NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS FOR PRESENTATION
Yelp Inc. was incorporated in Delaware on September 3, 2004. Except where specifically noted or the context otherwise requires, the use of terms such as the "Company" and "Yelp" in these Notes to Condensed Consolidated Financial Statements refers to Yelp Inc. and its subsidiaries.
Yelp is a trusted local resource for consumers and a partner in success for businesses of all sizes. Consumers trust Yelp for its extensive ratings and reviews of businesses across a broad range of categories, while businesses advertise on Yelp to reach its large audience of purchase-oriented and generally affluent consumers. Yelp has operations in the United States, United Kingdom, Canada, Ireland and Germany.
Basis of Presentation
The accompanying interim condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC") regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Annual Report.
The unaudited condensed consolidated balance sheet as of December 31, 2022 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures required by GAAP, including certain notes to the financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normally recurring nature necessary for the fair presentation of the interim periods presented.
Principles of Consolidation
These unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of the Company’s unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. Items that require estimates, judgments or assumptions include, but are not limited to, determining variable consideration and identifying the nature and timing of satisfaction of performance obligations, allowance for doubtful accounts and credit losses, fair value and estimated useful lives of long- and indefinite-lived assets, litigation loss contingencies, liabilities related to incurred but not reported insurance claims, fair value and achievement of targets for performance-based restricted stock units (“PRSUs”) and income taxes. These estimates, judgments and assumptions are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates due to macroeconomic uncertainty and other factors.
Significant Accounting Policies
There have been no material changes to the Company's significant accounting policies from those described in the Annual Report.
2. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash, cash equivalents and restricted cash as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Cash | $ | 65,944 | | | $ | 56,304 | |
Cash equivalents | 223,354 | | | 250,075 | |
Total cash and cash equivalents | $ | 289,298 | | | $ | 306,379 | |
Restricted cash | 537 | | | 759 | |
Total cash, cash equivalents and restricted cash | $ | 289,835 | | | $ | 307,138 | |
Restricted cash is included in other non-current assets on the Company’s condensed consolidated balance sheets.
3. MARKETABLE SECURITIES
Short-term investments and certain cash equivalents consist of investments in debt securities that are classified as available-for-sale. The amortized cost, gross unrealized gains and losses and fair value of investments as of March 31, 2023 and December 31, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
Short-term marketable securities: | | | | | | | |
Certificates of deposit | $ | 10,597 | | | $ | — | | | $ | — | | | $ | 10,597 | |
Commercial paper | 7,042 | | | — | | | — | | | 7,042 | |
Corporate bonds | 30,170 | | | 15 | | | (321) | | | 29,864 | |
Agency bonds | 14,945 | | | 24 | | | (7) | | | 14,962 | |
U.S. government bonds | 62,475 | | | 167 | | | (204) | | | 62,438 | |
Total short-term marketable securities | $ | 125,229 | | | $ | 206 | | | $ | (532) | | | $ | 124,903 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| December 31, 2022 |
Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
|
Cash equivalents: | | | | | | | |
Commercial paper | $ | 2,524 | | | $ | — | | | $ | — | | | $ | 2,524 | |
Total cash equivalents | 2,524 | | | — | | | — | | | 2,524 | |
Short-term marketable securities: | | | | | | | |
Certificates of deposit | 10,651 | | | — | | | — | | | 10,651 | |
Commercial paper | 13,054 | | | — | | | — | | | 13,054 | |
Corporate bonds | 32,701 | | | 3 | | | (353) | | | 32,351 | |
Agency bonds | 3,010 | | | — | | | (11) | | | 2,999 | |
U.S. government bonds | 35,479 | | | 8 | | | (298) | | | 35,189 | |
Total short-term marketable securities | 94,895 | | | 11 | | | (662) | | | 94,244 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total | $ | 97,419 | | | $ | 11 | | | $ | (662) | | | $ | 96,768 | |
The following tables present gross unrealized losses and fair values for those securities that were in an unrealized loss position as of March 31, 2023 and December 31, 2022, aggregated by investment category and the length of time that the individual securities have been in a continuous loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
Less Than 12 Months | | 12 Months or Greater | | Total |
Fair Value | | Unrealized Loss | Fair Value | | Unrealized Loss | Fair Value | | Unrealized Loss |
| | | | | | | | | | | |
| | | | | | | | | | | |
Corporate bonds | $ | 25,980 | | | $ | (321) | | | $ | — | | | $ | — | | | $ | 25,980 | | | $ | (321) | |
Agency bonds | 3,013 | | | (7) | | | — | | | — | | | 3,013 | | | (7) | |
U.S. government bonds | 21,290 | | | (204) | | | — | | | — | | | 21,290 | | | (204) | |
Total | $ | 50,283 | | | $ | (532) | | | $ | — | | | $ | — | | | $ | 50,283 | | | $ | (532) | |
|
| December 31, 2022 |
Less Than 12 Months | | 12 Months or Greater | | Total |
Fair Value | | Unrealized Loss | Fair Value | | Unrealized Loss | Fair Value | | Unrealized Loss |
| | | | | | | | | | | |
| | | | | | | | | | | |
Corporate bonds | $ | 29,428 | | | $ | (353) | | | $ | — | | | $ | — | | | $ | 29,428 | | | $ | (353) | |
Agency bonds | 2,999 | | | (11) | | | — | | | — | | | 2,999 | | | (11) | |
U.S. government bonds | 27,368 | | | (298) | | | — | | | — | | | 27,368 | | | (298) | |
Total | $ | 59,795 | | | $ | (662) | | | $ | — | | | $ | — | | | $ | 59,795 | | | $ | (662) | |
As of March 31, 2023 and December 31, 2022, the Company did not recognize any credit loss related to available-for-sale marketable securities.
