Edgar Filing: YELP INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended September 30, 2018
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Transition period from to

Commission file number: 001-35444

YELP INC.

(Exact Name of Registrant as Specified in Its Charter)



Delaware	20-1854266
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

140 New Montgomery Street, 9th Floor
San Francisco, CA 94105
(Address of Principal Executive Offices) (Zip Code)

(415) 908-3801

(Registrant’s Telephone Number, Including Area Code)

________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

As of October 31, 2018, there were 83,217,507 shares issued and 83,083,501 shares outstanding of registrant’s common stock, par value $0.000001 per share.

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YELP INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



		Page
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited).
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017.	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017.	3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017.	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017.	5
	Notes to Condensed Consolidated Financial Statements.	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	40
Item 4.	Controls and Procedures.	40
Part II.	Other Information
Item 1.	Legal Proceedings.	41
Item 1A.	Risk Factors.	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	62
Item 3.	Defaults Upon Senior Securities.	62
Item 4.	Mine Safety Disclosures.	62
Item 5.	Other Information.	62
Item 6.	Exhibits.	63
Signatures		64

___________________________________

Unless the context suggests otherwise, references in this Quarterly Report on Form 10-Q (the “Quarterly Report”) to “Yelp,” the “Company,” “we,” “us” and “our” refer to Yelp Inc. and, where appropriate, its subsidiaries.

Unless the context otherwise indicates, where we refer in this Quarterly Report to our “mobile application” or “mobile app,” we refer to all of our applications for mobile-enabled devices; references to our “mobile platform” refer to both our mobile app and the versions of our website that are optimized for mobile-based browsers. Similarly, references to our “website” refer to versions of our website dedicated to both desktop- and mobile-based browsers, as well as the U.S. and international versions of our website.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements that involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management, which are in turn based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

NOTE REGARDING METRICS

We review a number of performance metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions. Please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for information on how we define our key metrics. Unless otherwise stated, these metrics do not include metrics from Yelp Reservations, Yelp Nowait, Yelp WiFi Marketing, our business owner products or Yelp Eat24, which we sold as of October 10, 2017.

While our metrics are based on what we believe to be reasonable calculations, there are inherent challenges in measuring usage across our large user base. Certain of our performance metrics, including the number of unique devices accessing our mobile app, are tracked with internal company tools, which are not independently verified by any third party and have a number of limitations. For example, our metrics may be affected by mobile applications that automatically contact our servers for regular updates with no discernible user action involved; this activity can cause our system to count the device associated with the app as an app unique device in a given period.

Our metrics that are calculated based on data from third parties — the number of desktop and mobile website unique visitors — are subject to similar limitations. Our third-party providers periodically encounter difficulties in providing accurate data for such metrics as a result of a variety of factors, including human and software errors. In addition, because these traffic metrics are tracked based on unique cookie identifiers, an individual who accesses our website from multiple devices with different cookies may be counted as multiple unique visitors, and multiple individuals who access our website from a shared device with a single cookie may be counted as a single unique visitor. As a result, the calculations of our unique visitors may not accurately reflect the number of people actually visiting our website.

Our measures of traffic and other key metrics may also differ from estimates published by third parties (other than those whose data we use to calculate such metrics) or from similar metrics of our competitors. We are continually seeking to improve our ability to measure these key metrics, and regularly review our processes to assess potential improvements to their accuracy. From time to time, we may discover inaccuracies in our metrics or make adjustments to improve their accuracy, including adjustments that may result in the recalculation of our historical metrics. We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

YELP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



	September 30, 2018			December 31, 2017 ⁽¹⁾
Assets
Current assets:
Cash and cash equivalents	$	423,495		$	547,850
Short-term marketable securities	414,002			273,366
Accounts receivable (net of allowance for doubtful accounts of $8,885 and $8,602 at September 30, 2018 and December 31, 2017, respectively)	81,835			76,173
Prepaid expenses and other current assets	17,567			15,700
Total current assets	936,899			913,089
Long-term marketable securities	—			25,032
Property, equipment and software, net	110,899			103,651
Goodwill	106,323			107,954
Intangibles, net	14,242			16,893
Restricted cash	22,121			18,554
Other non-current assets	42,773			40,428
Total assets	$	1,233,257		$	1,225,601
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	6,829		$	9,033
Accrued liabilities	58,564			73,665
Deferred revenue	3,392			3,469
Total current liabilities	68,785			86,167
Long-term liabilities	34,978			30,737
Total liabilities	103,763			116,904
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock, $0.000001 par value, 200,000,000 shares authorized – 84,375,021 shares issued and outstanding at September 30, 2018 and 83,724,916 shares issued and outstanding at December 31, 2017	—			—
Additional paid-in capital	1,109,199			1,038,017
Treasury stock	—			(46		)
Accumulated other comprehensive loss	(10,225		)	(8,444		)
Retained earnings	30,520			79,170
Total stockholders' equity	1,129,494			1,108,697
Total liabilities and stockholders' equity	$	1,233,257		$	1,225,601


(1)	As of January 1, 2018, the Company adopted Accounting Standards Update 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"), using the full retrospective method. Accordingly, the Company has recast certain amounts in the prior period presented. See Note 1 below for additional discussion.

See Notes to Condensed Consolidated Financial Statements.

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YELP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017⁽¹⁾			2018		2017⁽¹⁾
Net revenue	$	241,096	$	223,287		$	699,033	$	631,406
Costs and expenses:
Cost of revenue (exclusive of depreciation and amortization shown separately below)	14,177		19,312			43,618		54,282
Sales and marketing	121,759		112,958			362,054		326,409
Product development	53,764		45,834			158,046		127,793
General and administrative	30,302		27,601			90,892		81,808
Depreciation and amortization	10,713		10,656			31,250		31,470
Restructuring and integration	—		35			—		286
Total costs and expenses	230,715		216,396			685,860		622,048
Income from operations	10,381		6,891			13,173		9,358
Other income, net	3,921		1,371			9,950		2,933
Income before income taxes	14,302		8,262			23,123		12,291
Benefit from (provision for) income taxes	684		(232		)	281		(417		)
Net income attributable to common stockholders	$	14,986	$	8,030		$	23,404	$	11,874
Net income per share attributable to common stockholders
Basic	$	0.18	$	0.10		$	0.28	$	0.15
Diluted	$	0.17	$	0.09		$	0.26	$	0.14
Weighted-average shares used to compute net income per share attributable to common stockholders
Basic	84,008		82,259			83,865		81,041
Diluted	88,724		87,433			89,271		86,097


(1)	As of January 1, 2018, the Company adopted ASC 606 using the full retrospective method. Accordingly, the Company has recast certain amounts in the prior periods presented. See Note 1 below for additional discussion.

See Notes to Condensed Consolidated Financial Statements.

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YELP INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017⁽¹⁾			2018			2017⁽¹⁾
Net income attributable to common stockholders	$	14,986		$	8,030		$	23,404		$	11,874
Other comprehensive (loss) income:
Foreign currency translation adjustments	(193		)	2,041			(1,811		)	6,673
Foreign currency adjustments to net income upon liquidation of investment in foreign entities	—			(175		)	30			(204		)
Other comprehensive (loss) income	(193		)	1,866			(1,781		)	6,469
Comprehensive income	$	14,793		$	9,896		$	21,623		$	18,343


(1)	As of January 1, 2018, the Company adopted ASC 606 using the full retrospective method. Accordingly, the Company has recast certain amounts in the prior periods presented. See Note 1 below for additional discussion.

See Notes to Condensed Consolidated Financial Statements.

