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Yelp (NYSE:YELP)

Q3 2012 Earnings Call

November 01, 2012 4:30 pm ET

Executives

Stacie Bosinoff

Jeremy Stoppelman - Co-Founder, Chief Executive Officer and Director

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

Geoff Donaker - Chief Operating Officer and Director

Analysts

Neil A. Doshi - Citigroup Inc, Research Division

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

Todd Van Fleet - First Analysis Securities Corporation, Research Division

James Cakmak – Telsey Advisory Group

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Yelp Earnings Conference Call. I would now like to turn the conference over to your host for today, Ms. Stacie Bosinoff. Please proceed, ma'am.

Stacie Bosinoff

Good afternoon, everyone, and thank you for joining us on Yelp's Third Quarter 2012 Conference Call. Joining me on the call today is CEO, Jeremy Stoppelman; and CFO, Rob Krolik. Before I turn in the call over to the company, 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 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. 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. 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 a reconciliation of net loss to adjusted EBITDA.

And with that, I'll now turn the call over to Jeremy.

Jeremy Stoppelman

Thanks, Stacy, and welcome, everyone. We had a great quarter fueled by the rich, authentic local content created by Yelpers around the world. The growth we're seeing today represents the power of the Yelp model. With increased numbers in content and traffic to our site, the value we provide to local businesses and advertisers continues to rise. The opportunity before us is enormous and we're just getting started. The growth strategy is simple: leverage our platform to become ubiquitous across all devices; expand our geographic presence through existing and new markets; and serve our growing base of local business customers.

I'm happy to say that this quarter we've executed in each of these areas. On Mobile, we are fortunate enough to have great partners like Apple that help distribute our brand in powerful ways. Last month, iOS 6 became available for download, and we are very pleased with the integration with Apple Maps and Siri which prompted an increase in app downloads. Although it's still early days since the launch, we are happy with the results so far.

On average, our app was used on over 8 million mobile devices per month in the third quarter, up 64% year-over-year and approximately 45% of all Yelp searches are now conducted on our Mobile apps. We believe that the migration towards Mobile ultimately leads to greater monetization as ads are better paired with the user's exact location. As a reminder, we've been showing local ads on the mobile web for some time now and have found that the click through rate on Mobile web is significantly higher than that on desktop. We will begin extending local ads to our Mobile apps soon and expect to have them fully rolled out by the end of the fourth quarter.

We also continue to expand geographically with the launch of new markets such as Helsinki and Singapore. Singapore is exciting as it marks our first entry point in Asia. We continue to broaden our presence in the U.S. as well with new markets such as Albuquerque and Jacksonville. We are now active in 96 Yelp markets including 19 countries. Just last week, we announced the acquisition of Qype, which further accelerates our European expansion, adding content and traffic faster worldwide. Their largest markets, Germany and the U.K., are key for Yelp and together we will have a significantly increased presence in these markets. We are excited to welcome Qype's employees to our team.

The buildout of our London sales office continues and we're excited about the opportunity in front of us. We believe the Playbook that has made Yelp a success in the U.S. will work in a similar manner in Europe. Also, continued to build products and services for local business customers, most recently by launching gift certificates that businesses can set up and sell directly to consumers through Yelp. While Yelp Deals are a great way to present a new customer with a reason to try a business, gift certificates are helpful for turning existing customers into promoters.

In 2010, we've started the Yelp Small Business Advisory Council to provide us with input and guidance regarding the unique concerns of local business owners. I'm excited to say that the third iteration of this annual council recently met. We now have representatives from across the U.S., Canada and the U.K. Our business outreach team offers ongoing workshops and webinars for local business owners and recently co-hosted 14 workshops across the country as part of the New York Stock Exchange's big startup initiative. With the help of programs like these, we continue to see an increase in the number of Claim local businesses which grew 68% year-over-year, and an increase in the number of Active local businesses which grew 82% year-over-year. With over 73 million local businesses worldwide, we believe our long-term opportunity is tremendous.

I'm proud of our employees for staying focused, delivering a great consumer experience and providing value to our customers. And now, I'll turn the call over to Rob for the financial details.

Robert J. Krolik

Thanks, Jeremy. We had a great third quarter and we're happy to share our final results with you. Please know that we have posted a few slides on our Investor Relations web page that accompanies the financial portion of the webcast.

Let me start with the results from the third quarter. We achieved record results in all of our key metrics with both revenue and adjusted EBITDA ahead of guidance as pre-announced last week. Revenue grew 63% year-over-year to $36.4 million. This equates to 65% year-over-year growth in the first 9 months. Adjusted EBITDA was $2.2 million and benefited from the strong revenue performance.