The contractual maturities for marketable securities classified as available-for-sale as of March 31, 2023 were as follows (in thousands):
| | | | | | | | | | | |
| Amortized Cost | | Fair Value |
Due in one year or less | $ | 71,744 | | | $ | 71,619 | |
Due in one to five years | 53,485 | | | 53,284 | |
Total | $ | 125,229 | | | $ | 124,903 | |
4. FAIR VALUE MEASUREMENTS
The Company’s investments in money market accounts are recorded as cash equivalents at fair value on the condensed consolidated balance sheets. Additionally, the Company carries its available-for-sale debt securities at fair value. See Note 3, "Marketable Securities," for further details. The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value in the following hierarchy:
Level 1—Observable inputs, such as quoted prices in active markets,
Level 2—Inputs other than quoted prices in active markets that are observable either directly or indirectly, or
Level 3—Unobservable inputs in which there are little or no market data, which require the Company to develop its own assumptions.
This hierarchy requires the Company to use observable market data, when available, to minimize the use of unobservable inputs when determining fair value. The Company’s money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets. The Company's certificates of deposit, commercial paper, corporate bonds, agency bonds and U.S. government bonds are classified within Level 2 of the fair value hierarchy because they have been valued using inputs other than quoted prices in active markets that are observable directly or indirectly.
The following table represents the fair value of the Company’s financial instruments, including those measured at fair value on a recurring basis, as of March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents: | | | | | | | | | | | | | | | |
Money market funds | $ | 198,305 | | | $ | — | | | $ | — | | | $ | 198,305 | | | $ | 247,551 | | | $ | — | | | $ | — | | | $ | 247,551 | |
| | | | | | | | | | | | | | | |
Commercial paper | — | | | — | | | — | | | — | | | — | | | 2,524 | | | — | | | 2,524 | |
Marketable securities: | | | | | | | | | | | | | | | |
Certificates of deposit | — | | | 10,597 | | | — | | | 10,597 | | | — | | | 10,651 | | | — | | | 10,651 | |
Commercial paper | — | | | 7,042 | | | — | | | 7,042 | | | — | | | 13,054 | | | — | | | 13,054 | |
Corporate bonds | — | | | 29,864 | | | — | | | 29,864 | | | — | | | 32,351 | | | — | | | 32,351 | |
Agency bonds | — | | | 14,962 | | | — | | | 14,962 | | | — | | | 2,999 | | | — | | | 2,999 | |
U.S. government bonds | — | | | 62,438 | | | — | | | 62,438 | | | — | | | 35,189 | | | — | | | 35,189 | |
Other investments: | | | | | | | | | | | | | | | |
Certificates of deposit | — | | | 10,000 | | | — | | | 10,000 | | | — | | | 10,000 | | | — | | | 10,000 | |
Total cash equivalents, marketable securities and other investments | $ | 198,305 | | | $ | 134,903 | | | $ | — | | | $ | 333,208 | | | $ | 247,551 | | | $ | 106,768 | | | $ | — | | | $ | 354,319 | |
The certificates of deposit that are categorized as other investments are reflected in prepaid expenses and other current assets on the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022.
The Company's long- and indefinite-lived assets, such as property, equipment and software, goodwill, other intangible assets and right-of-use ("ROU") assets, are measured at fair value on a non-recurring basis if the assets are determined to be impaired. The Company recognized an impairment charge related to the write off of ROU assets and leasehold improvements associated with certain of its office space that it abandoned during the three months ended March 31, 2023 based on the Company's determination that the fair values of these impaired assets were zero. See Note 8, "Leases," for further details. 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Prepaid expenses | $ | 15,737 | | | $ | 14,632 | |
Certificates of deposit | 10,000 | | | 10,000 | |
Non-trade receivables | 3,992 | | | 31,338 | |
Other current assets | 7,263 | | | 7,497 | |
Total prepaid expenses and other current assets | $ | 36,992 | | | $ | 63,467 | |
As of March 31, 2023, other current assets primarily consisted of deferred costs related to subleases and unsettled share repurchases as well as short-term deposits.