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YELP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2018			2017⁽¹⁾
OPERATING ACTIVITIES:
Net income attributable to common stockholders	$	23,404		$	11,874
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	31,250			31,470
Bad debt expense	19,285			15,239
Stock-based compensation	85,732			75,007
Other adjustments	(2,793		)	280
Changes in operating assets and liabilities:
Accounts receivable	(24,956		)	(19,810		)
Prepaid expenses and other assets	(2,085		)	(2,077		)
Accounts payable, accrued expenses and other liabilities	(13,647		)	15,628
Deferred revenue	(75		)	350
Net cash provided by operating activities	116,115			127,961
INVESTING ACTIVITIES:
Purchases of marketable securities	(572,788		)	(179,557		)
Maturities of marketable securities	460,800			191,000
Acquisition of a business, net of cash received	—			(50,544		)
Purchases of property, equipment and software	(18,699		)	(7,892		)
Capitalized website and software development costs	(15,238		)	(12,236		)
Other investing activities	64			69
Net cash used in investing activities	(145,861		)	(59,160		)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock for employee stock-based plans	21,835			29,556
Repurchases of common stock	(71,993		)	(7,743		)
Taxes paid related to the net share settlement of equity awards	(41,081		)	—
Net cash (used in) provided by financing activities	(91,239		)	21,813
Effect of exchange rate changes on cash, cash equivalents and restricted cash	197			864
CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(120,788		)	91,478
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period	566,404			289,518
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period	$	445,616		$	380,996
SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
Cash paid for income taxes, net	$	28,820		$	82
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property, equipment and software recorded in accounts payable, accrued expenses and other liabilities	$	2,393		$	3,555
Tax liability related to net share settlement of equity awards included in accrued liabilities	1,679			—

(1)

As of January 1, 2018, the Company adopted ASC 606 using the full retrospective method. Accordingly, the Company has recast certain amounts in the prior period presented. Also as of January 1, 2018, the Company adopted Accounting Standards Update No. 2016-18, "Statement of Cash Flows (Subtopic 230): Restricted Cash," and recast the prior period presented. See Note 1 below for additional discussion.

See Notes to Condensed Consolidated Financial Statements.

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YELP INC.

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 connects people with great local businesses by bringing "word of mouth" online and providing a platform for businesses and consumers to engage and transact. Yelp’s platform is transforming the way people discover local businesses; every day, millions of consumers visit its website or use its mobile app to find great local businesses to meet their everyday needs. Businesses of all sizes use the Yelp platform to engage with consumers at the critical moment when they are deciding where to spend their money.

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 28, 2018 (the "Annual Report").

The unaudited condensed consolidated balance sheet as of December 31, 2017 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 and certain balances that have been recast as a result of the adoption of new accounting pronouncements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, except as follows:

Revenue from Contracts with Customers—In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for such goods or services. ASC 606 also modified Subtopic Accounting Standards Codification 340-40, "Other Assets and Deferred Costs—Contracts with Customers," which required the Company to recognize a deferred cost asset for the incremental costs of obtaining a contract with a customer. The Company adopted ASC 606 effective January 1, 2018 using the full retrospective method and, accordingly, has recast each prior reporting period presented. The Company's adoption of ASC 606 resulted in the following adjustments to its previously reported results (in thousands):

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	As Previously Reported			Impact of ASC 606 Adoption			As Currently Reported
Condensed Consolidated Statement of Operations—Three Months Ended September 30, 2017
Net revenue	$	222,380		$	907		$	223,287
Costs and Expenses:
Sales and marketing	113,041			(83		)	112,958
General and administrative	26,694			907			27,601
Net income attributable to common stockholders	7,947			83			8,030

Condensed Consolidated Statement of Operations—Nine Months Ended September 30, 2017
Net revenue	$	628,567		$	2,839		$	631,406
Costs and Expenses:
Sales and marketing	327,559			(1,150		)	326,409
General and administrative	78,969			2,839			81,808
Net income attributable to common stockholders	10,724			1,150			11,874
Basic net income per share	0.13			0.02			0.15
Diluted net income per share	0.12			0.02			0.14

Condensed Consolidated Balance Sheet—As of December 31, 2017
Allowance for doubtful accounts	7,352			1,250			8,602
Other non-current assets	31,339			9,089			40,428
Retained earnings	70,081			9,089			79,170

Condensed Consolidated Statement of Cash Flows—Nine Months Ended September 30, 2017
Bad debt expense	12,400			2,839			15,239
Change in accounts receivable	(16,971		)	(2,839		)	(19,810		)
Other adjustments to reconcile net income to net cash provided by operating activities	(927		)	(1,150		)	(2,077		)

Statement of Cash Flows—In November 2016, FASB issued Accounting Standards Update No. 2016-18, "Statement of Cash Flows (Subtopic 230): Restricted Cash" ("ASU 2016-18"), which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The Company adopted the standard effective January 1, 2018 and recast the prior reported periods presented. The impact to the change in cash and cash equivalents balance previously reported on the consolidated statement of cash flows is presentation only; changes in restricted cash were previously included within investing activities and are now included in changes to the total cash balance within the condensed consolidated statements of cash flows.

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.

Significant Accounting Policies

Except as set forth below, there have been no material changes to the Company's significant accounting policies from those described in the Annual Report.

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Revenue Recognition—The Company generates revenue from the sale of of advertising products, transactions and other services, which correspond to the Company's major product lines. The Company recognizes revenue when all of the following criteria are met: the contract with the customer is identified; the performance obligations in the contract are identified; the transaction price is determined; the transaction price is allocated to the performance obligations in the contract; and revenue is recognized when (or as) the Company satisfies these performance obligations. The Company applies the portfolio practical expedient to account for contracts with customers in each category of revenue.

Revenue is recognized net of any taxes collected from customers, which are remitted to governmental authorities. The Company does not typically refund customers for services once it determines the performance obligations of the contract have been satisfied, but will assess any refund requests from customers and partners on a case by case basis. The Company records an allowance for potential future refunds, which is estimated based on historical trends and recorded as a reduction of net revenue.

Advertising. The Company generates advertising revenue primarily through the display of advertising products on its website and mobile app. These arrangements are evidenced by either written or electronic acceptance of a contract that stipulates the types of advertising to be delivered, the timing and pricing. Performance-based advertising placements are priced on a cost-per-click basis, while impression-based advertising placements are priced on a cost per thousand impressions basis. The Company recognizes revenue from the delivery of performance-based ads and impression-based ads in the period of delivery, in each case net of customer discounts, assuming all other revenue recognition criteria are met. The Company also offers businesses premium features in connection with their business listing pages pursuant to fixed monthly fees, and recognizes revenue from such offerings over the service period, assuming all other revenue recognition criteria are met.

The Company also generates advertising revenue through indirect sales of advertising products, such as through reseller contracts that allow partners to sell Yelp Branded Profiles to their clients and the monetization of remnant advertising inventory through third-party ad networks, and recognizes revenue in the period of delivery, assuming all other revenue recognition criteria are met.

Transactions. The Company generates transactions revenue from revenue-sharing partner contracts, the sale of vouchers through the Company's "Yelp Deals" and "Yelp Gift Certificates" products, and, through October 10, 2017, Yelp Eat24 as a standalone product.

The Company's transactions platform provides consumers with the ability to complete food delivery and other transactions through third parties directly on Yelp. The Company earns a per-transaction commission fee pursuant to partnership contracts for acting as an agent for these transactions, which it recognizes on a net basis and includes in revenue upon completion of a transaction, assuming all other revenue recognition criteria are met.

Other Services. The Company generates other services revenue through subscription services contracts, such as sales of monthly subscriptions to its Yelp Reservations, Yelp Nowait and Yelp WiFi Marketing products, licensing contracts for access to Yelp data and other non-advertising, non-transaction partnerships. Subscription revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the service is made available to customers, assuming all other revenue recognition criteria are met.

Contracts with Multiple Performance Obligations. Contracts with customers can include multiple performance obligations, where revenue is allocated to each performance obligation based on its relative standalone selling price ("SSP"). The Company determines SSP based on the prices of the promised goods or services charged when sold separately to customers, which are determined using contractually stated prices. The various products and services comprising contracts with multiple performance obligations are typically capable of being distinguished and accounted for as separate performance obligations.

Estimates and assumptions include determining variable consideration, identifying the nature and timing of satisfaction of performance obligations, and calculating the SSP of performance obligations. The Company allocates revenue to each of the performance obligations included in a contract with multiple performance obligations at the inception of the contract. The Company applies the invoice practical expedient to depict the value transferred to the customer and measure of progress towards completion of its obligations. The Company considers the right to receive consideration from a customer to correspond directly with the value to the customer of its performance completed to date. Because the Company considers contracts month-to-month, variable consideration is resolved at the time of invoicing, which eliminates the use of estimates in determining the transaction price. The Company does not consider the effects of the time value of money as the majority of the Company’s contracts are invoiced on a monthly basis, one month in arrears.

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Accounts Receivable, Net, and Payment Terms—The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an accounts receivable balance when revenue is recognized prior to or at the time of invoicing the customer. Payment terms and conditions vary by contract type and the service being provided. For advertising services, the Company typically invoices customers on a monthly basis, one month in arrears, and payment is collected either at the end of each billing period or up to 30 days after the end of the billing period. For transaction services, the Company's commission fee on each transaction is collected either at the time of the transaction, or up to 30 days after the end of the billing period. For subscription services, the Company typically invoices one month in advance, and payment is collected at the beginning of each billing period.

