Wendy Lim - IR Jeremy Stoppelman - CEO Rob Krolik - CFO Geoff Donaker - COO.

Lloyd Walmsley - Deutsche Bank Stephen Ju - Credit Suisse Mark Mahaney - RBC Capital Markets Gene Munster - Piper Jaffray Mark May - Citigroup Brian Fitzgerald - Jefferies Douglas Anmuth - JPMorgan Heath Terry - Goldman Sachs Eric Sheridan - UBS Brian Nowak - Morgan Stanley Jason Helfstein - Oppenheimer Paul Bieber - Bank of America Merrill Lynch Rob Sanderson - MKM Partners Chris Merwin - Barclays Capital.

Welcome to the Q3 2015 Yelp Inc. Earnings Conference Call. My name is Eric. I'll be your operator for today's call. [Operator Instructions]. I will now turn the call over to Wendy Lim. Wendy Lim, you may begin..

Good at afternoon, everyone and thank you for joining us on Yelp's third-quarter 2015 earnings come call. Joining me on the call today are CEO Jeremy Stoppelman and CFO Rob Krolik. And Geoff Donaker will join us for Q&A. Before we begin I'll read our Safe Harbor statement.

We will 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 revisions to these forward-looking statements in light of new information or future events. In addition, we're 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 financial results press release for a more detailed description of the risk factors that may affect our results. During our call today we will discuss adjusted EBITDA, non-GAAP net income and non-GAAP EPS which are non-GAAP financial measures.

In our press release issued this afternoon and our filings with the SEC, each of which is a posted on our website, you'll find additional disclosures regarding these non-GAAP financial measures and a reconciliation of historical net income to adjusted EBITDA and non-GAAP net income and GAAP EPS to non-GAAP EPS.

And with that I will turn the call over to Jeremy..

Thanks, Wendy. And welcome, everyone. We executed well in the third quarter. Total revenue was $143.6 million, representing 40% year over year growth. Our local sales team had a strong month in September and that momentum has extended into October.

I continue to be confident in our business and our ability to capture the large market opportunity ahead of us. We believe we're at the forefront of two key trends that will continue to make us the go-to platform for connecting consumers with great local businesses. First, consumer usage is shifting to mobile apps.

Our local mobile app experience is second to none and app unique devices grew to 20 million in the third quarter. Second, the advertising industry is moving towards native ads which have always been our focus and primary source of revenue. Local businesses find our ads compelling because we deliver valuable leads.

Coupled with our experience in execution we believe we're well positioned to take advantage of these trends for years to come. As mobile usage continues to grow, we're focused on increasing awareness of Yelp and our app.

According to ComScore data for September 2015, Yelp has about 30% reach among smartphone users and was one of the top 25 mobile web and app properties in the U.S.. Searching for local businesses is a universal need and therefore we believe we have significant room to grow.

While we continue to invest in mobile app installs on a positive ROI basis, our app growth has been overwhelmingly organic. To increase brand awareness we began our national TV advertising campaign in the third quarter. Based on a study of people who saw our ads, more than half of non-Yelp users indicated they are now likely to use Yelp in the future.

We're excited about these early results which demonstrate how our investment in marketing can increase awareness and usage of Yelp. Our product and engineering team has been hard at work showing business owners the value Yelp delivers. In September we're piloted a new Request a Quote feature in a few of our home services subcategories.

Those businesses saw a 200% increase on average in messages received from consumers and the feature is now fully rolled out to all client businesses in the home services category. Consumers have had the ability to message businesses on Yelp for years.

And with this change we've optimized this feature to drive even more valuable leads to business owners. This is just one example of how a small change in a specific vertical can have a major impact.

According to an August 2015 Nielsen survey we commissioned, Yelp advertises reported more than three dollars return for every one dollar invested in Yelp ads. We drive valuable traffic to business because consumers on Yelp have high purchase intent.

For example, Denny's noticed that when consumers search for pancakes on Yelp, they're looking for the nearest restaurant that serves pancakes rather than recipes or other more general information.

They recently began advertising with us because they found that Yelp has the potential to generate high-quality leads while converting users to restaurant guests.

Consumers come to Yelp when searching for local businesses and are increasingly transacting directly on Yelp, as demonstrated by approximately 170% year over year growth in the number of platform transactions in the third quarter. We're continually rolling out new features to enhance the transaction experience.

Now you can order food or make reservations directly from search results and this change drove a 10% lift in the number of platform transactions in the month after rollout. Since our acquisition of Eat24 we've also continued to optimize that experience. Eat24's revenue grew 73% in the third quarter and we have been pleased with its performance.

SeatMe is also experiencing tremendous growth and has received positive feedback from restaurant owners. When we acquired SeatMe about two years ago, it had approximately 200 customers. And as of the end of the third quarter, we had over 17,000 restaurants accepting reservations through our paid SeatMe or free Yelp reservations product.

