Good day, and welcome to the Yelp second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star one in your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to turn the conference over to James Miln, Vice President of Financial Planning and Analysis. Please go ahead.
Good afternoon, everyone, thanks for joining us on Yelp's second quarter earnings conference call. Joining me today are Yelp's CEO, Jeremy Stoppelman, CFO, David Schwarzbach, and COO, Jed Nachman. We published a shareholder letter on our investor relations website and with the SEC about an hour ago, and hope everyone had a chance to read it. We'll provide some brief opening comments and then turn to your questions. Now 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, 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.
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 shareholder letter for a more detailed description of the risk factors that may affect our results. During our call today, we'll discuss adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles. In our shareholder letter released 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, as well as historical reconciliations of GAAP net income to both adjusted EBITDA and adjusted EBITDA margin. With that, I will turn the call over to Jeremy.
Thanks, James, and welcome everyone. Our second quarter results demonstrated the resilience of our business in spite of the significant headwinds faced by local economies following the emergence of COVID-19. Yelp's diversified mix of categories, geographies, and sales channels helped us adapt to the rapidly changing environment, resulting in our traffic and revenue improving over the quarter. I'm proud of the speed and confidence with which our teams confronted one of the most challenging periods in our history. Due to our disciplined actions on expenses in the face of uncertainty, coupled with solid revenue performance, we added $35 million of cash and cash equivalents to our balance sheet. While we began the quarter with a significantly smaller workforce operating in a fully remote environment, we adapted our product efforts and operations to support our users connecting with their favorite local businesses in a socially distant world.
We provided new tools for local businesses to connect with their consumers, allowing them to post custom messages, to update their service offerings to include virtual options, and to list health and safety measures. We also continued to make progress on important strategic initiatives, including home and local services, which has long been our largest and often fastest-growing category. We continued to increase the percentage of monetized leads through additional improvements to our ad system, including better matching and Request a Quote. Revenue in the subcategory Home Services grew slightly compared to the second quarter of 2019. We remained focused on evolving our go-to-market to improve our sales efficiency over time. Throughout the quarter, our local sales team maintained a consistent level of productivity, even while working remotely. We also delivered a new profile product, Yelp Logo, and scaled our Connect offering.
Our continued investment in self-serve helped drive strong acquisition in the channel, which reached near-record levels of advertising starts in June. Though the pace of economic recovery remains uncertain and will not be uniform, we have confidence in our strong balance sheet and our proven ability to operate with flexibility in this environment. This month, we are pleased to return many of our furloughed employees and restore reduced salaries for our teams. This sets us up well to reestablish our growth momentum and capture demand as the economy recovers. With that, I'd like to turn it over to David.
Thanks, Jeremy. When we spoke to you back in May, the economic outlook for local businesses was highly uncertain. However, in late May, as local economies began to reopen and consumers and local businesses were adapting to the new normal, we saw both traffic and CPC advertising budgets begin to recover. In June, we continued to see steady improvement in ad budgets and retention, benefiting from a strong rate of return from customers who had received relief in April and May. We ended the quarter with $169 million in net revenue, a 32% decline compared to the same period last year, and a net loss of $24 million. In April, we took several actions to reduce our operating costs to better position Yelp to weather this unprecedented period, including the difficult decision to reduce our workforce.
Our actions contributed to a $71 million reduction in operating expenses from the first quarter, in line with the $70 million that we communicated in May. Coupled with our solid performance and revenue, we delivered positive adjusted EBITDA of $11 million in the quarter and further strengthened our balance sheet. Our cash balance rose from $491 million at the end of the first quarter to $526 million at the end of the second quarter, principally through our positive operating cash flow and the release of restricted cash. Restructuring costs in the quarter were $3 million as a result of the restructuring plan announced on April 9th, 2020. These costs include severance, payroll taxes, and related benefit costs for a workforce reduction affecting approximately 1,000 employees. While we exited the second quarter with increased confidence and an additional $35 million of cash on our balance sheet, economic uncertainty remains high.