6. PROPERTY, EQUIPMENT AND SOFTWARE, NET
Property, equipment and software, net as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Capitalized website and internal-use software development costs | $ | 237,804 | | | $ | 229,638 | |
Leasehold improvements(1) | 58,601 | | | 60,407 | |
Computer equipment | 48,122 | | | 50,920 | |
Furniture and fixtures | 10,692 | | | 11,627 | |
Telecommunication | 4,201 | | | 4,930 | |
Software | 1,113 | | | 1,702 | |
Total | 360,533 | | | 359,224 | |
Less accumulated depreciation and amortization(1) | (283,597) | | | (282,000) | |
Property, equipment and software, net | $ | 76,936 | | | $ | 77,224 | |
(1) Leasehold improvements, net was reduced to reflect an impairment of $1.0 million recorded during the three months ended March 31, 2023 as a result of the Company's abandonment of certain office space. For more information, see Note 8, "Leases." Depreciation and amortization expense related to property, equipment and software was $10.5 million and $10.8 million for the three months ended March 31, 2023 and 2022, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
The Company’s goodwill is the result of its acquisitions of other businesses and represents the excess of purchase consideration over the fair value of assets acquired and liabilities assumed. The Company performed its annual goodwill impairment analysis as of August 31, 2022 and concluded that goodwill was not impaired, as the fair value of the reporting unit exceeded its carrying value. Additionally, no triggering events were identified as of March 31, 2023 or December 31, 2022 that would more likely than not reduce the fair value of goodwill below its carrying value.
The changes in carrying amount of goodwill during the three months ended March 31, 2023 were as follows (in thousands):
| | | | | |
Balance as of December 31, 2022 | $ | 102,328 | |
Effect of currency translation | 867 | |
Balance as of March 31, 2023 | $ | 103,195 | |
Intangible assets that were not fully amortized as of March 31, 2023 and December 31, 2022 consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Life |
Business relationships | $ | 9,918 | | | $ | (5,727) | | | $ | 4,191 | | | 5.9 years | |
| | | | | | | | |
Licensing agreements | 6,129 | | | (1,667) | | | 4,462 | | | 6.9 years | |
| | | | | | | | |
Domains and data licenses | 2,869 | | | (2,866) | | | 3 | | | 0.3 years | |
| | | | | | | | |
| | | | | | | | |
Total | $ | 18,916 | | | $ | (10,260) | | | $ | 8,656 | | | | |
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| December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Life |
Business relationships | $ | 9,918 | | | $ | (5,550) | | | $ | 4,368 | | | 6.2 years | |
| | | | | | | | |
Licensing agreements | 6,129 | | | (1,505) | | | 4,624 | | | 7.2 years | |
| | | | | | | | |
Domain and data licenses | 2,869 | | | (2,864) | | | 5 | | | 0.5 years | |
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| | | | | | | | |
Total | $ | 18,916 | | | $ | (9,919) | | | $ | 8,997 | | | | |
Amortization expense related to intangible assets was $0.3 million and $0.7 million for the three months ended March 31, 2023 and 2022, respectively.
As of March 31, 2023, estimated future amortization expense was as follows (in thousands):
| | | | | | | | |
| | |
Remainder of 2023 | | $ | 1,018 | |
2024 | | 1,353 | |
2025 | | 1,353 | |
2026 | | 1,353 | |
2027 | | 1,353 | |
2028 | | 1,353 | |
Thereafter | | 873 | |
Total amortization | | $ | 8,656 | |
8. LEASES
The components of lease cost, net for the three months ended March 31, 2023 and 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Operating lease cost | $ | 9,531 | | | $ | 10,667 | | | | | |
Short-term lease cost (12 months or less) | 105 | | | 254 | | | | | |
Sublease income | (3,391) | | | (2,777) | | | | | |
Total lease cost, net | $ | 6,245 | | | $ | 8,144 | | | | | |
The Company's leases and subleases do not include any variable lease payments, residual value guarantees, related-party leases, or restrictions or covenants that would limit or prevent the Company from exercising its right to obtain substantially all of the economic benefits from use of the respective assets during the lease term.
