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Yelp (NYSE:YELP)

February 26, 2013 6:15 pm ET

Executives

Geoff Donaker - Chief Operating Officer and Director

Robert J. Krolik - Chief Financial Officer and Principal Accounting Officer

Analysts

Scott W. Devitt - Morgan Stanley, Research Division

Scott W. Devitt - Morgan Stanley, Research Division

Thanks. I'm Scott Devitt, Morgan Stanley's Internet analyst. I'm going to start with the disclosure. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures, or at the registration desk.

Very happy to have Geoff Donaker, COO of Yelp and Robert Krolik, CFO of Yelp with us today. I was thinking maybe, Geoff, if you wanted to start with what you think are the most exciting opportunities for Yelp in 2013.

Geoff Donaker

Sure. Thanks, Scott, and thanks, Morgan Stanley, for having us here. As we sort of think about the 3 big themes for Yelp of this year, the first one is really mobile. This is nothing new. The mobile transition is upon us. We think this becomes the year where more than half of all Yelp traffic and activity starts to initiate through a mobile device. As a point on that, in the fourth quarter, 46% of all Yelp searches came -- originated through our app, so that just gives you a sense of scale and kind of what's happening there, and you'll continue to see a lot of innovation from us on that side, and we think that's just great for both users and monetization, as it enables us to put even better ads in front of people.

Second big one is Europe. So of course we acquired Qype in the fourth quarter, and that helps accelerate our European expansion. We feel really good about the progress that's been made in Europe over the last couple of years and think you'll continue to see more from us there as this becomes really a year of sort of a branding tipping point where the typical man or woman on the street in Paris and London starts to think of Yelp first when they think about local search.

And then last but not least, on the business, business side, as we think about that ocean of local advertisers we're trying to serve, this is really the year where we're trying to help those advertisers take that final tie into closing that loop and understanding how every dollar spent on Yelp advertising is actually manifesting itself back in revenue to their business. So the variety of different programs in place to help address that. But that's one of the things we're trying to do out there.

Question-and-Answer Session

Scott W. Devitt - Morgan Stanley, Research Division

So yesterday, we hosted a company, Waves [ph], it was from the mapping side and Google is still doing things -- there's so many companies that are touching what you do. Some that actually have these platforms that can extend into local. So talk a little bit about the way that you think about the competitive landscape and the opportunity for Yelp, potentially, to integrate into some of these platforms to extend the business and create monetization capabilities for things that don't have that yet.

Geoff Donaker

Sure. So at the highest level, I think, there's no surprise that there's a lot of competition in the local media market, it's just a massive market, and that's a terribly attractive target and has been for decades and decades now. Something like 50 million local businesses in the western world, most of whom advertise in one form or another. And today, only a tiny fraction of that spend has moved online in any form. So when we think about competition and when our sales force is calling in to local business owners, today the people we're really competing with and the businesses we're really competing with, are print businesses, radio businesses and local television. We don't really run in to the other Internet businesses yet, as much as you think we might. So will those be the next generation of competition, whether it's the smaller companies or the big companies? We, of course, always get asked about Google and Facebook, and of course, they're going to be competitive in this marketplace over time as well. But our thought at this point is continue to put one foot in front of the other, make sure we're offering fantastic products to both our end-users, as well as local advertisers and we'll let that thing play out in the decades to come.

Scott W. Devitt - Morgan Stanley, Research Division

How do you convince consumers to more extensively use the product offering relative to now we're more of the activity it seems on the restaurant and shopping side and I assume you want to drive that more broadly into other local businesses over time. How do you incent consumers to use the product more broadly?

Geoff Donaker

Well, you know what's interesting? It's really content is king kind of an answer to this. So, when you're looking for a doctor, or a roofer, or a plumber, what you're really looking for is who can give me the most information to help me make an informed decision about what plumber, or doctor, or roofer I should choose, right? You're going to go to whatever site or property actually has the most information for you. Historically, and for the last couple of years, in most of the cities we have been operating in, that's actually become us. So to the extent that, that is true, more and more consumers have continued to find their way to Yelp to the tune of more than 100 million unique visitors last month. So it is working, and as a matter fact, I think when you ask this category question, it's a little bit counterintuitive, because many times over the years, people have asked us, don't you really want to emphasize the plumbing part of your business, or the doctor part of your business, relative to restaurants? And in fact it's the opposite. Because what we tend to find is that restaurants is the easiest point of entry. All of us are going to eat out multiple times this week. And to the extent that we can help them find a great sushi place this week, next week when you're looking for a doctor or a plumber, you'll actually also turn to Yelp.

