Good day, and welcome to the Yelp first quarter 2020 earnings conference call. All participants will be in listen -only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. 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, and thanks for joining us on Yelp's first quarter earnings conference call. Joining me today are Yelp's Chief Executive Officer, Jeremy Stoppelman; Chief Financial Officer, David Schwarzbach; and Chief Operating Officer, 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 other 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. At the beginning of the year, we, like everyone else, could not have imagined where we'd be today as a community. The global pandemic has disrupted any sense of normalcy for the world, and we've been witnessing the impacts on consumer behavior in real time. While the physical distancing measures and shelter -in-place orders have inevitably dealt a significant blow to many local businesses, this crisis has reinforced for us the critical role that Yelp plays and will continue to play connecting people with great local businesses. We moved quickly to take steps to navigate our business through these unprecedented times. To protect the safety of our employees and do our part to help flatten the curve, we took early and swift action to migrate our workforce to work from home.
At a company with thousands of employees, I am proud of the operational agility and speed with which our team has been able to adapt to this new work -from-home environment, given the difficult circumstances. We prioritize efforts to help our consumers and local businesses stay connected with Yelp's trusted content during this time. Our product team moved fast to create new features for businesses to showcase relevant offerings, such as virtual estimates or whether they offer delivery or takeout during COVID-19. These new attributes have been rapidly adopted by business owners with more than 120,000 active locations by the end of April. In addition, as part of our efforts to support local businesses, on March 20th, we announced a $25 million relief initiative primarily to support local restaurants and nightlife businesses, which have been particularly devastated by COVID-19.
We also took the difficult but necessary steps to reduce our workforce and expenses to help maintain financial stability in the quarters to come. From a balance sheet perspective, we ended the quarter with $491 million in cash equivalents and marketable securities and no debt. We believe we have the financial strength and liquidity to weather the uncertainty of the pandemic under a range of scenarios, allowing us to continue to focus on the health and well-being of the Yelp community, our employees, consumers, and local businesses. In summary, we entered this pandemic on the back of strong performance over the preceding quarters and into the first two months of this year. Despite the negative impact of the COVID-19 pandemic in March, our first quarter revenue was $250 million, up 6% compared to the first quarter of 2019.
We responded quickly to the health crisis and made the decisions we believe were necessary to preserve our financial liquidity and maintain our operational capability. By doing this, we believe Yelp will emerge uniquely positioned to help local economies through the recovery, both partnering with our existing advertisers and helping grow new ones. With that, I'd like to turn it over to David.
Thanks, Jeremy. Since this is my first earnings call with Yelp, I wanted to share a few thoughts around why I joined the team and to share a few first impressions. I'll then move on to our view around the second quarter. At its heart, an advertising business depends on content, consumer interest, and reach. Yelp has all three. We have highly valuable content through trusted reviews. We enjoy a strong consumer brand built over the past 15 years, one with appeal that weights towards more affluent households. We deliver value to advertisers across a broad range of categories, from restaurants to home services. These strengths remain true even with the current pandemic, and together they provide the foundation for us to grow as the economy recovers.
As I've worked with the team over the past two months, I've seen impressive operational agility in difficult circumstances as we transition to work from home and then had to take significant actions to reduce expenses. Those actions, made with careful consideration, reflect a commitment to financial discipline while also helping to ensure that we continue to drive product innovation and reach business owners through our sales organization. We believe that the steps we have taken align expenses to reduced revenue across a broad range of scenarios. As Jeremy said, we also have a strong balance sheet with $491 million in cash equivalents and marketable securities at March 31st. We currently have no exposure to corporate securities. We continue to take additional steps to further increase our liquidity, most recently adding a revolving credit facility in May with Wells Fargo for $75 million.
While we are mindful of dilution, we've indefinitely postponed share buybacks given current conditions. Taken together, I am confident in our ability to weather the current storm from a liquidity perspective and to emerge well-positioned for growth. Now I'll turn to our thoughts around Q2. While we are not in a position to provide our usual guidance for this quarter or the full year, given the current uncertainties, we continue to closely monitor business performance and make decisions to ensure our financial strength. As described in our shareholder letter, we've seen a steep decline in traffic. Fewer people going out to eat and shop, coupled with broad-based shelter-in-place orders, have resulted in an extraordinary number of local businesses closing or operating at limited capacity. This, in turn, has understandably led to many of our advertisers canceling, pausing, or reducing their spend on Yelp.
