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Yelp, Inc. (NYSE:YELP)

Q2 2012 Earnings Call

August 1, 2012 4:30 PM ET

Executives

Todd Friedman – IR

Jeremy Stoppelman – Co-Founder and CEO

Rob Krolik – CFO

Analysts

Mark Mahaney – Citi

Heath Terry – Goldman Sachs

Jason Helfstein – Oppenheimer

Aaron Kessler – Raymond James

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2012 Yelp Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer-session. (Operator Instructions)

At this time, I would now like to hand the call over to your host for today, Mr. Todd Friedman, Investor Relations. Please proceed.

Todd Friedman

Thanks, operator. Good afternoon everyone, and thank you for joining us in Yelp’s second quarter 2012 conference call. Joining me on the call today is CEO, Jeremy Stoppelman; and CFO, Rob Krolik. Before I turn the call over to the company, 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. 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. 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’ll discuss adjusted EBITDA. In our press release issued this afternoon and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding this non-GAAP financial measure and reconciliations of net loss to adjusted EBITDA.

And with that, I’ll turn the call over to Rob.

Rob Krolik

Thanks, Todd and welcome to today’s conference call. It was a strong second quarter and we are happy to share our results with you. For today’s call, I will cover the financial pieces and then Jeremy will give a brief review of recent highlights before we take your questions. Please note that we have posted a few slides on our Investor Relations webpage that accompany this webcast.

Let me start with the results from the second quarter of 2012, we achieved record results in all of our key metrics including revenue, which grew 67% year-over-year to $32.7 million. We were particularly pleased to report adjusted EBITDA of $1.6 million, which was well ahead of guidance. Adjusted EBITDA benefited from the strong revenue performance.

There are four key operating metrics that we had previously provided as they underpin our strategic and financial success. They are one, the number of reviews contributed to our site; two, the number of unique visitors; three, the number of plain local businesses and four, the number of active local business account.

Each of these grew significantly in the quarter. Reviews grew 54% year-over-year to 30.3 million as we added almost 2.7 million reviews in the quarter. Our average monthly unique visitors grew 52% year-over-year to roughly 78 million, which is 7 million from the first quarter. Approximately 24% of these uniques are accessing our mobile site. Claim local businesses hit 791,000 up 75% year-over-year, and up 91,000 from the first quarter. And active local business accounts grew 113% year-over-year to almost 32,000.

These financial results and operating metrics demonstrate that playbook continues to deliver growth across all of our markets. And we are especially encouraged by the large numbers of cities with growing communities where we have not yet started selling advertising.

To provide some additional color, let me walk down the P&L starting with the revenue mix. As a quick reminder we break revenue into three categories. One local, which includes enhanced profile pages and performance and impression based advertising. Two, brand, which includes display advertising. And three, other, which includes Yelp Deals and other commerce related revenue.

For the second quarter, local revenue was $25.3 million up 89% year-over-year. Brand revenue was $5.7 million up 27% year-over-year. Other revenues flat year-over-year at $1.7 million, given our transition from email deals to deals on the site. That said, we now have around 35,000 deals on the site, most of which are self-serve where merchants are signing up on their own.

Our customer repeat rate defined in the percentage of current customers who advertise with us in the past 12 months was 70% this past quarter consistent with the first quarter 2012 and second quarter of last year.

Gross margin was consistent at 92% as same as last year’s 2Q. Sales and marketing was 62% of revenue compared with 63% last year. Sales and marketing is both a primary point of investment for growth as well as the greatest point of operating leverage as we move towards our target model. We’ve grown sales and marketing head count above 50% over the last year reflecting our continued investment in opening new markets with our Community Manager program and adding new sales associates.

We invested approximately $2 million in the quarter in overseas market compared with $1.2 million in the same quarter last year, and $2.4 million in the first quarter. As a reminder, virtually no revenue has come from overseas market. In fact, we are only generating revenue in 3 out of our 17 countries that we operate in, which we see as an opportunity.