We're seeing increased interest in SeatMe because it drives considerable consumer traffic to restaurants through the integration on Yelp, while providing the same functionality as other front of house solutions at a fraction of the cost.

Recently The Slanted Door, one of the highest grossing restaurants in California, switched to SeatMe and they expect over $100,000 in annual savings. With our solid execution in the third quarter, I remain very confident in our business.

Our ongoing commitment to the consumer is the reason people trust us when deciding where to spend their money and make Yelp the ideal channels for local businesses looking to advertise. We continue to see strong interest from local businesses who have historically advertised off-line.

And as the number of advertisers grow, we're building a large base of legacy advertisers and a stream of recurring revenue. We're just scratching the surface of this large opportunity and we're well positioned to capitalize on the trends within local advertising.

Before I turn the call over to Rob I'd like to take a moment to recognize Diane Irvine has been elected Chairperson of our Board. Since joining the Board in 2011, Diane has been helpful on strategic decisions and has played an important role as our audit committee chairperson.

With her experience in finance and technology, combined with her deep knowledge of Yelp, Diane will continue to provide great insight and leadership. And now I'll turn the call over to Rob for the financial details..

Thanks, Jeremy. Please note that we have posted a few slides and a datasheet on our investor relations webpage that accompany the financial portion of the webcast. In the third quarter revenue grew 40% year over year to $143.6 million and adjusted EBITDA was $12.5 million.

For the third quarter local revenue was approximately $116 million, up 36% year over year. As of September we made packaged CPC available to all advertisers resulting in strong performance in the month which has continued in October. Revenue from CPC advertisers now comprise 52% of local revenue in the third quarter.

Transactions revenue was $12 million compared to $1.3 million in the third quarter of 2014 primarily reflecting our acquisition of Eat24 in the first quarter of 2015. Eat24 contributed about $11 million in transaction revenue. Brand advertising revenue was $9 million, down 4% year over year.

We saw higher-than-expected brand advertising revenue in the third quarter due to lower than expected contact cancellations. As we discussed on last quarter's call, we will be phasing out our brand advertising products by the end of 2015.

Other revenue which consists primarily of revenue from partnership arrangements, was $6.7 million, flat compared to third quarter of last year. International revenue contributed about 2% of total revenue in the third quarter. Gross margin was 90% in the third quarter, compared to 94% in the same period last year.

Cost of revenue in the quarter was consistent with last quarter, as we made investments in our hosting centers and testing infrastructure. We expect cost of revenue to be approximately 10% in the fourth quarter.

Total sales and marketing expense was approximately 58% of revenue in the third quarter, compared to approximately 53% in the same period last year. The increase in sales and marketing expense was primarily driven by the increase in marketing with our national TV advertising campaign and higher-than-expected sales headcount growth.

Sales headcount in the third quarter grew approximately 35% year over year. Product development expense was approximately 20% of revenue compared to 17% in the third quarter of last year, as we continued to invest in consumer features and advertising products. G&A expense was flat year over year to 15% of revenue.

GAAP net loss was $8.1 million and GAAP EPS was negative $0.11 in the third quarter. Non-GAAP net income which consist of net income excluding stock-based compensation and amortization, was $2.7 million in the third quarter. Non-GAAP EPS which is a non-GAAP net income divided by fully diluted share count, was $0.03.

Adjusted EBITDA was $12.5 million in the third quarter. With our revenue outperformance we took the opportunity to increase our marketing spend in the third quarter. We also saw slightly higher sales expenses due to higher-than-expected sales headcount growth in the quarter.

We're investing in our future as we believe our marketing campaign along with the continued growth of our sales teams, will benefit our business over the long term.

We generated approximately $10 million in cash flow from operations in the quarter and finished the third quarter with approximately $370 million of cash, cash equivalents and marketable securities on the balance sheet. Before I turn to our outlook I want to go through some of our operating metrics for the quarter.

Cumulative reviews grew 35% year over year to approximately 90 million. Unique devices accessing our apps grew 39% year over year to 20 million on a monthly average basis, lapping a strong uptick in app usage in the third quarter of last year. Average monthly mobile unique visitors grew 22% year over year to approximately 89 million.

Average monthly desktop unique visitors was down 2% year over year to approximately 79 million. Local advertising accounts grew 37% year over year to approximately 104,000. Claims local businesses were approximately 2.5 million, up 33% year over year.

Our customer repeat rate which we calculate as the percentage of existing local advertising accounts from which we recognized revenue in the immediately preceding 12 month period, was 77%, for the third quarter of 2015. Repeat rate provides context about the proportion of our customers that are legacy customers.