Scott W. Devitt - Morgan Stanley, Research Division

So in different markets, you have different levels of review density? And particularly outside the U.S., there's less density than inside the U.S. And so, how do you drive the review density? Because that seems to create a tremendous amount of value in a particular market, in terms of the advertising opportunity opening for you.

Geoff Donaker

Thanks for asking that question. That's -- it's actually less about a U.S. versus non-U.S. Delta than it is a newer market versus older markets thing. So of course, we've been in San Francisco now for 8 years, and that's given the community a really long time to generate a wealth of local content. And sort of the same thing, on the second year, of course, for those who know our story, we got into L.A. and Boston and New York, and so those are the second most dense cities and so on into our more recent cities. So as an example, in the last month I think we opened up in Bordeaux and a few months earlier, we opened up in Albuquerque. Whether you think about the U.S. market, Albuquerque, or the foreign market, in this case, the non-U.S. Market in Bordeaux, I think in both cases, you're going to find not a ton of review density, because we're really just getting started in both of those places. But if you sort of back up and look at our more older and older markets, you'll find that, that review density really starts to kick in after a couple of years.

Robert J. Krolik

And one thing I'll add is, from a revenue standpoint, so we have 3 sources: Local ad, display and other. In local ads, if you kind of break that down from a category standpoint, about 22%, which is the largest portion, come from home and local services. So home and local services contribute about 22% of that revenue line item. Restaurant, is actually second, even though it's one of the largest categories next to shopping at about 20% of local ad revenues. So and then health and beauty and doctor, health and then fitness is in there as well and shopping, obviously. But home, it surprises some people that home and local is such the largest percentage, even though it's fairly small at 22% of local advertising.

Scott W. Devitt - Morgan Stanley, Research Division

Geoff, you mentioned that it's not really regional, it's more of the markets that you entered first. Qype, which you acquired outside the U.S., does accelerate in some of the less mature markets that are outside the U.S. So can you talk about that acquisition and how it does accelerate efforts in those markets?

Geoff Donaker

Certainly. Yes, so again we acquired Qype in October and the real motivation for that, of course, was they've got some rich content, as well as traffic. We said more than 15 million monthly uniques, mostly concentrated in Germany and the U.K. Of course, 2 of the core markets in Europe. And we think by pulling that content and users and traffic into the Yelp platform, it will indeed accelerate our growth in those markets. Now we're really just focused on making that happen. So as a first step there, what we've said and you'll see from us over the next few weeks, is we're integrating the Irish Qype site into Yelp Ireland, that'll be about 1 month from now. We'll see how that goes. Assuming that all goes well, you'll continue to see a sort of a country-by-country rollout, as we integrate sort of the rest of the Qype properties into a single Yelp branded sort of home, both mobile, as well as desktop.

Scott W. Devitt - Morgan Stanley, Research Division

How do you measure -- or how do you offer tools and analytics for the advertisers to actually measure their returns? I mean Google, as a group, was pretty easily -- was very tied to a transaction. In some cases, you have less sophisticated users that are using your system that may not be using the technology extensively in their business given the size of their business. So that seems like a point of friction, which is proving the Yelp value proposition to the advertiser, and that also can be -- could be an area where you significantly reduce friction over time in terms of getting ad dollars online. And so where are you now with analytics, and what are some of the thing that you can share around ROI capability of those advertisers?

Geoff Donaker

This is one of the areas that I get most excited about. Some really interesting research that's out there that I won't share any details today, but we've seen a number of different studies that suggest that advertisers on Yelp -- third-party studies, are getting tremendous return from the revenue, or the ad dollars they're actually spending on Yelp programs and they're seeing that back in the form of straight local customers into their businesses. To the question about how do they measure those results. There are, of course, other variety of ways. Where we are today is that every business owner on Yelp has a dashboard where they can evaluate and see actual customer leads that they're getting generated from the Yelp platform. And those are things like calls straight into your business from the Yelp mobile app, right? Those are clicks from maps and directions to your business. Those are purchases of Yelp deals. All these things that are very strong leading indicators that somebody did indeed try to become a customer of your business. So there are more things that we can do to further close the loop and help those advertisers really pencil that out, right? Okay, so now I know I got a call at this time from this person, what's that worth? What's the revenue associated with that worth? And then how much did I spend for that lead, right? And do those calculations. So you can imagine, it will be an evolutionary process, as we try to help every single local business, have the appropriate kind of tools that are what they're looking for. As you mentioned, there are quite a wide range of needs and wants on the local business advertiser front. Some are very, very sophisticated and want all kinds of math and analytics capabilities. Some want a little bit less and so you want to keep it simpler for those. And our goal and approach is really let's just make it a dealer's choice, make sure that every local advertiser out there has the dashboard that best meets their needs.