In California and New York, two of our strongest regions and two of the first states to order residents to shelter in place, we began to see both traffic and advertiser budgets begin to stabilize in the second half of April. While we are still closing our books, for April, we expect revenue to decline by approximately 35% compared to April of 2019. It is important to recognize that our revenue may be lower in May and June due to a number of factors. While we are seeing some easing of consumer restrictions, it remains a very challenging environment for small local businesses, and we may see more of our advertisers pause, reduce, or cancel budgets. To support many of these businesses, we may expand upon our relief initiatives, and this could have a direct impact on both our advertising and services revenue.
With recent changes to our sales force, we may not be able to maintain productivity levels as time passes and we continue to work remotely. In addition, the rates of recovery in consumer behavior and user engagement will impact revenue through the fulfillment of ad budgets and the cost per click we deliver, both of which remain uncertain. On the cost side, we expect a reduction in GAAP expenses of $70 million compared to Q1. This excludes a one-time restructuring charge between $4 million and $5 million for the year. It's important to recognize that our cost basis is driven predominantly by our headcount. As revenue recovers, we plan on restoring more employees to full-time. As a result, we anticipate our expenses will rise in the second half of the year. As we see improvement in business performance, we plan to selectively reinvest in our business.
We will be guided in that reinvestment by opportunities to drive profitable growth over the long term across channels, categories, and geographies while maintaining our financial discipline. With that, operator, please open up the line for questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. As a reminder, please limit yourself to one question and one follow-up. If you have additional questions, you may reenter the question queue. At this time, we will pause momentarily to assemble the roster. The first question comes from Colin Sebastian of Baird. Please go ahead.
Great. Thanks. Good afternoon. Hope everyone there is safe and healthy. Jeremy, it may be a little bit early, but beyond managing through the current environment, are you thinking of any longer-term changes to the company's strategic priorities, or is the goal to get back to the progress that you were making earlier in the year? As a follow-up on the multi-location, given some of the relative strength we're seeing in national chain restaurants and other businesses, can you talk about maybe some of the relative demand trends from that group in your business sitting here in early May and maybe some of the B2B performance marketing that you plan to leverage with that group? Thank you.
Hi, Colin. This is Jeremy. I'll take the first half of the question. Maybe Jed can hop on with the national question. As far as changes to our priorities, certainly we're looking at our product development pipeline to see if there's any things that should be done more urgently in light of COVID-19. We already scrambled the jets and got out a bunch of features to help make it easier for businesses to communicate with their customers around things like hours changing, how are they handling pickup and delivery, and so forth. We've actually seen a lot of success, as measured by engagement, with some of those features.
A COVID-19 banner, for instance, that all businesses can put up on their business page. We had 225,000 of those up by the end of April. We launched some new biz highlights. Those are sort of tiles that businesses could put up to highlight specific things about their offering. We put out some special ones related to COVID, and we had 120,000 of them activated by the end of April. Additionally, Yelp Connect, which is functionality that allows you to post both visual and text information to your page, and then it also gets pushed out to people that are past customers as well as people that might be interested in your business, is seeing a pretty nice pickup there with 10,000 businesses activated.
We'll continue to push forward on features like those that are extremely relevant in the short term, and then there's adjustments, I think, to the pipeline over the long term, things that maybe we hadn't considered before that now are more urgent. I would say, generally, a lot of the things that we were working on are still quite relevant. We've seen a lot of strength and resiliency in the home and local services category. It's been less impacted overall, and we had an enormous opportunity, which we still have, to monetize more of the leads there. Many of the projects that we're already working on continue to be relevant at driving high-value, high-quality leads to our advertisers. With that being said, you can hop in on the national chain question.
Sure. In terms of the national chains, they're obviously still operating in a local economy, and they've been hit in varying degrees, depending on the segment and category. Obviously, restaurants are still trying to find their footing in this new world. When we talk about multi-location, it's kind of everything from mid-market all the way up to kind of your largest national chains. You have to break it down further into kind of QSR versus dining-in options. There's a very broad range in terms of how this has impacted. Obviously, pickup and delivery are a dynamic; that is, within the restaurant segment specifically, we are seeing a bunch of increased interest on that. Although I don't think, as a rule, most of these large enterprise accounts have really figured out what strategy they're going to move forward with.
