Yelp (NYSE:YELP) Q4 2015 Earnings Conference Call February 8, 2016 4:30 PM ET
Wendy Lim - Investor Relations
Jeremy Stoppelman - Chief Executive Officer
Rob Krolik - Chief Financial Officer
Geoff Donaker - Chief Operating Officer
Gene Munster - Piper Jaffray
Stephen Ju - Credit Suisse
Lloyd Walmsley - Deutsche Bank
Matthew Thornton - SunTrust
Mark Mahaney - RBC Capital Markets
Ron Josey - JMP Securities
Douglas Anmuth - JPMorgan
Mark May - Citi
Brian Nowak - Morgan Stanley
Kevin Kopelman - Cowen and Company
Youssef Squali - Cantor Fitzgerald
Jason Helfstein - Oppenheimer
Brian Fitzgerald - Jefferies
Aaron Kessler - Raymond James
Rob Sanderson - MKM Partners
Welcome to the Fourth Quarter and Full Year 2015 Yelp Inc. Earnings Conference Call. My name is Nicole and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Wendy Lim. Wendy Lim you may begin.
Good afternoon, everyone and thank you for joining us in Yelp’s fourth quarter and full year 2015 earnings conference call. Joining me on the call today are CEO, Jeremy Stoppelman; and CFO, Rob Krolik. And COO, Geoff Donaker, will join us for Q&A.
Before we begin, I will 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 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 revisions 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 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, non-GAAP net income and non-GAAP EPS, which are non-GAAP financial measures. 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 these non-GAAP financial measures and a reconciliation of historical net income to adjusted EBITDA and non-GAAP net income and non-GAAP EPS to, or excuse me, and GAAP EPS to non-GAAP EPS.
And with that, I will turn the call over to Jeremy.
Thanks, Wendy and welcome everyone. We saw strong performance in 2015 as revenue grew 46% year-over-year to more than $0.5 billion. We successfully shifted our business to perform its based advertising and as of the fourth quarter, more than 60% of our local advertising revenue came from CPC customers. Consumers are increasingly moving their online activity to mobile devices and we have evolved to a mobile-centric company. We will continue our focus in the mobile app since app users are more than 10x as engaged as web users based on the number of pages viewed and our shift towards the app will enable us to establish a direct relationship with consumers.
As I think about the year ahead and the large opportunity in front of us, our three priorities are to continue to build our core local advertising business, increase awareness and engagement and grow transactions. The vast majority of local business owners continue to advertise in traditional offline channels. BIA/Kelsey projects that the Yellow Pages industry will generate roughly $7 billion in 2016. Even though according to a 2015 BrightLocal study, more than 90% of consumers read online reviews when looking for a great local business. Migrating these offline marketing budgets online continues to represent a huge market opportunity for us.
As business owners evaluate their marketing options, many are coming to appreciate the value of Yelp advertising. For example, KinderCare Education, a childcare provider with over 1,000 locations across the country, have been a Yelp advertiser for 2 years but stopped in 2013. Based on a decline in the quality of their lead shortly thereafter, so they recently resumed advertising on Yelp to tap into our purchase-oriented consumer traffic. We are pleased to see KinderCare return to Yelp and this experience underscores the importance of communicating ROI to business owners.
We continue to invest in new products and tools for business owners. In spring of 2015, we rolled out updates to the Business Owners app to allow them to upload photos and respond to reviews while on-the-go. The percentage of business owners who use the app daily is twice as large as those who use the website daily, demonstrating how important mobile apps are to driving engagements.
In the fourth quarter, we fully rolled out our Request a Quote feature, an increase from consumers increase nearly 200% sequentially. We also see a significant opportunity to increase awareness in usage of Yelp. ComScore indicates that Yelp has only about 30% reach on U.S. smartphones. So in 2015, we expanded our marketing efforts to include our first TV advertising campaign to increase awareness. Based on a survey we conducted with Nielsen in the fourth quarter, unaided brand awareness increased from 26% to 41% over the last year among U.S. adults online. We are pleased with these results and plan to continue investing in marketing throughout 2016.
In addition to our consumer marketing programs, we also have several initiatives to increase awareness within the local business community. For years, our local business outreach team has been traveling around the country speaking with business owners at local Chambers of Commerce meetings and tradeshows about how Yelp can empower their businesses. Our Yelp’s Small Business Advisory Council, which we created in 2010, has been a valuable forum for us to hear feedback from business owners on a variety of topics, such as new product features. We expanded this concept in 2015 and brought 100 business owners to our headquarters in the fourth quarter.