This has picked up over the last couple of years as our base of legacy advertisers continues to increase. Consumer engagement was strong in the third quarter. Similar to the second quarter, page views grew nearly 40% year over year across the entire ecosystem, with approximately 70% of page views coming from the app.

Now turning to our outlook for the fourth quarter and full-year 2015, for the fourth quarter we expect revenues in the range of $149.5 million to $15.5, representing a 38% year-over-year increase at the midpoint.

We expect adjusted EBITDA for the fourth quarter to range between $20 million and $24 million which reflects the impact of our marketing spend of approximately $13 million in the fourth quarter.

We also expect stock-based compensation to range between $16 million and $17 million and depreciation and amortization to be approximately 5% to 6% of revenue. For the full year 2015 we're updating our outlook and expect revenue to be in the range of $545.5 million to $551.5 million or approximately 45% growth over 2014 at the midpoint.

For the full year we expect adjusted EBITDA to range between $72 million and $76 million. And we expect stock-based compensation to range between $61 million and $63 million and depreciation and amortization to be approximately 5% to 6% of revenue.

For modeling purposes we expect our weighted average basic share count to be approximately 75.5 million in the fourth quarter and approximately 75 million for the full year. We expect our weighted average fully diluted share count to be approximately 82 million for the fourth quarter and full year.

We continue to be confident about the strength of our business and our ability to capitalize on trends towards app usage and native advertising. We're investing in marketing, to increase consumer awareness and growing our sales team to educate business owners about the value Yelp delivers.

We believe both of these investments will enable us to capture the large market opportunity ahead of us. I'll now turn the call over to the operator to open the call up for questions..

[Operator Instructions]. And our first question comes from Lloyd Walmsley with Deutsche Bank. Please go ahead..

My first question would just be, it sounds like you had a little bit more progress on hiring this quarter. Wondering if you can just comment on the competitive environment or what you're doing to accelerate that hiring.

And then a related question, if you strip out advertising from sales and marketing, it looks like you've seeing sales and marketing ex advertising de-lever for the first time in a while or just getting a lot less leverage out of that, again even excluding advertising.

So just wondering, going forward, if we model advertising separately from the headcount portion, do you expect to see leverage in that line item? Or is it just a big investment period on that front for a little while? Thanks..

It's Geoff. I'll take the first part of your question and Rob will answer the second one. Hiring and the sales force, in particular, sales force did grow 35% year on year in this past quarter. And that was due to a great summer of hiring for us really across offices, as well as slight reduction in attrition relative to the second quarter.

In San Francisco specifically, it certainly does remain a very competitive hiring environment. A bit less true in our other locations where we continue to grow the offices really quickly -- Chicago, New York..

On the sales and marketing question [Technical Difficulty], but that said, if you look at our long-term model, we're looking at about 44% to 45% as a percent of revenue for sales and marketing. We do expect to leverage that going forward over the next couple years but right now we consider the investment a very workable model.

As Jeremy said, we got some good cadence back on the early data back on the commercials and TV. Just to highlight, I said n the call on the brief prepared comments that we were going to spend about $13 million on marketing in Q3 and that includes Eat24. E24 comprises about a few million dollars of that..

And the next question comes from Stephen Ju with Credit Suisse. Please go ahead..

Jeremy, I think there was a time when the absolute number of reviews being written was decelerating and actually declined at one point. And now that growth rate has accelerated--.

Should we take the next question?.

Can you hear me?.

Participants, please stand by while we reconnect the host. Stephen Ju, if you can, please reconnect to the question Q. We look ahead with the next question from Mark Mahaney with RBC Capital. Please go ahead..

Two questions. One, a little bit more color on the September and the October month, the improvement you saw sequentially which part of the revenue streams was that from? And then I want to get back to the question that it's now 52%, a majority of your local ad revenue that's coming through the CPC format.

Can you say anything about whether that customer base is showing lower churn, better loyalty, more spend per customer than a CPM cohort? Thank you..

It's Geoff. I'll give both your questions a try here. First off, on September and October, what Jeremy mentioned there was that we did see great performance out of our sales teams in September and October is looking good so far. Now, that is related to local revenue.

That having been said, remember, we're only talking about new accounts coming in and those will be reflected in the months and years ahead as opposed to in those months specifically. By great local sales performance in those months.

That was really driven by, in the beginning of September, us opening up the package CPC product at the standard product offering across all accounts, the completion of that CPC rollout. To your question about CPC, still too early to say that we have any material changes.

We don't expect any material changes as far as churn or retention trends or wallet, those kinds of things. The real reasons we made that shift toward CPC is just market demand. We saw our customers wanting it.

It is also good for us from a supply/demand perspective because using options, it allows us to go ahead and continue to sell into tight geo categories where, for instance, we've got so many movers in San Francisco who want access to inventory at a particular time period.