Supplemental cash flow information related to leases for the three months ended March 31, 2023 and 2022 was as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 12,031 | | | $ | 11,899 | |
As of March 31, 2023, maturities of lease liabilities were as follows (in thousands):
| | | | | |
| |
Remainder of 2023 | $ | 33,362 | |
2024 | 42,658 | |
2025 | 22,119 | |
2026 | 7,181 | |
2027 | 6,369 | |
2028 | 6,507 | |
Thereafter | 9,632 | |
Total minimum lease payments | 127,828 | |
Less imputed interest | (11,621) | |
Present value of lease liabilities | $ | 116,207 | |
As of March 31, 2023 and December 31, 2022, the weighted-average remaining lease term and weighted-average discount rate were as follows:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Weighted-average remaining lease term (years) — operating leases | 4.0 | | 4.1 |
Weighted-average discount rate — operating leases | 5.3 | % | | 5.3 | % |
During the three months ended March 31, 2023, the Company abandoned certain office space in San Francisco. The Company evaluated the associated ROU assets and leasehold improvements for impairment as a result of the abandonment in accordance with Accounting Standards Codification Topic 360, “Property, Plant, and Equipment,” because the change in circumstances indicated that the carrying amount of such assets may not be recoverable. The Company compared the carrying value of the impacted assets to the fair value to determine the impairment amount and recognized an impairment charge of $3.6 million during the three months ended March 31, 2023, which is included in general and administrative expenses on its condensed consolidated statement of operations. The Company reduced the carrying amount of the ROU asset and leasehold improvements by $2.6 million and $1.0 million, respectively. For more information on the fair values of the ROU asset and leasehold improvements used in the impairment analysis, see Note 4, "Fair Value Measurements." 9. OTHER NON-CURRENT ASSETS
Other non-current assets as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Deferred tax assets | $ | 117,263 | | | $ | 97,426 | |
Deferred contract costs | 26,252 | | | 25,946 | |
Other non-current assets | 10,686 | | | 10,617 | |
Total other non-current assets | $ | 154,201 | | | $ | 133,989 | |
10. CONTRACT BALANCES
The changes in the allowance for doubtful accounts during the three months ended March 31, 2023 and 2022 were as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Balance, beginning of period | $ | 9,277 | | | $ | 7,153 | |
Add: provision for doubtful accounts | 6,784 | | | 7,562 | |
Less: write-offs, net of recoveries | (7,430) | | | (6,514) | |
Balance, end of period | $ | 8,631 | | | $ | 8,201 | |
The net decrease in the allowance for doubtful accounts in the three months ended March 31, 2023 was primarily related to a reduction in expected customer delinquencies and the release of bad debt reserves. The net increase in the allowance for doubtful accounts in the three months ended March 31, 2022 was primarily related to an anticipated increase in customer delinquencies due to an increase in both advertisers and customer spend during the three-month period. In calculating the allowance for doubtful accounts as of March 31, 2023 and 2022, the Company considered expectations of probable credit losses, including those associated with the COVID-19 pandemic for the 2022 period, based on observed trends in cancellations, observed changes in the credit risk of specific customers, the impact of anticipated closures and bankruptcies using forecasted economic indicators in addition to historical experience and loss patterns during periods of macroeconomic uncertainty.
Contract liabilities consist of deferred revenue, which is recorded on the condensed consolidated balance sheets when the Company has received consideration, or has the right to receive consideration, in advance of transferring the performance obligations under the contract to the customer.
The changes in deferred revenue during the three months ended March 31, 2023 were as follows (in thousands):
| | | | | | |
| Three Months Ended March 31, 2023 | |
Balance, beginning of period | $ | 5,200 | | |
Less: recognition of deferred revenue from beginning balance | (3,698) | | |
Add: net increase in current period contract liabilities | 5,912 | | |
Balance, end of period | $ | 7,414 | | |
The majority of the Company's deferred revenue balance as of March 31, 2023 is classified as short-term and is expected to be recognized as revenue in the subsequent three-month period ending June 30, 2023. An immaterial amount of long-term deferred revenue is included in other long-term liabilities as of March 31, 2023. No other contract assets or liabilities were recorded on the Company's condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022.
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Accounts payable | $ | 18,248 | | | $ | 14,525 | |
Employee-related liabilities | 82,557 | | | 66,929 | |
| | | |
Taxes payable | 21,195 | | | 6,218 | |
| | | |
| | | |
Accrued legal settlements | 4,000 | | | 26,250 | |
Other accrued liabilities | 26,860 | | | 24,028 | |
Total accounts payable and accrued liabilities | $ | 152,860 | | | $ | 137,950 | |
As of March 31, 2023, other accrued liabilities primarily consisted of accrued cost of revenue, sales and marketing, workplace and general and administrative expenses, unsettled share repurchases, as well as a reserve for refunds for advertising revenue.
12. COMMITMENTS AND CONTINGENCIES
Legal Proceedings—In January 2018, a putative class action lawsuit alleging violations of the federal securities laws was filed in the U.S. District Court for the Northern District of California (the "Court"), naming as defendants the Company and certain of its officers (the “Securities Class Action”). The complaint, which the plaintiff amended on June 25, 2018, alleged violations of the Securities Exchange Act of 1934, as amended, by the Company and its officers for allegedly making materially false and misleading statements regarding its business and operations on February 9, 2017. The plaintiff sought unspecified monetary damages and other relief. On November 27, 2018, the Court granted in part and denied in part the defendants’ motion to dismiss. On October 22, 2019, the Court approved a stipulation to certify a class in this action and, on September 9, 2021, it denied the defendants’ motion for summary judgment. The case was scheduled for trial to begin on February 7, 2022. However, on December 3, 2021, the defendants reached a preliminary agreement with the plaintiff to settle this matter for $22.25 million. The proposed settlement was subsequently filed with the Court, which preliminarily approved it on July 25, 2022. The settlement was then funded by defendants' insurers during the three months ended September 30, 2022. The Court entered an order granting final approval to the settlement on January 27, 2023 and, on the same day, entered judgment in the Securities Class Action. The settlement resolves all claims asserted against all defendants in the Securities Class Action without any liability or wrongdoing attributed to them.