We recently announced that we’ve started to hire our UK-based sales force and expect the office to be fully operational by the end of Q3. That said, we expect the revenue contribution from international markets would be nominal this year. In the short term, we think the spending on new markets is an investment until they generate revenue.

If you take this international investment into account, sales and marketing would fall to 53% of total revenue in the quarter. This shows the leverage we continue to gain in the model.

Product development was 13% of revenue slightly down from 14% in the second quarter last year. On a dollar basis, we increased product development by $1.7 million year-over-year, as we invest in the future of the platform.

G&A was 18% of revenue similar to 18% in the second quarter of last year. We are incurring additional public company costs but expect G&A to grow at a much slower pace than revenue.

Turning to the balance sheet, our cash and cash equivalents position at the end of the quarter was over $123 million, which excludes $6 million of restricted cash related to new leases we signed since the beginning of the year. We generated approximately $300,000 in cash from operations in the quarter.

Let me close by turning to guidance for the third quarter and full year 2012. For the third quarter, we expect revenues in the range of $34.5 million to $35.5 million and the full year to be within a range of $135 million to $136 million, which is an increase from our previous mid-point of $130 million for the year.

We expect adjusted EBITDA for the third quarter to range between $750,000 and $1.25 million. One comment that I’ll make about adjusted EBITDA is that our second quarter hiring was weighted a bit towards the back end of the quarter. With a full quarter at that higher head count, we expect adjusted EBITDA will decline slightly sequentially, but still be positive.

That said, we remain ahead of our goal and we are substantially raising adjusted EBITDA guidance for the full year from approximately break-even to a new range of $3 million to $4 million. For modeling purposes, our basic share count in the third quarter will be approximately 61 million shares.

With that, let me turn it over to Jeremy.

Jeremy Stoppelman

Thanks, Rob. As Rob discussed our financial results highlight the underlying power of the Yelp model, by focusing almost singularly on cultivating rich, authentic local content, we’ve created a site that is rapidly becoming the de facto local search engine for connecting consumers to create local businesses.

It’s been exciting for me to watch Yelp grow over the past eight years into the trusted resource we’ve become today. Last month that evolution took an important step when we officially launched our London sales office. The office is now operating in 17 countries, but London marks our first sales office outside North America.

As part of this initiative Jed Nachman our Senior VP of Revenue moves to London. Jed will stay there for some time to ensure that the same principles that have made Yelp a trusted resource for local advertisers in the U.S. stays through to our new customers overseas.

Driving forward with our international expansion plans, we launched six new international cities in the second quarter including a big focus in the Nordics to go along with the two domestic cities. We are now active in 90 Yelp markets around the world and we believe there are more than 1,000 cities like this leaving ample room to continue launching new markets.

Growth also will come from extending our distribution network through strategic partnerships and affiliations. Apple recently announced at its Worldwide Developer Conference that it intended to integrate Yelp branded content in the Siri and the new Apple Maps application on iOS 6, with links that would take users directly to Yelp.

We were also very pleased to announce this quarter the Bing Local Search experience is now powered by Yelp. These types of partnerships strengthen our types of consumers, which ultimately drives more value to local businesses.

We believe the partners and consumers come to us as a direct result of our focus on having trusted content that is rich and relevant. One of the core strengths of Yelp is our breadth of reviews. For example, 23% of review businesses are in the shopping category, 21% are in restaurant and 11% are in home and local services.

Through the end of the second quarter, over 30 million reviews have been written on our platform. More local content means better and more accurate recommendation for consumers. For example, a new feature Yelpy Insights mines review content and user profiles to uncover helpful nuggets. Now, it’s easy for us to identify restaurants, popular with vegetarian reviewers that aren’t exclusive to vegetarians and we are just getting started.

Mobile remains a top priority at Yelp and we expect it to be a key driver of engagement and success in the future. Mobile changes the consumer engagement model dramatically and we have by far the best app in the market for finding local businesses. With the phone in hand our users can contribute more content faster. We’ve released new features that make it easier for users to contribute content to Yelp from a mobile device. These appear to have had the desired effect as we have seen a significant increase across the number of mobile contribution categories including photos, tips, and business listing updates.

