hard to say. I don't think we're right up against the ceiling. I think we have plenty of headroom. And how do we get there? Well, I think it's continue doing what we're doing on the services side. So, we continue to invest significantly in Request-a-Quote, as well as our ad matching technology. And we have a deep portfolio of improvements coming this year, so we'll keep you posted on how that progresses. But I think we're feeling confident about our product investment. And our product-led strategy on the services side. When it comes to Yelp audiences and sort of their cookie deprecation, I guess, first off on the grand scheme of things, like the overall revenue that comes or requires cookies in the grand scheme of things is not very material. But that said, we are working on these sort of post-cookie solutions. There's a few different industry approaches. And our teams are all over those working with the clients that, do rely on cookies for advertising with us. If you asked me kind of mid-year, last year, how was that going? A lot of clients were in kind of the procrastination phase, in terms of getting serious about the migration, but I think now as cookie deprecation has come in. There is more clarity on when cookies are going away, there's a lot more motivation on the client side. So, we feel confident about the solutions and the go-forward from here, but it's something that we're keeping a close eye on, to make sure that we can keep that YA revenue going for the long-term.