It allows us to just price that inventory at the market demands on any given time frame..

And the next question comes from Stephen Ju with Credit Suisse. Please go ahead..

So Rob, I was wondering if you can provide some more color on the incremental marketing spend in the fourth quarter, especially around Eat24. Is this just straightforward marketing dollars that you're running campaigns with? Or is are you running contra during the quarter.

Just trying to get a feel for how that will be flowing through the P&L And, Jeremy, on the transaction revenue, what you're doing right now to monetize Seat24 different, as you know, the transaction value from one and not the other.

How are you approaching some of the other nonfood-related categories where you might actually have visibility into the total transaction value? Thanks..

Stephen, I'll take the color on incremental marketing spend in Q4. We're spending about $13 million in marketing advertising spend in Q4. A few million of that is related to Eat24 and about $10 million is related to Yelp itself.

That's not contra revenue so there is a different component where we do some couponing off Eat24 and that's netted against revenue. So, this is just basically online and a lot of off-line marketing that we do..

And this is Jeremy. On transaction revenue, we continue to be excited what we're seeing there. There's been some product changes that I think demonstrate some of the leverage we can get from the Yelp platform. We saw a 10% lift just in a single month after bringing transactions forward into search results.

And also we find that Yelp's platform is a great driver of new customers for Eat24, in particular. So, it feels like that strategy is working. And we're in a number of other verticals. Obviously, we made a purchase and have SeatMe which is doing quite well and transactions are going up very nicely there.

However, of course, we don't charge on a per transaction basis. That's one of the key differentiators as we roll that out. We do have partners in other verticals. We'll continue to iterate on the platform and try to drive additional volume there. And we'll keep looking strategically at what makes sense over time.

So, all in all we feel really good about Yelp being a transaction platform and being able to drive both new customers to our partners and our wholly-owned properties and driving transaction volume directly, as well..

The next question comes from Gene Munster with Piper Jaffray. Please go ahead..

I would like to focus on the app side of the equation. You mentioned that at the top that there is a 20 million unique app users and that's been a greater focus for the company. A couple questions.

First, how should we just, high level, think about the app growth where it was a couple quarters, still growing rapidly but maybe not as fast as it was a couple quarters ago.

And, second, can you remind us about app users behave maybe different than a mobile user or a desktop user? Are they tend to be more engaged? Is there more transactions that are potentially done for them? Is there some greater long-term economic value. If you can just remind us the importance of that. Thank you..

We're delighted with app growth. Continues to be a major source of engagement and audience. It's now representing about 70% of page views. So, that's very dramatic and meaningful. On the growth side, we continue to be very encouraged, really healthy growth there. And as we're looking at the changes in growth rates, I wouldn't read too much into that.

There is a top comp from last year where we started more heavily promoting app downloads from mobile webpages. As a result, there's a little bit of change there, but we're still seeing very healthy growth.

On the behavior engagement side, what does an app user mean to Yelp, I think the 70% page view numbers speaks to what is happening there which is, the app is essentially skimming our very best, most highest value users and it's giving us a direct relationship with them, so that person that otherwise might have gone to Google to start their search and then found a way to a local business.

And really someone that enjoys of the Yelp experience and values the quality content, they are now moving away from Google and directly to the Yelp app. As that trend continues, I think that's just going to strengthen the company over time..

The next question comes from Robert Peck with SunTrust. Please go ahead..

It's actually Matt in for Bob. A couple, if I could. First one and I apologize if you mentioned this, but for the fourth quarter, what were you expecting for brand revenue in that guidance? I think you had previously said $10 million in the back half of the year, obviously did $9 million in 3Q. So, just curious what you're expecting for 4Q there.

Secondly, brand obviously outperformed in the quarter. You had a little bit of a mix shift towards brand. I would've thought there would have been a little bit of a pop in the gross margin given the margin profile of that business. Just curious if there's anything else in the COGS line a weighing on that.

And then, finally, how are you guys thinking about international right now? If I remember correctly, I think you've previously talked about it being about a $4 million EBITDA drag per quarter.

How do you think about continuing to invest there as opposed to perhaps maybe pulling back, reinvesting in engineering or even letting that flow to the bottom line? Any color there would be helpful. Thanks, guys..

In terms of the fourth quarter, what we're expecting for brand, we're not providing any guidance on the individual line items of the revenue section. Given that we're eliminating our display ad product, there's a lot of puts and takes with that revenue line item so we've decided to not give any color on that at this point.

In terms of the gross margin, I hear what you're saying about the pop you were expecting. We did indicate last quarter that we were and continuing this quarter and also into fourth quarter, that we're going to be investing in our infrastructure, our hosting infrastructure. So, that's driving down our gross margin just by a few points.