Therefore, in lieu of a formal business outlook, we are providing additional insight into recent business trends. As a result of improved business performance in June, including the return of spend from many customers who received relief in April and May, revenue in the month declined by 25% compared to June 2019. While we are encouraged by our performance in June, we saw consumer demand begin to plateau in July as the recent resurgence of COVID-19 cases led many states to pause or reverse their phased reopening measures. As we look ahead, in the absence of a vaccine or effective therapeutics, we expect to see continued fluctuations in business openings and closures as communities respond to local outbreaks, which may impact the pace at which our revenue recovers. Our strong balance sheet gives us more flexibility even in the face of this uncertainty.
On the cost side, we anticipate third quarter operating expenses may increase by as much as $30 million compared to the second quarter. In addition to restoring reduced salaries, we are also returning furloughed employees to full-time over a four-month period ending in October, many of whom are trained sales reps. We are also mindful of various uncertainties, including employee healthcare costs and our provision for doubtful accounts. With that, operator, please open up the line for questions.
At this time, in order to ask a question, please press star one on your telephone keypad. Your first question comes from the line of Shweta Khajuria from RBC Capital Markets. Your line is open.
Okay, thank you. I'll try two, please. First one is on locations declined 31% year-over-year. Could you provide a little bit more color on that? Are these businesses that are shut down for good or are they just closed because of COVID? Second, on locations, how fast do you think is that recovery in terms of bringing those locations back onto the platform post-COVID? Third, on the same locations question, what percent of these businesses are multi-location restaurant chains versus local SMBs? Thank you.
Shweta, it's David. Thanks so much for your question. In terms of the reduction in locations, what we believe is the case is that a considerable number of these will be temporary. It's important to be mindful that over the course of the quarter, we did provide relief to many businesses, and that relief took place across the entire three months. When those businesses begin to spend with Yelp again, they will show up again in paying advertising locations. It's important to be mindful that over the course of the pandemic and the impact on the economy, there are quite a few businesses that are not going to reopen. We don't have a great sense yet for that distribution, even by category.
In terms of how do we think paying advertising locations will recover over time, the pace of that recovery, we think is very much tied to the pace of the overall recovery. I think it is actually very important to consider that continued fiscal support from the federal government is going to have a big impact. Again, unfortunately, we wish that we had better insights over how it will play out over the next several months. One of the things that we did do through the relief efforts is establish stronger relationships with many of these business owners. What we did see when that relief was ending in the June timeframe, that they did come back to us. We feel good about where we have positioned ourselves with those business owners.
In terms of local versus multi-location percentage, we'll need to get back to you on that. Jeremy, I don't know if you want to comment a little bit how you see the longer term for advertising locations.
Sure. I would say what we saw is coming off of the bottom of the panic around the virus, we did see as markets reopened, a recovery happening. That's encouraging for the long term because as economic activity continues to pick up more widely, we believe that we will also see activity on Yelp picking up more widely. While in the short term, that means categories like restaurants and retail are likely to be more impacted. Home and local, for instance, has been quite robust and actually is an area where we continue to put a lot of our investment, even prior to the COVID pandemic. We do feel optimistic that in the long term, we'll see a robust recovery as the virus abates.
Okay. Thank you, Jeremy. Thank you, David.
Sure thing.
Your next question comes from the line of Cory Carpenter from JP Morgan. Your line is open.
Great. Thanks for the questions. I had two. Just first, hoping you could expand a bit on the trends you're seeing quarter to date. You mentioned in the shareholder letter, traffic started to plateau in July, but any additional color you could provide in terms of trends by vertical or geography would be helpful. Then on the product side, you went through a number of initiatives in the letter. Just curious how we should think about your key priorities and roadmap in the second half of the year. Thank you.
Sure. Hi, Cory. This is Jeremy. Talking first about traffic trends. As I mentioned on the previous question, we saw some recovery as markets opened up, as there was more economic activity, people moved around more. While that did slow as virus cases rose, we do think over the long term that as the pandemic does ultimately get under control, we're going to continue to see a robust recovery of activity and then therefore traffic. On the product side, we had been investing pretty heavily in home and local services and specifically, things like Request a Quote, our ad system, increasing the percentage of monetized leads. We continue to make progress on that front, and we continue to roll out new updates that are having impact. In addition, we mentioned in the letter, some newer products that are showing considerable life.