For example, 50% of the contributed photos on Yelp are coming from a mobile device. We love that our mobile app creates a direct relationship with our users, by choosing the Yelp app people are bypassing search engines and consequently their engagement is higher. On average, our mobile app was used on 7.2 million mobile devices per month in the second quarter, up 70% year-over-year. Approximately 40% of Yelp searches are now conducted on our mobile apps, becoming the majority on weekends.

We believe that the migration towards mobile ultimately leads to greater monetization; while we don’t currently display ads on our mobile apps, we do display ads on the mobile optimized version of our website. There we have found that the click through rate on our local ad is significantly higher than that on desktops. When you consider that 40% of our searches come from mobile apps there is quite a bit of un-monetized mobile traffic that we expect to unlock in the near future.

As we look at all these opportunities to grow our business, mobile, international partnerships and product, our strength ultimately comes from our passionate community of Yelpers. Over the next few months we will be kicking off Yelp Helps in nine markets across the globe. These local events match non-profits with Yelpers looking for volunteer opportunities.

In the month following, Yelp communities plan together for group volunteer activities such as mail deliveries to the elderly and reading to low-literacy children. Seeing our online community come together offline in such a way is truly humbling. The opportunities ahead are exciting and of course, our focus remains on ensuring the 78 million unique monthly visitors coming to Yelp always find that great local business.

Let me now ask the operator to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Todd Friedman

Operator, we’ll move to the first question?

Operator

And our first question comes from the line of Mark Mahaney with Citi. Please proceed.

Mark Mahaney – Citi

Thanks. A couple of questions, first Rob in that near term financial question that EBITDA upside would you attribute all of that to the revenue upside or were there any maybe greater than expected cost efficiencies that you think are sustainable going forward. Secondly, broader picture about the rate at which you add new cities – a rate at which you had new markets around the world, how do you think about the ideal – how do you decide what the ideal growth of that is? How do you figure out what’s too fast, or too slow? How much of that are you just following the growth that set by users? How easy is that to figure out the optimal growth with that? Thanks.

Rob Krolik

Thanks, Mark. Let me take the first one, this is Rob. As it relates to the second quarter on the upside in EBITDA that transpired, I would say, that a vast majority of that was driven by the revenue. So, we’re up about probably couple of million dollars from our guidance in revenue and a lot of that dropped to the bottom line.

Jeremy Stoppelman

Hi Mark, this is Jeremy. On the new markets question, rolling out faster versus slower, how do we think about that and which markets are attractive? We start by looking at, of course GDP, what’s going on in that country on a per capita basis and then also we want a population, so the bigger the population, the better dense cities obviously have been a great fit for us. And then we’re trying to add as many of those markets as possible and we said earlier, there – we think there is about a 1,000 of them out there and we’re in 90 today.

But to reach them, we’ve got to build a team. We got to send community managers into those cities. We need management, infrastructure and so forth. So, we’re really striving for that Goldilocks temperature, just not too fast, not too slow, just right. And so what you’ve seen as far as our city expansion is a pace that we think is rapid, but yet not too hard where we stretch ourselves too thin.

Mark Mahaney – Citi

If I could throw one last question in, it’s obviously a very significant percentage of your activity that comes via mobile devices, but the level of engagement to that activity, what people do via mobile devices, do you see that as – do the trends show that that’s materially different than how people interact with Yelp on their desktops?

Jeremy Stoppelman

We do see more highly engaged users so – which isn’t that dissimilar from what we see on the website. So if somebody navigates straight to Yelp by typing Yelp into the browser, they’re going to be a more engaged user and similarly when someone downloads our app and starts using it directly, they’re much more engaged.

So they’re going to view more businesses than someone who say casually found us through Google, say we’re looking for a particular restaurant or so forth. And then also on the contribution side, someone who comes directly to us is much more likely to contribute content and we’ve seen a lot of success there, particularly we get a number where over 50% of our photos are now coming from mobile devices and that’s just one element, we also get lots of tips, check-ins and other data as well.