Moving on to the 4 key operating metrics. Reviews grew 49% year-over-year to 33.3 million as we added almost 3 million reviews in the quarter. Our average monthly unique visitors grew 37% year-over-year to roughly 83.5 million, which is up approximately 5.2 million from the second quarter. Approximately 25% of these uniques are accessing our Mobile web. Claim local businesses hit 889,000, up 68% year-over-year and up 98,000 from the second quarter. Active local business accounts grew 82% year-over-year to 35,500.

These financial results and operating metrics demonstrate that our Playbook continues to deliver growth across all of our markets, and we are especially encouraged by the large number 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 3 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 third quarter, Local revenue was $28.5 million, up 81% year-over-year; Brand revenue was $5.9 million, up 28% year-over-year; Other revenue was flat year-over-year at $2 million given our continued transition from e-mailed deals to Yelp Deals offered on the site. That said, we now have around 40,000 deals on the site, all of which are self-served.

Our customer repeat rate, defined as the percentage of current customers who advertise with us in the last 12 -- in the past 12 months was 72% this past quarter which is up slightly from our historical range. Gross margin was consistent at 93%. Sales and marketing was 59% of revenue compared to 67% last year. Sales and marketing are both the primary point of investment for growth as well as the greatest point of operating leverage as we move toward our target model.

We have grown sales and marketing headcount about 50% over the last year, reflecting our continued investment in opening new market with our Community Manager program and adding new sales associates. We invested approximately $3 million in the quarter and overseas markets compared with $1.7 million in the same quarter last year and $3 million in the second quarter. As a reminder, we think of spending on new markets as an investment until they generate revenue. If you exclude this international investment, sales and marketing was 50% of total revenue in the quarter. This shows the leverage we continue to gain in the model.

Product development was 16% of revenue, slightly up from 15% in the third quarter last year. On a dollar basis, we increased product development by $2.3 million year-over-year as we continue to invest in the future of the platform. This quarter, product development was focused on deepening the Mobile engagement on both the homepage and the app. The new homepage now places a greater focus on activity from the user and his or her friends, and emphasized individual mobile app activity along with the user social graph. We also redesigned business pages on the app to emphasize user engagement like photos, gifts and check-in, putting the most important information front and center.

G&A was 19% of revenue, down from 21% in the third quarter of last year. Compared to last year, we are incurring public company costs this year, 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. We generated approximately $700,000 in cash from operations in the quarter. As you know, last week we purchased Qype, Europe's largest local review site. The total purchase price was approximately $50 million, consisting of approximately 970,000 Yelp shares of Class A common stock and EUR 18.6 million or approximately $24.2 million paid. We're still in the process of converting Qype's financials from German GAAP into U.S. GAAP. This will take some time to complete and we therefore do not have audited historical financials at this time to report. Under German GAAP in 2011, Qype did approximately $8 million of revenue and lost approximately $9 million which includes approximately $2.5 million related to one-time items. That revenue includes their daily e-mail deals which is an area we discontinued last week. Given that fact and the absence of U.S. GAAP figures, the year-over-year comparisons for guidance may not be particularly meaningful.

For the fourth quarter of 2012, we expect Qype to generate approximately $900,000 in revenue for the 2 months we will own it, and to incur about $2 million in expenses, creating a drag of roughly $1 million on adjusted EBITDA in the fourth quarter of 2012. That said, we expect that in 2013, revenue and expenses will be both $6 million, with a neutral impact on adjusted EBITDA. As we've said, we believe that, longer term, Qype will accelerate our international expansion strategy with both content and traffic it brings to the table, and we're confident additional monetization will follow.

We expect to have a one-time charge in the fourth quarter of 2012 of approximately $1 million for restructuring and transaction-related expenses associated with the acquisition. Restructuring primarily consisted of the elimination of Qype's E-mail Deal program and the people associated with that line of business. There were also some duplicative functions within certain areas such as G&A that we are in the process of rationalizing.

Let me close by turning to guidance for the fourth quarter and full year 2012. For the fourth quarter, we expect revenues in the range of $40 million to $40.5 million. This includes local revenue growth of approximately 75% over the last year with Brand revenue flat to down year-over-year. We expect adjusted EBITDA for the fourth quarter to range between $1.25 million and $1.5 million, which includes the $1 million drag from the Qype acquisition, but excludes the one-time charges for restructuring and transaction costs. We expect our full year revenue to be in the range of $136 million to $137 million or approximately 64% growth over the last year. For the full year, adjusted EBITDA is expected to be approximately $3.5 million to $4 million excluding the one-time charges related to Qype. For modeling purposes, our basic share count in the fourth quarter will be approximately 63.5 million shares and 54 million for the full year.

I'll now turn the call over to the operator and open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Neil Doshi with Citi.