For example, Yelp Connect, which allows businesses to push out updates to their page, those also get sent out to former customers, people that have expressed interest in their business. That's really resonating and thousands of businesses have started paying for that functionality, which we initially gave as part of the relief package, was included as part of the relief package that we were doing as the pandemic hit. Also, we recently rolled out Yelp Logo, which is something that we had heard from our customers was really important to them to look professional, to be able to brand themselves, and put their logo front and center on their business page. We've seen pretty solid uptick as we've just launched that feature.
Needless to say, we've got a lot of capability in our product and engineering team, and it's a capability that we maintained over this period, and they continue to drive really innovative and impactful functionality for business owners and for helping people connect with great local businesses.
Your next question comes from the line of Colin Sebastian from Robert Baird. Your line is open.
Thanks very much. Good afternoon, everyone. Within Home Services, I'm wondering how much of the rebound in activity there is reflective of people adjusting to work from home and refurbishing their homes more broadly, which could be a bit transitory as offices reopen, versus how much of that's related to specific product improvements, like Jeremy, the ones maybe you mentioned, that could have more of a sustainable impact longer term. David, with traffic plateauing in July, should we assume, given the mix of CPC, that that's consistent with sort of the advertising revenue impact? If that's the case, just trying to put a finer point on what we might expect in Q3 if we assume June monthly revenue trends continue through to the third quarter.
It seems like the sequential improvement in revenues would roughly equal the increase in operating expenses. Wondering if that's a fair way to assess the current situation. Thank you.
Hi, Colin. This is Jeremy. I'll take your first question there on Home Services. Do we believe it's sustainable? Yeah, obviously it's very hard to predict the future in this very unique situation of the pandemic. I would say, within Home Services, there's a lot of different categories. While some of them may be optional, like building that new deck may be optional. Things like getting yourself back into your house if you need a locksmith or if your toilet's clogged, you got to get that fixed. Obviously people are spending a lot more time in their homes, so I think that is driving some of this robust demand for Home Services. In my opinion, I would say yes, it's sustainable. Time will tell, and obviously it's a very dynamic situation.
Just Colin, it's David. To follow up on your second question, a few thoughts there. First of all, one of the things that we have been very focused on is investing as we see the recovery pick up. In terms of just starting with the operating expenses and the furloughed folks that we brought back, it's really our perspective that we want to be in a position to continue to participate in, as Jeremy has really emphasized, we want to participate in that demand around Home Services in the near term. Over the longer term, that is the foundation for us to see revenue grow. In terms of extrapolating from July revenue or from the, excuse me, July traffic or from the improvement in revenue in June, again, we'd caution you, and that's for a couple of reasons.
The first is, as you know, traffic is important for us, but through the matching algorithm. There's a variety of adjustments that take place, and so you can't match those one to one. In general, what we did see and what we're very cautious about is that the uptick in cases has been obviously extremely widespread. As we think about this current quarter, but the rest of the year, we continue to believe that we will participate as caseload declines and as the overall economy recovers. We're not yet prepared to provide a more specific view on July or Q3 performance.
Okay, that's all very helpful. Thank you, guys.
Your next question comes from the line of Mike Ng from Goldman Sachs. Your line is open.
Hey, good afternoon. Thanks for the question. I just have two. First, could you talk about how the composition of the sales force of the company may be different relative to pre-pandemic? Will your sales force be meaningfully more focused on multi-location versus individual small businesses? The second question is, could you talk about your plans for ongoing relief and offering free advertising product in 3Q versus 2Q? I really appreciate you laying out some of those numbers for the second quarter. Will that turn into recognized or paid revenue in the third quarter? Thank you.
Sure. Hey, Mike, this is Jed. I'll take the first one, and then maybe David can jump on for the second one. In terms of sales force composition, obviously we made the very difficult decision early on in the quarter to, or maybe it was late third quarter, to both furlough folks on the sales team as well as have a permanent reduction in force. By the way, the team rallied and responded into a completely remote work environment, and productivity within the local sales team was consistent with what we had seen in the past. We're really happy and proud of the team for kind of turning on a dime on that one. Based on the results that we saw in the second quarter, we felt comfortable bringing back our furloughed employees. That's a real advantage for us.
