Yelp Inc. (NYSE:YELP) has established itself as a trusted local resource for consumers and a valuable partner for businesses of all sizes. As one of the best known Internet brands in the United States, Yelp connects people with great local businesses through its extensive ratings, reviews, and business information across a broad range of categories.

Financials

In the fiscal year 2023, Yelp delivered impressive financial results, reporting annual net income of $99.2 million, annual revenue of $1.34 billion, annual operating cash flow of $306.3 million, and annual free cash flow of $279.4 million. These strong financials underscore the company's ability to execute on its strategic initiatives and drive profitable growth.

During the first quarter of 2024, Yelp continued to build on its momentum, reporting a 7% year-over-year increase in net revenue to $332.8 million. Net income for the quarter was $14.2 million, reflecting a 4% margin, and adjusted EBITDA increased by 19% year-over-year to $64.5 million, representing a 19% margin. These results demonstrate Yelp's focus on improving profitability while investing in strategic growth initiatives.

Key Performance Drivers

A key driver of Yelp's performance in the first quarter was the strength in its Services categories, particularly Home Services. Advertising revenue from Services businesses increased by 11% year-over-year, led by approximately 15% year-over-year revenue growth in the Home Services subcategories. This growth was fueled by Yelp's investments in acquiring Services projects through paid search engine marketing, which drove an approximately 20% year-over-year increase in Request-a-Quote projects. Additionally, the company's introduction of Yelp Assistant, a conversational AI feature powered by large language model technology, has helped improve the consumer experience and drive more relevant leads to service professionals.

In contrast, Yelp's Restaurants, Retail & Other (RR&O) categories continued to face a challenging operating environment, with advertising revenue from these categories growing a modest 1% year-over-year. This reflects the impact of macroeconomic factors, including elevated input costs, inflationary pressures, and businesses' inability to pass along higher costs to consumers. Additionally, Yelp may be seeing the effects of trends associated with off-premise dining and delivery.

Yelp's multi-location revenue increased by approximately 5% year-over-year in the first quarter, also attributable to the softness in the RR&O categories. To address this, the company is actively working on enhancing the Request-a-Quote experience to enable more multi-location services businesses to benefit from this valuable feature, including the launch of an API that aims to streamline the tracking of leads and enhance conversion rates for enterprise customers.

Despite the challenges in the RR&O categories, Yelp's ad system continued to deliver valuable clicks to advertisers in the first quarter. The company saw an 8% year-over-year increase in ad clicks across all categories, while average cost-per-click declined by 1%, with more substantial decreases in the Services categories. These improvements in ad performance contributed to year-over-year increases in Yelp's retention rate for non-term advertisers' budgets.

Efficiency Initiatives

Yelp's focus on driving efficiency has also paid off, with the company reducing stock-based compensation expense to 13% of revenue in the first quarter, a 2 percentage point decrease from the prior-year period. The company expects to further reduce stock-based compensation expense to below 8% by the end of 2025, while also reducing the number of shares subject to employee equity awards granted in 2024 by approximately 65% compared to 2023.

Capital Allocation

Returning capital to shareholders through share repurchases continues to be a key element of Yelp's capital allocation strategy. In the first quarter, the company repurchased $62.5 million worth of shares at an average purchase price of $40.95 per share. As of March 31, 2024, Yelp had $519 million remaining under its existing repurchase authorization and plans to continue repurchasing shares in 2024, subject to market and economic conditions.

Outlook

Looking ahead, Yelp expects net revenue to be in the range of $350 million to $355 million for the second quarter of 2024. For the full year, the company is reaffirming its guidance and expects net revenue to be in the range of $1.42 billion to $1.44 billion as its Services initiatives continue to gain traction. However, the company anticipates that second quarter adjusted EBITDA will be in the range of $70 million to $75 million, as it plans to increase its investments in Services project acquisition through paid search, which it expects to spend $40 million or more on in 2024. As a result, Yelp has narrowed its 2024 adjusted EBITDA guidance to $315 million to $325 million to reflect this increased investment.

Geographic Footprint

Yelp's geographic footprint is primarily focused on the United States, which accounted for $330.1 million, or 99.2%, of its net revenue in the first quarter of 2024. The company's international operations, which include the United Kingdom, Canada, Ireland, and Germany, contributed the remaining $2.6 million, or 0.8%, of net revenue during the same period.

Revenue Breakdown

In terms of revenue breakdown, Yelp's advertising revenue is the primary driver, comprising $317.6 million, or 95.4%, of total net revenue in the first quarter of 2024. This advertising revenue is further disaggregated into two high-level category groupings: Services and Restaurants, Retail & Other (RR&O). Advertising revenue from the Services categories grew 11% year-over-year to $203.3 million, while advertising revenue from the RR&O categories increased by a more modest 1% to $114.4 million.

The company's other revenue, which includes revenue from non-advertising contracts such as subscription services and data licensing programs, contributed the remaining $15.1 million, or 4.6%, of total net revenue in the first quarter of 2024. This represents a slight decrease of 1% compared to the prior-year period, primarily due to a lower volume of food takeout and delivery orders, partially offset by higher revenue from the continued growth of Yelp's Fusion and Knowledge programs.

Conclusion

Yelp's strong financial performance and strategic initiatives position the company well for continued growth and value creation. The company's focus on driving innovation, particularly in its Services categories, and its disciplined approach to capital allocation and expense management have enabled it to navigate the challenging macroeconomic environment and deliver solid results. As Yelp continues to execute on its robust product roadmap and expand its reach through partnerships and new offerings, the company remains well-positioned to capitalize on the large and growing local discovery and advertising market.