We expect that to recover in the next couple of years. But what we want to do is offer a great consumer experience, so we're addressing a lot of things with this investment in infrastructure. I would expect cost of sales to be about 10% in the fourth quarter..

And I think maybe there was a question in there also about where did the incremental expense come in, as to why that brand popped and dragged through into adjusted EBITDA.

I think the big story there is over hiring in the summer which we talked about, with the great summer hiring on the sales team, as well as actually higher than expected commissions, as well.

As far as your international question, I think there's a couple of different ways to think about this but I believe that international revenue is running at about $3 million a quarter. And international expense is running at around $6 million a quarter.

So, really, on a netted basis, I think about this as a $3 million quarter investment which really gives the Yelpers the ability to use our product across 31 other countries that aren't in the U.S. And that, in and of itself, actually feels like a pretty appropriate investment level to continue to go forward with.

Given that while it is still a work in progress today, we think there's a big long-term opportunity for Yelp abroad and want to continue to keep that option highly open..

And the next question comes from Mark May with Citi. Please go ahead..

I believe mine's a little bit of a rehash on some of the others. But given that the outperformance in the quarter was around brand and that you basically, I think, kept your implied Q4 revenue guidance relatively stable, it implies that you are taking down your local ad revenue.

I'm trying to reconcile that, I think, with some comments you made around seeing momentum in the local sales force. If you could walk us through. Is this maybe some of the new sales people you brought on are not scaling up as quickly as you typically would expect? Just trying to understand the dynamics there. Thanks..

A couple of points, we continue to invest in the business, obviously. When you look at 35% headcount, growth in sales in Q3, obviously a lot of those folks are being trained and getting up to speed. So, I don't think there's any real change in how long it takes them to get up to speed, anywhere between six and nine months.

So, they're not necessarily going to contribute a lot to the top or bottom this year and we're really setting ourselves up for next year. From that perspective, the great performance that they're experiencing both in September and continued momentum in October will really benefit us into 2016.

From that perspective, that's how we want invest in that business. In terms of when you look at Q4, we're going to continue to hire on the sales side and we're also going to continue to do some marketing expenses on the national TV campaign and some other areas.

We want to continue to invest in the business and what we've provided is some guidance that allows us to do that but also takes the over-performance in Q3 and adds it to the full year..

The next question comes from Brian Fitzgerald with Jefferies. Please go ahead..

Maybe a quick follow on to Gene's question and then one other. So, an app user is a more engaged or a better user.

Any color around if those engagement patterns or usage patterns improve the more they use the app or the more you add functionalities or utility? And I think you have given reviews from the mobile side or percentage of reviews from the app.

Any color there? And then, the follow-on I had was, what percentage of people move down this funnel from a review to closing the loop and booking something? And are you seeing this dynamic change over time? Thanks..

This is Jeremy. We did talk about how app users are more engaged.

Your question is can they be even more engaged through new functionality features and reaching out to them? We do have a team focused on rolling out new features for the consumer app, as well as simply trying to bring users back because we have relevant content -- a new business that showed up in their neighborhood, for example.

Or simply pointing them to a weekly newsletter. Those are all different things that have been experimented with over the past quarter and we're seeing really positive results there. And then the second question you asked was--.

You asked about reviews, as an example. Really, everything is trending in the direction of apps users being the most engaged of our users, as Jeremy mentioned earlier. Another metric that we've shared is that 56% of reviews in the quarter came in through mobile, all app, as well or also [indiscernible] the app.

So, again, that gives you a taste for what's going on there. I think you also asked for what happens on platform and bookings. I know we had a metric that I think was 170% growth in platform transactions in that time period. Obviously trailing a smaller comp a year ago.

But clearly it's a segment that grew quickly and app is a very active part of that growth..

The next question comes from Douglas Anmuth with JPMorgan. Please go ahead..

A couple things I wanted to ask. Just on the sales force, you talked about the 35% growth in 3Q.

Is it still reasonable to think about it in the mid-20%s over the next two years? And then can that still get you to the $1 billion that you've talked about in the past in 2017? And then, secondly, can you just comment on the impact from Apple nearby within maps and iOS 9, both competitively and then also perhaps in terms of the traffic that it might be driving into the Yelp app, as well.

Thanks..

On the sales force growth for Q3, sales about 35%. I think at this point we're expecting it to be above 30% for 2015. And when we do the calculations, we figure that if we grow the sales force about 25% in both 2016 and 2017, that $1 billion revenue is still achievable..

This is Jeremy. On the Apple question, impact of iOS 9, we continue to be happy with our relationship with Apple. It's obviously great from a branding experience and just the ubiquity element. Wherever you go, be it on the Web or on your phone, you should be running into Yelp content when you're thinking about local.

