Thank you. We'll get started. We have David CFO of Yelp. Thanks for joining us today. He's gonna start off with a safe harbor.
Thanks, Corey, for having us at the conference. We'll be making some forward-looking statements during the conversation today that are subject to risks and uncertainties. Please refer to our SEC filings for more information on the risk factors that may affect our results.
That was short. Before we dive into the business, David, just wanted to give you a chance to address the activist letter you received this morning and any thoughts you can share.
It's obviously fresh news. We first learned about it through The Wall Street Journal yesterday evening. I do just wanna underscore that we welcome constructive investor input. It's one of the reasons that we're at the conference today. We're very committed to creating shareholder value, and I'm looking forward to talking about our strong Q1 results.
Awesome. Okay. leave it at that. kind of we'll get to Q1, maybe for those newer to the story, just Yelp has evolved a lot over the years. could you just kick things off and talk about the state of the business today and some of the biggest changes you've made?
We have gone through a strategic transformation over the past several years. We did set for ourselves a clear strategy, which was first to really improve the efficiency of our sales process by adding self-service and also serving multi-location businesses. We think of those as both mid-market businesses as well as large enterprise businesses. That was the first. The second was really ensure that we're delivering value to advertisers. The third, we had a tremendous amount of services traffic, and we were looking to increase the monetization. Those were the three strategic pillars that we set for ourselves a number of years ago. At the beginning of last year, we really wanted to also focus on the consumer and drive engagement. We've been executing on those over the past several years. In fact, in 2020, we accelerated the transformation.
We cut our local sales headcount about in half, and we really focused on this product-led strategy that we've put in place, and we think that we have been executing well against.
You've grown through the recent ad downturn largely unaffected. I think it surprised a lot of investors and analysts given just the more performance challenge of your peers. Why has Yelp been so resilient, and what are you doing that's resonating with investors?
Coming out of those strategic priorities, in particular, I just focus on value. I think it's clear, obviously, for consumer internet companies, with an ad-driven revenue model that you have to deliver return to investors. We've really focused on the ad tech stack and matching consumers with those advertisers to deliver value to both of them. The consumer wants to find the right business quickly, and the business wants a lead that's well qualified. From the advertiser's perspective, why would they wanna reach folks who are visiting Yelp? Well, a couple of aspects. First of all, visitors to Yelp, more than 50% come from households with income over $100,000. When they come to Yelp, it's very high intent, and it's query-based. They're just telling us exactly what they're looking for.
That really enhances our ability to not just match them, to match a quality lead with that advertiser. Because it's cost per click, they can measure that performance. It's ROI-driven. You have clear performance, down funnel with great high-quality leads. We think that's why advertisers have been choosing to advertise on Yelp. On the services side, in particular, what we've seen over the past several years is that they are increasing revenue per paying advertising location, so you could think of that as same-store sales for us. We think that reflects the increased value that we've been delivering to them.
Let's go through your three go-to-market channels, locals, self-service, multi-location. Maybe starting with self-service. You saw a record customer acquisition last quarter, re-accelerated growth to 25% year-over-year. What's driving this, and how do you think about sustainability?
Yeah, there's a couple parts to that. One, I think might be somewhat surprising to folks. There was a significant amount of new business creation in 2022, and we do write occasionally about things like that. What we saw was strength in claims in 2022, and as a result, we also saw real strength in acquisition. When you start a new business, Yelp is certainly one of the first places that you go to tell the world about the business that you've started. We were very successful in reaching those folks. This product investment has been very important because if it's self-serve, it has to be easy to do. It has to be easy to sign up.
Equally important, it has to be easy to manage your spend after you sign up. We've really focused on those as well as communicating to those small business owners the value that they're receiving. That has been an essential part of our ability to drive performance in the self-serve channel. The last thing is, if you come to the site, you find the site, you sign up, you manage your ad spend, you're more committed. We do see better retention by small businesses that come in through that self-serve channel. Over time, the mix increases.
Multi-location growth slowed a bit to 15% last quarter. You called out macro headwinds in the RR& O restaurant channel. Could you expand on what you're seeing in this channel and the macro impact you're seeing?