Neil A. Doshi - Citigroup Inc, Research Division

Quick question on Mobile. Can you provide any indication as to how Mobile app pricing is relative to that of desktop pricing, and any traction that you're getting on the mobile advertising side? And then secondly, in terms of the monthly revenue per advertiser, we've seen that decline on a year-over-year basis. I guess, at what point do you expect that to stabilize or maybe start to grow?

Geoff Donaker

Neil, this is Geoff Donaker, COO, here with the group. And I'm going to try answer both of your questions there. So your first question was Mobile ad pricing. And one of the things that we've talked about in Germany as referenced in the past, is that today, our current Mobile ads as they exist on the desktop are also running on the Mobile site which is our HTML 5 site. And they work just the same as they do on the desktop. And therefore, pricing is the same to the end advertiser. We would expect that to continue when we roll these ads onto the Mobile app which we've said will happen by the end of this quarter, this fourth quarter. So what you can expect is that lots of new inventory across all categories will come online as that happens, but you wouldn't see any immediate pop in the metrics since, by and large, our local advertisers are paying on a flat rate subscription kind of a model, at least for the lines here of advertising revenue. You also asked another question, which is the monthly advertising revenue per advertiser question. And so on that point, I would just note that you're really looking at a couple of different factors. And as we're rolling out new products for advertisers such as the Yelp Deals and Yelp gift certificates, you're seeing a different blend of revenue paid per advertiser as they pick up different kind of products. So ultimately, I would suggest not really focusing on that ratio at this point, which is again revenue per advertiser, but rather just focusing on, as we do, the gross number of advertisers that we bring in as we're really in an acquisition mode around advertisers over the next couple of years.

Operator

And your next question comes from the line of Brian Pitz with Jefferies.

Unknown Analyst

It's Sutchon [ph] sitting in for Brian. A couple of questions. First is on -- I think, I don't remember if you guys talked about this on the Deal call, but how much of Qype's traffic comes from search engines and how much comes organically?

Jeremy Stoppelman

This is Jeremy. So I don't have the exact breakdown but I think it's safe to say, the traffic pattern looks a lot like Yelp, which is the majority of traffic driven by search engines, particularly Google.

Unknown Analyst

Okay, cool. And then on -- and a few more questions on Brand. You just got -- I think, I don't know if I heard this incorrectly, but did you guide branded revenues down -- flat to down, for the fourth quarter and if so, what was the sort of a -- at least versus our expectations that seemed that was all surprising. So I just -- what was the kind of the thinking behind there? And then third, how many of your cities currently contribute to revenue, to local revenue at least?

Robert J. Krolik

Sutchon [ph] it's Robb. I'll take that Brand question. Yes, we did guide flat to down year-over-year in Q4. We're experiencing some of what we call execution challenges in that part of the business that we're working through. As I've said, where our priority is continuing to be on Local revenue which is growing a healthy 75% year-over-year in Q4 and displays a fairly small part of our business. We're comfortable with the business going forward. So that doesn't mean that we're going to ignore but it is facing some challenges in Q4. And then your other question was?

Unknown Analyst

How much -- how many of your cities currently contribute to the local revenue?

Robert J. Krolik

Yes. So I have to do quick math on that. I think that there's probably 60 U.S. cities or Yelp markets as we call them. And I would say a vast majority of those really connect with revenue. We just started monetizing overseas and there's about -- I don't know, 45 or so...

Jeremy Stoppelman

It's actually 43 international markets.

Robert J. Krolik

Yes, 43 international markets that, what I'd say at this point, at least in Q3 or 9 months September ending, weren't very much contributing at all to our revenue as of yet.

Operator

And your next question comes from the line of Jason Helfstein with Oppenheimer & Co.

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

Two questions. Have we seen anything different from Google as a competitor with the acquisition of Frommer's and then kind of given they're not on Apple, presumably now there's more of a focus on their own business there. And then secondly, can you just give us a sense of what you're thinking about next year from an investment standpoint? Any color you can give us as far as where you plan on investing and perhaps like how that investment might compare to this year?

Jeremy Stoppelman

This is Jeremy. I'll take the first part of that question, maybe Rob can pitch in for the second part. So specifically with Google, we've been competing with them successfully for several years now and while we take them very seriously, we also feel very comfortable with our strategic position. And I think things keep getting better and better obviously. We have the Qype acquisition which accelerates things, if all goes well in Germany, which is a key market for us and the U.K. And then there's also of course, the Apple partnership, which I think is a marquee partnership for us and we're very happy about. Every year, as you look back, there's an announcement or two by Google in the space. I mean, Local is a enormous market. We're really a tip of the iceberg. And so it's not surprising that they continue to invest in that area because of its enormous potential. But really, the things that they've done in the past haven't had a big impact, and that's why every year there's sort of a big announcement that this time it's different and I think that's some of what you're seeing with whether it's Zagat or Frommer's. It's trying to re-energize something that's been struggling for a long time.