We did see a positive bump with the rollout of iOS 9. Overall, the amount of traffic that we get from the integration I would characterize as modest. We're happy with it. And so we did see something positive out of that. And we feel great about the relationship going forward..

The next question comes from Heath Terry with Goldman Sachs. Please go ahead..

I was wondering if you could give us a bit of a sense, you talk about the growth that you're seeing in CPC revenue, are there specific segments that are showing more open to that? Are there areas where you're still struggling to get CPC adoption? And then, as you market more directly to consumers and you see changes in other areas within your channel mix, can you give us a sense of what overall source of traffic has grown to look like now and how much you feel confident about being able to affect that through incremental marketing spend?.

First off, on CPC revenue, you asked about segments and where it's being adopted. Really, for the last couple months what we've seen is that almost all of our new advertisers are adopting CPC. It's not 100%, we still do offer CPM to those who prefer to buy that way, but it's overwhelmingly become CPC in the last couple of months.

So, there are no segments that I would suggest are resistant or anything like that. That having been said, if you look at the datasheet you can see that a couple of our categories of business owners have grown particularly quickly over the last couple of years from a mix perspective.

And, in particular, home and local services I think is now at 28% of local advertiser revenue. So, you can get a sense that that segment particularly likes this product. As to traffic sources, no material change in traffic sources over the last time period. We do continue to look at marketing results across all the different channels.

And while we're, as Jerry mentioned, investing in online marketing where we can find ROI positive online marketing to get, that's not yet a material traffic source for us in the U.S.. The off-line marketing is really more of a long-term investment.

We evaluate that, of course, in terms of things like traffic, but more in terms of future interest in consumers and consideration in consumers to use our product next year and the year after..

The next question comes from Eric Sheridan with UBS. Please go ahead. .

Maybe two questions.

As we move out of 2015 and into 2016, maybe you could just frame even qualitatively what are the big areas of investment for the business going forward, where should we be expecting capital to be allocated, both on the OpEx side and the CapEx side to the business to get where you want to go? And then I just want to trace back to the international comment before because it sounded to me as if that was a little bit of a change in that international would be grown to be a steady-state of revenue and OpEx.

Maybe I'm trying to see was there a change in thought there around the way you're thinking about the international opportunity and the balance of challenges and opportunities of expanding the brand overseas, as well. Thanks..

For 2016, as we look at the investments, it's probably a lot more of the same. For a product in development, we believe continuing to higher the great quality of folks that we bring on board is going to be really important for the future innovation that we're putting up on the app and the site.

The same thing with sales, we're hiring some great people there. We want to obviously train them and for them to do well. They are continuing to do well. And we think that investment in the sales and marketing line item, not only on the headcount but also to reach out to local businesses, but also on the marketing side.

We'll be doing some more of that in 2016. And then I think the other line items, hopefully we'll continue to leverage those line items. And overall, I think, we'll be more leveraged in 2016 than we have been, at least in 2015..

Yes. And in terms of international, I think that certainly we've had an evolution there over the last five years as we've begun that international rollout.

And while there was definitely a time period where we were racing to bring Yelp to markets all across the world and plant those seeds, in a lot of ways we feel like we've planted the seeds now in the core countries that we expect Yelp to be in in the future years.

So, now it's really about making sure that each of those seeds is growing to its full potential in the years ahead and then figuring out monetization in Europe, in particular, before we triple down on that level of investment.

So, still think it's a great long-term option for the business but you're probably not going to see us a triple down on that investment in the short term..

The next question comes from Brian Nowak with Morgan Stanley. Please go ahead..

I have a couple questions.

The first one, going back to the CPC ad units and some of these new ad units are around quote requests, if I look at a customer that was not using CPC last year and now I look at a customer that is, even directionally can you say if they're spending more after they take on these new ad units? And if they're not, what do you think you have to change in order to get a higher spend per local customer? And then the second one, just to touch a little bit on the relationships with the local accounts, what are the top reasons that you find for local accounts churning away or not signing on when the salespeople call them? And what do you think you have to do to improve those trends?.

First off, you asked are CPC customers spending more than a new customer spent a year ago. There is a lot of mix in there, in general. There have been mild uplift in spend across the average packaged CPC customer versus the average CPM customer a year ago.

But directionally with mix and many people also coming in at lower price points, it looks very similar to how it looked a year or so ago. So, what can we do to increase spending amongst the high spenders? Of course making sure that they understand the ROI that they're getting and that, of course, is the beauty of CPC.

We certainly do see amongst some of our mid-market national customers, they evaluate their ROI very closely and many of them choose to increase their spending over time because that investment is really paying off for them.

So, of course more that we can do in that area to help all of our customers understand the return that they're getting from their investment. As to the reasons that a local account might not buy or that they might churn, of course there's a host of them. With 100,000 customers and millions of potential customers out, there are so many different ones.