Yeah. One thing that does seem to be the case for large enterprises is that they are anticipating the recession, and they're taking steps and actions around profitability ahead of that recession. Obviously we still saw growth in the first quarter, although inflation still eclipsed that. Probably purchasing power declined a little bit, and I'll come back to the consumer side of it. They have been a little bit more cautious on the spend. Now, that being said, our multi-location business did grow about 15% in the first quarter, which we think still is ahead of peers. We feel like we're doing very well with them. Equally important, over the past several years, we've really built out our enterprise sales team. We think they've matured, we've built relationships, and we've built out products. Again, on this product-led strategy theme.
We've built out products that enable them, enterprise customers, to spend with us up and down the funnel, on and off Yelp, and so they have a reason to advertise with us. It's also ROI driven. Obviously, they care a lot about attribution, and so we believe that we are very well positioned to continue to bring them new products, and we're well positioned, obviously, to capture ad budget as it grows.
Local sales channel, you had a bit of a, I call it a unique problem, where retention was better than you had expected earlier in the year. Where are you on managing sales force headcount, and how would you characterize, like, the productivity and the tenure of your sales force today?
Yeah. This was actually true for the entire company, and this includes product and engineering, where we have seen very strong retention of employees. Obviously we like that. This is a positive. It's a positive for a couple obvious reasons. One, persons ramped, they're contributing, they're delivering value to the company, we're happy to see that. Now, it does mean that expense was a bit higher than we anticipated, at the beginning of the year, we said that we would hold headcount to about flat in 2023. We find that we are aiming to have headcount about flat by the time that we end the year. In terms of productivity, both on the product and engineering side as well as on the sales side, we've been very pleased.
We're committed to remote, and I think it was probably a surprise to many, but we've seen that productivity of our local sales team has been as good as when they were in the office. Now, it took us some time to get there, and we've got a lot of learnings around how to do that, but we've been very pleased. Then on the product and engineering side, we've also seen strong productivity working remotely. People seem to be happier because they can really choose where to live, and it lets them balance some of the things that are going on in their lives with work. Overall, it really has fitted our culture, and we're very pleased with the outcome.
I can relate to that. One of the big focus areas has been increasing product velocity. You've launched more than a dozen new product features so far this year. Could you talk about, you know, maybe at first, just the shift that the cultural shift it took to become a product-led company, and then of the products you've announced, what are, you know, one, two or three that you think could have the biggest impact?
Yeah. This transition from having a sales headcount driven growth model to product-led model, it does take time. It takes time in the sense of course, just capital allocation. You're spending a lot on sales, and then you need to free up some capacity and start to be able to spend on the product and engineering side. That isn't instantaneous overnight. Second, it is really important to ensure if you're gonna grow any team, but particularly in product and engineering, that you have a roadmap that is gonna yield and that you can get the organization lined up because there's a lot of specialties. We talk about product and engineering as monolithic, but actually there's a lot of domains and there's a lot of expertise that has to be lined up to deliver on that roadmap over time. We've been executing against that.
Part of our strategy has also been to hire outside of the Bay Area and also outside the United States. We've hired up in the U.K. and Canada. We do have a small team in Germany, and what we found is that those folks are super talented, they stay longer, and they actually have somewhat of a preference for cash over equity from a mix perspective. From a stock-based compensation perspective, that is also important to us.
We'll come back to the stock-based comp at the end. Yelp Audiences is still a newish product that allows ad campaigns to extend beyond the Yelp platform. How is this product resonating with advertisers? You know, how big of a contributor could this be to revenue?
Yeah. Yelp Audiences is an off-platform product. The way it works is visitor comes to Yelp, they share something with us. It could be they were looking for that locksmith. They could be looking for an Italian restaurant but we've learned something about them. When they are browsing the web, we have created an audience out of those visitors as a group, and we make that audience available to other advertisers, and we monetize that. We charge on a CPM basis for that product, and we pay on a CPM basis to display that product across the web. It's been very successful. The last number we shared was on our Q2 call last August. We had a run rate of about $30 million for that product.
That gives you a sense. At least it had only been around a couple of years, in the tens of millions to begin with. Obviously there's tremendous amount of spend off of Yelp, so this is an opportunity for us to tap into it. More broadly, we think that there's a myriad of opportunities for us to tap into traffic away from Yelp and to generate revenue.