These are trained employees who kind of can come in and hit the ground running and are a real asset for Yelp. We believe we're correctly positioned right now to take advantage of the second half of the year, and that the sales force is, for what it's worth, right-sized. We're not going to comment on kind of where we are in 2021 as an example from a sales force perspective. I will say that, even prior to the pandemic, when we talked about reducing the sales force over time, this certainly accelerated that. We're going to continue to lean into the channels that are our high leverage channels, and those are self-serve and the multi-loc opportunity, which both are really, really important for the long-term viability of Yelp. By the same token, we're always going to need some version of a sales force.
There are local businesses out there that need to be talked to in order to kind of understand the products that we have. We feel like we're coming to the market these days with a really nice suite of products. The addition of Connect and the addition of Logos has been a real boon for folks to be able to talk about that on the phone, and we're excited about kind of the future on those products. The bottom line is, we feel like we're right-sized with the local sales force today. We're going to continue to invest in self-serve and in the multi-loc business as well.
Hi, Mike. Just to talk a little bit about relief. We first announced $25 million. So far, it's coming at about $32 million, and that's split half and half between direct revenue relief, both on the ad side as well as on the restaurant SaaS side, and then paused or free products. Accounts that we paused over this period of time or where we've provided free products. What we expect is that there is a few million dollars more to go in Q3, principally around paused SaaS restaurant product. As you'd imagine, obviously with some of the openings reversed and dine-in being eliminated in some locales, those restaurants don't have immediate need of the product. What I do really want to underscore is that this investment overall has worked well for us.
What we did see in June was where we had paused for customers or where we had encouraged them to pause and set a restart date, we were very pleased by the number of advertisers who came back to us. If it's needed, if we see a need in the market to further invest in that area, then we are not going to hesitate to do that because we are seeing the ROI.
Great. Thanks, Jed. Thanks, David.
Your next question comes from the line of Dan Salmon from BMO Capital Markets. Your line is open.
Hey, good afternoon, everyone. Thanks for taking a couple questions. First, self-service as a channel, Home Services as a category, both outperformers. Was there some causation to that correlation? In other words, did the Home Services category particularly help drive self-service? I'd just be interested to hear about that. Second. On multi-location, what I'm trying to ask is if you think the pandemic has helped or hurt your long-term push there, by which I mean, many of those restaurants were able to stay open, pivot to delivery, to pick-up, and focus on that. Have you been able to help them with that pivot such that, in a sense, maybe build that goodwill where maybe that push can be accelerated as things get back to normal? I'd be interested to hear about that, too. Thanks.
Hi, Dan. This is Jeremy. I'll take a stab at the first one, whether self-service and Home Services were connected. I'm not aware of a causation between those two. I think, self-service, we did see healthy starts, near record levels of advertising starts in June, and some strength in that channel. On the Home Services side, frankly, I think it's the consumer activity that's driving the strength or the robustness compared to other categories, which is just with people at home, there's a lot to be done. There's a lot of wear and tear. Consumers are showing up, the demand is there, and businesses are happy to pick up that demand. We're just enabling successful matching, and we've been investing in things like Request a Quote in our advertising system to drive those leads to our advertisers.
I can take the second one, Dan. In terms of multi-loc and how the pandemic is affecting that segment, first of all, obviously, multi-loc as a whole is a very diverse segment. We operate in all categories. When we think about things like restaurants specifically, even there is a kind of a bifurcation in terms of the types of multi-loc restaurants. You have your QSR and fast casual, which throughout the quarter, were able to make a pretty fast pivot to pick-up and delivery. Our goals were to be there right alongside with them and help them in any way navigate that. If we could help them drive that business, that was going to be really important. You look at kind of the casual dining sector and/or fine dining sector, and in restaurant dining has obviously been hit really, really, really hard.
I would say it's a combination of both in the near term. Over the long term, I've been really impressed with how a lot of these multi-location restaurants have pivoted their business. Certainly, we're not back to full steam yet in terms of folks dining out. This is not something they're taking casually. I suspect some of the trends that you see happening during the pandemic will, in fact, continue past the pandemic, once we get a therapeutic or a vaccine in place. I think they're kind of taking it week by week and month by month as well. I think one of the advantages that we have right now, kind of hitting that market is that we can be very local in terms of how people react.