On August 26, 2022, the Court granted final approval of the settlement of a stockholder derivative action (the “Derivative Action”) asserting claims against certain current and former officers, and naming the Company as a nominal defendant, which arose out of the same facts as the Securities Class Action and was pending before the Court. The settlement resolved all claims asserted against all defendants in the Derivative Action without any liability or wrongdoing attributed to them personally or to the Company. Under the terms of the settlement, the Company’s board of directors adopted certain corporate governance modifications and the Company received $18.0 million of insurance proceeds. The Company has paid $3.75 million of such insurance proceeds to the plaintiff’s attorneys as fees. The remaining insurance proceeds partially funded the Securities Class Action settlement.
The Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and contingencies, which it will accrue when it believes a loss is probable and the amount can be reasonably estimated. The Company believed the losses for both the settlements of the Securities Class Action and the Derivative Action were probable and the payment amounts described above, which totaled $26.0 million, represented reasonable estimates of loss contingencies. The Company also believed that the anticipated insurance proceeds related to the settlement of each action described above, which also totaled $26.0 million, were probable and represented reasonable estimates for loss recovery. Accordingly, the Company recorded a $26.0 million accrual for loss contingency within accounts payable and accrued liabilities as well as a $26.0 million receivable for loss recovery within prepaid expenses and other current assets during 2021. As of December 31, 2022, following payment to the plaintiff's attorneys in the Derivative Action, the Company had $22.25 million remaining for the settlement of the Securities Class Action on its condensed consolidated balance sheets for the loss contingency accrual and loss recovery receivable. In January 2023, the Company released the remaining receivable and accrual upon the Court granting final approval of these settlements.
On October 12, 2016, a putative class action lawsuit asserting claims against the Company was filed in the Superior Court of California for the County of San Francisco relating to alleged unlawful call recording and/or monitoring under the California Invasion of Privacy Act. Plaintiff seeks statutory damages and other relief. In response, the Company filed a motion for summary judgment, which the Court granted. Plaintiff appealed and, in October 2020, the California Court of Appeal for the First District reversed the decision of the trial court, and the California Supreme Court denied review. The case was then remanded to the Superior Court, where the Company subsequently amended its answer to add affirmative defenses, and Plaintiff amended his complaint to add additional named plaintiffs. On January 12, 2023, the Company filed another motion for summary judgment and a hearing on that motion is scheduled for May 19, 2023. On January 18, 2023, the Court granted plaintiffs’ motion for class certification. On February 17, 2023, the Company filed a petition for a writ with the California Court of Appeal, seeking reversal of the lower court’s class certification decision. Trial is currently scheduled to commence on January 29, 2024.
The Company is subject to other legal proceedings arising in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently does not believe that the final outcome of any of these other matters will have a material effect on the Company’s business, financial position, results of operations or cash flows.
Indemnification Agreements—In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or from intellectual property infringement claims made by third parties.
In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company to, among other things, indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.
While the outcome of claims cannot be predicted with certainty, the Company does not believe that the outcome of any claims under the indemnification arrangements will have a material effect on the Company’s business, financial position, results of operations or cash flows.
Revolving Credit Facility—As of March 31, 2023, the Company had access to a $75.0 million senior unsecured revolving credit facility with Wells Fargo Bank, National Association, which it entered into on May 5, 2020 (as amended, the "2020 credit facility"). The 2020 credit facility included a letter of credit sub-limit of $25.0 million and, as of March 31, 2023, the Company had $20.5 million of letters of credit under the sub-limit related to lease agreements for certain office locations, which are required to be maintained and issued to the landlords of each facility. As of March 31, 2023, $54.5 million remained available under the 2020 credit facility. As of this date, the Company was in compliance with all covenants associated with the credit facility and there were no loans outstanding.
On April 28, 2023, the Company entered into a Revolving Credit and Guaranty Agreement with certain lenders and JPMorgan Chase Bank, N.A., as administrative and collateral agent, which provides for a five-year $125.0 million senior secured revolving credit facility (the "2023 credit facility"). The 2023 credit facility replaced the 2020 credit facility, which terminated concurrently with the establishment of the 2023 credit facility. The 2023 credit facility includes a letter of credit sub-limit of $25.0 million, a bilateral letter of credit facility of $25.0 million and an accordion option, which, if exercised, would allow the Company to increase the aggregate commitments by up to $250.0 million, plus additional amounts if the Company is able to satisfy a leverage test, subject to certain conditions. As of the date of this Quarterly Report, no loans were outstanding under the 2023 credit facility and the Company's letters of credit outstanding under the 2020 credit facility as of April 28, 2023 in aggregate amount of $17.1 million were moved under the 2023 credit facility sub-limit. The commitments under the 2023 credit facility expire on April 28, 2028. For further details on the 2023 credit facility, refer to the Company's Current Report on Form 8-K filed with the SEC on May 4, 2023.
