Yelp Inc. (NYSE:YELP) Q4 2022 Earnings Call Transcript

Yelp Inc. (NYSE:YELP) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good afternoon. Thank you for attending today’s Yelp Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Megan, and I’ll be your moderator for today’s call. I would now like to pass the conference over to James Miln, Senior Vice President of Finance and Investor Relations. James, please go ahead.

James Miln: Good afternoon everyone, and thanks for joining us on Yelp’s fourth quarter and full year 2022 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 a 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 and adjusted EBITDA margin 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 with that, I will turn the call over to Jeremy.

Jeremy Stoppelman: Thanks James, and welcome everyone. Yelp delivered one of the strongest revenue growth performances among our advertising and marketplace peers in 2022. Our performance ad products and high intent audience generated robust advertiser demand across a broad range of categories, both on and off Yelp. Net revenue increased by 16% year-over-year to a record $1.2 billion in 2022. We delivered this performance with net income of $36 million and adjusted EBITDA of $270 million. These results demonstrate the strength and durability of Yelp’s ad platform and the ability of our team to execute under a range of difficult conditions to deliver excellent results. Underlying our record top line our product led strategy drove a number of other record results in 2022.

We achieved record paying advertising locations and average revenue per location for the year. In services, we succeeded in differentiating the product experience and increasing monetization and lead quality resulting in greater value to service growth. We believe Yelp gained market share in 2022 as advertising revenue from services businesses grew 14% year-over-year to a record $694 million. The home services category was particularly strong, with year-over-year growth of approximately 20%. Since 2019, revenue from this category has compounded at an annual growth rate of nearly 20%. Advertising revenue for Restaurants, Retail & Other businesses increased by 17% year-over-year to $441 million, driven by growth in paying advertising locations.

We continue to deliver value to advertisers in these categories by enhancing our suite of ad products designed to deliver high intent clicks, both up and down in the funnel and on/off Yelp. On the consumer side of our business, traffic remained below pre-pandemic levels as the macro environment contributed to softer consumer demand. App unique devices of $33 million were flat compared to 2021. Despite this backdrop, we made early progress on the consumer focused initiative we announced at the beginning of 2022. We reduced friction from the rewriting process, which helped our trustworthy content grow by 21 million new reviews in 2022. This resulted in more than 265 million cumulative reviews as of December 31, up 9% from 2021. In addition, our early work with large language models suggest there are a number of near-term applications that we can leverage to enhance the consumer experience on Yelp.

We deliver value to our advertisers through our sophisticated ad system. This best-in-class technology is able to respond dynamically to changes in supply and demand to efficiently match consumers with advertisers. While ad clicks for the year declined by 8% from 2021, a year that had benefited from reopening tailwind and elevated consumer spending, advertiser demand remained robust as we executed against our roadmap of ad system improvements and average CPC increased by 27% year-over-year. We also made progress on our initiative to drive sales through the most efficient channels. Self-serve and Multi-location channels each grew approximately 25% year-over-year to record levels in 2022. Together, these channels represented approximately 48% of advertising revenue in 2022, up four percentage points from 2021.

Looking back over the last year, the Yelp team has made tremendous progress across all of our strategic initiatives. Our investments in product have not only delivered record revenue, but also strengthened Yelp’s position as a leader in local with trusted content sophisticated ad time. As a result, we plan to expand upon each of our initiatives to drive profitable growth in 2023 and over the long-term by continuing to invest in, growing quality leads and monetization and services, driving sales through the most efficient channels, delivering more value to advertisers and enhancing the consumer experience. After a quarter, these initiatives aim to continue to differentiate Yelp from peers in bringing increased value to local consumers and advertisers.

We believe that our consistent execution in these areas in 2022 has positioned Yelp better than ever to drive long-term profitable growth. With that, I’d like to turn it over to David.

David Schwarzbach: Thanks for the recap of our strong 2022 performance journey. I will now turn to our fourth quarter results. Fourth quarter net revenue increased by 13% year-over-year to $309 million, near the high end of our outlook range. Net income decreased by 13% year-over-year to $20 million, largely due to a significant increase in our effective GAAP tax rate. Adjusted EBITDA grew by 18% year-over-year to $80 million, which is at the midpoint of our outlook range. Paying advertising locations increased by 3% year-over-year to $545,000 in the fourth quarter, while average revenue per location reached a quarterly record. Advertising revenue from services businesses increased by 13% year-over-year to $178 million in the fourth quarter.

Our efforts to drive high-quality leads to service pros have clearly resonated with advertisers in these categories. Average revenue per location and services reached a record and increased for the 10th quarter in a row. Advertising revenue from Restaurants, Retail & Other businesses increased by 11% year-over-year to $116 million. As anticipated in our fourth quarter business outlook, advertiser demand was more muted in the 2022 holiday season than in prior years, particularly among Multi-location advertisers. This contributed to softer year-over-year growth in paying advertising locations in these categories. Turning to expenses. Since significantly decrease in our headcount in 2020, we have made prudent investments in our product-led strategy to drive profitable growth over the long-term.