Mark Mahaney – Citi

Thank you, Jeremy. Thank you, Rob.

Jeremy Stoppelman

Sure.

Operator

And our next question comes from the line of Heath Terry with Goldman Sachs. Please proceed.

Heath Terry – Goldman Sachs

Great, thanks guys. I was wondering if you could give us a sense as you talk about mobile and the improvement that you’re seeing there, what kind of adoption are you seeing on the merchant side for the analytics that you’ve begun to offer – the new analytics package you rolled out at the end of March and to what extent are they able to recognize or appreciate the conversion rates that you’re seeing in mobile?

Jeremy Stoppelman

I don’t think that it massively changes the game for us, we’ve always tried to give business owners as many pieces of data about how people are interacting with their business whether they were making phone calls, clicking on websites and so forth. And so our mobile roll out has just added a bunch of data to that. For example, on mobile apps, we can actually track when someone clicks – the call – hits the number and actually tries to call that business. And so, we’re just continuing to push that in front of the business owner and they’re able to do whatever ROI calculation makes sense for them and it varies based on businesses obviously, some take phone calls from new customers, other’s phone calls are completely irrelevant. So, it’s really a case-by-case basis.

Heath Terry – Goldman Sachs

And have you seen engagement with those analytics improving since the new package was launched?

Jeremy Stoppelman

I don’t know that we’ve closely looked at the metrics. Our business is diving deeper. I mean, a lot of its pushed out to businesses. There is a weekly email that goes out to business owners that have unlocked their free page or unlocked their free tools and so, if they get that email, those metrics have just appeared. So, I haven’t actually looked at any click through rate data to see if that’s materially changed.

Heath Terry – Goldman Sachs

Okay great, thank you.

Operator

And our next question comes from the line of Jason Helfstein with Oppenheimer. Please proceed.

Jason Helfstein – Oppenheimer

Thanks. I’ll go for three questions. So, in the quarter, we saw really that the growth more driven by adding new businesses. You sacrificed some monetization. I think that was on purpose to try to just work on bringing the cost of entry down for new customers. So, just talk about how that’s going and if you expect to see the same type of strategy in the back half of the year?

The second is just going back to the city question; you guys were on track to beat last year’s total, last year you added 22 cities, this year arguably on track to do, I don’t know, 25, 26, something like that. Can you talk about perhaps a target for next year, may be just do you expect the pace to continue at the same level?

And then lastly, can you give us an update on some of your partnerships? A lot of announcements in the quarter. When do you expect any of those to have an impact on revenue? Thanks.

Rob Krolik

Hey Jason, let me answer your clarifying question on the adding new businesses. Can you repeat that because I don’t think I’m clear on –

Jason Helfstein – Oppenheimer

Sure. So, active business accounts is up –

Rob Krolik

113%.

Jason Helfstein – Oppenheimer

Active business account is up 113%.

Rob Krolik

Okay.

Jason Helfstein – Oppenheimer

However like – if you do like revenue per – it was down 11%, so 791, which was down 11% per new business, so. So basically, we are seeing less revenue per new business, but you guys are really accelerating the number of businesses being added. And I think in the past we just talked about that as part of a strategy to just try to find the right price point to bring new vendors on the platform.

Rob Krolik

Right. I think part of the number that’s included in active accounts is the deals component. So, there are a number of customers that sign up for deals and are included – and actually sell deals and are included and so, the average price for those may be not in line with our standard subscription packages. So, they could sell a $10 for $20 deal or $50 for $100. So, it’s not in line with the $300. So, that maybe actually what’s driving the number. And what I had is for Q1, we had about $262 when you divide local revenue by the active accounts. And then for Q2, I had $270. So, just up slightly, but I’m happy to talk about it more later.

Jason Helfstein – Oppenheimer

Oh, no I was looking on a year-over-year basis, yeah, sequentially.