In addition to presenting on general topics ranging for managing employees to maximizing cash flow, we showed business owners how Yelp can work for their businesses. It was the success as a number of those attendees have become ambassadors for Yelp volunteering to host sessions to educate other business owners about Yelp in their local communities. Consumers come to Yelp to discover great local businesses and transacting on Yelp’s platform is a natural next step. In early 2015, we acquired Eat24, our most successful platform partner. The combination drove incremental transactions and new diners to Eat24 at low or no cost, and Eat24’s revenue growth accelerated to more than 80% year-over-year to almost $13 million in the fourth quarter. In addition, Yelp platform transactions across all verticals grew over 150% year-over-year to about $2.5 million in 2015 and we have been encouraged by its continued strong performance. In 2015, we launched multiple new features to make transactions more prominent, most notably, the ability to order food and book reservations directly from search results.
We have also seen strong traction with SeatMe, our online reservation and table management solution for restaurants. When we acquired SeatMe in summer 2013, it had about 200 customers. As of the end of 2015, we had approximately 2,800 paying customers. In San Francisco and Los Angeles, we estimate that SeatMe is more than 20% of OpenTable size based on number of customers and we are happy with the significant progress we made in just 2.5 years. Recently, DOSA, a restaurant in San Francisco, switched from OpenTable to SeatMe and had their best December in years as the number of diners increased after the switch. Similarly, LA’s Hinoki & The Bird switched to SeatMe in October, after seeing its two sister restaurants successfully utilize our cloud-based table management software. While we believe our revenue will be driven by our local advertising business over the next few years, we are excited about the long-term potential of our transaction business.
I am proud of what we accomplished in 2015 and our success is due to the hard work and commitment of our employees. In a recent employee engagement survey, 91% of respondents said they would recommend Yelp as a great place to work. I am excited about our employees’ tremendous contributions everyday and how we are connecting people with great local businesses around the world. We have an enormous opportunity in front of us and I am looking forward to what we will achieve in 2016 and beyond.
Before I turn the call over, I would like to take a moment to thank Rob. Rob has played crucial role in Yelp’s successful transition from startup to a public company and I am grateful for all of his contributions. We have mutually agreed that this is the right time for a transition and Rob will continue in his role until we hire a new CFO.
And now I will turn the call over to Rob for the financial details.
Thanks, Jeremy. I am proud of what Yelp has achieved during my tenure and believe in the power of Yelp to help consumers and local businesses alike. Please note that we have posted an updated investor presentation in the datasheet on our Investor Relations webpage that accompanies financial portion of the webcast.
In the fourth quarter, we achieved strong results as revenue grew 40% year-over-year to $153.7 million. For the fourth quarter, local revenue was $126 million, up 35% year-over-year. Transaction revenue was $14 million compared to $1.4 million in the fourth quarter of 2014, primarily reflecting our acquisition of Eat24 a year ago. Eat24 contributed nearly $13 million in transaction revenue in the quarter. Brand revenue was $7.1 million, down 18% year-over-year. As we talked about in 2015, we have discontinued selling display advertising products and do not expect any revenue from display advertising in 2016. Other revenue was flat year-over-year at $6.8 million.
Our customer repeat rate, defined as a percentage of existing customers from which we recognized revenue in the immediately preceding 12-month period, was 77% for the fourth quarter of 2015. Cost of revenue in the fourth quarter was consistent with the prior quarter as we continue to invest our hosting and testing infrastructure resulting in a gross margin of 90%. Total sales and marketing was approximately 57% of revenue in the fourth quarter compared to approximately 49% last year, primarily driven by our marketing investments and higher sales headcount. Sales headcount in the fourth quarter grew about 45% year-over-year, partially driven by sales person retention in the second half of 2015 returning to historic levels. We plan to invest approximately $50 million in marketing in 2016, which represents an incremental $20 million compared to 2015. Given the significant increase in unaided brand awareness, we feel this is an appropriate level of spend for 2016.
Product development was approximately 19% of revenue compared to 17% in the fourth quarter of last year. G&A was 13% of revenue compared to 15% in the fourth quarter of last year. GAAP net loss was $22.2 million and GAAP EPS was negative $0.29 in the fourth quarter. This included a $20 million tax entry we recorded in the fourth quarter as we booked evaluation elation allowance against our deferred tax assets as we are in a 3-year cumulative loss position for income taxes. Please note that we believe we will not be paying significant cash taxes for the next couple of years as we intend to utilize the accumulated net operating losses to offset income.
Non-GAAP net income, which excludes stock-based compensation, amortization and valuation allowance, was $9 million in the fourth quarter. Non-GAAP EPS, which is non-GAAP net income divided by our fully diluted share count, was $0.11. Adjusted EBITDA was $17.5 million in the fourth quarter. With the large market opportunity ahead of us, we accelerate our investment in our sales force. The increase in sales headcount growth as well as higher than expected sales force retention led to higher than planned sales expenses. While we are below the range for the fourth quarter, our ability to exceed our sales headcount expectations gives us confidence in our 2016 revenue growth.