Robert J. Krolik

And, Jason, I'll take the color on next year. We're not going to give really any guidance for next year as of yet. But one of the things I guess I'd call out is if you look at this year's investment, obviously, the lion's share of the investment is going into sales and marketing. I think year-to-date we spent about $8 million or $9 million in our investment overseas and we feel good about that investment, especially now with the Qype acquisition and we expect that to pay back at some point in the future. So kind of continued investment in sales and marketing. You look at it line by line. Cost of sales has been pretty consistent quarter-on-quarter and obviously, sales and marketing -- or sorry, G&A will become a smaller percentage of revenue as that doesn't need to -- as that is a scaling function. We think we're getting good scale out of sales and marketing, especially if you consider the fact that you take out the investment in overseas and it gets about 50% that we're seeing on a percentage of revenue basis. So we're getting a lot of scale and leverage out of that business.

Operator

And your next question comes from the line of James Cakmak – Telsey Advisory Group.

James Cakmak – Telsey Advisory Group

Two quick ones, please. The first one, you talked about the successes that you're having with Apple and with the integration there and pretty impressive numbers coming out of that. Can you talk about, Yelp on the other platforms like the Android and maybe differences in behavior that you're seeing or similarities with iOS 4 customers? And secondly, internationally, you've been in London. You had the London sales office. So can you talk about some of the learnings that you have there as you bring on the Qype sales team onboard to that market. I guess is a centralized sales force makes sense there just as it does State side?

Jeremy Stoppelman

This is Jeremy, I'll take the first half in looking at iOS versus android. So, yes, we've got great applications on both platforms, a lot of traction on both platforms. I think we see what everyone else sees which is that iOS users are more highly engaged. I think there's a tendency to use more apps on iOS. But that said, we do have material traffic and users coming from Android so we're very happy with our position there.

Geoff Donaker

This is Geoff. I'll take the second question there on the international sales force. Yes, we mentioned in Q2 we did open up our London sales office and have been hiring there. While still small relative to the overall U.S.-based business today, that's growing nicely for us and we're excited about the future of that office and centralized sales team out of the U.K. and Ireland. Now, you also mentioned the Qype team. Today, Qype has sales offices in London, Hamburg and Berlin. We're excited to welcome those folks into the Yelp family and to ultimately integrate them with kind of the Yelp sales team. You'd imagine that in the future they will all be selling a common set of products, selling into Yelp advertisers. Today, we're of course, leaving that team selling its own Qype products and we'll sort of figure out what the integration looks like in the months ahead.

Operator

[Operator Instructions] And your next question comes from the line of Todd Van Fleet with First Analysis.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Jeremy, I just wanted to follow up on the last question in terms of the engagement on iOS. How do you guys measure that engagement? Is that just based on the number of inquiries that you're seeing on those devices versus some of the others? Is it -- are you seeing an increase in the percentage of mobile inquiries coming from iOS 6 devices? Just give us a sense as to how you measure internally that engagement level.

Jeremy Stoppelman

Yes. Primarily -- this is Jeremy again. Primarily what I was talking about was the number of users on each platform. So iOS, there's more people actively using that app on a monthly basis than Android. Both are significant for us, both are material traffic. I don't have any specific numbers on page views per users or search per user to measure that kind of engagement, but I was speaking more generally about our people using apps. So more engagement on the platform, period.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Is that visibility that you think you'll be getting at some point in the future? I'm just curious. I think one of the big reasons to be bullish on the integration effort here between Yelp and Apple is that Apple or the iOS 6 users would ultimately be utilizing Yelp more frequently for their search activity. And I'm just looking for ways to kind of ferret out whether or not that's actually occurring.

Jeremy Stoppelman

Yes. I mean, those are certainly numbers that we have and we will take a look at. I think in general the feeling is that iOS users are more engaged users. When you start talking about some of those other metrics. Although, I haven't personally pulled the data and looked at it. But there does seem to be something perhaps in the demographic mix of who's buying an iPhone versus who's using an Android. But I don't have any more data to give you at this point.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

All right. Two quick ones then. Did you guys give the customer repeat rate in the quarter?

Robert J. Krolik

Yes. It was 72%, Todd.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

I'm sorry, 72%?

Robert J. Krolik

Yes. It was up slightly from the last couple of quarters.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Okay, great. And what was the headcount in the quarter?

Robert J. Krolik

1,200 -- approximately 1,200 people and a little over half of those are sales.

Operator

At this time, there are no further questions in queue.

Jeremy Stoppelman

Okay. Well, thank you very much and we look forward to updating you on our next call. Thanks.

Operator

And ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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