Allowance for Doubtful Accounts—The Company maintains an allowance for doubtful accounts receivable. The allowance reflects the Company's best estimate of probable losses inherent in the accounts receivable balance. It is based upon historical experience and loss patterns, the number of days that billings are past due, an evaluation of the potential risk of loss associated with delinquent accounts and known delinquent accounts. When new information becomes available that allows the Company to more accurately estimate the allowance, it makes an adjustment, which is considered a change in accounting estimate. The carrying value of accounts receivable approximates their fair value.

Deferred Contract Costs—The Company classifies certain sales incentive compensation costs as incremental to obtaining the related contract. These costs are capitalized in the period in which they are incurred and amortized on a straight-line basis over the expected customer life of the associated contract. The Company uses a straight line basis as it expects the benefit of these costs to be realized uniformly over the amortization period. The amortization periods for contract costs, which extend up to 41 months, were determined based on both qualitative and quantitative factors, including product lifecycle attributes and customer retention historical data. For contract costs with amortization periods of less than 12 months, the Company applies a practical expedient to expense such costs as incurred. The Company assesses deferred contract costs for impairment on a quarterly basis. Amortized contract costs are recorded within sales and marketing expense on the consolidated statements of operations. Deferred contract costs are included within other non-current assets on the Company's consolidated balance sheets (see Note 8).

Deferred Revenue—The Company records deferred revenue when it has received consideration, or has the right to receive consideration, in advance of the transfer of the performance obligations of the contract to the customer.

Recent Accounting Pronouncements Not Yet Effective

Lease Accounting

In February 2016, FASB issued Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASC 842"). ASC 842 supersedes the previous accounting guidance for leases included within Accounting Standards Codification 840, "Leases" ("ASC 840"). The new guidance generally requires an entity to recognize on its balance sheet operating and financing lease liabilities and corresponding right-of-use assets, as well as to recognize the associated lease expenses on its statements of operations in a manner similar to that required under current accounting rules. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The new standard initially required a modified retrospective transition for existing leases to each prior reporting period presented. However, in July 2018, FASB issued Accounting Standards Update No. 2018-11, "Targeted Improvements to ASC 842" ("ASU 2018-11"), which provides entities with the option to begin applying ASC 842 at the adoption date rather than at the beginning of the earliest period presented (the "Effective Date Method"). Entities using the Effective Date Method recognize a cumulative-effect adjustment to the opening balance of retained earnings (or accumulated deficit) in the period of adoption.

The Company plans to adopt ASC 842 on January 1, 2019 using the Effective Date Method by recording a cumulative-effect adjustment to retained earnings (or accumulated deficit) as of January 1, 2019. As a result, the Company will continue to disclose comparative reporting periods under the previous accounting guidance, ASC 840. The Company continues to evaluate the impact of ASC 842 on its consolidated financial statements and accounting processes. Based on these ongoing evaluations, the Company currently expects the most significant changes will be related to the recognition of operating lease right-of-use assets and operating lease liabilities on its consolidated balance sheet in the amounts of approximately $240 million to $260 million and approximately $270 million to $290 million, respectively. The Company does not expect the impact on its consolidated statement of operations to be material. These estimates are based on the Company's office lease portfolio and, to a much lesser extent, its lease portfolio of computer equipment, each as of September 30, 2018. The ultimate impact of the Company's adoption of ASC 842 on its financial statements may change for reasons including, but not limited to:


•	finalization of the impact analysis of the new standard;


•	new lease contracts entered into during the three months ending December 31, 2018 that result in additional lease assets and lease liabilities;


•	changes in discount rates used to calculate the initial lease liability;

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•	significant changes in foreign exchange rates applied to lease liabilities and right-of-use assets denominated in currencies other than U.S. dollars; and


•	changes in the Company's expectations for renewal options of existing leases.

Other Pronouncements

In January 2017, FASB issued Accounting Standards Update No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). This new guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new standard, entities will perform goodwill impairment tests by comparing fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

In March 2017, FASB issued Accounting Standards Update No. 2017-08, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities" ("ASU 2017-08"). This new guidance requires entities to amortize purchased callable debt securities held at a premium to the earliest call date. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company does not expect the adoption of ASU 2017-08 to have a material impact on its consolidated financial statements.

In June 2018, FASB issued Accounting Standards Update No. 2018-07, "Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting" ("ASU 2018-07"). This new guidance changes the accounting for non-employee share-based payments to align with the accounting for employee stock compensation. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.

In August 2018, FASB issued Accounting Standards Update No. 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" (“ASU 2018-13”), which amends Accounting Standards Codification 820, "Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-13 on its consolidated financial statements.

In August 2018, FASB issued Accounting Standards Update No. 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract" ("ASU 2018-15"). This new guidance requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. ASU 2018-15 generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. ASU 2018-15 is effective for the first interim period within annual reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently assessing the impact of ASU 2018-15 on its consolidated financial statements and related disclosures.

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 and assumptions that affect the reported amounts of assets and liabilities and 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. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates.

2. CASH, CASH EQUIVALENTS AND RESTRICTED CASH

Cash, cash equivalents and restricted cash as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands):

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	September 30, 2018		December 31, 2017

Cash	$	166,336	$	283,085
Cash equivalents	257,159		264,765
Total cash and cash equivalents	$	423,495	$	547,850
Restricted cash	22,121		18,554
Total cash, cash equivalents and restricted cash	$	445,616	$	566,404

As of September 30, 2018 and December 31, 2017, the Company had letters of credit collateralized fully by bank deposits which totaled $22.1 million and $18.6 million, respectively. These letters of credit primarily relate to lease agreements for certain of the Company’s offices, which are required to be maintained and issued to the landlords of each facility. Each letter of credit is subject to renewal annually until the applicable lease expires. As the bank deposits have restrictions on their use, they are classified as restricted cash on the Company's condensed consolidated balance sheets.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s investments in money market accounts are recorded as cash equivalents at fair value in the condensed consolidated balance sheets. All other financial instruments are classified as held-to-maturity investments and, accordingly, are recorded at amortized cost; however, the Company is required to determine the fair value of these investments on a recurring basis to identify any potential impairment. 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 commercial paper, corporate bonds, U.S. government bonds, agency bonds and agency discount notes 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 Company’s financial instruments measured at fair value as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018								December 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash Equivalents:
Money market funds	$	219,742	$	—	$	—	$	219,742	$	217,838	$	—	$	—	$	217,838
Commercial paper	—		37,417		—		37,417		—		46,927		—		46,927
Marketable Securities:
Commercial paper	—		158,506		—		158,506		—		138,412		—		138,412
Corporate bonds	—		137,967		—		137,967		—		69,926		—		69,926
U.S. government bonds	—		69,208		—		69,208		—		—		—		—
Agency bonds	—		48,047		—		48,047		—		78,913		—		78,913
Agency discount notes	—		—		—		—		—		10,989		—		10,989
Total cash equivalents and marketable securities	$	219,742	$	451,145	$	—	$	670,887	$	217,838	$	345,167	$	—	$	563,005

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4. MARKETABLE SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of securities held-to-maturity as of September 30, 2018 and December 31, 2017 were as follows (in thousands):



	September 30, 2018
Short-term marketable securities:		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper		$	158,506	$	—	$	—		$	158,506
Corporate bonds		138,141		—		(174		)	137,967
U.S. government bonds		69,241		—		(33		)	69,208
Agency bonds		48,114		—		(67		)	48,047
Total short-term marketable securities		414,002		—		(274		)	413,728
Total marketable securities		$	414,002	$	—	$	(274	)	$	413,728



	December 31, 2017
Short-term marketable securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	138,412	$	1	$	(1	)	$	138,412
Corporate bonds	45,006		—		(41		)	44,965
Agency bonds	78,958		—		(45		)	78,913
Agency discount bonds	$	10,990	$	—	$	(1	)	$	10,989
Total short-term marketable securities	$	273,366	$	1	$	(88	)	$	273,279
Long-term marketable securities:
Corporate bonds	$	25,032	$	—	$	(71	)	$	24,961
Total long-term marketable securities	$	25,032	$	—	$	(71	)	$	24,961
Total marketable securities	$	298,398	$	1	$	(159	)	$	298,240

The following tables present gross unrealized losses and fair values for those securities that were in an unrealized loss position as of September 30, 2018 and December 31, 2017, aggregated by investment category and the length of time that the individual securities have been in a continuous loss position (in thousands):



	September 30, 2018
	Less Than 12 Months					12 Months or Greater				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Corporate bonds	$	132,992	$	(174	)	$	—	$	—	$	132,992	$	(174	)
Agency bonds	48,047		(67		)	—		—		48,047		(67		)
U.S. government bonds	69,208		(33		)	—		—		69,208		(33		)
Commercial paper	—		—			—		—		—		—
Total	$	250,247	$	(274	)	$	—	$	—	$	250,247	$	(274	)

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	December 31, 2017
	Less Than 12 Months					12 Months or Greater				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Agency bonds	$	78,913	$	(45	)	$	—	$	—	$	78,913	$	(45	)
Corporate bonds	62,927		(112		)	—		—		62,927		(112		)
Agency discount notes	10,989		(1		)	—		—		10,989		(1		)
Commercial paper	3,975		(1		)	—		—		3,975		(1		)
Total	$	156,804	$	(159	)	$	—	$	—	$	156,804	$	(159	)

The Company periodically reviews its investment portfolio for other-than-temporary impairment. The Company considers such factors as the duration, severity and reason for the decline in value, and the potential recovery period. The Company also considers whether it is more likely than not that it will be required to sell the securities before the recovery of their amortized cost basis, and whether the amortized cost basis cannot be recovered as a result of credit losses. During the three and nine months ended September 30, 2018 and 2017, the Company did not recognize any other-than-temporary impairment loss.