We have increased the size of our product development and Multi-location sales organizations, while holding local sales headcount relatively flat. As a result, we ended the year with a total headcount of approximately 4,800 people, representing an increase of 11% year-over-year, but still 18% below 2019, while full year net revenue increased by 16% and 18% over the same periods. We are pleased with this progress and currently plan to maintain approximately the same total headcount in 2023. We believe our sales channel mix shift, product-led strategy and reduced real estate footprint will be sources of leverage and margin improvement over the long-term. In addition, we are committed to reducing stock-based compensation as a percentage of revenue.

In 2022, we decreased this percentage by approximately two percentage points and expect to drive an additional decrease of one percentage point in 2023. Looking ahead, we believe we can lower stock-based compensation to less than 8% of revenue by the end of 2025, driven by revenue growth as well as by continuing to optimize our location and compensation mix, particularly within product development. Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy. In 2022, we repurchased $200 million worth of shares at average purchase price of $32.28. At the end of the year, we had $282 million remaining on our existing repurchase authorization. We plan to continue repurchasing shares in 2023, subject to market and economic conditions.

Turning to our outlook. As we enter 2023, we continue to believe in the significant long-term opportunities ahead and our team’s ability to capture them. However, the macro environment remains challenging. We expect net revenue will be in the range of $300 million to $310 million for the first quarter, reflecting typical seasonality. For the full year, we expect net revenue to be in the range of $1.29 billion to $1.31 billion as our initiatives continue to drive growth against the backdrop of ongoing macro uncertainties. Turning to margin. We expect expenses to increase from the fourth quarter to the first quarter, reflecting our hiring efforts in 2022 as well as a seasonal increase in expense, primarily driven by payroll taxes. As a result, we anticipate first quarter adjusted EBITDA to be in the range of $40 million to $50 million.

For the full year, we expect expenses to increase modestly year-over-year as we maintain approximately the same total headcount compared to the end of 2022. As such, we anticipate adjusted EBITDA to be in the range of $290 million to $310 million for the full year. We also currently expect our effective GAAP tax rate for 2023 to be in the range of 32% to 38%, largely due to the requirement to amortize certain research and development expenses under the 2017 U.S. Tax Cuts and Jobs Act. In closing, Yelp delivered one of the strongest revenue growth performances among our advertising and marketplace peers in 2022. Our broad-based local ad platform has proven its durability and our team has continued to execute against our initiatives driving excellent results.

While the macro environment remains uncertain, we’ve built a strong foundation for the future and are confident in Yelp’s path to deliver profitable growth along with shareholder value over the long-term. With that, operator, please open up the line for questions.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Colin Sebastian with Baird. Your line is now open.

Colin Sebastian: Great. Thanks. Good afternoon. Thanks for taking my questions. I guess two for me. First, regarding some of the expense outlook. I think keeping product development roughly flattish, adding headcount to sales. Just curious about the thought process behind that. It sounds like you have what you need from a product development or a product developer standpoint, but just a little more detail on the sales strategy? And then secondly, I mean given the strength you saw during the year, just curious in terms of how we should think about — you talked about the roadmap, but continuing growth beyond this year. Pricing is — the ad pricing is still going up, clicks down, maybe there’s a flip there where it shifts more to more ad click growth. Just curious on some of the metrics, how you see that playing out. Thank you.

David Schwarzbach: Thanks for the question, Colin. With regard to headcount on the expense side, just to clarify, in 2022, we added to product and engineering. We also added to our Multi-location sales team. And our local sales headcount, which is still down substantially from 2020 — from 2019 was modestly higher, but in line with what we’ve shared with you in the past about being in the range of about half of what it had previously been. That’s really around 2022. For 2023, we plan to keep headcount overall approximately flat. And that’s true across all of the functional areas, whether it’s product and engineering, sales and marketing or general and administrative. So, no shift in mix expected in terms of headcount in 2023.

Jeremy Stoppelman: And Colin, this is Jeremy. I’ll take the second question there, thinking about the roadmap for the year and beyond. We feel really great. Despite all of the macro uncertainty, the team’s execution on the product and engineering side, the rest of the company too, but specifically on the product and engineering side, it’s been really clean. We continue to have a deep portfolio of projects leading into ads continuing to improve. Our ad tech stack that are matching, request-a-quote driving up both the number of projects as well as the quality of leads, obviously it makes a difference. We turn towards — more towards the consumer. Recently in 2022, we started that pivot. We’re starting to see some benefits there.

You may have noticed reviews grew 3% year-over-year to starting to see some of those wins stack up. And then from a go-to-market perspective, we’ve been leaning into Self-serve and Multi-location continues to go well, continues — we continue to see really great progress there. And then for further afield, we’ve started to try and share a little bit more color about why we have conviction that we can grow for a considerable amount of time into the future. One example that we cite in the latter is looking at CM for services traffic. There’s a big pool of quality leads out there, and we currently don’t participate in that area really at all. And so, if you go and you look back at what we’ve built with request-a-quote, nearby jobs, matching technology, like we’ve been slowly assembling the pieces necessary to play uniquely in that space.