It's a complex problem given varying rules and regulations in different states and different cities. The most important thing is we're just aligned with them side by side as they're making their plans to kind of come into a recovery posture and making sure that when they do turn on the spigots in terms of advertising budgets, that we're right there with them. I would say on the services side, this is an opportunity, and we still see folks on the consumer side still need services. On the business side, they're still buying advertising. Making sure that we're fully alongside on the services side, too, because that's going to tend to have a faster recovery than the restaurant piece of the business.
Thank you.
The next question comes from Cory Carpenter of JPMorgan. Please go ahead.
Great. Thanks for the questions; appreciate the color on April trends in the shareholder letter. I was just hoping you could expand some on what you're seeing across sales channels and categories over the last month. Maybe—I don't know if it's possible to quantify how far ahead New York and California may be than other geographies. As I mentioned, any touch points on what the B2B performance marketing, maybe just more color on your strategy to drive re-engagement. Thank you.
I can take the one on categories and segments. Overall, in terms of channels and categories, the services segment, obviously, as we indicated, has not been hit as hard as the restaurant side, both from a traffic and from a revenue perspective. We were certainly encouraged by April seeing at least a leveling off of the decline and stabilization, which has been really important. Our sales force productivity has been as good as we could have expected. We did a huge transition to work from home. Really did not see any dips in productivities in aggregate or on an individual basis. We're seeing real strong productivity there. Obviously, you start to look at categories like health and beauty that are impacted as well, and restaurants obviously taking a big hit.
Overall, I would say the strength has been in the services side of the business, both from a retention and a production perspective.
Cory, this is David.
I guess I can take this. Sorry. Go ahead, David.
Cory, this is David. When we think about driving advertiser re-engagement, part of the investment in a sense that we made is we provided relief to our businesses. The $25 million that we announced was an opportunity to engage with them and bring them back, allowing them to pause for the business. One of the things that we're focused on is ensuring that it's easy for them to come back and for our sales team to engage. On the B2B marketing side, as you know, we have not invested heavily in performance marketing, and we haven't had to. That being said, as we see opportunities there, we're definitely looking to drive traffic as the economy recovers.
Great. Thank you, guys.
The next question comes from Dan Salmon of BMO Capital Markets. Please go ahead.
All right. Great. Good afternoon, everyone. Thanks for taking some questions. First, maybe just return to the restaurant category specifically, and maybe for Jeremy or Jed, you noted continuing to maintain the high level of investments in national. Can you just remind us? I think that if we step back, notwithstanding the multiple categories of multiple locations, that the general view that they should rebound more than traditional, sort of local restaurants, independent restaurants? Just maybe remind us what are some of the key areas of investment to support the national business and, in particular, your views on whether that may be able to accelerate coming out of it. Maybe for David, just welcome to your first call, but, and we'll jump right into one about with buybacks being halted, how we should think about expectations for restarting that?
What are some of the key milestones you're looking for? Would love to hear a little bit more on that as well. Thanks.
I can take the first one on national in terms of the investment. I would start with when we talk about continuing to invest in that segment. We largely kept the enterprise sales team in place and the infrastructure in there to make sure that we could service those folks in the best way possible. Those relationships continue today, even where some of those folks have cut down on initial advertising spend. Obviously, we've got to take a look at delivery and pickup as a huge opportunity for these folks. Although it's not the panacea that would totally drive that segment in terms of a quick rebound. I think most folks are just trying to kind of keep their head above water. Obviously in-store attribution's going to be a little bit harder given this environment and folks sheltering in place.
An example of one of the things that we're doing is the Yelp Audiences platform, where we kind of look at folks who have intent to pick up and deliver and can access them in other places around the internet. That's been a product that has seen some uptick recently as a result. In general, it's just making sure that we're providing the core blocking and tackling so when folks decide they need to start to spend and various states and cities start to recover, that we're right alongside them.
Dan, I'll pick up from Jed there. In terms of share repurchases, one thing, of course, that's important to appreciate is that over the course of last year, we bought nearly half a billion dollars of stock. So it's much too early to consider share purchases today. We've been extremely focused on liquidity, and as we've mentioned, we believe with $491 million at the end of the first quarter, we're extremely well-positioned. We just added the credit facility with Wells. We're taking other steps. We are mindful of dilution, but it's much, much too early for us to consider moving back to a position where we're engaged in share repurchases.
Okay. Thank you.
The next question comes from Michael Ng of Goldman Sachs. Please go ahead.
Great. Thank you for the question. I was wondering if you could just expand a little bit about the pacing of revenue through the first quarter. I thought it was encouraging to see the acceleration in revenue growth in February to 15%. What drove that acceleration in February? Does that give you confidence that you'll be able to execute against those same initiatives once the pandemic is over? Thank you.