5. PROPERTY, EQUIPMENT AND SOFTWARE, NET

Property, equipment and software, net as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands):



	September 30, 2018			December 31, 2017
Capitalized website and internal-use software development costs	$	102,004		$	81,710
Leasehold improvements	79,589			74,236
Computer equipment	40,129			32,450
Furniture and fixtures	17,351			16,435
Telecommunication	4,554			3,996
Software	1,515			1,212
Total	245,142			210,039
Less accumulated depreciation	(134,243		)	(106,388		)
Property, equipment and software, net	$	110,899		$	103,651

Depreciation expense was approximately $9.8 million and $9.2 million for the three months ended September 30, 2018 and 2017, respectively, and approximately $28.6 million and $25.8 million for the nine months ended September 30, 2018 and 2017, respectively.

6. 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 and liabilities acquired. The Company performed its annual goodwill impairment analysis during the three months ended September 30, 2018 and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value.

The changes in carrying amount of goodwill during the nine months ended September 30, 2018 were as follows (in thousands):



Balance as of December 31, 2017	$	107,954
Effect of foreign currency translation	(1,631		)
Balance as of September 30, 2018	$	106,323

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Intangible assets at September 30, 2018 and December 31, 2017 consisted of the following (dollars in thousands):



	September 30, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Life
Business relationships	$	9,918	$	(1,625	)	$	8,293	9.7	years
Developed technology	7,832		(3,189		)	4,643		3.4	years
Content	3,912		(3,681		)	231		1.0	years
Domains and data licenses	2,869		(2,231		)	638		1.6	years
Trademarks	877		(506		)	371		1.4	years
User relationships	146		(80		)	66		1.5	years
Total	$	25,554	$	(11,312	)	$	14,242



	December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Life
Business relationships	$	9,918	$	(896	)	$	9,022	10.3	years
Developed technology	7,832		(2,071		)	5,761		4.1	years
Content	4,005		(3,610		)	395		1.8	years
Domain and data licenses	2,869		(1,847		)	1,022		2.2	years
Trademarks	877		(287		)	590		2.2	years
User relationships	146		(43		)	103		2.2	years
Total	$	25,647	$	(8,754	)	$	16,893

Amortization expense was $0.9 million and $1.4 million for the three months ended September 30, 2018 and 2017, respectively, and $2.7 million and $5.7 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, the estimated future amortization of purchased intangible assets for (i) the remaining three months of 2018, (ii) each of the succeeding four years, and (iii) thereafter is as follows (in thousands):



Year Ending December 31,	Amount
2018 (from October 1, 2018)	$	882
2019	3,277
2020	2,402
2021	2,262
2022	1,045
Thereafter	4,374
Total amortization	$	14,242

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7. ACQUISITIONS AND DISPOSALS

Nowait, Inc.

On February 28, 2017, the Company acquired Nowait, Inc. ("Nowait"). In connection with the acquisition, all outstanding capital stock and options and warrants to purchase capital stock of Nowait — including the 20% equity investment in Nowait the Company acquired in July 2016 — were converted into the right to receive an aggregate of $39.8 million in cash. Of the total amount of consideration paid in connection with the acquisition, $7.9 million is being held in escrow for a two-year period after the closing to secure the Company’s indemnification rights. The key purpose underlying the acquisition was to secure waitlist system and seating tool technology. The Company utilized an income approach to determine the valuation of the Company’s existing equity investment in Nowait as of the acquisition date. The carrying value of the Company’s investment approximated its fair value.

The acquisition was accounted for as a business combination in accordance with Accounting Standards Codification Topic 805, "Business Combinations" ("ASC 805"), with the results of Nowait’s operations included in the Company’s condensed consolidated financial statements from February 28, 2017. The final purchase price allocation is as follows (in thousands):



	February 28, 2017
Fair value of purchase consideration
Cash:
Distributed to Nowait stockholders	$	31,892
Held in escrow account	7,945
Total purchase consideration	$	39,837
Fair value of net assets acquired:
Cash and cash equivalents	$	1,004
Intangible assets	12,670
Goodwill	25,959
Other assets	1,065
Total assets acquired	40,698
Liabilities assumed	(861		)
Total liabilities assumed	(861		)
Net assets acquired	$	39,837

Estimated useful lives and the amount assigned to each class of intangible assets acquired are as follows (dollars in thousands):



Intangible Asset Type	Amount Assigned		Useful Life
Enterprise restaurant relationships	$	8,500	12.0 years
Acquired technology	2,900		5.0 years
Trademarks	610		3.0 years
Local restaurant relationships	600		5.0 years
User relationships	60		3.0 years
Weighted average			9.6 years

The intangible assets are being amortized on a straight-line basis, which reflects the pattern in which the economic benefits of the intangible assets are being utilized. The goodwill results from the Company’s opportunity to drive daily engagement in its key restaurant vertical by allowing consumers to move more quickly from search and discovery to transacting at a local business. None of the goodwill is deductible for tax purposes.

The Company recorded no acquisition-related transaction costs for the three months ended September 30, 2018 and 2017, and zero and $0.1 million for the nine months ended September 30, 2018 and 2017, respectively, which were included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

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The condensed consolidated statements of operations for the three and nine months ended September 30, 2018 include $1.3 million and $3.9 million of revenue attributable to the Nowait product, respectively. The Company completed its integration of Nowait's operations into those of the Company during the three months ended December 31, 2017 and, as such, determining Nowait's contribution to the net income of the Company for the three and nine months ended September 30, 2018 is impracticable.

The condensed consolidated statements of operations for the three and nine months ended September 30, 2017 include $1.3 million and $2.6 million of revenue, respectively, and $1.9 million and $5.1 million of net loss, respectively, attributable to Nowait.

Turnstyle Analytics Inc.

On April 3, 2017, the Company acquired all of the equity interests in Turnstyle Analytics Inc. ("Turnstyle") for $20.6 million, approximately $1.0 million of which represents compensation cost due to a continuous service requirement, and the remainder of which represents purchase consideration. Of the total consideration paid in connection with the acquisition, $3.1 million was initially held in escrow for an 18-month period after the closing to secure the Company’s indemnification rights. The balance remaining in the escrow fund was $3.0 million as of September 30, 2018, and the remaining escrow funds were released in October 2018. The key factor underlying the acquisition was to obtain a customer retention and loyalty product in the form of a location-based marketing and analytics platform that provides Wi-Fi as a digital marketing tool to expand its product offerings for local businesses.

The acquisition was accounted for as a business combination in accordance with ASC 805, with the results of Turnstyle’s operations included in the Company’s condensed consolidated financial statements from April 3, 2017. The final purchase price allocation is as follows (in thousands):



	April 3, 2017
Fair value of purchase consideration
Cash:
Distributed to Turnstyle stockholders	$	16,648
Held in escrow account	3,093
Total purchase consideration	$	19,741
Fair value of net assets acquired:
Cash and cash equivalents	$	30
Intangible assets	4,252
Goodwill	16,048
Other assets	250
Total assets acquired	20,580
Deferred tax liability	(450		)
Liabilities assumed	(389		)
Total liabilities assumed	(839		)
Net assets acquired	$	19,741

Estimated useful lives and the amount assigned to each class of intangible assets acquired are as follows (dollars in thousands):



Intangible Asset Type	Amount Assigned		Useful Life
Acquired technology	$	3,250	5.0 years
Business relationships	672		5.0 years
Trademarks	250		3.0 years
User relationships	80		3.0 years
Weighted average			4.9 years

The intangible assets are being amortized on a straight-line basis, which reflects the pattern in which the economic benefits of the intangible assets are being utilized. The goodwill results from the Company’s opportunity to expand its product offerings to local businesses through the Turnstyle marketing and analytics platform, which the Company renamed Yelp WiFi Marketing. None of the goodwill is deductible for tax purposes.