It's not a national television campaign that's got to go out to everybody when somebody's not having the capability to kind of serve people across the country. You can pick markets or the Southeast and as things are closing and opening, they can get very specific around how they're marketing out to those segments. Overall, we believe the TAM's there for restaurants going forward, and that when we come out of this thing, we may even come out stronger. In the meantime, we're still going to see some volatility, and every restaurant operator is handling it in different ways and putting priorities on different things.
That's great. Thank you both.
Again, if you would like to ask a question, please press star one on your telephone. Your next question comes from the line of Elliot Alper from D.A. Davidson. Your line is open.
Great. Thank you. Similar to a previous question, but as you look at some of the geographies that are farther along in the phases of reopening, what are you seeing as far as consumer re-engagement with Yelp as well as the local businesses' re-engagement with Yelp? Then curious on any contacts into the sales force and small business sentiment as it relates to continuing their partnerships with Yelp and utilizing some of the free services offered in the quarter? Thank you.
Hi, Elliot. On your first question there, as we saw markets reopen and more economic activity pick up, we did see recoveries that were what I would characterize as fairly rapid as people left their houses and started transacting with local businesses. I see that as an encouraging sign that as things do ultimately get back to normal in kind of the medium term, as the virus gets controlled, the vaccine is here, I do think that we will see a recovery along with that activity. That's kind of what we've seen on a market-by-market basis. As more activity picks up, more transactions are happening on Yelp. Obviously, more website visits, more mobile app activity, more Request a Quote, all of those good things.
I can take the engagement question. Overall, we're really happy with the engagement of local businesses with the Yelp product right now, albeit, this is a very stressful time for local businesses and certainly, we want to be an advocate for them and a partner along the way. When you look at some of the statistics that we have in terms of folks taking advantage of COVID-related products, as an example, it's really robust. We have over 650,000 customized COVID-19 sections at the end of July. You can imagine as a consumer today, and as a business owner, it's really important that you have communication channels that are accurate, up-to-date. Folks really don't know in their day-to-day which businesses are open, how they're operating, whether they're operating with health and safety measures in place. We think we provide a really key critical communication channel for those businesses.
Sentiment, as you imagine, it's not exactly a happy, non-stressful time for local business owners, so I don't think people are on the phone jumping for joy about the situation. That being said, there is an appreciative sentiment and one of our goals throughout this entire process is to make sure that we're having relationships that last well beyond this pandemic, and that we're in a position to, A, recapture clients that are potentially not spending now, and also engage customers that have not used Yelp in as a robust way prior. We're pretty happy with the engagement thus far.
Great. Appreciate it.
Your next question comes from the line of Brent Thill from Jefferies. Your line is open.
Hi. Thanks for taking my question. This is Stan Velikov for Brent. Pre-pandemic, high-frequency categories like restaurants used to drive traffic to your high-value categories like services. Now, this dynamic has changed a bit. What can you do to increase traffic to the higher revenue categories in the current environment?
Yeah, we definitely have relied historically on the high-frequency categories like restaurants to drive engagement. The good news is there's still traffic there. It hasn't gone to zero. I think what's particularly encouraging is even though, over the long term, we'd love to, and we will, I think, or we certainly believe we will see restaurant traffic back and robust as the virus gets under control. In the meantime, we have seen the home and local category recover from the lows of kind of March and April. It's not exactly a restaurants have to be gangbusters for us to have a solid business. I think you can kind of see from the traction that we've seen, particularly in Home Services, that people still do rely on Yelp.
Obviously, they're coming to restaurants, but they're also coming to us for a whole host of other categories. We are quite diversified from a category standpoint, and that's resulted in, I'd say, solid revenue in the Home Services category that's buoying the business and is giving us the confidence, frankly, that we're going to get through the other end of this crisis and ultimately be well-positioned for the recovery.
I get it. Thanks for the color.
Sure thing.
There are no further questions at this time. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating, and you may now disconnect.