We generated approximately $4 million of cash flow from operations in the quarter and finished the fourth quarter with $371 million of cash and cash equivalents and marketable securities on the balance sheet. Before I turn to our outlook, I want to go through our operating metrics for the quarter. Cumulative reviews grew 34% year-over-year to approximately $95 million. Unique devices accessing our app grew 38% year-over-year to 20 million on a monthly average basis. Average monthly mobile web unique visitors grew 14% year-over-year to approximately 66 million. Average monthly desktop unique visitors were down 4% year-over-year to approximately 75 million. Local advertising accounts grew 32% year-over-year to approximately 111,000. Claim local businesses were approximately 2.6 million, up 31% year-over-year.
Now, I will turn to our outlook for the first quarter and full year 2016. For the first quarter, we expect revenues in the range of $154 million to $157 million, representing a 31% year-over-year increase or 39%, excluding display advertising at the midpoint. We expect adjusted EBITDA for the first quarter of the range between $10 million to $12 million as we continue to invest in marketing and sales force area. We also expect stock-based compensation to range between $19 million and $20 million and depreciation and amortization to be approximately 5% of revenue. We expect full year 2016 revenue to be in the range of $685 million to $700 million or approximately 26% growth over 2015 or 34%, excluding display advertising at the midpoint.
For the full year, we expect adjusted EBITDA to range between $90 million and $105 million. Similar to 2014, we expect adjusted EBITDA to ramp up throughout the year with significant increases in the third and fourth quarters, in particular. In addition, we plan to spend slightly less in marketing in the second half of 2016 and also expect lower sales headcount growth in the fourth quarter of 2016 compared to the same period in 2015. We expect stock-based compensation to range between $83 million and $87 million and depreciation and amortization to be approximately 5% of revenue. We expect CapEx to be approximately $30 million.
For modeling purposes, in the first quarter we expect our basic share count to be approximately 76.5 million and weighted average fully diluted share count to be approximately 83.5 million shares. For the full year, we expect our basic share count to be approximately 77.5 million and weighted average fully diluted share count to be approximately 84.5 million shares.
In summary, we are as optimistic about the future as we have ever been. We have generated about $57 million of cash and showed 46% revenue growth in 2015 and we still have a long runway. We are investing in the business to capture the large market opportunity ahead of us as we connect consumers with great businesses in U.S. and around the world.
I will now turn the call over to the operator to open up the call for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from line of Gene Munster of Piper Jaffray. Your line is now open.
Hi, good afternoon. I had a question on the unique user growth, it sort of a little bit in this quarter has been relatively flat for a while, any thoughts on how we should think about that in the future. And separately, a little bit on the hiring front, 100 salespeople in the quarter, 350 in the September quarter, was there anything seasonal about that or any thoughts on the ease or difficulty in terms of adding new salespeople? Thanks.
Hi, Gene, this is Jeremy. I will take the first part of that question and then I think Geoff will handle the sales component. So, on the unique user growth, particularly on the app side, it’s kind of seeing similar pattern to what we historically have seen and it’s really a function of seasonal stuff. And generally, once you get through the holidays, you see it’s starting to take off in January and continued to rise through the summer and so far we are seeing kind of similar patterns there.
Yes. And I would guess along those lines, we did see 38% year-on-year growth on the app side as well. Gene, this is Geoff. And then I will take the hiring component as well. We did see 45% year-on-year growth for the sales force. By the time we got to the end of last year, fourth quarter that had slowed in the summer months for a number of different reasons. We both experienced slightly higher attrition in the summer months and then didn’t hire as many people as we have expected to. That really did turnaround as we get into the third and fourth quarter and ended the year on a strong note on both fronts.
Thank you. Our next question comes from the line of Stephen Ju of Credit Suisse. Your line is now open.
Thanks. Jeremy, when I searched for business on the Google app on my iPhone and then I clicked on link for Yelp business listing, it still takes me to the mobile web instead of the app, although I have the app installed on the phone, so I am wondering whether app indexing is important to you. And if so and when we might see the implementation, should we start seeing I guess a greater traffic flow through to the app. And I guess, I think back when OpenTable was still publicly emphasized the real time nature of the available inventory, so I am wondering you SeatMe is still primarily on an allocation basis or have you been able to switch restaurants over to real time? Thanks.