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The Company recorded no acquisition-related transaction costs for the three and nine months ended September 30, 2018, and zero and $0.3 million for the three and nine months ended September 30, 2017, respectively, which were included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

The condensed consolidated statements of operations for the three and nine months ended September 30, 2018 include $0.9 million and $2.4 million of revenue attributable to Yelp WiFi Marketing, respectively.

The Company completed its integration of Turnstyle's operations into those of the Company during the three months ended December 31, 2017 and, as such, determining Turnstyle's contribution to the net income of the Company for the three and nine months ended September 30, 2018 is impracticable.

The condensed consolidated statements of operations for the three and nine months ended September 30, 2017 include $0.4 million and $0.8 million of revenue, respectively, and $4.0 million and $4.6 million of net loss, respectively, attributable to Turnstyle.

Eat24, LLC

On October 10, 2017, pursuant to the terms of a Unit Purchase Agreement, dated as of August 3, 2017 (the "Purchase Agreement"), by and among the Company, Eat24, LLC, a wholly-owned subsidiary of the Company ("Eat24"), Grubhub Inc. ("Grubhub") and Grubhub Holdings Inc. ("Purchaser"), a wholly-owned subsidiary of Grubhub, the Company completed the sale of all of the outstanding equity interests in Eat24 to the Purchaser (the "Disposal"). Immediately prior to the closing of the Disposal, the Company transferred certain assets to Eat24, which consisted of assets that were material to or necessary for the operation of the Eat24 business that were not then owned by Eat24. The Company entered into a Marketing Partnership Agreement ("Partnership Agreement") with the Purchaser concurrently with the Purchase Agreement. The purpose of the Disposal was to further capitalize on the Company's strong market position of connecting people with local businesses by selling Eat24 to the Purchaser, which has a strong presence in online and mobile food ordering, and entering into the Partnership Agreement, pursuant to which the Company earns a fee on all food orders placed through the Grubhub restaurant network, including Eat24 restaurants, that originate on the Company's Platform.

The Company received $251.7 million in cash at closing; the Purchaser paid the remaining $28.8 million of the purchase price into an escrow account, which will be held for an 18-month period after closing to secure the Purchaser's rights of indemnification under the Purchase Agreement and is presented on the Company's consolidated balance sheets as an other non-current asset (see Note 8). The Company received $1.0 million in additional purchase consideration on December 14, 2017 as a net working capital adjustment. As a result of the sale, the Company recognized a pre-tax gain of $164.8 million during the three months ended December 31, 2017, which is included in gain on disposal of a business unit in the Company's consolidated statement of operations, and which is net of $0.3 million in Disposal-related costs. Prior to the Disposal, Eat24 was its own reporting unit and $110.8 million of goodwill associated with the Eat24 reporting unit was derecognized and included with the net assets disposed. The gain recognized on the sale of Eat24 decreased by $1.1 million to $163.7 million as a result of an increase in the net assets of Eat24 as of the closing date due to the Company's adoption of ASC 606 on January 1, 2018 (see Note 1), which related to the recognition of capitalized contract costs.

The Disposal was accounted for as an asset group disposal in accordance with Accounting Standards Codification 360, "Property, Plant, and Equipment." The results of Eat24's operations are included in the Company's consolidated financial statements through October 10, 2017. The loss before provision for income taxes attributable to Eat24 for the three and nine months ended September 30, 2017 was $2.7 million and $11.0 million, respectively.

The Company acquired Eat24 on February 9, 2015. The final disbursement from the escrow account created to secure indemnification obligations related to the Company's acquisition of Eat24 was completed in the three months ended March 31, 2018.

8. OTHER NON-CURRENT ASSETS

Other non-current assets as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands):



	September 30, 2018		December 31, 2017
Escrow deposit	$	28,750	$	28,750
Deferred contract costs	11,367		9,089
Other	2,656		2,589
Total other non-current assets	$	42,773	$	40,428

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The escrow deposit consists of the funds held in escrow in connection with the Disposal of Eat24 (see Note 7), which are being held for an 18-month period after closing (provided, however, that any amounts subject to unresolved claims as of the end of the escrow period will remain in escrow until such claims are resolved) to secure the Purchaser's rights of indemnification under the Purchase Agreement.

Deferred contract costs as of September 30, 2018 and December 31, 2017, and changes in deferred contract costs during the nine months ended September 30, 2018, were as follows (in thousands):



	Nine Months Ended September 30, 2018

Balance, beginning of period	$	9,089
Add: costs deferred on new contracts	10,629
Less: amortization recorded in sales and marketing expenses	(8,351		)
Balance, end of period	$	11,367

9. CONTRACT BALANCES

The allowance for doubtful accounts as of September 30, 2018, and changes in the allowance for doubtful accounts during the nine months ended September 30, 2018, were as follows (in thousands):



	Nine Months Ended September 30, 2018

Balance, beginning of period	$	8,602
Add: bad debt expense	19,285
Less: write-offs, net of recoveries	(19,002		)
Balance, end of period	$	8,885

Contract liabilities consist of deferred revenue, which is recorded on the consolidated balance sheets when the Company has received consideration, or has the right to receive consideration, in advance of the transfer of the performance obligations of the contract to the customer.

As of September 30, 2018, deferred revenue was $3.4 million, the majority of which is expected to be recognized as revenue in the subsequent three-month period ending December 31, 2018. Changes in deferred revenue during the nine months ended September 30, 2018 were as follows (in thousands):



	Nine Months Ended September 30, 2018

Balance, beginning of period	$	3,469
Less: Recognition of deferred revenue from beginning balance	(3,132		)
Add: Net increase in current period contract liabilities	3,055
Balance, end of period	$	3,392

No other contract assets or liabilities are recorded on the Company's condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017.

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10. ACCRUED LIABILITIES

Accrued liabilities as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands):



	September 30, 2018		December 31, 2017
Accrued compensation	$	27,652	$	17,725
Accrued sales and marketing	6,057		3,458
Accrued tax liabilities	4,785		32,617
Accrued cost of revenue	5,397		3,022
Other accrued expenses	14,673		16,843
Total accrued liabilities	$	58,564	$	73,665

11. LONG-TERM LIABILITIES

Long-term liabilities as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands):



	September 30, 2018		December 31, 2017
Deferred rent	$	30,446	$	26,904
Other long-term liabilities	4,532		3,833
Total long-term liabilities	$	34,978	$	30,737

12. COMMITMENTS AND CONTINGENCIES

Office Facility Leases—The Company leases its office facilities under operating lease agreements that expire from 2018 to 2029. Certain lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period. Rental expense was $13.7 million and $11.4 million for the three months ended September 30, 2018 and 2017, respectively, and $37.7 million and $31.0 million for the nine months ended September 30, 2018 and 2017, respectively.

The Company has subleased certain office facilities under operating lease agreements that expire in 2021. The Company recognizes sublease rentals as a reduction in rental expense on a straight-line basis over the lease period. Sublease rental income was $0.5 million and $0.5 million for the three months ended September 30, 2018 and 2017, respectively, and $1.7 million and $1.5 million for the nine months ended September 30, 2018 and 2017, respectively.

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, naming as defendants the Company and certain of its officers. The complaint, which the plaintiff amended on June 25, 2018, alleges violations of the Exchange Act 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 seeks unspecified monetary damages and other relief. On August 2, 2018, the Company and the other defendants filed a motion to dismiss the amended complaint. The court held a hearing on the motion on September 20, 2018 and has not yet issued a ruling. Due to the preliminary nature of this lawsuit, the Company is unable to reasonably estimate either the probability of incurring a loss or an estimated range of such loss, if any, from the lawsuit.

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 adverse 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.

Under the Purchase Agreement (see Note 7), the Company agreed to indemnify the Purchaser and certain related parties against certain losses arising out of Purchaser's acquisition of Eat24, including, but not limited to, any breach or inaccuracy of any representation or warranty made by the Company or Eat24 in the Purchase Agreement. The Company's indemnification obligations

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are subject to the terms and conditions set forth in the Purchase Agreement, and are capped at the purchase price received by the Company in the Disposal.