13. STOCKHOLDERS’ EQUITY
The following table presents the number of shares authorized and issued as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Shares Authorized | | Shares Issued | | Shares Authorized | | Shares Issued |
Stockholders’ equity: | | | | | | | |
Common stock, $0.000001 par value | 200,000 | | | 69,649 | | | 200,000 | | | 69,797 | |
Undesignated preferred stock | 10,000 | | | — | | | 10,000 | | | — | |
Stock Repurchase Program
As of March 31, 2023, the Company's board of directors had authorized it to repurchase up to an aggregate of $1.45 billion of its outstanding common stock, $231.7 million of which remained available as of March 31, 2023. The Company may purchase shares at management’s discretion in the open market, in privately negotiated transactions, in transactions structured through investment banking institutions or a combination of the foregoing.
During the three months ended March 31, 2023, the Company repurchased on the open market and subsequently retired 1,700,835 shares for an aggregate purchase price of $50.0 million. Although no shares were held in treasury stock as of March 31, 2023, an immaterial balance that remained was comprised of excise tax under the Inflation Reduction Act of 2022 on stock repurchases, net of shares issued, during the three-month period. The Company expects to pay the excise tax in early 2024.
During the three months ended March 31, 2022, the Company repurchased on the open market 1,464,614 shares for an aggregate purchase price of $50.0 million and retired 1,382,078 shares. As of March 31, 2022, the Company had a treasury stock balance of 82,536 shares, which were excluded from its outstanding share count as of such date and subsequently retired in April 2022.
Equity Incentive Plans
Stock Options
Stock options are granted at a price per share not less than the fair value of a share of the Company’s common stock on the grant date. Options generally vest over a four-year period, on one of two schedules: (a) 25% vesting at the end of one year and the remaining shares vesting monthly thereafter or (b) ratably on a monthly basis. Options granted are generally exercisable for contractual terms of up to 10 years. The Company issues new shares when stock options are exercised.
A summary of stock option activity for the three months ended March 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares (in thousands) | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at December 31, 2022 | 3,543 | | | $ | 32.81 | | | 3.6 | | $ | 7,507 | |
| | | | | | | |
Exercised | (685) | | | 21.31 | | | | | |
Canceled | (2) | | | 21.72 | | | | | |
Outstanding at March 31, 2023 | 2,856 | | | $ | 35.57 | | | 4.2 | | $ | 7,715 | |
Options vested and exercisable at March 31, 2023 | 2,772 | | | $ | 35.59 | | | 4.1 | | $ | 7,556 | |
Aggregate intrinsic value represents the difference between the closing price of the Company’s common stock as quoted on the New York Stock Exchange on a given date and the exercise price of outstanding, in-the-money options. The total intrinsic value of options exercised was approximately $5.4 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively.
There were no options granted during the three months ended March 31, 2023 and 2022.
As of March 31, 2023, total unrecognized compensation costs related to nonvested stock options were approximately $1.3 million, which the Company expects to recognize over a weighted-average time period of 1.8 years.
RSUs
RSUs generally vest over a four-year period, on one of two schedules: (a) 25% vesting at the end of one year and the remaining vesting quarterly or annually thereafter or (b) ratably on a quarterly basis.
RSUs also include PRSUs, which are subject to either (a) a market condition or (b) the achievement of performance goals. PRSUs may also be subject to a time-based vesting schedule of quarterly over four years (the "Time-Based Vesting Schedule"). For PRSUs subject to a market condition, the Company recognizes expense from the date of grant. For PRSUs subject to performance goals, the Company recognizes expense when it is probable that the performance condition will be achieved.
The Company granted PRSUs subject to market conditions in 2022 and 2023. The shares underlying each of these PRSU awards vest based on the relative performance of the Company's total stockholder return ("TSR") over a three-year period. A percentage of the target number of shares underlying each award, ranging from zero to 200%, will vest based on the percentile rank of the Company's TSR relative to that of the other companies in the Russell 2000 Index over the period beginning January 1st of the year of grant and ending three years later (the "Performance Period"). The Company’s TSR, as well as the TSR of the other companies in the Russell 2000 Index, will be calculated based on the average closing price of each company's stock over the last 20 trading days of the Performance Period compared to the average closing price over the first 20 trading days of the Performance Period. Any shares that become eligible to vest based on the Company's level of achievement of the market goal will fully vest on or following certification of the Company's performance on February 20, 2025 and 2026, respectively, or, if certification occurs following such date, March 15, 2025 and 2026, respectively, for the 2022 and 2023 grants, subject to the applicable employee's continued service as of such vesting dates.