Stephen, so on your first question, when you Google something, you go straight to the app, that can be, like in general, we are trying to do that. It can be a function of a number of different things. Apple has been changing around the way that they allow developers to do that and also there is user preferences involved. So it’s possible that you just turned it off or it’s possible on the configuration that you are got that it’s not, that there is no way for us to send you directly into the app. And so we continue to work on that and try to identify all the kind of kinks in different corner cases that might result in you having the Yelp app, but not necessarily going straight into it. In general, on average we should be doing that. So hopefully, that answers your question. As far as inventory for SeatMe, the numbers that we are talking about with – it’s getting close to 3,000 restaurants that are on kind of our full service solutions to the front of house management. We also have many thousands on sort of a lighter weight Yelp reservations product, which I think is more of what you are referring to when you say non-real time. And so we do have quite a bit of traction now with the real time inventory in restaurants that are doing complete floor management quite similar to OpenTable. And I mentioned earlier in the call, when we are looking at San Francisco now and L.A., we have about 20% of OpenTable size. And that’s looking at that, that full service front of house solution. So we are seeing a lot of really high quality, high traffic restaurants moving over and doing quite well in the product, which as an order of manage less expensive generally than OpenTable.
Thank you. And our next question comes from the line of Lloyd Walmsley of Deutsche Bank. Your line is now open.
Thanks. Just had a question or a couple of questions on the EBITDA guidance for the full year ‘16, I am just trying to make sense, your guidance for the first quarter implies it’s down year-over-year. And then for the full year, it’s up quite a bit when if you just kind of take your display revenue from ‘15, assume 50% incremental margin, plus you add the $20 million of incremental ad expense for this year, those two numbers are about half of your 2015 EBITDA. It seems like a big hold to callout from to get such big growth in EBITDA in ‘16. And I am just trying to understand, are there a lot of cost savings that you are able to see in display or do you assume you will monetize some of that inventory? How should we think about how you get such a big ramp when you are getting rid of display and spending so much more in advertising?
Hey, Lloyd thanks. This is Rob. So, I think you have to look at it a couple of ways. One, I think if you look back to 2014 and look at the percentage of EBITDA that was dropped to the bottom line on a quarter-over-quarter basis, I think you will see something very similar in 2016 where we are dropping about 11% or 10% in the first quarter or so and then it kind of ramps from there. And I think you are going to see the same thing in 2016. We also are spending as you say more on marketing, but it’s slightly weighted towards the first half of the year than the second half of 2016. And in particular, in Q1 2016, we are spending about $14 million of approximately of marketing and that obviously has a way on our adjusted EBITDA. The third thing that we are kind of looking at is the expected flow of sales headcount growth in Q4 2016 compared to Q4 2015. So I think as you know and others know, we had a bit of a mess up in the beginning of 2015 and we lost a number of folks. And so we hired pretty aggressively in the back half of the year. And we also saw, which was nice, is retention come back to historical levels. So, when we look at Q4 over – 2016 over Q4 of 2015, I think what you will see is fairly even amounts.
I guess just following up specifically on display. I mean, I assume that comes in at a pretty high incremental margin. Are there costs you can cut to offset that or was it not in fact kind of a 50% plus incremental margin?
Yes, I mean, there are some costs associated with the display business. And what we are looking at is, on a revenue basis, growing about 34% in 2016, excluding display and adjusted EBITDA like we put out at $90 million to $105 million, which includes 14% margin for 2016, which is actually incrementally better than 2015. And so despite the fact that we are losing display and despite the fact that we are going ahead and spending a little bit more on marketing, again, a little bit more weighted to the first half of 2016, we are able to see a path to getting higher margins in 2016.
Thank you. Our next question comes from the line of Matthew Thornton of SunTrust. Your line is now open.
Yes, hey, good evening and thanks for taking the question. A couple if I could. I guess, first, Jeremy, Geoff, on the CFO transition, I am interested what are you looking for in your next CFO as you kind of run the course of the course here looking for that replacements? What are you looking for? Secondly, from an innovation standpoint, I guess, what should we be thinking about in terms of the incremental innovation on the platform, whether it’s ad tech facing, consumer facing whatever might be? What should we be thinking about where your focus is in terms of innovation? And then third question, how are we thinking about capital allocation at this point? One of your comparables out there obviously had a bid out for at about 1.5x revenue. You guys are trading at about 1.3x revenue, just curious if buybacks started to come into your thinking as we go into 2016? Thanks.
Sure. Matthew, so I will take the first couple of questions here. So, what are we thinking about on the CFO side? I mean, I think the biggest thing is we are headed north of 4,000 people until we have to really think about scale. And so that’s going to be kind of the primary criteria there looking for someone that’s operated at that kind of scale is going to be the key thing. On the innovation side, some of the focus areas for us are going to be, obviously, doubling down our transactions. It’s growing really nicely. There are some numbers early around Eat24, saw 80% year-over-year growth. And so we are going to continue to push that natively on Yelp, so within the Yelp platform and there is a number of other verticals that are doing well too. We talked a little bit about SeatMe earlier. And so what we are finding is by tweaking on the Yelp platform, we are able to drive new users drive incremental transaction. And I think that’s really an exciting area for us. There is also, on the technology side, there is a lot of stuff happening with photos and leveraging deep learning and machine learning to create insights. And it was a cool feature that we rolled not too long ago, just came to mobile actually where we can actually – we can derive meaning from the photos. And so when you are looking at say a photo of a menu, we know it’s a menu. When you are looking at a food item, we know it’s a food item. And we could go even deeper and get more detail. And so I think that’s really exciting area to explore.