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 financial position, results of operations or cash flows.

13. STOCKHOLDERS’ EQUITY

The following table presents the number of shares authorized and issued as of the dates indicated:



	September 30, 2018		December 31, 2017
	Shares Authorized	Shares Issued	Shares Authorized	Shares Issued
Stockholders’ equity:
Common stock, $0.000001 par value	200,000,000	84,375,021	200,000,000	83,724,916
Undesignated Preferred Stock	10,000,000	—	10,000,000	—

Stock Repurchase Program

On July 31, 2017, the Company’s board of directors authorized a stock repurchase program under which the Company may repurchase up to $200.0 million of its outstanding common stock. 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.

The Company repurchased on the open market and retired 1,752,895 shares for an aggregate purchase price of $72.0 million during the nine months ended September 30, 2018.

Equity Incentive Plans

The Company has outstanding awards under three equity incentive plans: the Amended and Restated 2005 Equity Incentive Plan (the "2005 Plan"), the 2011 Equity Incentive Plan (the "2011 Plan") and the 2012 Equity Incentive Plan, as amended (the "2012 Plan"). In July 2011, the Company adopted the 2011 Plan, terminated the 2005 Plan and provided that no further stock awards were to be granted under the 2005 Plan. All outstanding stock awards under the 2005 Plan continue to be governed by their existing terms. Upon the effectiveness of the underwriting agreement in connection with the Company’s initial public offering ("IPO"), the Company terminated the 2011 Plan and all shares that were reserved under the 2011 Plan but not issued were assumed by the 2012 Plan. No further awards will be granted pursuant to the 2011 Plan. All outstanding stock awards under the 2011 Plan continue to be governed by their existing terms. Under the 2012 Plan, the Company has the ability to issue incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock units ("RSUs"), restricted stock awards ("RSAs"), performance units and performance shares. Additionally, the 2012 Plan provides for the grant of performance cash awards to employees, directors and consultants.

Stock Options

Stock options granted under the 2012 Plan are granted at a price per share not less than the fair value of a share of the Company’s common stock at date of grant. Options granted to date generally vest over a three- or four-year period, on one of four schedules: (a) 25% vesting at the end of one year and the remaining shares vesting monthly thereafter; (b) 10% vesting over the first year, 20% vesting over the second year, 30% vesting over the third year and 40% vesting over the fourth year; (c) ratably on a monthly basis; or (d) 35% vesting over the first year, 40% vesting over the second year and 25% vesting over the third year. Options granted are generally exercisable for up to 10 years. The Company issues new shares when stock options are exercised.

A summary of stock option activity for the nine months ended September 30, 2018 is as follows:

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	Options Outstanding
	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding - December 31, 2017	7,078,932		$	22.70	5.56	$	145,613
Granted	685,850		43.52
Exercised	(737,986	)	19.91
Canceled	(109,361	)	48.85
Outstanding - September 30, 2018	6,917,435		$	24.65	5.38	$	174,842
Options vested and exercisable as of September 30, 2018	5,543,179		$	21.71	4.60	$	157,306

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 $5.3 million and $9.8 million for the three months ended September 30, 2018 and 2017, respectively, and $18.1 million and $20.2 million for the nine months ended September 30, 2018 and 2017, respectively.

The weighted-average grant date fair value of options granted was $23.41 and $13.31 per share for the three months ended September 30, 2018 and 2017, respectively, and $18.89 and $15.35 per share for the nine months ended September 30, 2018 and 2017, respectively.

As of September 30, 2018, total unrecognized compensation costs related to unvested stock options was approximately $21.0 million, which is expected to be recognized over a weighted-average time period of 2.5 years.

RSUs

The cost of RSUs is determined using the fair value of the Company’s common stock on the date of grant. RSUs generally vest over a four-year period, on one of three schedules: (a) 25% vesting at the end of one year and the remaining vesting quarterly or annually thereafter; (b) 10% vesting over the first year, 20% vesting over the second year, 30% vesting over the third year and 40% vesting over the fourth year; or (c) ratably on a quarterly basis.

A summary of RSU activity for the nine months ended September 30, 2018 is as follows:



	Restricted Stock Units
	Number of Shares		Weighted-Average Grant Date Fair Value
Unvested - December 31, 2017	7,249,205		$	34.57
Granted	3,029,151		42.59
Released	(2,393,407	)	36.06
Canceled	(1,087,920	)	36.02
Unvested - September 30, 2018	6,797,029		$	37.39

As of September 30, 2018, the Company had approximately $242.0 million of unrecognized stock-based compensation expense related to RSUs, which is expected to be recognized over the remaining weighted-average vesting period of approximately 2.6 years.

Employee Stock Purchase Plan

The 2012 Employee Stock Purchase Plan, as amended ("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.

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There were no shares purchased by employees under the ESPP in the three months ended September 30, 2018 or 2017. Employees purchased 195,987 shares and 228,299 shares under the ESPP in the nine months ended September 30, 2018 and 2017, respectively, at weighted-average purchase prices of $36.42 per share and $23.73 per share, respectively. The Company recognized $0.7 million and $0.5 million of stock-based compensation expense related to the discounted share price provided to employees under the ESPP in the three months ended September 30, 2018 and 2017, respectively, and $2.0 million and $1.5 million in the nine months ended September 30, 2018 and 2017, 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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cost of revenue	$	1,162	$	993	$	3,345	$	2,931
Sales and marketing	7,941		7,305		23,514		21,434
Product development	14,536		11,976		41,878		34,428
General and administrative	5,555		5,035		16,995		16,214
Total stock-based compensation	$	29,194	$	25,309	$	85,732	$	75,007

The Company capitalized $1.9 million and $1.5 million of stock-based compensation expense as website development costs in the three months ended September 30, 2018 and 2017, respectively, and $5.9 million and $4.6 million in the nine months ended September 30, 2018 and 2017, respectively.

14. OTHER INCOME, NET

Other income, net for the three and nine months ended September 30, 2018 and 2017 consisted of the following (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Interest income, net	$	3,705	$	991	$	9,606	$	2,431
Transaction gain on foreign exchange	75		323		89		377
Other non-operating income, net	141		57		255		125
Other income, net	$	3,921	$	1,371	$	9,950	$	2,933

15. INCOME TAXES

Benefit from (provision for) income taxes for the three and nine months ended September 30, 2018 and 2017 consisted of the following (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018		2017
Benefit from (provision for) income taxes	$	684	$	(232	)	$	281	$	(417	)

The Company is subject to income tax 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 tax. The tax benefit for the nine months ended September 30, 2018 is $0.3 million, which is due to $1.2 million in U.S. federal, state and foreign income tax expense, offset by $1.5 million of net discrete tax benefit related to a change in the valuation allowance from return to provision true-ups and excess stock option benefits. The tax provision for the nine months ended September 30, 2017 is due to $0.4 million in U.S. state and foreign income tax expense.

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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 ("Ordinary" income), for the reporting period. For the three and nine months ended September 30, 2018, a discrete effective tax rate method was used in jurisdictions where a small change in estimated Ordinary income has a significant impact on the annual effective tax rate. The primary difference between the effective tax rate and the federal statutory tax rate relates to the valuation allowances on certain of the Company’s net operating losses, foreign tax rate differences and stock-based compensation expense. Jurisdictions where no benefit is recorded on forecasted losses were excluded from the consolidated effective tax rate. As of September 30, 2018, the total amount of gross unrecognized tax benefits was $24.4 million, $23.5 million of which is subject to a full valuation allowance and would not affect the Company’s effective tax rate if recognized. As of September 30, 2018, amounts related to the accrual of interest and penalties were immaterial. During the three months ended September 30, 2018, the Company’s gross unrecognized tax benefits increased by $2.0 million, an immaterial amount of which would affect the Company’s effective tax rate if recognized.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act makes broad and complex changes to the U.S. tax code that impact the Company's provision for income taxes, including, but not limited to, reducing the U.S. federal corporate tax rate from 35.0% to 21.0% (the "Tax Rate Reduction"), and requiring a one-time Deemed Repatriation Tax (the "Transition Tax") on certain un-repatriated earnings of foreign subsidiaries. However, because the Company has a net cumulative deficit on the earnings and profits of its foreign subsidiaries, it is not subject to the Transition Tax.