I think it's safe to say Home Services has been your best performing category of late. Revenue grew 25% in 1Q. Can you talk about how you've been able to take share in the category, you know, a lot of others are not growing at that rate, and some of the initiatives that you're working on?
In Home Services, it's obviously going back to a theme, important to deliver value to a service pro, communicate that value to the service pro. There may not be as using as much analysis in determining whether to spend. It really has to be clear to them that they should spend, that they're getting result from it. What matters to them, it's a lead, but they're paying us on a click basis. One of the things that we really attend to is what we call click-through rate, which is, "Hey, I'm paying for that click, but did I get a lead? Did I get a quality lead out of that?" We think that we've been able to drive that.
As I mentioned earlier, a reflection of that is that revenue per paying advertising location has increased quite consistently over the past several years and remained quite strong in the first quarter. It's that matching the consumer who's high intent and of value to that advertiser, to that service pro, with the right service pro. In that sense, you are delivering value to both of them. It's all of that ad tech stack. Also, we use Request a Quote, where we are soliciting from that consumer, what is the exact project that you're engaged in to really refine the matching for that. Request a Quote has continued to improve. We had a big upgrade in our Message Center late last year. Message Center is where that consumer has the opportunity to interact with the service pro.
We wanted to really modernize that, use a flow that's much more familiar to people from other platforms. Equally important is really enabling ease of communication, so making that multi-channel, whether it's by email or by text message, or it could be that you wanna do Request a Call instead of communicating through the Message Center. We just think there's a lot of opportunity to continue to improve that experience and in a way, help to intermediate to deliver value for both parties when they're interacting.
Yelp Guaranteed is one of the product launches that touches on Home Services. Could you just expand a bit on how this product works? I guess it's kind of self-explanatory.
Yeah.
On the consumer and service pro side, and how you plan to roll it out more broadly.
Yeah. We've done a lot of work around Yelp Guaranteed. It starts with badging a pro, so you do need to go through Request a Quote. The pro has to be signed up for Request a Quote, but you have to go through the Request a Quote flow. That pro is badged, and it's up to $2,500 lifetime for a consumer if they have a problem. There's a process to submit a claim, of course. We've done a lot of work to understand which pros should we badge, can we badge. Of course, a lot to understand, how do we make sure it's a good consumer experience when someone submits a claim, while also understanding that we have to manage the overall cost of this program.
What's clear is that this is of value to consumers because as Yelp, we are a trusted brand. We enjoy very high consumer trust. Our standing behind the service pro, we think from the experimentation that we've done, does carry over to that business, and it makes a consumer more comfortable to sign up with a pro. That's probably more true for a non-rated pro as opposed to a rated pro. We're looking at ways to ensure that we're managing the risk. At the moment, we don't see this as being a huge expense line for us, but a very high value to pros and consumers alike.
AI, a topic that I think we're having with every company. Let's, you know, I wanna take it on the positive side, then perhaps the risk side. Starting on the positive side, you know, how are you using AI today? What are some of the ways you think Yelp can benefit given, you know, the review first party data that you have?
Yeah. There's obviously been a tremendous amount of conversation about large language models over the past three months. In fact, maybe it's the only conversation around AI that we've been having recently. It's certainly not the only way that people are applying AI, and we've been using AI for some time in the form of machine learning, whether that's for search or for these matching algorithms between consumers and advertisers. We're very experienced using these types of methods. Specifically to large language models, we did start using them last year, so it's not new to us, and we've applied them in a couple of ways that are already delivering value.
One of them is we announced as part of this batch of products, more than a dozen that we announced a couple weeks ago, which is people just wanna see quick snippets of reviews to really understand what people are saying about that particular business. Large language models are excellent at really summarizing and extracting sentiment and information from large data sets, obviously. This has been a high value add for our visitors. Another less obvious one is in search, it turns out, I didn't quite realize this myself until recently, that synonyms really matter because people search for things in queries in different ways for the same thing. Large language models are very, very helpful in identifying and prioritizing which synonyms to use for search.