For PRSUs subject to performance goals, a percentage of the target number of shares, ranging from zero to 200%, will become eligible to vest based on the Company's level of achievement of certain financial targets, subject to the Time-Based Vesting Schedule. The shares subject to performance goals become eligible to vest once the achievement against the financial targets is known, which will be no later than March of the year following the year in which the PRSUs are granted. On the quarterly vest date immediately following such determination (or a vest date otherwise specified in the agreement), the eligible shares, if any, will vest to the extent that the employee has met the Time-Based Vesting Schedule as of such date. Thereafter,
the eligible shares will continue to vest in accordance with the Time-Based Vesting Schedule, subject to the applicable employee's continued service as of each such vesting date. The Company performed an analysis as of March 31, 2023 to assess the probability of achievement of the PRSU financial targets and, as a result, recorded compensation costs in the three months ended March 31, 2023 for the PRSUs that it expected to vest.
As the PRSU activity during the three months ended March 31, 2023 was not material, it is presented together with the RSU activity in the table below. A summary of RSU and PRSU activity for the three months ended March 31, 2023 is as follows (in thousands, except per share amounts):
| | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
Nonvested at December 31, 2022 | 9,962 | | | $ | 33.48 | |
Granted | 5,985 | | | 29.31 | |
Vested(1) | (1,502) | | | 31.81 | |
Canceled | (424) | | | 31.91 | |
Nonvested at March 31, 2023(2) | 14,021 | | | $ | 31.93 | |
(1) Includes 636,311 shares that vested but were not issued due to the Company's use of net share withholding for payment of employee taxes.
(2) Includes 936,082 PRSUs.
The aggregate fair value as of the vest date of RSUs and PRSUs that vested during the three months ended March 31, 2023 and 2022 was $46.2 million and $46.7 million, respectively. As of March 31, 2023, the Company had approximately $425.5 million of unrecognized stock-based compensation expense related to RSUs and PRSUs, which it expects to recognize over the remaining weighted-average vesting period of approximately 2.8 years.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan ("ESPP") allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations, during designated offering periods. At the end of each offering period, employees are able to purchase shares at 85% of the fair market value of the Company’s common stock on the last day of the offering period, based on the closing sales price of the Company's common stock as quoted on the New York Stock Exchange on such date.
There were 676 shares purchased by employees under the ESPP at a weighted-average purchase price per share of $26.31 during the three months ended March 31, 2023 and no shares purchased by employees under the ESPP during the three months ended March 31, 2022. The Company recognized stock-based compensation expense related to the ESPP of $0.9 million and $0.8 million during the three months ended March 31, 2023 and 2022, respectively.
Stock-Based Compensation
The following table summarizes the effects of stock-based compensation expense related to stock-based awards in the condensed consolidated statements of operations during the periods presented (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Cost of revenue | $ | 1,382 | | | $ | 1,305 | | | | | |
Sales and marketing | 9,114 | | | 8,655 | | | | | |
Product development | 25,867 | | | 23,125 | | | | | |
General and administrative | 9,894 | | | 7,975 | | | | | |
Total stock-based compensation recorded to loss before income taxes | 46,257 | | | 41,060 | | | | | |
Provision for income taxes | (9,604) | | | (9,138) | | | | | |
Total stock-based compensation recorded to net loss attributable to common stockholders | $ | 36,653 | | | $ | 31,922 | | | | | |
The Company capitalized $2.9 million and $2.5 million of stock-based compensation expense as website development costs and, to a lesser extent, implementation costs incurred related to cloud computing arrangements that are service contracts in the three months ended March 31, 2023 and 2022, respectively.
14. OTHER INCOME, NET
Other income, net for the three months ended March 31, 2023 and 2022 consisted of the following (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Interest income | $ | 4,007 | | | $ | 22 | | | | | |
Transaction (loss) gain on foreign exchange, net | (70) | | | 71 | | | | | |
Other non-operating income, net | 1,275 | | | 836 | | | | | |
Other income, net | $ | 5,212 | | | $ | 929 | | | | | |
15. INCOME TAXES
The Company is subject to income taxes in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income taxes. The benefit from income taxes for the three months ended March 31, 2023 was $0.2 million, which was due to $0.5 million of U.S. federal, state and foreign income tax benefit, partially offset by $0.3 million of net discrete tax expense primarily related to stock-based compensation. The benefit from income taxes for the three months ended March 31, 2022 was $2.6 million, which was due to $1.6 million of U.S. federal, state and foreign income taxes benefit and $1.0 million of net discrete tax benefit primarily related to stock-based compensation.
Accounting for income taxes for interim periods generally requires the provision for income taxes to be determined by applying an estimate of the annual effective tax rate for the full fiscal year to income or loss before income taxes, excluding unusual or infrequently occurring discrete items, for the reporting period. For the three months ended March 31, 2023 and 2022, the difference between the effective tax rate and the federal statutory tax rate primarily related to stock-based compensation and the inclusion of global intangible low-taxed income ("GILTI"), offset by tax credits. As currently enacted, the Tax Cuts and Jobs Act requires taxpayers to capitalize research and development expenses with amortization periods over five and fifteen years, which is expected to increase the amount of the Company's GILTI.