I can jump in on that one. Yeah, we were really happy with the way that the year started, looked at that acceleration from January into February, at that 15% range. I think it was a lot of the work that we had started in 2019. Obviously, we had, I think, a 25% year-over-year improvement in retention that was the largest driver there. Continuing to deliver more value to our advertisers per dollar spent was really, really important. As we saw, kind of the calendar turnover, that became very evident that we saw those retention improvements. Sales productivity continued to be in a very, very healthy place over those first two months and even into the first half of March.
I think looking forward, we structurally kind of changed the model over 2019 that was much more heavily reliant on not growing the sales force as much and driving kind of growth while we had a shrinking local sales force and really leaning into the national opportunity and the self-serve opportunity. So all those things kind of came together over the first couple months of the year. I would imagine as we come out of this that we'll continue to lean in on those channels and continue to make improvements on the retention side as well. That is a big driver of that productivity and a big driver of the revenue.
Great. Thank you very much.
The next question comes from Shweta Khajuria of RBC Capital Markets. Please go ahead.
Great, thanks. A quick one, I'm sorry if this was covered. Jeremy, could you talk about how you think Yelp will be positioned post-COVID? How differently it will be positioned post-COVID as you think about self-serve as well as larger advertisers, multi-location advertisers, and your positioning there? Also, in terms of your conversations with small businesses, they may not be operating right now, but post-COVID, currently, are you in conversations just so that it is a smoother onboarding post-COVID? Thank you.
Hi, Shweta. This is Jeremy. Yeah, I would say one of the things we're really focused on is making sure we are top of mind with consumers. We think one of the most important ways to do that is ensuring that our information is as up-to-date as possible. We're spending a lot of time and resources on making sure that things like hours are correct. How is a business handling itself during this time? What can you buy from particular businesses? Can we automate some of that, especially for larger businesses? You mentioned national. Obviously, it's harder for a business with thousands of locations to keep everything up-to-date. Making sure that we have the resourcing to help them stay top of mind with consumers. I think all of that work is going to help keep that connection to consumers.
Ultimately, that's what businesses are coming for, is valuable leads, getting connected to that consumer that's ready to buy. That's where our focus remains, is connecting with those consumers to businesses. You had a second question, which was I didn't catch it. Let's see. It is post-COVID-
How
Self-serve
Yes
self-serve, multi-location. How are we going to change that? I think we're basically open to all the different channels. We acquire customers through a variety of different means. Obviously, a local sales team, self-serve, multi-location is more of an enterprise relationship. I think we want to be very thoughtful about how we bring on all that recovering revenue. We're going to be looking for the most efficient channels. We've gotten better and better at self-serve, for instance. That's a great place to reacquire customers because we can reach out to them, maybe people that have churned, and with one click, they could be activated again on Yelp and spending with us to grow their business coming out of COVID.
We are taking steps right now to make ourselves more efficient as we ultimately come out of this pandemic so we can reacquire any business that we've lost and then also just ideally grow more efficiently and quickly.
Thanks, Jeremy.
Sure.
The next question comes from Richard Kramer of Arete Research. Please go ahead.
Yeah, thank you very much. It's for Arete Research. Two questions, please. First of all, I'd like to ask about how you see the value of the 210 million cumulative reviews. That's traditionally, in a number of categories, been very important to Yelp's business. Obviously, they will age rather more quickly in this COVID environment. How do you see that review base going forward as a key asset for the company? I guess for the second question, you cited the increase in provision for doubtful accounts. Could you give us a bit of a sense of how far through that process you are and understanding, how many of your both claimed locations and current advertisers will make it through to the other side?
Whether that changes the sort of scope of the business or the nature of the business in terms of how many of your potential advertisers can weather this storm. Thanks very much.
Hi, Richard. I'll take the first half of the question. Maybe David can take the second one there. We do have, as you pointed out, an incredibly rich corpus of reviews that has been proven to be extremely valuable and durable. We continue to have an engaged community of reviewers; especially our elites are worth calling out, which are our model users. We have maintained a large community management team that works from home currently and engages with those key community members. What we generally see is contributions do move along with traffic. As traffic goes down, you would expect to see contributions as people are experiencing fewer businesses; it will go down. I don't expect all those 210 million reviews to be worthless anytime soon.
