Yelp Inc – October 27, 2022

For almost two decades, Yelp has been connecting people with local businesses. Over that time, it has become one of the best-known internet brands in the U.S., as consumers have access to more than 220 million ratings across a broad range of business categories. With local information, photos, and review content, Yelp provides a one-stop local platform for consumers to discover, connect, and transact with businesses of all sizes.

By making it easy to request a quote, join a waitlist, make a reservation, appointment, or even a purchase, the company’s products help businesses reach a large audience, advertise their products, and drive conversion of their services.

Yelp has built a broad-based local advertising platform with sophisticated technology, offering a range of free and paid advertising products including cost-per-click and multi-location ads, along with several business page products that allow customers to build a complete online profile that highlights their business and showcases their specialties. In addition to its advertising products, it also offers features and interactive tools to facilitate transactions between consumers and the local businesses they find on the platform.

Thanks to an ambitious, multi-year business transformation plan initiated in 2019 which was designed to drive and sustain long-term growth through product innovation, Yelp has successfully transformed into a stronger and more efficient business. Despite the company’s consistent, long-term growth being interrupted by the covid pandemic, Yelp’s performance in 2021 saw it emerge to deliver record revenue and profitable growth despite a difficult operating environment.

Looking ahead, the company plans to continue enhancing the Yelp experience for consumers, business owners, and advertisers with a comprehensive strategy that focuses on product investments and driving sales in its most efficient channels, which continue to trend towards highly scalable self-serving and multi-location offerings.

In 2004, two former PayPal employees, Jeremy Stoppelman and Russel Simmons founded Yelp at a business incubator. The pair conceived the initial idea for the business as an email-based referral network, after Stoppelman caught the flu and had a difficult time finding an online recommendation for a local doctor. With support from a former colleague and founding chief technology officer of PayPal, Max Levchin, the platform evolved from an email-based system to user reviews, which saw the site’s popularity soar after it was re-designed in late 2005.

By the summer of 2006, the site had one million monthly visitors, which grew to over 16 million in 2008, as it reached over 24 cities across the country. Expansion continued internationally as the site was introduced to countries across Europe and Asia in the years following.

Yelp went public in 2012, listing on the NYSE, after which several acquisitions followed, including its largest European rival, Qype, for $50 million. Within two years the company was profitable for the first time as ad spending by business owners increased and changes in Google’s local search algorithm helped authoritative local directory sites like Yelp in getting more visibility.

Additional sites were launched across numerous countries along with several more acquisitions expanding the company’s footprint, however, operations were drastically scaled back when business closures and stay-at-home orders during the covid pandemic caused a massive decline in searches. Yet with many people resuming their pre-pandemic habits, Yelp revenues have returned to their 2019 highs, which now exceed $1 billion per year.

Co-founder Jeremy Stoppelman continues to drive the vision and product experience for Yelp as the company’s chief executive officer. With a hands-on management style that sees him sit at a desk among his employees, Stoppelman also oversees product development among other aspects of the business. Prior to Yelp, he was the V.P. of engineering at PayPal, and one of the group’s highly successful early employees referred to as the PayPal Mafia.

Joining Stoppleman as Yelp’s chief operating officer is Jed Nachman, who after previous roles as chief revenue officer and senior VP of revenue, now oversees the company’s business operations including sales, marketing, and administration. Prior to Yelp, Nachman spent several years in senior sales roles for Yahoo! HotJobs, after beginning his career at the investment bank, Robertson Stephens.

Yelp’s range of advertising products provide the ability to deliver targeted search advertising to large local audiences. The vast majority of the company’s revenue comes from its cost-per-click (CPC) search advertising, which allows businesses to promote themselves as a sponsored search result on the platform, including on the Yelp pages of businesses in similar categories. Customers can also provide competing quotes for consumers using a Request-A-Quote feature. Revenue is generated primarily via performance-based ads, which the platform matches to individual consumers through auctions priced on a CPC basis.

Multi-location ad products also make it possible to display Showcase Ads that show special offerings with limited-time localized promotions in relevant search results. While Spotlight Ads highlight special offers and promotions related to holidays or other special events in a carousel directly on the Yelp app home screen. Furthermore, with the Yelp Audience Network, ads can be displayed on a large collection of third-party sites such as Business Insider, The Washington Post, Daily Mail, New York Post, and others.

In 2020, Yelp released a new Store Visits product that utilizes a variety of signals to measure user engagement with business pages and opt-in location data provided by customers. Leveraging these data points, Yelp can generate a cost-per-visit metric for businesses, so they can get a better sense of return on ad spend.

The company’s suite of Business Page products begin with a basic free online account where businesses can claim the Yelp page for each of their locations. Once a business has claimed its listing page, it can update its information and has the option to purchase a range of premium page features. These features include enhanced and branded profiles, business highlights, and showcase specialties, while Yelp Verified License badge upgrades allow businesses to distinguish themselves as licensed, to help consumers make confident decisions.

