YELP | Earnings Call Notes (2Q16)

INITIAL TAKEAWAY: 2Q was basically driven by the algorithm stunt implemented in 1Q.  Everything else was just noise; including mgmt’s efforts to change their message, which they are actually doing a decent job with.  Below are our notes from the call.  We’ll have a more detailed note out in the morning.

CEO Prepared Remarks

• Local Ad Revenue growth accelerated to 41% (vs. 40% in 1Q), exceeding expectations across sales channels, with slightly better revenue retention
• 3 priorities for the year:
  • Driving awareness/engagement
    • TV/Online Ad spend
    • Request a quote feature drove over 1M consumer inquiries
    • Business owner app drove 1/3 of activity for business traffice
  • Growing core local advertiser business
    • Providing performance based solution for independent to national accts
    • Investing in client service teams
  • Developing transactional capabilities
    • Total transaction volume grew almost 50% y/y
    • Nearly 6M transactions across Eat2Q, Yelp reservations
    • Consumers can now transact w/ over 100K local businesses
• Announced small investment in Nowait
  • Product helps restaurant to manage waitlists, over 4K restaurants using already
  • Wil be integrated on YELP platform, enabling consumers to see current wait times
• Jed Nachman appointed to COO effective today
  • Donaker will be retiring, will be an advisor and retain seat on Board

CFO Prepared Remarks

• YELP model is diversified, defensible core business
  • No customer represents > 0.5% of rev, largest product category 15% of rev
  • Revenue growth is still in the 30%-40% range in longest tenured markets
• Business model provides significant near-term visibility
  • Entering 2Q, YELP had commitments representing ~75% of the local rev it expected
• Core local Sales team
  • Produced over half of the y/y increase in Local Revenue
  • Grew small business advertisers nearly 30% y/y
• National accounts
  • Higher rev/rep, rev/customer, and renewals than core local
  • Expanding sales team in this area
• Self-serve
  • revenue more than doubled y/y, small part of Local rev, but strong growth in accounts
  • Lower budget commitments, tend to advertise more opportunistically
• Revenue and adjusted EBITDA both exceeded expectations
  • Local ad revenue ahead of expectations, flowed through to EBITDA
• Revenue up 38% y/y ex Brand, Local revenue up 41%
  • New account growth among smaller businesses was biggest driver
  • Saw slightly higher revenue retention across its customer base
  • Transaction up 37% y/y, now past year anniversary of Eat24
  • Other revenue flat q/q
• Expenses
  • Cost of revenue up 16% y/y, gross margin % up 100bps
  • Sales and marketing up 39% y/y, 12M ad investment accounted for $7M of the increase
  • Sales & Market % of revenue was 54% vs. 60% in 2Q15
• EBITDA up 24%vs. last year
• Guidance (midpoints)
  • 2016 Revenue of $704 (vs. 696M prior), 2016 Adjusted EBITDA of $104M (vs. 99M prior)
  • 3Q rev of $182M, 3Q EBITDA of $26M

Q&A

• Budget Fulfillment
  • "No step function kind of improvements"
• User Growth softening
  • More of a function of general trends moving more toward apps, away from desktop/mobile
• Guidance around $1B revenue target for 2017
  • Not sure when they will get to $1B, but not giving a timeframe as to when
• Update on YP partnership
  • Portion of revenue in Other, no incremental color
• Transactions accounts, over 100K, what is overlap b/w that and the LAAs
  • Dodged question
• Slightly improved revenue retention, anything it can attribute to
  • Doing a little better than retention, within historical ranges
  • Are starting to experiment with client service reps in local
• Commitments in place for 3Qs of guide
  • Quite a bit of visibility, a lot of annual contracts, multi-month contracts
  • No real change, just a fact of the business
• Salesforce productivity across cohorts
  • No silver bullets, modest outperformance against expectations across all channels
  • Varity of segments impacting
• Inventory constraints/sell-out in any regions?
  • dodged
• YELP Knowledge launch, initial feedback
  • Data opens doors to have dialogue with certain companies it couldn’t have had otherwise
  • Note a game changer overnight
• International Monetization improved
  • More focused on domestic, but making modest investments
• Customer/ROI dashboard impact on retention
  • Not seeing direct correlation
• Contributions by business lines
  • Multi-location business is about 20% of Local Revenue (referring to 1Q comment)
  • Bulk of local growth coming from adding new accounts
  • National is the inverse, mostly in the upsell
  • Seeing nice growth in self-serve, balanced b/w ARPU and account growth
• Contract Duration
  • There is natural attrition once customers lapse annual contract
  • Going to let customers buy in the way they want to buy (3, 6 , 12-month contracts, and self-serve)
• Guidance: 2H revenue is going up in excess of the 2Q beat, but adjusted EBITDA not up as much
  • Numerous investment opportunities
• Salesforce Hiring tracking well closer to 40% vs. 25%-30% target, expecting to ramp up
  • Retention and hiring trends within historical ranges
  • Still expecting 20%-30% range for the full year