Scott W. Devitt - Morgan Stanley, Research Division

And then how do you think about the dependence that you have on Google for traffic and you recently integrated into iOS and mapping and Siri to the extent that, that's actually benefited traffic and reduced your reliance on Google at all?

Geoff Donaker

Well, let's just start with a kind of the desktop or the kind of website world for a moment. So as we said, we did 100 million unique visitors on our website. That includes both mobile and desktop last month. Certainly, we do get a material portion of traffic from search of all kinds, Google being the biggest. And our belief is that content is going to continue to be king in the search world. So he who has the best plumber and doctor and roofer content is going to be the one that tends to show up best in search engines. Now you also touched on mobile, and we're incredibly excited about mobile both in terms of mobile sites, as well as in terms of the app. And I mentioned earlier that 46% of all Yelp searches originated from our app, and that's of course, a direct consumer relationship. Somebody has already got the Yelp app on their phone, they're hitting it and kind of going into Yelp and performing a search there. So in a sense, we already have tremendous diversification, given both the app as well as the desktop world.

Robert J. Krolik

And just to that point, some 9.2 million people at the end of last year were using, on a monthly average basis, our app. And then what was exciting to us is local adds. So we've served up about 25% of local ads on the mobile devices. So either mobile Web or apps. So while we're still happy to have traffic coming from Google or whatever search engine, we're seeing mobile as being a little bit of a game changer.

Scott W. Devitt - Morgan Stanley, Research Division

And just following -- kind of extending on the topic of where traffic comes from and the fact that the Internet is such a larger percentage of the consumer's day, Geoff mentioned earlier kind of print being an area where some of the dollars are coming from and particularly Yellow Pages, it seems like tens and billions of dollars of opportunity and Yelp's built this unique position as a growing local content company. So one of the things that's always come across my mind, is why that company is not that's a lot bigger at this point, $1 billion -- why the numbers aren't so much bigger. Why do you think the points of friction are too restricting the ad dollars coming online into becoming a much bigger company? Either...

Geoff Donaker

I appreciate the question, because I think, hey, we certainly think we'll get there and beyond. Obviously, it all remains to be seen. I don't even know that I would call it friction. I would just say that in the local marketplace, the local media marketplace has always required a tremendous amount of patience. I don't know that I can think of a good example of anybody that's grown quickly at scale and then stayed there in the local advertising marketplace. So we think 65% annual growth rate last year is pretty good, and we're certainly hoping to do something not quite that this year but approximating that based on Rob's guidance and continue to grow very quickly over the years to come. So when do we get to $1 billion and multibillion? That remains to be seen. But I don't know that there is a single point of friction, rather it's an incredibly diversified divergent marketplace, where a plumber in Idaho has nothing in common with a doctor here in San Francisco and you have to talk to each one of them individually, in order to establish that relationship. But once you do, that's a relationship that can last a long time.

Scott W. Devitt - Morgan Stanley, Research Division

It there something within sales force deployment, or otherwise, that would accelerate the opportunity, the revenue opportunity?

Robert J. Krolik

Geoff and I actually have this debate occasionally about when there's going to be a switch or flip-over from all these local businesses realizing that if you look at the dashboard that we give local businesses, it tells you how many phone calls you got. It tells you how many check-ins you got. These are real customers coming to your door. And quite frankly, $9 billion was spent on Yellow Pages a couple years ago, and they don't give any of that information. So it's that transition that the local business owner has to make to not only coming off a subscription-based business, but also over to performance-based product. So we...

Scott W. Devitt - Morgan Stanley, Research Division

I guess the Web or digital media at all?