Hey, Matthew. On your question about capital allocation, I think we think about it a couple of different ways. One is obviously we want to have liquidity on our balance sheet. So, we have about $370 million of cash and cash equivalents and marketable securities. And so when we think about our financial architecture, we obviously have operating expenses, we have capital expenditures and then any flexibility regarding M&A in the future if that’s something we choose to do. As far as buybacks go, we aren’t planning a share buyback at this time, but obviously, our Board is open to strategic opportunities to build shareholder value. And if that’s something that they want to do, then that’s something they can.
Thank you. And our next question comes from the line of Mark Mahaney of RBC Capital Markets. Your line is now open.
Thanks. Two questions. Slide 12 talks about these local advertising revenue drivers. And in the middle there, there is reference to inventory levels and the ad performance. Could you explain that draw some details on that? What leverage you can pull there? What are your plans on those two particular areas, inventory levels and ad performance?
Hey, Mark, it’s Geoff. Yes, this – that lever always or those set of leverages always existed when we are a CPM business, because of course we had to have sufficient inventory in any geo category combination in order to deliver that advertising. Now that we have moved over to a CPC based world, we have to take that next step and confirm that all those pieces are in place, right? Do we have the inventory? Can we deliver the clicks? And then are the bids associated with each of those clicks sufficient to fulfill the budget? So, there are a number of levers that our ad delivery engineering team is working with everyday in order to ensure that our fulfillment is as high as possible both for the benefit of the advertisers and then of course for us to fulfill the revenue as well.
And then if I could follow-up on the greater than expected rep sales and marketing spend, was that all due to sales force or was part of that due to the marketed brand advertising TV campaign? And I think you mentioned was it $14 million for the brand TV campaign in the March quarter? I just want to make sure I got that. And those are behind which brands, both SeatMe and the core business or any allocation there? Thank you.
Yes, thanks Mark. It’s Rob. So first quarter of 2016, we are expecting to spend about $14 million in marketing. That’s really a combination of Yelp and SeatMe and Eat24. Obviously, the majority of that spend is related to Yelp, so – and we are not necessarily breaking it out. In terms of your other question, let me hear that again.
We may have lost him already. I believe the question was the increase in sales and marketing spend in Q4 relative to plan. I believe that was all.
Yes, it was mostly all sales headcount related, which drove about a few million dollars of unexpected cost in Q4 of 2015.
Thank you. Our next question comes from line of Ron Josey of JMP Securities. Your line is now open.
Great, thanks for taking the question. I wanted to go back, I think you all have said in the past on the March path towards $1 billion in revenue maybe even as early as 2017, are you still – I am sure you are cautiously aiming towards that goal? I am just hoping you can maybe provide some drivers on how you get there, is it national expansion, continued sales force growth, which is nice to see rebound here, drive more awareness or if it’s longer than that, I would love to know maybe Jeremy when you think about Yelp in 2 to 3 years, what do you think are the biggest opportunities over the next several years like bolt-on adjacencies? Thank you.
Yes. Hey, Ron, it’s Rob. So for – beyond really 2016, I think we want to focus on 2016. And we have given our guidance of about 34% revenue growth, $685 million to $700 million. And that’s today what we are focused on. We think there is a huge opportunity in the market if you look at the fact that there is $7 billion in 2016 that’s being spent on Yellow Pages alone. I mean, most of that money is going to move online and we think we are the perfect place to grab that, given our high ROI.
Yes. I will just add on there. I mean, there is something like 20 million businesses in the U.S. It’s just broken over 100,000 local advertising accounts. So it feels like on the core business, there is still a really nice runway there. That said, we are making a lot of progress in transactions. And so I think further out years that could become an important component of business. But for the foreseeable future, we see local advertising as the core.
Thank you. And our next question comes from the line of Douglas Anmuth of JPMorgan. Your line is now open.
Thanks for taking the question. You guys commented on the sales force growth a few times, just wanted to go back to that and try to understand better what do you think is driving kind of the outsized growth that you saw and the better retention, if you could tell us about some of the initiatives that you think are working particularly well here. And then also, what’s implied there in the ‘16 guide for sales force growth? Thanks.