Prior to the effectiveness of the Tax Act, the Company did not recognize a deferred tax liability related to un-remitted foreign earnings because such earnings were expected to be reinvested indefinitely. Although the Company is not subject to the Transition Tax, an actual repatriation from its non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. However, it remains the Company’s intention to reinvest the earnings from its non-U.S. subsidiaries. As of September 30, 2018, the Company estimates that it had $3.3 million of cumulative earnings upon which U.S. income taxes had not been provided. Determination of the amount of unrecognized deferred tax liability with respect to un-remitted foreign earnings, if any, is not practicable.

In March 2018, FASB issued Accounting Standards Update No. 2018-05, "Income Taxes Topic (740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118" ("ASU 2018-05") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As of September 30, 2018, the Company's analysis for the Transition Tax was final; the Company considered its accounting for this area of the Tax Act to be complete as of such date and did not make any measurement-period adjustments related to it. However, the Company's accounting for other areas of the Tax Act was incomplete as of September 30, 2018. For the nine months ended September 30, 2018, the Company made measurement-period adjustments related to the re-measurement of deferred taxes and valuation allowance due to the Tax Rate Reduction previously estimated, but the adjustment had no material impact on the Company's income tax benefit. Since ongoing guidance and accounting interpretation for the Tax Act are expected over the next three months, the Company considers the accounting for areas of the Tax Act other than the Transition Tax to be incomplete as the Company continues to gather additional information and evaluate the provisions of the Tax Act and the application of ASU 2018-05. The Company expects to finalize the analysis and record any adjustments to provisional estimates no later than one year beyond the enactment date in accordance with ASU 2018-05. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

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 fiscal years subsequent to 2003 remain open to examination. In the Company’s most significant foreign jurisdictions — Canada, Ireland, the United Kingdom and Germany — the tax years subsequent to 2010 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. Although the timing of the resolution or closure of audits is not certain, the Company believes it is reasonably possible that its unrecognized tax benefits could be reduced by an immaterial amount over the 12 months following December 31, 2017.

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16. NET INCOME PER SHARE

Basic net income per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential shares of common stock outstanding during the period. Potential common shares consist of the incremental shares of common stock issuable upon the exercise of stock options, shares issuable upon the vesting of RSUs and, to a lesser extent, purchase rights related to the ESPP.

The following table presents the calculation of basic and diluted net income per share (in thousands, except per share data):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Basic net income per share:
Net income	$	14,986	$	8,030	$	23,404	$	11,874
Shares used in computation:
Weighted-average common shares outstanding	84,008		82,259		83,865		81,041
Basic net income per share attributable to common stockholders	$	0.18	$	0.10	$	0.28	$	0.15



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Diluted net income per share
Net income	14,986		8,030		23,404		11,874
Shares used in computation:
Weighted-average common shares outstanding	84,008		82,259		83,865		81,041
Stock options	3,011		3,253		3,096		3,179
Restricted stock units	1,656		1,921		2,240		1,877
Employee stock purchase program	49		—		70		—
Number of shares used in diluted calculation	88,724		87,433		89,271		86,097
Diluted net income per share attributable to common stockholders	$	0.17	$	0.09	$	0.26	$	0.14

The following weighted-average stock-based instruments were excluded from the calculation of diluted net income per share because their effect would have been anti-dilutive for the periods presented (in thousands):



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017
Stock options	1,694	1,793	1,681	1,911
Restricted stock units	591	871	106	978

17. INFORMATION ABOUT REVENUE AND GEOGRAPHIC AREAS

The Company considers operating segments to be components of the Company in which separate financial information is available that is 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.

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The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, 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 revenue by major product lines is based on the type of service provided and also aligns with the timing of revenue recognition.

Net Revenue

The following table presents the Company’s net revenue disaggregated by major product line for the periods presented (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Net revenue by product:
Advertising	$	232,502	$	200,502	$	672,712	$	566,085
Transactions	3,042		18,524		10,402		55,024
Other services	5,552		4,261		15,919		10,297
Total net revenue	$	241,096	$	223,287	$	699,033	$	631,406

During the three and nine months ended September 30, 2018 and 2017, no individual customer accounted for 10% or more of consolidated net revenue.

The following table presents the Company’s net revenue disaggregated by major geographic region for the periods indicated (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
United States	$	237,597	$	219,642	$	689,096	$	620,925
All other countries	3,499		3,645		9,937		10,481
Total net revenue	$	241,096	$	223,287	$	699,033	$	631,406

Long-Lived Assets

The following table presents the Company’s long-lived assets by geographic region for the periods indicated (in thousands):



	September 30, 2018		December 31, 2017
United States	$	108,900	$	100,990
All other countries	1,999		2,661
Total long-lived assets	$	110,899	$	103,651

18. RESTRUCTURING AND INTEGRATION

The following table presents the Company’s restructuring and integration costs for the periods indicated (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Restructuring and integration	$	—	$	35	$	—	$	286

On November 2, 2016, the Company announced plans to significantly reduce sales and marketing activities in markets outside of the United States and Canada. The restructuring plan was completed by December 31, 2017. No additional expense related to

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this restructuring plan is expected. No goodwill, intangible assets or other long-lived assets were impaired as a result of the restructuring plan. There were no remaining unpaid amounts related to this plan as of December 31, 2017.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part II, Item 1A and elsewhere in this Quarterly Report. See “Special Note Regarding Forward-Looking Statements” in this Quarterly Report.

Overview

As the leading local business review site in the United States, we offer consumers unmatched local business information, as well as a convenient platform on which they can discover, engage and transact with local businesses to meet their everyday needs. Our value proposition to businesses is simple: we provide the opportunity to connect with the millions of purchase-intent driven consumers through our ad products; messaging features, such as Request-A-Quote; our transactions platform; and our retention tools, such as Yelp WiFi Marketing, among other ways.

We derive substantially all of our revenue from the sale of advertising products. In the three months ended September 30, 2018, our net revenue was $241.1 million, which represented an increase of 8% from the three months ended September 30, 2017, and we recorded net income of $15.0 million and adjusted EBITDA of $50.3 million. In the nine months ended September 30, 2018, our net revenue was $699.0 million, which represented an increase of 11% from the nine months ended September 30, 2017, and we recorded net income of $23.4 million and adjusted EBITDA of $130.2 million. Our net revenue for the three and nine months ended September 30, 2018 was recognized in accordance with the new revenue recognition standard, Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"), on January 1, 2018. Although our adoption of ASC 606 did not significantly change our revenue recognition practices and policies, it impacted our previously reported net revenue, costs and expenses, net income, EBITDA and adjusted EBITDA, and our financial results for the three and nine months ended September 30, 2017 presented in this Quarterly Report have been recast to reflect ASC 606 accordingly. Please refer to Note 1 in our condensed consolidated financial statements for additional information regarding our adoption of ASC 606.

Our success is primarily the result of significant investment in our communities, employees, content, brand and technology. We believe that continued investment in our business provides our largest opportunity for future growth and plan to continue investing for long-term growth in our key strategies:

•

Driving Monetization. With our local sales force now fully transitioned to selling advertising plans without fixed durations (referred to as "non-term contracts"), we are shifting our focus to making our sales process more efficient, improving customer retention and diversifying our go-to-market strategy. For example, in the three months ended September 30, 2018, we began making improvements to our sales lead generation system and customer success efforts to better align them with selling and supporting non-term contracts. We are also continuing to explore ways to drive sales traffic through our high-margin self-serve and third-party reseller channels and to grow our high-value national and multi-location channels.

•

Strengthening Our Competitive Position in the Restaurant Category. Our restaurants category receives the most traffic and reviews of any category on our platform, allowing us to attract and retain a large consumer audience with relatively low acquisition costs and supporting our subscription and transaction revenue streams. In the three months ended September 30, 2018, food orders placed through our platform grew more than 30% compared to the three months ended September 30, 2017 as Grubhub expanded its restaurant network to more restaurants on our platform across the United States. In addition, growth in diners seated through our Yelp Reservations and Yelp Nowait products accelerated to 133% in the three months ended September 30, 2018 compared to the same period in 2017.

•

Generating Strong Usage and Engagement. We are focused on creating a compelling user experience to attract more new users and drive engagement on Yelp. In the three months ended September 30, 2018, we expanded the valuable information that we provide to consumers through the launch of our Open to All program, which allows businesses to indicate on their business listings pages whether they are safe and welcoming to everyone, regardless of race, ethnicity, national origin, sex, sexual orientation, gender identity and expression, religion or disability. We also continued our consumer protection efforts by making health scores available for restaurants in new geographic areas; we plan to incorporate health scores for additional areas in the coming months to cover markets across 42 states and three-quarters of the U.S. population.