Rob Krolik

Okay. Yeah, $299 right last year. And yeah, I think it’s going to – we’re not focused on the average amount anyone pays specifically. We are more focused on grabbing lion share right now. We have an ocean of 10 million to 15 million businesses that we’re trying to go after and whether they sign up for our subscription packages or deals or any other transactions that they can do on a platform. We’re just happy for them to do that; it’s all positive for us.

Yeah and then let me take the second question. So, we had 22 cities that we launched Yelp markets in 2010 and 2011 coincidentally. And in 2012, we’re at 20 cities, I believe we launched 8 in Q1 and – 12, sorry and 8 in Q2.

We don’t necessarily give a target for next year. It’s something that we constantly evaluate as Jeremy kind of talked about in terms of GDP, internet penetration, all of that into particular city. So, we wouldn’t necessarily give out a target. What I would say is if you kind of look at how we’ve rolled out cities in prior years, obviously I think 2012, in the first quarter, was our high watermark for the year; we did eight this past quarter. So, I wouldn’t expect that we do significantly more in the next couple of quarters.

Jason Helfstein – Oppenheimer

Okay.

Jeremy Stoppelman

And then finally on the – yeah, on the partnerships question. We are very excited about some of the partnerships that we announced this quarter, obviously working with Apple as well as Microsoft. I don’t really have any guidance on impact to revenue on the Apple integration in particular, it looks like that hit some time later this year, obviously that’s up to Apple and it’s hard to know exactly what the impact will be, but we’re certainly excited about our relationship and working with them directly.

Jason Helfstein – Oppenheimer

Okay, thank you.

Rob Krolik

Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Aaron Kessler with Raymond James. Please proceed.

Aaron Kessler – Raymond James

Yes. Hi, guys. Couple of questions. First, can you give us any sense on verticals in the quarter, maybe strength and any softness in any of the verticals that you saw? In terms of also mobile monetization, I believe, you are expecting something over the next – maybe six months or so. Any thoughts at this point on what type of revenue model you’d see there? Should we expect a similar model to the desktop and it’s just – will the – does the advertiser option to opt-in or is it just kind of on both? Thank you.

Rob Krolik

Thanks, Aaron. Let me take that first one. So, when you look at net revenue on the local side and look at the categories, it hasn’t changed dramatically actually from what we have disclosed previously. So, home and local services from a revenue standpoint came in at in Q2 about 21%. And then restaurants came in about 17% of local revenues in Q2.

The next was beauty and fitness at 16% and then health was 10% and shopping – sorry, health was 12%, shopping was 10%. It’s similar to what we have disclosed in the past, so not dramatically different. And then for review businesses, in the S1, we disclosed the percentages it was in the pie and it really hasn’t changed much from that. Shopping is still the number one, what we – for locations of review businesses at 23%.

Jeremy Stoppelman

And then on to the mobile monetization question, we actually already are monetizing a portion of mobile, particularly the mobile web. So, if you go and search for something via your smartphone using Google and find your way to the Yelp site, you’ll see a page that looks just like what we have on our apps and you’ll see an ad there. The performance of that ad unit has actually been higher than what we see on the desktop.

And so, we feel very encouraged by that, we feel very confident that our ad unit translates very nicely to the mobile web and mobile apps as well. And so then, it’s just been a technical thing to actually get that implemented. And so, we’re looking at sometime soon for mobile app monetization, we haven’t announced an actual date, but it’s obviously a high priority and something that that we’ll be doing soon.

Aaron Kessler – Raymond James

And would mobile still be within the subscription model or would you look at maybe a click-to-call with mobile?

Jeremy Stoppelman

I think we’re open to anything that works well for our business customers. But I think right now, what we’ve already got is something that’s similar to what’s on the desktop, it’s sold on CPM as well as a CPC basis, that’s the obvious first step. But we’ll continue to look at other products as well.

Aaron Kessler – Raymond James

Great. Thank you.

Operator

Ladies and gentlemen, with no further questions, this concludes today’s question and answer session. We would like to thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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