Robert J. Krolik

Yes, and that just -- yes. And first over to digital. And so I think it will be a long time. I mean kind of the thought process is probably 5 to 10 years, and we look at it like we're just getting started. We had approximately 40,000 customers at the end of Q4 of 2012 and there's literally, as I've said, tens and millions of potential customers for us. So it's just convincing, in a large part, one-to-one those local businesses to convert over. The conversation is not about hey, how much are you spending on Google? How much do you want to spend on Yelp? It's how much are you spending on the value pack coupons you're sending out in the mail.

Scott W. Devitt - Morgan Stanley, Research Division

And you've got this dynamic of free listings and paid listings. So you're up-selling a customer. What is it that customers that are paying are getting and what are some of those features and functionality that you could potentially add the businesses there today that would accelerate adoption of those paying for distribution?

Geoff Donaker

Well, just as a point of clarification, I want to make sure folks get it. We do have this concept of a claims business on Yelp. So every business owner who has a local business, can actually go ahead into Yelp and for free, claim their page, and that enables them to do things like respond to reviews and add photos and put a description of their business up on Yelp. And we frankly, we think, that's just good for everybody. Certainly, it's a good entry point to Yelp for those local businesses. But it's also good for consumers, to just have more information. So we certainly plan to offer that free business on our account for a very long time, and we think that's a good thing to do. I want to say that the number there was directionally 1 million ...

Robert J. Krolik

It's about 1 million, yes, 994,000.

Geoff Donaker

Of businesses who had claimed an account on Yelp and therefore started that process of participating in a digital world and then on Yelp and in the Yelp ecosystem, which, again, we think is a very good start. Now, you asked the question, what do you get if you advertise on Yelp? That's it. That's what you get. You get advertising. And so effectively, if you want advertising, if you want increase your exposure rather than getting the free account, which really just enables you to communicate with people who are already looking at your business on Yelp, the advertising program enables you to actually reach new customers. And for those who haven't played around with Yelp advertising, you could try this on your phone right now. If you look for a dentist in San Francisco, you'll most likely see at the very top of the search results a paid ad unit, and you'll see that, that's an ad that can either be paid for on a bundle, sort of effectively a CPM basis, or on a pay-per-click or pay-per-call basis.

Scott W. Devitt - Morgan Stanley, Research Division

A couple more for me then we'll have about 5 minutes for questions. You talk about renewal rates in the low 70s. How does one think about the churn in the business? Obviously, small businesses, local businesses, there's a natural churn. How much of it is that natural churn versus other reasons and what are the other reasons?

Geoff Donaker

First off, I know sometimes we get asked for a churn rate. We don't share, specifically, a churn rate. You did mention that. That's a repeat rate, which we think is positive and that is in the low 70s. At the high level, as Rob mentioned, the way we're really focused today is, we've got this 40,000 customer base of accounts in an ocean of tens of millions of prospective accounts. We're very much in acquisition mode and expect to be in acquisition mode for several years at this point. Certainly, the existing relationships we have are important, and we want to take advantage -- or take advantage of those relationships and certainly do the most to leverage them, mostly by making sure the businesses understand the value of what they're getting from Yelp. With the dashboard, with an account manager and with making that dashboard even richer and better, so they can evaluate their Yelp spend, yes, a question on why might somebody choose to not spend on Yelp anymore? Mostly, that is the already existing dynamic of businesses kind of going in and out of business. It's also things like seasonal businesses and that can take a couple of different incarnations, right? You might have a ski resort or a ski shop that only advertises in certain months. You may also have a mover who actually only advertisers in certain months because they're busy in other months. So you have those notions of people who come in and out of the program. And then there's certainly experimentation. There's people who give Yelp a try, either through a CPC package or something like that, as they're learning to experiment with digital media. They try it for a few months and then they turn it off and they try something else for a few months. And we certainly try to keep these relationships positive, so that they'll come back to us again at some point when they're ready.

Scott W. Devitt - Morgan Stanley, Research Division

So you mentioned the dynamics of more mature markets getting more extensive reviews and density. And I assume you have stats also on the economics of these markets like, say, San Francisco versus a less mature market. What is the mature market look like from an economic profile standpoint relative to a less mature market?