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•

Building Out Our Home & Local Services Offering. In the three months ended September 30, 2018, advertising revenue and ad clicks from our home & local services category — already our largest revenue category — continued to grow faster than from any other category compared to the three months ended September 30, 2017. In addition to continuing to refine our Request-A-Quote feature in the third quarter, we began offering a Yelp Verified badge as a paid upgrade for certain licensed advertisers, primarily in our home & local services category. The badge indicates that we have verified the business's trade license and confirmed it was in good standing as of a certain date, allowing businesses to distinguish themselves as licensed and helping consumers make safe and confident decisions when selecting businesses for their projects.

During the remainder of 2018, we expect to continue investing in sales and marketing, including the expansion of our sales force, and capital expenditures, including increasing our office space and upgrading our technology and infrastructure to improve the ability of our platform to handle projected increases in usage and to enable the release of new features and solutions. As a result of this investment policy, we expect that our operating expenses will continue to increase for the foreseeable future.

As of September 30, 2018, we had 5,842 full-time employees, comprising 5,692 salaried employees and 150 non-salaried support staff, which represents an increase of 11% compared to September 30, 2017.

Key Metrics

We regularly review a number of metrics, including the key metrics below, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions. Unless otherwise stated, these metrics do not include metrics for Yelp Reservations, Yelp Nowait, Yelp WiFi Marketing, our business owner products, or Yelp Eat24, which we sold on October 10, 2017.

Reviews

Number of reviews represents the cumulative number of reviews submitted to Yelp since inception, as of the period end, including reviews that were not recommended or had been removed from our platform. In addition to the text of the review, each review includes a rating of one to five stars. We include reviews that are not recommended and that have been removed because all of them are either currently accessible on our platform or were accessible at some point in time, providing information that may be useful to users to evaluate businesses and individual reviewers. Because our automated recommendation software continually reassesses which reviews to recommend based on new information that becomes available, the "recommended" or "not recommended" status of reviews may change over time. Reviews that are not recommended or that have been removed do not factor into a business’s overall star rating. By clicking on a link on a reviewed business’s page on our website, users can access the reviews that are not currently recommended for the business, as well as the star rating and other information about reviews that were removed for violation of our terms of service.

As of September 30, 2018, approximately 158.4 million reviews were available on business listing pages, including approximately 35.4 million reviews that were not recommended, after 12.5 million reviews had been removed from our platform, either by us for violation of our terms of service or by the users who contributed them. The following table presents the number of cumulative reviews as of the dates indicated (in thousands):



	As of September 30,
	2018	2017
Reviews	170,865	142,036

Traffic

Traffic to our website and mobile app has three components: visitors to our non-mobile optimized website (our "desktop website"), visitors to our mobile-optimized website (our "mobile website") and mobile devices accessing our mobile app. We use the following metrics to measure each of these traffic streams:

Desktop and Mobile Website Unique Visitors. We calculate desktop unique visitors as the number of "users," as measured by Google Analytics, who have visited our desktop website at least once in a given month, averaged over a given three-month period. Similarly, we calculate mobile website unique visitors as the number of "users" who have visited our mobile website at least once in a given month, averaged over a given three-month period.

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Google Analytics, a product from Google LLC that provides digital marketing intelligence, measures “users” based on unique cookie identifiers. Because the numbers of desktop unique visitors and mobile website unique visitors are therefore based on unique cookies, an individual who accesses our desktop website or mobile website from multiple devices with different cookies may be counted as multiple desktop unique visitors or mobile website unique visitors, as applicable, and multiple individuals who access our desktop website or mobile website from a shared device with a single cookie may be counted as a single desktop unique visitor or mobile website unique visitor. In addition, although in some circumstances we use technology designed to block low-quality traffic, such as robots, spiders and other software, we may not be able to prevent all such traffic, and such technology may have the effect of blocking some valid traffic. For these and other reasons, the calculations of our desktop unique visitors and mobile website unique visitors may not accurately reflect the number of individuals actually using our platform at a particular time or during a particular reporting period.

App Unique Devices. We calculate app unique devices as the number of unique mobile devices using our mobile app in a given month, averaged over a given three-month period. Under this method of calculation, an individual who accesses our mobile app from multiple mobile devices will be counted as multiple app unique devices. Multiple individuals who access our mobile app from a shared device will be counted as a single app unique device.

We anticipate that our mobile traffic will be the driver of our growth for the foreseeable future and that traffic to our desktop website will fluctuate and generally decline as we focus on driving traffic to our mobile app, where we have our most engaged users and which reduces our reliance on Google and other search engines.

The following table presents our traffic for the periods indicated (in thousands):



	Three Months Ended September 30,
	2018	2017
Desktop Unique Visitors	68,807	83,592
Mobile Website Unique Visitors	74,789	73,508
App Unique Devices	34,025	30,162

We have discovered in the past, and expect to discover in the future, that portions of our desktop traffic, as measured by Google Analytics, have been attributable to robots. Because the traffic from robots does not represent valid consumer traffic, our reported desktop unique visitor metric for impacted periods reflects an adjustment to the Google Analytics measurement of our traffic to remove traffic that we have identified as originating from robots to provide greater accuracy and transparency. However, we cannot assure you that we will be able to identify all such traffic for any particular period. For additional information, please see the risk factor included under Part II, Item 1A under the heading “We rely on data from both internal tools and third parties to calculate certain of our performance metrics. Real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.”

Claimed Local Business Locations

The number of claimed local business locations represents the cumulative number of business locations that have been claimed on Yelp worldwide since 2008, as of a given date. We define a claimed local business location as each business address for which a business representative has visited our website and claimed the free business listing page for the business located at that address. The following table presents the number of cumulative claimed local business locations as of the dates presented (in thousands):



	As of September 30,
	2018	2017
Claimed Local Business Locations	4,790	3,963

As previously disclosed, we identified a software error that caused our reported claimed local business locations metric to be overstated for certain prior periods, including the third quarter of 2017. We have adjusted the number of claimed local business locations as of September 30, 2017 to account for the error. For additional information, please see the risk factor included under Part II, Item 1A under the heading “We rely on data from both internal tools and third parties to calculate certain of our performance metrics. Real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.”

Paying Advertising Accounts

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Paying advertising accounts comprise all business accounts from which we recognized advertising revenue in a given three-month period. As with our advertising revenue classification, paying advertising accounts excludes subscription services customers that are not also advertising customers.

The growth in paying advertising accounts in the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily due to our shift to selling non-term contracts in our local advertising business, which allowed our sales force to successfully sell our products to a broader range of customers, some of whom may not have purchased our products in the past because of the required initial term commitment. Although selling non-term contracts has increased the number of businesses purchasing our advertising products in a given quarter, we have also observed higher turnover rates for advertiser accounts with non-term contracts compared to advertiser accounts with fixed-term contracts. For example, although the number of new businesses that purchased our local advertising products in the three months ended September 30, 2018 was high compared to periods prior to our transition to non-term advertising, cancellations also increased following the record number of new paying advertising account additions in the first half of 2018. This increased level of offsetting cancellations, combined with a lower rate of new paying advertising account additions compared to the first half of 2018, resulted in flat paying advertising accounts for the three months ended September 30, 2018 compared to the three months ended June 30, 2018.

Based on these trends, we anticipate that the number of paying advertising accounts may be more volatile from quarter to quarter as our sales, customer success and other organizations adapt to selling to and supporting non-term contract customers.

The following table presents the number of paying advertising accounts during the periods presented (in thousands):



	Three Months Ended September 30,
	2018	2017
Paying Advertising Accounts	194	155

Results of Operations

Three and Nine Months Ended September 30, 2018 and 2017

The following table sets forth our results of operations for the periods indicated and as a percentage of net revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of the results of operations to be anticipated for the full year 2018 or any future period.

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	Three Months Ended September 30,								Nine Months Ended September 30,
	2018				2017				2018				2017
	Amount		% of revenue		Amount		% of revenue		Amount		% of revenue		Amount		% of revenue

	(in thousands, except percentages)
Net revenue by product:
Advertising	$	232,502	96	%	$	200,502	90	%	$	672,712	96	%	$	566,085	90	%
Transactions	3,042		2		18,524		8		10,402		2		55,024		9
Other services	5,552		2		4,261		2		15,919		2		10,297		1
Total net revenue	$	241,096	100	%	$	223,287	100	%	$	699,033	100	%	$	631,406	100	%
Costs and expenses:
Cost of revenue (exclusive of depreciation and amortization shown separately below)	14,177		6	%	19,312		9	%	43,618		6	%	54,282		9	%
Sales and marketing	121,759		51		112,958		51		362,054		52		326,409		52
Product development