Some of the top reasons that businesses churn out, unfortunately, include the business is going out of businesses or trading hands or changing their name and going through a renovation, those types of things that are really secular and have nothing to do with Yelp.

Then you have other things like folks either believe they're getting a negative ROI or actually are getting an ROI or they're just going through some sort of investment crunch business, as well. So, it tends to be those types of reasons that are the top reasons.

In terms of how can we accelerate spending, certainly there's marketing and sales itself which is why we continue to invest there. So, you'll continue to see more of that.

And then I do believe there continues to be opportunity around helping those advertisers and prospective advertisers understand the return on investment that they can get when they choose to stay with Yelp. So, more for us to do on that, as well..

The next question comes from Jason Helfstein with Oppenheimer. Please go ahead..

A few questions, as we're thinking about the $10 million you guys are going to spend on marketing in the fourth quarter, what's the best way to judge the effectiveness of that? Should we look for an acceleration in mobile UVs? Is it looking for the app unique device number to accelerate? How should we judge you? The second question, as it relates to Eat24, are you able to use your same sales force or do you have a dedicated sales force? Because I presume it's getting the restaurants on the platform that's still the investment in the business.

And then my last question, you reiterated the $1 billion in revenue in 2017. What type of target margin is reasonable to assume if you can hit the $1 billion? Thanks..

I'm going to start with the first part of your question, the $10 million of marketing. Again, there are a variety of ways that we'll be evaluating that marketing spend. I would not encourage you to evaluate it in terms of short-term traffic or anything like that.

Our footprint is just too big for us to be able to reasonably move those numbers in a short-term basis with $10 million. That having been said we do believe, based on what we're seeing so far, that this investment will pay off over the longer term.

Give us a little bit of time to evaluate the effectiveness of this using a variety of different tests, some of which we've already alluded to like the surveys that we've been running. And we may come back in the future with what we believe we're getting for the investment in marketing.

Obviously we're just in the midst of that first investment right now..

Jason, this is Jeremy. On your question about Eat24 and do we have a single sales force combined with Yelp or do we have a dedicated team? We have a dedicated team. We'll continue to experiment and see where there's opportunities to gain leverage out of the core Yelp sales force. But fundamentally we're selling pretty different products.

Eat24 is much more verticalized than a typical Yelp salesperson, where the Eat24 person is just dealing with certain types of restaurants rather than [indiscernible] and hairstylists and so forth. So, we feel like the right approach is still to have that dedicated team.

But we're going to continue to run experiments to see how we can make sure we leverage the other salespeople that we've got..

Jason, it's Rob. Just actually follow-up to Geoff on the $10 million of marketing in Q4 and how should you measure us in terms of traffic, one thing I would call out is that in Q4, as we've seen in previous years, there is usually a little bit of dip or less growth or even negative growth in traffic and app usage and whatnot in Q4.

So, I would caution people to take that into consideration as we go through the holidays. Again, we've seen it in prior years so I want to make sure people recognize that they may happen. In terms of your $1 billion question in 2017 and what's the target margin, we haven't specifically said what the margin is.

I would imagine it's going to be quite a bit higher than 2015. And when we look at long term what our target margin is, we feel like it's going to be on an adjusted EBITDA basis 35% to 40%.

And we feel pretty confident that -- we haven't set a specific revenue goal for that margin as we continue to invest in the business but we can see a lot of opportunity to increase our margin..

The next question comes from Paul Bieber with Bank of America. Please go ahead..

First of all, can you comment on how the integration of food delivery has impacted engagement levels? And then, my second question, on the cohort table, it looks like in the oldest cohort the advertising growth is pretty stable, but there seems to be some decent deceleration in the newer cohorts.

I was hoping you could give some color around those dynamics..

I'll try and hit your first question here around food delivery and engagement. I'd say the overall transaction volume for food delivered, particularly on Yelp's platform, while meaningful isn't at the scale where we'd be able to see, really, major moves on engagement per se that It's just the Yelp app or even the website overall.

That said, as it continues to scale and become bigger, I would expect to see that users who are ordering their food through us end up doing lots of other things. And that's certainly part of the thesis. But at this point it's too nascent to really see..

Paul, on the question about coverts, yes, the earliest cohort grew about 33% in the quarter year over year and then the 2007-2008 cohort grew about 35% and 2009-2010 grew at about 36%.

While we give this information for color and for people to really understand the market side, we don't actually task our sales force to specifically call into a particular cohort and try to drive sales at any particular cohort. For instance, if you look at non-U.S.

cohort market which is just those markets that are outside of what we provide and excluding international, that grew at about 55% on the non-U.S. year over year in the quarter. It's not a purposeful exercise where we give our salespeople a target.