Finally, Yelp’s tools to facilitate transactions between consumers and local businesses are primarily available through partner integrations such as Grubhub, which makes it possible for consumers to place food orders for pickup and delivery through the platform.

Yelp has established itself with a proven engine to generate and recommend trusted content. The platform provides the type of reliable and useful reviews that consumers value, creating a virtuous cycle in which more content attracts more users, content, and advertisers in turn. The breadth and depth of its high-quality content are the result of significant investments over the past 18 years in developing communities of contributors, as well as providing a robust consumer interface that enables and encourages consumers to share their everyday business experiences. Yelp’s availability across a wide range of platforms and devices also provides a compelling value proposition to advertisers.

The company has also developed industry-leading moderation practices to maintain the quality and integrity of content, as recommendation software and other machine learning algorithms are designed to surface the most useful and trustworthy information for consumers. This technology, together with other consumer protection efforts, helps Yelp detect and mitigate attempts to manipulate ratings and reviews.

Strategic initiatives that have helped transform Yelp’s business continue to provide significant opportunities for growth. Looking ahead the company plans to build increasingly differentiated product experiences for both consumers and businesses in Services categories, such as home, local, auto, professional, pets, events, real estate, and financial services, whilst also increasing monetization in these areas. In 2021, the percentage of monetized leads in the Services categories increased to 25% from less than 10% in 2018, the year before Yelp adopted the initiative. As a result, the company achieved a record average revenue per paying advertising location in the Services categories in 2021.

Through investments in the Multi-location business, Yelp has also significantly shifted its go-to-market mix in recent years toward its most efficient channels, allowing the company to surpass 2019 revenue in 2021 with a significantly smaller local sales force. In 2021, the Self-serve channel, together with a more-tenured local sales force, acquired small and medium-sized businesses more efficiently and exhibited a higher retention rate than with its pre-pandemic local sales force. Thanks to these improvements, as well as marketing investments, revenue from the Self-serve channel also reached a new record in 2021 and increased as a percentage of advertising revenue to 17%, up from 10% in 2019.

In addition, developing customer relationships and introducing new Multi-location products resulted in record revenue in 2021 from this channel as well. Newly introduced products such as Seasonal Spotlight Ads and Sponsored Collections, expanded the company’s first-party attribution solution, Yelp Store Visits. While the fully launched off-platform solution, Yelp Audiences, increased the company’s market opportunity by enabling multi-platform brand awareness campaigns and providing non-location-based advertisers with access to Yelp’s audience.

These strategies led Yelp to return to record highs in revenue as the company delivered a strong performance in the most recent second quarter, driven by surging demand in Self-serve and Multi-location channels, which now comprise 49% of total Ad revenue. Net revenue for the period was $299 million, growing 16% on the prior year, and exceeding the high end of the company’s expected business outlook range. Higher aggregate customer spend and higher average revenue per location also factored strongly in the solid performance.

Total expenses were also higher, coming in at $283 million for the quarter, up 10% on 2021. These were driven by a combination of variable cost of revenue expenses including higher advertising fulfillment costs attributable to the expansion of Yelp Audiences, higher website infrastructure expenses, and higher merchant credit card processing fees associated with the increase in Advertising revenue. Sales and marketing expenses and product development costs also contributed to the increase. Consequently, net income was $8 million for the period compared to $4 million in the second quarter of 2021.

The strong second-quarter results heightened Yelp’s growth expectations for the year despite continued macro uncertainty. The company raised its full-year revenue outlook to a range of $1.18 to $1.20 billion, in line with consensus expectations, and representing year-over-year growth of 16%. Analysts have full-year earnings per share estimates for 2022 forecasted to contract modestly by almost 10% to $2.29 per share, after the 2021 result of $2.53 smashed expectations. However, EPS growth is expected to return to 25%+ year-over-year in 2023 and 2024.

Yelp competes with a wide range of companies that help businesses connect and engage with consumers including online search engines, directories, and providers of online marketing and tools, such as Google, Facebook, and Twitter. As well as various forms of traditional offline advertising, including radio, direct marketing campaigns, yellow pages, and newspapers. It also competes with dedicated providers of consumer ratings, reviews, and referrals, such as TripAdvisor, as well as restaurant reservation, seating, food ordering, and delivery services. However, Yelp’s strength in size, composition, and level of engagement of its consumer audience, along with its ease of use, performance, and reliability of products and services set it above many of these competitors.

Like many other publishers, Yelp also faces ongoing challenges regarding privacy issues, and in particular, crackdowns on sharing and selling user data. Although by relying primarily on its own first-party consumer data, Yelp hopes to address a key problem facing other competitors.

Yelp is well positioned in the large and growing local, digital advertising market. The competitive advantages the company has established over the past two decades, together with a structurally more efficient, product-led business model, have helped re-accelerate a return to growth after the impacts of the covid pandemic.