Those are a couple of things that we've talked about that are important. I think more broadly, the opportunity is really to make something like Request a Quote more conversational. Today, it's a tree that you answer, and as you give an answer, it may take you down a certain path in order to gather that information. I think there's a lot of potential to make that whole interaction more conversational. On the service pro side, a lot of times the service pro might just reply, "Call me." They could be a little more expansive in what they're sharing with the consumer. There's an opportunity we think to perhaps harness large language models. Broadly, we see this as an opportunity, especially since we have very reliable information for consumers between the ratings, but more importantly through the reviews.
We think that that is a real asset for us. We've heard a lot about the way that these large language models hallucinate. It does seem that it's inherent to this particular way of constructing a sentence or a paragraph. The ability to train a large language model on trusted content, we believe is a very powerful way to enhance the reliability and trustworthiness of what that large language model is yielding. Overall, we think between our content, the infrastructure we've built, our ability to deliver that to consumers, we overall see this as a real opportunity for us.
On the risk side, I mean, how do you protect those reviews? Certainly a lot of concern around online publishers around just the data being scrapped and then instead of, you know, going to the website and getting ads, you're seeing a summary in Bard or in ChatGPT. I just wanna hear about how you plan on or how you can protect your review data.
Yeah.
You know, how big of a risk you think this is to Yelp and how you can address it.
Yeah. And just to point out the obvious, Google already does a lot at the top of the page and on the second page and on the third page, in some instances, the fourth page. Organic results are already pushed very far down. This isn't new, and we've been competing with Google for more than a decade quite successfully. In terms of summarizing reviews, there's also a lot of summary already occurring on Google, whether it's the Answer Box that they use or even in how the search algorithm has prompted publishers to increase the amount of information that's showing up in the organic result itself. People are still clicking through. Why do they still click through?
Because they want to go to the place that is the origin, because that is where you have more information, where you get more of the insights into that decision-making. I would just say we don't see large language models in and of themselves as transforming that dynamic with Google itself or summarizing our results for consumers and obviating their need to come and visit us. I would just say that's the, that's the first part of the answer. The second part of the answer is, okay, well, that's all well and fine, but what about fake reviews? How much of a threat that could that be? Now, Yelp is gonna have its 20th anniversary next year, and we spent 19 years figuring out how to discern fake reviews from authentic reviews, and it's not easy.
We believe we have a lot of techniques in place that enable us to attack problems like this. Of course, we have to figure out exactly how it's gonna work with these large language models. I think the large players have committed to watermarking or otherwise creating ways to discern when a response is generated in a large language model. That certainly will be helpful. They're, I think, gonna play their part, but also there are techniques that can be applied, ironically, using AI, to discern when a response has been generated by a large language model. We think that the ability to moderate content is actually a real asset at Yelp. In fact, we don't even display approximately 25% of the reviews we receive to ensure the reliability of those reviews in the first place.
We're very, very committed to ensuring that reliability. What does that translate into? We believe it really translates into consumer trust, which I've talked about as being so important overall to the experience on Yelp.
Following up, you mentioned, you know, traffic in Google. I think it's always been a topic for Yelp over the years. Also think you've significantly reduced your reliance on Google traffic over time. Any update on, you know, how much of your traffic today is direct to the Yelp website through the app, through Google or other means? What, you know, what are you willing to share there?
What we've shared is that the majority of clicks on Yelp do come through the app. We obviously attend to it, and it's been more than a decade that we've really focused on the strategy of enticing, encouraging people to use the app as opposed to using the website. We think we've been successful with that. The beauty of the app, of course, is that it provides a very rich experience. I think like others, we really do want to encourage folks to use the app in order to ensure that they're getting the best possible experience, and it also limits our exposure to Google. That being said, of course, Google generates traffic for us, and so what we wanna do, of course, is optimize the way that we present that information to Google.
Probably even more importantly, what we wanna make sure is that when we do get that click-through, that we're really capturing the opportunity. I mentioned that we're investing heavily in the consumer experience. Part of that is to modernize it, part of it is to make it more visual, but part of it is to really ensure that that landing page experience or when you deep link into the app, that there's continuity in the experience, that what you see is relevant to you, and then you choose to continue to use the app. That engagement is very important to us. It's also very important because we want people to write reviews. We want them, when they come to write that review, obviously, that more engaged user comes back more frequently. They might try services if they've only tried restaurants.