Robert J. Krolik

So we have an example it's up on our IR website, it's a deck that has Philadelphia as a -- it's in the second cohort. So it's not the first 6 markets but it's in the next 14. What we've tried to do is just give you a glimpse of the economics. So we have a community manager in Philadelphia, which is a direct cost. She makes less than $100,000, we'll just leave it at that. And then we have salespeople that call in to that market. So for 2011, we have approximately say 4 -- on a full-time equivalent basis of salespeople calling in to that market. Salespeople make, they're out of callers, they make between $30,000 and $40,000 a year, 10% -- on top of that 10% commission. So if you kind of add all that up with benefits and whatnot probably $250,000 maybe $300,00. And then in 2011, we did about $650,000 to $700,000 in revenue in Philadelphia. And then in 2012, we gave -- we updated the chart to show that we did about $1.4 million in Philadelphia in 2012. Still with that same community manager and then maybe we're still looking at the data in terms of how many more salespeople. But even if it was double, you still, from an economic standpoint, are experiencing, from a contribution margin basis, pretty high contribution margin. We don't -- just to call it out, product and development and G&A, we don't do by market. It's across platform. So we don't allocate it or look at it like that. But from a contribution margin, we're feeling pretty good about our older market. And what we're doing right now is we're using all that margin to invest internationally or mostly internationally.

Scott W. Devitt - Morgan Stanley, Research Division

Questions? There are some microphones around. Well, yes, in the front. Jordan [ph],go ahead.

Unknown Analyst

Yes. Just a question. You're integrated with Facebook and that allows consumers to have various benefits, but you also have your own internal social products. Could you just talk about engagement, someone using Facebook versus someone actually using your own social products?

Geoff Donaker

Sure. So I guess quick clarification there. We do participate with Facebook Connect and that has a couple of benefits when somebody wants to come and create a new Yelp account, we can do the thing that you see on many sites now where it pulls down your name and your photo if you choose to use Facebook, so it can streamline that process a little. The coolest feature from Facebook Connect, in my own opinion, is that if you come to Yelp and you're logged in to Facebook, your friends' reviews and contents sort of pops to the top of your Yelp experience. So it's a neat consumer experience. It doesn't really replace the community or social features on Yelp, which exist -- first of all, they're from a sort of a pre-Facebook era. Most of them existed back in 2004, 2005, but they're really there for the Yelp community. And that's the community of writers who are actually writing all the reviews and photos and sharing tips and what not. And so that's for them to communicate with one another, more than it is for you to communicate with your friends outside of the Yelp ecosystem, which is what Facebook is for.

Unknown Analyst

Talk to us a little bit about how the Facebook Graph Search might impact Yelp? When they first announced it, the Yelp stock went down because there was a belief that, oh, they would be in Yelp's face.

Geoff Donaker

Yes. Here -- I guess I will certainly answer your question. I do want to start back with the local advertising market is enormous. And so every big media company it seems both well before my time, as well as through the Yelp experiences kind of is coming at this local directory space in one form or another. It's no big surprise that Facebook and others have taken a few cracks at it. And I think -- as to Graph Search specifically, we're really going to have to see what that product looks like, it's very hard to say today. As it regards to Yelp specifically, we really don't get any material traffic from Facebook, so there's not a direct disruption threat, whether they create a great local product in and of themselves. I guess we'll just have to wait and see.

Scott W. Devitt - Morgan Stanley, Research Division

Anyone else? I just -- I want to follow-up, Rob, on the cohort-type analyst of the market, but what have you said publicly about the long-term margin profile of the business? Because Philly is not even one of the most mature markets and sort of assuming there are other markets that are more profitable in terms of the way you think about the business at that scale, where you're not taking money from mature markets and deploying it into the newer markets. So what does the business look like?

Robert J. Krolik

So we feel that adjusted EBITDA in the future, kind of from a target standpoint, could be 30% to 35%. And that's kind of how we've modeled it out. Obviously, when Philadelphia is in the second cohort, obviously generating fairly significant margins on a contribution basis. Our even older cohorts if you can imagine are probably even higher than that. So what we want to do is we want to continue to invest in the business. As Geoff said, we have 65% growth rate last year. We're predicting if you use the middle of the guidance range about 53% growth in 2013. Last year, last -- and fourth quarter, we had 87% growth in our local ad business, which is our biggest piece of our revenue stream. So we think of it as, "Hey let's continue to invest." And long term, we see feel the target margins are 30% to 35%, but we'll continue and invest as long as we continue to see this incredible growth rate and revenue.

Scott W. Devitt - Morgan Stanley, Research Division

Great. I think we're out of time. Geoff and Rob, thanks for your time.

Robert J. Krolik

Thanks, Scott.

Geoff Donaker

Thank you.

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