On Tuesday, Yelp Inc. (YELP, Financial) reported results for the fourth quarter and full year of fiscal 2020.
It was another difficult quarter in what proved to be a challenging year, with revenues down 13% to $233 million. These results reflect the ongoing impact of the pandemic, which has forced many businesses to close or at lead reduce their operating hours. In most cases, advertising budgets were one of the fisrt things to go, which is where Yelp gets its income.
For full-year 2020, revenues declined low-double digits, down 14% to $837 million. Despite a tough 2020, the track record at Yelp is still quite strong; as shown below, the business is nearly 20 times larger today than it was a decade ago.
The pain was widespread, with the majority of Yelp's product categories reporting double-digit declines in revenues in the fourth quarter (granted, those declines were about half as bad as they were in the second quarter).
The one standout was Home & Local Services, where revenues increased mid-single digits in the quarter and for the full year. As I've discussed in the past, this category has become increasingly important to Yelp over the last few years, and now accounts for nearly half of the company's revenues (despite accounting for less than 10% of page views).
Strength in Home & Local reflects a number of developments. First, the business experienced a tailwind in the back half of 2020 as the pandemic endured and Americans were stuck in their homes (which increased the need and desire for repairs, renovations, etc.). As highlighted in the shareholder letter, this led to higher demand for Request-A-Quote by consumers, with requests up 15% year-over-year in the third quarter and up 25% year-over-year in the fourth quarter.
Second, Yelp has done a better job monetizing the leads that it provides to local businesses. In the fourth quarter of 2020, roughly 20% of leads in the Home & Local category were monetized by Yelp, a five point improvement versus the year-ago period.
Finally, the company is investing in additional lead generation offerings like Nearby Jobs, which will further improve their ability to monetize the valuable leads being delivered to service providers. All-in, it was a good year for Home & Local given the circumstances – and I expect continued improvement in this category in the years to come.
In addition to the changes at Home & Local, there were other important developments at Yelp (some which have been masked by the pandemic). For example, the company's go-to-market mix shift – with a focus on self-serve (+25% year-over-year in the fourth quarter) and multi-location customers – continues to bear fruit. The clearest indication of this shift has been the significant and sustained reduction in Yelp's local salesforce: at year-end, the company had roughly 2,000 salespeople on the payroll, down by more than 40% from the year ago period (again, compared to a low double digit decline in revenues).
In addition to the reduction in the local salesforce, the company continues to explore ways to reduce other employee-related costs. For example, as highlighted in the shareholder letter, the company will operate with a "significant majority" of employees working remotely part-time or full-time, which also introduces the option to hire individuals in lower cost markets outside of San Francisco where Yelp doesn't have a physical presence. Both of these changes will enable the company to "significantly reduce" its real estate footprint in the next few years (the company spends about $50 million a year on real estate costs).
Largely because it is critical to achieving management's long-term margin (profit) targets, the shift towards self-serve ads and larger (multi-loc) accounts means Yelp can generate the same dollar of revenues with fewer salespeople. Looking at 2020, we can see that this has continued to play out – and amazingly, even accelerated. In the back half of the year, despite a double digit decline in sales, sales and marketing expense was equal to 45% of revenues, roughly 500 basis points lower than it was two years ago.
The improvement in local sales force productivity was the primary driver of adjusted Ebitda margin expansion in the fourth quarter, which increased 300 basis points to 26%.
Turning to the balance sheet, Yelp ended the year with nearly $600 million in net cash, or roughly $8 cash per share. The company reinitiated its share repurchase program in the fourth quarter, buying a total of $50 million over the past four months (through early February) at an average price of $31 per share.
Conclusion
Looking ahead to 2021, management expects a return to growth, with guidance calling for roughly $1 billion in revenues (up mid-teens). Importantly, they expect continued improvements on the top-line and bottom-line as we look out further: "Focused on achieving mid-teens percentage annual revenue growth and adjusted EBITDA margins exceeding 20% in 2022."
The question for investors is whether Yelp can continue to deliver double digit revenue growth and margin expansion (as a reminder, management has previously guided to 30-35% adjusted Ebitda margins by 2023). For a long time, Mr. Market was clearly skeptical that Yelp would come anywhere close to hitting these targets. But today, at a price of $38 per share, that pessimism has turned to optimism.
By my math, assuming mid-teens revenue growth and more than 1,000 basis points of margin expansion over the next five years, the business can generate roughly $500 million in Ebitda by 2025, which ultimately works its way through to roughly $2.50 per share in earnings. That's a long way of saying that while I still continue to hold a (relatively small) position in Yelp, I liked the stock a lot more at $20 per share than I do today.
Disclosure: Long Yelp
Read more here:
- Under Armour: Are the Clouds Parting?
- Fox: Tougher Comparisons in 2021
- Match Group: A Strong 2020, With More to Come in 2021
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