What we're trying to actually show is that when you look at the data -- so for instance, the earliest cohort which includes about six markets and we generated at about $8 million in the quarter on average for each of those markets, then you're talking about a pretty sizable amount of money on an annual basis, $32 million.

But if you look at the markets that they are in, like LA and New York and San Francisco and Chicago, it's probably a drop in the hat in terms of a few hundred million dollars that are being spent in in those particular markets on local advertising.

So, what we're trying to do is give people a sense that, while these markets are, after 10 years, growing at 33%, still have a long way to go..

The next question comes from Rob Sanderson with MKM Partners. Please go ahead..

So maybe continue along that thread for a moment. Solid growth in the older cohorts but sharper deceleration in some of the newer cohorts.

As you come up a little light on the sales force hiring this year, is part of this an allocation of sales resources towards the older more proven markets? Or is there something about the mid-tier cities that imply a more limited opportunity? And then a second question, on international, I know you talked a little bit about this earlier but you've been in a handful of cities international for five or six years now.

Some of them quite large cities, London, Paris, Toronto, et cetera. And you've had sales offices in Europe for a few years.

So, why are we not seeing the ramp-up in revenue a little faster? Is the traffic funnel a material issue in developing these markets? Or does the Yelp playbook really not work overseas and you need to do something different there? Thank you..

On the cohort sales force allocation, yes, salespeople are assigned to different territories and there certainly, as you said, older cohorts that are still growing at a pretty decent clip, in the low 30s, while our newest cohorts are growing, it seems well over 50%.

And those are, again, not assigned to that 2009-2010 cohort but rather all the cities that are launched into 2010. As Rob mentioned, we really don't specifically manage to any of these cohorts.

I think what you're seeing is just a reflection of where salespeople have spent their time and it just so happens that more sales energy has been spent in some of those newest markets versus the 2009-2010 cohort. So, I probably wouldn't over read into that segment mix across the cohorts.

As to international, I think it's fair to characterize international revenue as still very much a work in progress. When you take out FX international revenue did grow, still, at 35% which is quite similar to domestic revenue growth, albeit on a much smaller base.

So, it is working, it is growing but certainly not at the pace that we might have initially thought. And I think there are a variety of factors there, not least of which is that you mentioned the traffic funnel and some of the SEO changes internationally in the last couple of years. Those are related things.

Given the overall net investment of $3 million a quarter internationally, we still feel pretty good about the optionality there and continue to want to invest at that rate..

The next question comes from Chris Merwin with Barclays. Please go ahead..

I just had a couple questions. First, for Eat24, you called out, I think, $3 million of marketing spend for that product in particular. Obviously there's a lot of marketing spend being poured into that category right now.

So, how are you targeting that spent? What markets are you most focused on? And what's the broader plan for differentiating Eat24 relative to the competition? And then just secondly, obviously there's a lot of verticals in local but are there certain ones where you're making the most progress right now in terms of net ads.

and to the extent that you are having greater success there, does it make any sense to focused the brand marketing on some of those verticals? Thanks..

Hi there. Geoff, again. On Eat24, how do we think about our marketing spend in a pretty competitive category and how do we differentiate Yelp Eat24. The biggest thing we have going, of course, is that we have Yelp. As Jerry mentioned, that's becomes a tremendous traffic source as well as a source of new customers for Eat24 itself.

The tight integration is really working well these days. If you haven't tried ordering something directly from Yelp I encourage all of you to try a delivery this evening. It is a good product and we're seeing people are generally happy with it. So, that's, in many ways, the top form of differentiation.

In addition we're working directly with restaurants. At this point we're not actually providing a delivery service which is something that's different and as a result we're looking at take-out restaurants, as well as those who are already offering delivery.

And as far as the marketing spend goes, we're really just targeting the cities in which Yelp and Eat24 have the strongest prevalence which is about a dozen markets across the U.S. today. I think you also asked which Yelp categories are growing the fastest. I alluded to this earlier.

The mix across categories in terms of revenue has been pretty consistent over time. The fastest growing from a mix perspective looks like home and local services over the last couple of years. And that continues to be true. Of course, from a reviews perspective and a consumer traffic perspective, the restaurant oriented categories remain the biggest.

And of course that's what the Eat24 integration has been all about. So, from a marketing perspective I think that is what you have seen from us, if you've watched the long form version of our current TV ad, as an example. One of the main things it's trying to communicate is that Yelp is great across a variety of local businesses.

And as we tested that with consumers, they totally got that. That was the number one takeaway, I know Yelp is a food place, I didn't realize I could also it in these other categories, too. So, that was, of course, one of the key messages we're trying to communicate..

At this time I would like to turn the call back over to Rob for closing comments..

Thanks, everyone, for joining us on the third-quarter call. We look forward to talking to you next time. Thanks..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..