I think, obviously, and we all hope that many local businesses will survive, even if they're on pause for a period of time and their past performance is a pretty good indicator to consumers of how they'll perform in the future. That said, we still continue to get quite a bit of content from our community of reviewers still writing, and we're still engaging them with our community managers. We continue to develop new features and functionality geared towards contributors to make sure that they stay engaged through the pandemic and to the other side when things can come, we hope, roaring back. We are conscious of trying to maintain that connection with consumers. That's top of mind for us since that's such a key part of our business over the long term.
This is David. There's really two parts to the question you asked: provision for doubtful accounts and then what are we seeing in terms of advertisers, but really businesses surviving. Just to answer the second first, it's still very early. Many of these folks are still working through their survival strategy, and they're obviously also applying for loans. We ourselves are not going to know for some time yet where that's going to land. Unfortunately, that will be something that we're all going to see. As Jeremy said, we hope, of course, that many survive. In terms of the provision for doubtful accounts, it was significantly higher at the end of the first quarter, as you'd expect, as a variety of these businesses took steps to trim advertising or were already in a position where they could no longer pay bills.
That was definitely elevated. What I'd expect is for us to see a somewhat elevated level for a period of time, but that provision for doubtful accounts really is a monthly item. We'll see how that evolves as the overall recovery takes place. I think the duration of that will certainly influence the ability of people to continue to pay or not.
Okay. Thank you.
The next question comes from Yigal Arounian of Wedbush. Please go ahead.
Hey, guys. This is Rod on the line for Yigal. Thanks for taking the question. I wanted to ask on self-serve. You talked about it a little bit already; you called out in the letter that it was seeing good strength in February, obviously it's a channel that can re-accelerate quickly. By the same token, I imagine it's also maybe a channel where the pullback is a bit faster. What's been the impact on the environment on self-serve specifically? If you get some color there, is it at a level that gives you confidence, maybe depressed, at a level that you think you can re-accelerate it quickly? How do you balance that with the changing dynamics of the sales force?
Even though you were talking about this a little bit ago in terms of the go -forward and kind of the strategies for coming out on the other side, but just a bit more color on that would be helpful. Thanks.
Sure. I can start off, and if David wants to jump in after, feel free. In terms of self-serve versus our rep sales channel, we've actually seen them in line in terms of, obviously, there's a mixed shift as a result of COVID. We're really encouraged with the progress we've made on the self-serve channel. I think a proxy for that right now, first of all, if you look at claimed businesses, they're up. We've had significant progress year-over-year on claimed businesses, which shows that businesses are interacting with what is the self-serve platform. You look at all of those features that have been adopted as part of the COVID effort, and whether that's business highlights or the special COVID banners or the Connect product that we're seeing upwards of 10,000 folks who have chosen to use that as well.
It really bodes well for self-serve over the long term. What you really want in these periods of times is engagement. There might be a subset of businesses that today, in April, May, cannot afford to go advertise. They're worried about survival and their employees and kind of coming out of this thing and navigating through their various circumstances. They're still engaging and understand that Yelp is an important platform and an important communication platform for them. We've been making improvements both in our platform as well, with a new business owner site that is a lot more rich in terms of the features and functionality, and we're really pleased with the engagement that we're seeing thus far. I think it bodes well for coming out of this as a continued shift towards self-serve.
We're always going to have a local sales force, and we'll be really mindful of how we grow that coming out of this and make sure that, A, we have enough coverage, but also that we continue down the path of trying to get more efficient with the channels that we do have.
Rod, this is David. We didn't quite catch the second part of your question there.
Yeah, no, I was just kind of asking how, in terms of the go -forward and coming out on the other side of this, how do you maybe strike a balance in terms of leaning into self-serve and kind of the more rapid response versus the changing dynamics of the sales force, especially given the increased relevance of the sales force, given the current environment, maybe leaning into it a bit more heavily. Just kind of going forward, how do you balance between different channels and try to prioritize on the fly what's the best combination for when you're emerging out of this the strongest?
I can take a crack at that one, too. It's really looking at making sure that we're serving the customer in whichever way they want to get served. We can see that some folks are always going to want to have a self-provisioning interface and not want to talk to a salesperson. There are folks that, no matter what you do, want to get somebody on the phone and actually have them walk them through an advertising program. I guess going back to my last answer, we're going to be able to see that in real time, although I do believe that self-serve is very well positioned coming out of this. In terms of the multi-location, we believe we're still very early in this opportunity for Yelp.
Certainly this time notwithstanding, when we come out on the other end, it's going to be a really important segment for us.
Great. Thanks very much
This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.