They might try restaurants if they've only tried services. It's really a whole effort, a broad effort in order to ensure that engagement and to maximize the value of the traffic that we do receive from Google.
You've mentioned a few times now you've been working on improving the consumer experience for the past year or so. I know you don't disclose traffic metrics quarterly anymore, but could you broadly talk about consumer engagement trends that you're seeing, and, you know, are the initiatives that you're working on working to get traffic back to where it was pre-COVID?
Yeah. Maybe just as a way to make it tangible, in our Request a Quote flow, actually, the number of requests declined in the first quarter by 5% from the first quarter of 2022. Yet clicks were up, services had record revenue. How can those two things be true? The way that they're true is that we are able to drive that engagement with the consumer, understand their intent better, and better match them to the business. We feel like we've made good progress around engagement. First quarter, we did see good progress in encouraging people to write reviews, that matters again, both because it's the purpose of Yelp, it's our content that we're monetizing, but it also deepens the relationship with that consumer.
I think that's a good example of how clicks can differ, for instance, from MUVs or Request a Quote requests and still enable us to be successful in an environment where with inflation, consumers are doing less things less frequently. They're spending about the same, but they're doing less frequently. We have to be able to manage that. All of that, again, is a result of the product-led strategy that we've set for ourselves.
Let's stick with CPC and ad clicks. That is something you do provide. Most of the growth has been on the CPC side recently, a lot of that due to funky comps. Ad clicks did turn positive in 1Q. What should we expect from here? How important is the return to ad click growth?
Just as a reminder, when advertisers advertise on Yelp, they provide us a budget, and we optimize that budget on their behalf. We optimize that budget by running an auction, and we believe that auction finds the market clearing price for that visitor at that time, in that geography, for that category. Obviously, if we're generating robust advertiser demand and visitors are about the same, there's a market clearing price that's gonna have to rise. CPCs did go up, which is why this lead-through rate becomes all the more important because if I'm paying more for a click, then I expect more value out of the lead that I receive. We're not choosing or setting the click or the CPC.
What we're doing is we're optimizing the deployment of that budget on behalf of the advertiser, and we really care, because if they don't perceive that they're receiving value, they will churn. We don't want them to churn. We acquired them, we want them to be successful on the site, and we obviously want them to expand their spend. We don't think of it in terms of, hey, do we want clicks to be higher or do we want CPCs to be higher? We think of it as, we're gonna invest to continue to make the matching process better and better, to deploy as efficiently and optimally on behalf of the advertiser to deliver them long-term value.
Shifting to a few questions on financials now. You raised your 2023 revenue outlook after 1Q. Can you walk us through some of the, you know, macro assumptions you're making within the guidance? One question we get a lot is just how much visibility, you know, do you have given the month-to-month nature of your contracts?
I would just say that I think the, you know, the first quarter was the 13th quarter in a row that we are ahead of analyst estimates in terms of revenue. I think that suggests that we have some experience and visibility and understanding of the dynamics on Yelp. That's been something that we've built over time. What I would remind folks about is that Yelp is a diversified set of categories. I think that diversification at scale is really important to being able to forecast, because what we saw during the course of COVID was that Restaurant, Retail and Other revenue did decline, but services expanded. We see that even within each of those broad category sets, that there are dynamics and shifts in the way that people are spending.
The first thing I would just say is diversified set of categories is very important for being able to forecast. The second is we do use a lot of scenario planning in order to play out what different paths could be. We do develop a playbook and think ahead of time about how we might react under different scenarios so that we can be proactive and not reactive. Of course, the guidance we give has to reflect those risks and uncertainties, and I think we'd all agree it's hard to know where the Fed terminal rate is gonna be, and it's very difficult to forecast when, if we're gonna have a recession and what the depth of that recession might be.
I think we're operating right now under conditions that are somewhat heightened in terms of that macro uncertainty, we obviously take all that into account. All that being said, we are very focused on delivering value to advertisers, doing it more efficiently, monetizing the services leads that we have, creating a great consumer experience. We're focused on the things that are in our control. Again, I would just offer 13% growth in the first quarter, I think stands out among ad peers. I think it's a reflection of the performance that we've been able to deliver. As we go through the year, there's always some seasonality historically that we've seen where revenue does increase as we move quarter- by- quarter through the year.