As of March 31, 2023, the total amount of gross unrecognized tax benefits was $61.7 million, $29.6 million of which was subject to a full valuation allowance and would not affect the Company’s effective tax rate if recognized. In the three months ended March 31, 2023, the Company recorded an immaterial amount of interest and penalties.
As of March 31, 2023, the Company estimated that it had accumulated undistributed earnings generated by its foreign subsidiaries of approximately $19.6 million. Any taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of the Company's foreign investments would generally be limited to foreign and state taxes. The Company has not recognized a deferred tax liability related to unremitted foreign earnings, as it intends to indefinitely reinvest these earnings, and expects future U.S. cash generation to be sufficient to meet future U.S. cash needs.
In addition, the Company is subject to the continuous examination of its income tax returns by the Internal Revenue Service and other tax authorities. The Company’s federal and state income tax returns for tax years subsequent to 2003 remain open to examination. In the Company’s foreign jurisdictions — Canada, Germany, Ireland and the United Kingdom — the tax years subsequent to 2017 remain open to examination. The Company regularly assesses the likelihood of adverse outcomes resulting from examinations to determine the adequacy of its provision for income taxes and monitors the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. As of March 31, 2023, although the timing of the resolution or closure of audits is not certain, the Company believes it is reasonably possible that unrecognized tax benefits will not be reduced within the next 12 months.
16. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net income (loss) per share attributable to common stockholders is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted net income (loss) per share attributable to common stockholders is computed using the weighted-average number of outstanding shares of common stock and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options, RSUs (including PRSUs) and, to a lesser extent, ESPP shares. If dilutive, such potentially dilutive securities are reflected in net income (loss) per share attributable to common stockholders using the treasury stock method.
The following tables present the calculation of basic and diluted net loss per share attributable to common stockholders for the periods presented (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Basic net loss per share: | | | | | | | |
Net loss attributable to common stockholders | $ | (1,178) | | | $ | (915) | | | | | |
Shares used in computation: | | | | | | | |
Weighted-average common shares outstanding | 69,821 | | | 71,639 | | | | | |
Basic net loss per share attributable to common stockholders: | $ | (0.02) | | | $ | (0.01) | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Diluted net loss per share: | | | | | | | |
Net loss attributable to common stockholders | $ | (1,178) | | | $ | (915) | | | | | |
Shares used in computation: | | | | | | | |
Weighted-average common shares outstanding | 69,821 | | | 71,639 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted net loss per share attributable to common stockholders: | $ | (0.02) | | | $ | (0.01) | | | | | |
The following stock-based instruments were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Stock options | 2,856 | | | 3,938 | | | | | |
RSUs | 14,021 | | | 12,735 | | | | | |
ESPP | 299 | | | 226 | | | | | |
17. INFORMATION ABOUT REVENUE AND GEOGRAPHIC AREAS
The Company considers operating segments to be components of the Company for which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the chief executive officer. The chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by product line and geographic region for purposes of allocating resources and evaluating financial performance.
The Company has determined that it has a single operating and reporting segment. When the Company communicates results externally, it disaggregates net revenue into major product lines and primary geographical markets, which is based on the billing address of the customer. The disaggregation of net revenue by major product lines is based on the type of service provided and also aligns with the timing of revenue recognition for each. To reflect the Company's strategic focus on creating differentiated experiences for its Services categories and Restaurants, Retail & Other categories, the Company further disaggregates advertising revenue to reflect these two high-level category groupings. The Services categories consist of the following businesses: home, local, auto, professional, pets, events, real estate and financial services. The Restaurants, Retail & Other categories consist of the following businesses: restaurants, shopping, beauty & fitness, health and other.
Net Revenue
The following table presents the Company’s net revenue by major product line (and by category for advertising revenue) for the periods presented (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net revenue by product: | | | | | | | |
Advertising revenue by category: | | | | | | | |
Services | $ | 183,520 | | | $ | 160,263 | | | | | |
Restaurants, Retail & Other | 113,623 | | | 102,974 | | | | | |
Advertising | 297,143 | | | 263,237 | | | | | |
Transactions | 3,556 | | | 3,180 | | | | | |
Other | 11,739 | | | 10,211 | | | | | |
Total net revenue | $ | 312,438 | | | $ | 276,628 | | | | | |
During the three months ended March 31, 2023 and 2022, no individual customer accounted for 10% or more of consolidated net revenue.
The following table presents the Company’s net revenue by major geographic region for the periods presented (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
United States | $ | 310,222 | | | $ | 274,644 | | | | | |
All other countries | 2,216 | | | 1,984 | | | | | |
Total net revenue | $ | 312,438 | | | $ | 276,628 | | | | | |
Long-Lived Assets
The following table presents the Company’s long-lived assets by major geographic region for the periods presented (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
United States | $ | 70,568 | | | $ | 72,325 | |
All other countries | 6,368 | | | 4,899 | |
Total long-lived assets | $ | 76,936 | | | $ | 77,224 | |