Hey. Thanks for the question. This is Geoff again. So I think there are a number of different trends that certainly helped us in the second half of last year. First off, we were starting – we hurt ourselves in Q1, as we have talked about before. And so that’s really what sort of drove both more difficult hiring environment, as well as some attrition. We were able to rebound from both of those through some structural changes and frankly just getting the entire sales force back on track such that everybody was meeting their quotas and doing what they need to do and getting paid. As we looked at, the same was sort of true on the hiring side. I think both Yelp’s brand continued to be strong as employer, so we were able to continue to sort of hire at a strong pace through the back half of this year, culminating at 45% year-on-year growth. As to ‘16, our expectation is the sales force will grow between 20% and 30%, so continuing to grow at a nice rate, but trying to imply some of that Goldilocks that we have talked about in past of not trying to go too fast.
Great. Thank you.
Thank you. Our next question comes from line of Mark May of Citi. Your line is now open.
Hi. A couple of questions I think both around kind of the marketing spend plans for this year, I recall that last year was kind of a New Year for you, where you stepped up your consumer facing marketing. And at least on the mobile user side, you continue to add mobile users, but the rate at which you are growing that continued to decelerate, i.e. you added fewer mobile users last year than you did your prior. So I am guessing – or I guess the question is that kind of the key metric that you look at for a return on your marketing spend is driving more mobile users. And as you look to your marketing plan for this year, are you going to be doing anything different that would more directly impact mobile users. I guess, sorry for the long-winded, but other related question, are you inventory constrained, like it’s the reason why you are increasing your spending on marketing is you feel like you need to drive more users and more inventory or is it really more of your marketing spend going to be driven towards sales force and driving local business engagement? Thanks.
Hi Mark, let me try to hit a couple of different points. I am actually going to start with your second question, which is are we inventory constrained and is that kind of somehow related to why we are doing marketing. The answer is no. We don’t believe we are inventory constrained really at all. And while there is always opportunity to incrementally drive traffic in certain type geo categories, that’s really not what our marketing is about. We think there is lot of opportunity to continue to monetize for years to come, actually just on our existing footprint. And you can, I think look to some other comes in the marketplace who have actually more advertisers but less traffic than we do today. And I think that can be a decent place to start. As to why are we advertising, with approximately 30% share of smartphone users in the U.S, we think we are starting from a great place, but there is an opportunity for us to really touch every smartphone user who is looking for local businesses. I think we have talked to this group in the past about our unaided brand awareness that was running at about 29% based on another study we did a year ago in the end of ‘14. And based on our TV advertising and other marketing campaigns in ‘15, we have seen that number grow up to 41% in just a single year. So that was obviously very promising. So rather than actually focusing on a specific user metric in the short-term, at this point we are very much focused on building the brand, making sure that we are at a top of mind for consideration amongst app users and smartphone users. And our hope would be that certainly over time, that gets reflected in user metrics and whatnot. But rather than focusing on our short-term metric like users in a particular month or quarter, we really are thinking about building the brand such that users can come and think about Yelp with long-term.
Thank you. And our next question comes from line of Brian Nowak of Morgan Stanley. Your line is now open.
Thanks for taking my questions. I have two, the first one, Eat24 I guess, can you talk to some of the drivers of the 80% growth in Eat24 the fourth quarter, what type of growth is baked into the guidance in 2016. And then last one Eat24, can you just help us with what the EBITDA impact was in 2015 and the second one on the user growth I think this is the first time that users across mobile web app and desktop have fallen sequentially, I know there is seasonality to this number, but Jeremy can you just kind of talk about how you think about what are the biggest sources of untapped user demand still out there that you need to really penetrate? Thanks.
Sure. So on Eat24, a major driver there was the integration with Yelp, so creating Yelp platform a number of years ago around the time of the IPO, Eat24 was our best partner, our most successful partner. And as we have combined, we found opportunities to promote ordering, particularly in search. It’s had a really nice impact driving new users, as well as transaction volume to Eat24. Of course, a number of those users that are driven from Yelp turn into Eat24 users as well natively on the separate app and so overall, we are seeing a really nice synergy there. As far as app growth is concerned, I mean we feel really great about our position and sort of how it’s grown. Last year, I remember it was doing particularly well because we started really pushing the app in mobile web. And so we are facing a little bit more of a tough comp now because we had so much success before. But 38% year-over-year growth to north of 20 million, we feel really good about that. And the seasonal patterns, it’s just something we have seen every year. Traffic tends to peak some time in the summer and then slowdown kind of Q3 and especially Q4 and then take off again in January, so no real concerns there.
As far as the impact of Eat24 to 2015 on an EBITDA basis, it’s fairly neutral. And then for the 2016 guidance, we are not guiding specifically to Eat24. It did grow about 80% in Q4 of 2015. So we are pretty excited about that. And obviously, looking for more things to come from them, but not specifically calling out anything particular about them.
Thank you. Our next question comes from the line of Kevin Kopelman of Cowen and Company. You may begin.