On the expense side, you guided margins to pretty meaningfully increase in the second half of the year as well. What's driving this inflection, and could you just help bridge where you expect the OpEx decreases to come from as we work through the year?
Yeah. There's a few dynamics at play in the first quarter. One most certainly is payroll tax. That doesn't recur. Another is seasonally ad spend declines in the fourth quarter. It increases in the first quarter, and then it will decline again, we'd expect in the fourth quarter. That's part of the expense profile. Obviously, I mentioned that we had higher headcount than anticipated in the first quarter because of retaining employees, again, overall positive. We do plan to manage to headcount being about flat by the end of the year, that's also a important element.
Just in terms of margin with the expectation, obviously our Q2 guide at $320-$330 is up from the $312 that we delivered in the first quarter, and then the overall guide for the year being up from where we initially guided. We expect that revenue to increase as you move quarter- by- quarter. On the expense side, we think we can manage that so that you basically get that expansion in margin as you go through the year.
How do you think longer term just about the right level of growth, the sustainable or healthy level of growth for Yelp? Has your view changed at all given your performance over the last year or so?
We're very, very disciplined from an ROI perspective. We really think and put a lot of effort into determining, hey, is that next sales headcount going to yield? Will that next dollar spent on marketing yield? Will the next engineer yield? First and foremost, we're always looking at investing dollars efficiently to drive performance. We are committed to delivering profitable growth over long term. We think that there's a balance between those two that enables you to sustainably and consistently deliver performance over the long term. We think that this product-led strategy gives us an opportunity to drive real margin leverage. I just remind folks, we made the transition on the sales headcount. We said in 2021 and 2022 that those were gonna be investment years for product and engineering.
This year we committed, refined to have flat headcount this year, and yet revenue is growing from the $1,194 that we did in 2022 to about $1.3 billion this year with that anticipated flat headcount. We think that we're on that point where we can deliver the margin, but we do think in terms of trade-offs between margin and growth.
Capital allocation, you've bought back a ton of shares.
Yeah.
Over the years. You've been recently buying about $50 million a quarter. Why is this the right buyback level, and what would have to change for your priorities to shift on the capital allocation front to, say, M&A, a dividend or something different?
Just to remind folks on the capital allocation front, we are committed to returning capital in excess of a target balance to shareholders. The way that we arrive at that target balance is there's an operating amount of cash that we wanna have. There's a buffer to that. We do hold cash on the balance sheet for tuck-in acquisitions, and then beyond that, we wanna return it. When we think about returning capital and the level that we purchase at, we do use a pricing grid, as you would expect, to have a specific level of purchases. As you'll note, we have been able to reduce share count over time, and we've returned approximately $1.2 billion in capital to investors. What would cause us to shift? Just say we're very disciplined on the M&A side.
We're unwilling to overpay for assets. From a tuck-in acquisition perspective, the things that we would be interested in doing is continuing to enhance the ad tech stack that we've built. For the consumer, perhaps enabling them with more tools as we add things like including videos in their reviews. Perhaps there's something that we could do around that. For service pros, we wanna make life easier for them. Maybe there are things that we can enhance for that experience. Those would be examples of the kinds of things that we would use to deploy capital that differently than just the share repurchases that we've been doing.
We'll end on the exciting topic of stock-based comp. You've laid out a plan to get stock-based comp down from 13% today to less than 8% by the end of 2025. You know, help us with how you get there, you know, a question we get a lot too is how much of this is gonna be offset by higher wages?
The way we think about it is both revenue and expense, and we have given ourselves the target of getting stock-based comp as a percentage of revenue to 8% by the end of 2025. Obviously, we are very focused on continuing to drive growth. In terms of expense, we are going through a process to look at how we can shift cost from equity to cash and the way that we compensate people and continue to motivate them. Obviously, notwithstanding the current environment, it's gonna continue to be very competitive for product and engineering talent and good people. We recognize that. That is complicated, and we're right now in the middle of thinking through all of that for 2024 and for 2025.
We do see a path, obviously, to being able to deliver that by the end of 2025.
Awesome. Well, thank you very much.
Thanks so much.