Hi, thanks a lot. So you have recently said with headcount growth of 25% over the next 2 years, you get to $1 billion in revenue in 2017 assuming stable productivity. And just looking at the rev guide today, it seems like it falls short of that trajectory. And I was just wondering, should we think about this conservatism and how you are looking at today or has something changed with the sales force productivity? Thanks.
I don’t think – hey Kevin, it’s Rob. I don’t think necessarily a much has changed. I think we are looking for 20% to 30% sales headcount growth in 2016. And today, we are just focused on 2016 expectations. So we are guiding to about a 34%, excluding brand revenue growth, which we are really pleased about for 2016. And we will talk about ‘17 in the coming quarters.
Thank you. Our next question comes from the line of Youssef Squali of Cantor Fitzgerald. Your line is now open.
Thank you very much. Two quick questions, please, as I look at your 2016 guidance and the potential implied, estimates for the active local accounts I think you have been adding 6,000 to 7,000, yet now you seem to be – to have accelerated the hiring of salespeople, is there a correlation either should be, but are you assuming any correlation between that and growth in active local accounts in 2016. And then, on the SBC it looks like there is a surge, both in terms – in dollar terms, which is to be expected, but also the percentage revenue, why the surge? Thanks.
Hey, Youssef, it’s Rob. So in terms of 2016 guidance in active local accounts and what that means, just as a reminder, our sales folks are compensated on revenue, not specifically on account growth. So while obviously, it’s important, more important is the advertising revenue that we are generating from each client. So, there is a big mix in there. So, there is national accounts that obviously pay us more money for because they have many locations, but they are counted as the single account and then there is self-serve that probably generates less than average, because they are only spending a little bit with us. So, it’s kind of a mixed bag and mix in there. But in terms of revenue, I think we are pretty pleased. And one of the things to think about also is while we did have very strong hiring towards the end of the year of about 45% increase in our sales headcount growth, one thing that happens is it takes 6 to 9 months for these folks to kind of ramp and get up to speed and fully productive. So, it’s going to be basically Q2, Q3 before these people are fully productive and so they won’t have necessarily a big impact in the first half of the year.
And on the...
Yes. And on stock-based compensation as a percent of revenue, so one of the things that we have been doing over the last few years is we have had grants every other year as part of our process. And one of the things that we did this year is we actually have now brands every year. So, we are going to have kind of a one-time bump in stock-based compensation in 2016. That’s going to take care of people and have them incentive to stick around for the next number of years. And so that’s what the reason that stock-based comp has increased quite a bit over the previous years.
Thank you. Our next question comes from line of Jason Helfstein of Oppenheimer. Your line is now open.
Thanks. Just can you comment – when your sales guys are out there calling and winning – not winning, etcetera, are you seeing any meaningful conversation from Facebook? Does that come off as a reason why somebody doesn’t ultimately close with you? And then secondly, was there any one-time costs relating to shutting down the display business that you can callout this year?
Hey, Jason, it’s Geoff. I will take the competition question first. I think what I hear from our sales team is that Google and Facebook do come up, but in general, when they hear Google and Facebook from a local advertiser, that’s a really good sign. That means that the local advertisers who has already started to shift online and it’s a great opportunity for us to talk with them about Yelp advertising as well and we are very confident with the ROI that we offer the typical advertiser. More often frankly, we are dealing with prospects who don’t advertise online at all yet and that’s a more difficult conversation, because you are trying to get somebody effectively out of print and online, which is happening over time, but is a more gradual process.
In terms of setting down display and is there any one-time costs? It really was not. There was a fairly small team of folks and a number of those folks actually moved over internally into our national mid-market accounts, so nothing necessarily to call.
Thank you. Our next question comes from the line of Brian Fitzgerald of Jefferies. Your line is now open.
Thanks, guys. You mentioned KinderCare leaving in ‘13, but then returning, is this kind of the typical lifecycle you see of a client leaving and then kind of realizing the value of the platform and the ad format improvements and innovations you made throughout ‘14 and ‘15 and then start coming back or do you see that shortening or lengthening or that’s just a one-off? And then on the local transactions and delivery business, it’s fragmented, it’s competitive, many players attacking those markets just on a global basis in different areas. How important are kind of three drivers there that the relationships you already have versus having an encompassing kind of review and then local platform or maybe just having more competitive rates? Thanks.
Hey, Brian, it’s Geoff. I will try the first question. You asked about KinderCare and how typical was their experience where they sort of tried with us and then turned off for a little while and came back. I would say that our national or multi-location business is still newer than our local business. While we have been with national advertising for years now, it is a growing segment for us. And so I don’t have off the top of my mind, lots of examples like KinderCare, that’s an interesting example because of their size. That having been said, we do see this sort of pattern with local and all sorts of size advertisers as well, where they will experiment with us or others, turn off for a little while and then come back on. My understanding is that this is pretty typical of the advertising industry in general and we have heard that from sort of print and other kinds of businesses too.
And on the delivery side, this is Jeremy we think we have some very unique advantages in the space, in particular, on the user acquisition side to readily use the halo from Yelp the fact that people are already making their decisions about local businesses, especially restaurants and places they may want to order from right on the app and then that provides a natural funnel over to Eat24. And so we are seeing that work really well. You mentioned rates and I assume you are talking about sort of the take rate of what we are charging businesses. But I think the really special thing is having low rates for consumers and so very low delivery charges. And that’s something that the platform offers as well. And I think that’s going to be a challenge for some of the various competitors that have popped up as there has been a lot of subsidy around these rates. And I think as that drives up with kind of the market dynamic changing, I think that will bode well and we are seeing really strong growth from Eat24 so far as we feel great.
Thank you. And our next question comes from the line of Aaron Kessler of Raymond James. Your line is now open.
Yes, hi guys. A couple of questions. First, can you just give us an update on some of the ROI initiatives I know you are targeting to finish a few up by the end of the year, specifically by providing more transparency to the advertisers? And then second just from a cost-per-click or the CPC model, any changes you are seeing that have on advertiser impact yet or how about that impacting advertisers? Thank you.
Yes, hey, Aaron. It’s Geoff. Let me answer the first one first on the CP model, are we seeing any impacts advertiser lifecycle or retention, anything like that? There certainly are lots of different segments within our advertiser base and there are many good signs. That have being said overall, the trends are awfully consistent over the last several years in terms of retention patterns of the typical advertiser. So, no changes to report there one way or the other. As to the ROI initiatives, you may have seen some of those mockups, I know we have made available in the past, new versions of our ROI and revenue estimate dashboards. The new revenue estimator is available now for all self-serve and full-serve accounts. The ROI calculators that basically try to estimate specific ROI associated with ad spend are being gradually rolled out now. They are available in some segments, but we are doing AB testing as we roll that out.
Are you breaking out paid versus free yet or is that still to come for the advertiser?
Yes, that’s the second piece of what I was just describing there with the ROI calculator. That one does break out page specific to organic.
Got it. Great, thank you.
Thank you. And our last question comes from line of Rob Sanderson of MKM Partners. Your line is now open.
Yes, thank you. Most have been answered, but I want to dig back into the marketing investments and I know that both Geoff and Jeremy have addressed this. I am just going to try a different approach. A lot of effort to drive awareness looks like that’s moving in the right direction, lot of focus on driving app usage. But if you look at the app unique users as a proportion of your mobile uniques, it’s only 23% again this quarter. I think that proportions well below many of your peers and that ratio was actually higher for Yelp 2.5 years ago. So, I am just trying to understand the dynamics in the mechanics here like how and when does the improvement in awareness begin to drive better app user metrics or is this already happening, but you are fighting some other structural issues on the traffic funnel or can you just help me reconcile all of the information on the marketing investment and the app usage?
Hey, Rob, thanks for the question. It’s Geoff again. I will give it a try and Jeremy can chime in if I missed something. I think back to why the marketing investment that really is about the long-term opportunity to try to take our share of smartphone users out from a thirdish to a very high percentage. Everybody in the U.S. who owns a smartphone has to go to local businesses and they want the best deal they can get. So, we want to make sure that they have access to the best content, which will be through Yelp. As to kind of trying to track that ratio of app unique devices relative to mobile web, we have run those ratios here too. And frankly, they can drive us a little bit nuts, because you can really push on either end of that ratio, right. One of the things we have tried to do is make sure that our mobile web experience is as good as it can possibly be. And there is always going to be some of our monthly users who only use Yelp once or twice a month. And for those users, they may very well continue to find that it works just fine for them to access our mobile website rather than using the app. Of course, we do know that for every app user we get, they are going to be 10x more active. And so it’s of course always an incentive for us to try to drive those app users over time as well, but while not taking them off if they want to just be able to kind of fly through and use the website. So, those ratios are interesting, but I can tell you that we are trying to drive a specific number there.
Yes, I guess, I would just kind of add, it’s kind of the Goldilocks philosophy, where we do have a lot of the value on the mobile web and that’s always been our approach even if you go back to the early days could all of our content out there is not a walled garden and Google historically is into exit and sent us a lot of traffic. Is that still true on the mobile web? We are trying to use that essentially as a free advertisement for mobile apps. And I think frankly the increase that we have seen in app adoption suggests that, that we are seeing a lot of success there in each of those users does result kind of 10x the value of the mobile web users. So, I think over time it kind of plays itself up naturally.
Thank you. I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Have a great day everyone.
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