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 I, Item 1A in our Annual Report, as updated by Part II, Item 1A of this Quarterly Report. See " Special Note Regarding Forward-Looking Statements " in this Quarterly Report. Overview As one of the best known internet brands inthe United States ,Yelp is a trusted local resource for consumers and a partner in success for businesses of all sizes. Consumers trust us for our more than 220 million ratings and reviews of businesses across a broad range of categories, while businesses advertise with us to reach our large audience of purchase-oriented and generally affluent consumers. We believe our ability to provide value to both consumers and businesses not only fulfills our mission to connect consumers with great local businesses, but also positions us well in the local, digital advertising market inthe United States . We generate substantially all of our revenue from the sale of performance-based advertising products, which our advertising platform matches to individual consumers through auctions priced on a cost-per-click ("CPC") basis. In the three months endedSeptember 30, 2022 , our net revenue was$308.9 million , up 15% from the three months endedSeptember 30, 2021 , and we recorded net income of$9.1 million and adjusted EBITDA of$73.9 million . In the nine months endedSeptember 30, 2022 , our net revenue was$884.4 million , which represented an increase of 17% from the nine months endedSeptember 30, 2021 , and we recorded net income of$16.2 million and adjusted EBITDA of$189.4 million . For information on how we define and calculate adjusted EBITDA, and a reconciliation of this non-GAAP financial measure to net income, see " Non-GAAP Financial Measures " below.
In the third quarter of 2022, our strategic investments in product and marketing continued to drive further progress on our revenue growth initiatives:
•Grow quality leads and monetization in Services. Our focus on increasing lead quality and monetization yielded a 15% year-over-year increase in advertising revenue from Services businesses in the third quarter, driven by growth in the Home Services category, which accelerated from approximately 20% year-over-year in the second quarter to approximately 25% year-over-year in the third quarter. We achieved this growth despite softer consumer demand for Services categories onYelp in the third quarter; Request-a-Quote requests remained above pre-pandemic levels, but decreased by approximately 10% year over year, in line with the second quarter. To capitalize on the growth in Services advertising by providing a differentiated product experience, we continued to refine the Request-a-Quote flow and underlying matching technology that connects consumers with the right Services businesses, which delivered a greater number of quality requests to advertisers in the third quarter compared to the prior-year period. At the same time, we worked to improve the Request-a-Quote inbox experience to help business owners more easily manage their consumer leads fromYelp . •Drive sales through the most efficient channels. We continued to operate efficiently across all sales channels in the third quarter. As a result, revenue from our Self-serve and Multi-location channels accounted for approximately 49% of advertising revenue in the third quarter, while our Local sales team also remained productive. To grow our Self-serve channel and more efficiently acquire small and medium-sized business ("SMB") customers, we continued to enhance the digital claim and ads purchase flows, including by providing advertisers with more visual customization options for their ads. This drove record Self-serve customer acquisition and contributed to increased revenue in the channel by approximately 25% year-over-year in the third quarter. We also saw productivity gains from our Customer Success team while experimenting with ways to improve the SMB post-sale process. Additionally, Multi-location revenue increased by approximately 25% year over year in the third quarter as a result of the expansion of our portfolio of ad products and attribution solutions for multi-location advertisers. •Deliver more value to advertisers. Amid ongoing volatility in the macroeconomic environment in the third quarter, ad clicks remained consistent with the second quarter but decreased by 15% from the prior-year period, during which the reopening of businesses had led to elevated consumer spending and engagement, while average CPC increased by 36% year over year as a result of strong advertiser demand. Our retention rate for non-term advertisers' budgets remained solid but declined modestly from the second quarter. We remained focused on delivering more value to advertisers 26
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through quality - the percentage of ad clicks converted to leads, an important quality indicator, remained above 2021 levels in the third quarter.
•Enhance the consumer experience. In the third quarter, we continued to invest in enhancing the consumer experience with the goal of expandingYelp 's trusted content and driving increased user engagement and audience growth over the long term. We further improved the Android app experience, including by introducing a more visual and vertical home feed, which contributed to increased engagement and monetization per session. Our product and engineering teams continued to pursue projects intended to grow review contributions, including leveraging smart notifications, which we estimate contributed to a high-single-digit percentage lift in new reviews over the first three quarters of 2022. We also partnered with Mailchimp through ourYelp Fusion program to allow businesses to more easily populate their email marketing campaigns with content from theirYelp pages. Our broad-based local platform and product initiatives drove growth across our business in the third quarter despite a volatile macroeconomic environment. In the fourth quarter, we anticipate typical sequential seasonality in Services, with fewer consumer projects initiated in the winter months, as well as increased caution among some multi-location advertisers in the Restaurants, Retail & Other categories that emerged late in the third quarter in response to heightened macroeconomic uncertainties. At the same time, we believe our strategic investments will enable us to drive long-term growth: in the fourth quarter, we expect net revenue to remain relatively consistent with the third quarter and the adjusted EBITDA to increase sequentially, and for the full year 2022, we expect both net revenue and adjusted EBITDA to increase from the prior-year period.
Key Metrics
We regularly review a number of metrics, including the key metrics set forth below, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.
Ad Clicks
Ad clicks represent user interactions with our pay-for-performance advertising products, including clicks on advertisements on our website and mobile app, clicks on syndicated advertisements on third-party platforms and Request-a-Quote submissions. Ad clicks include only user interactions that we are able to track directly, and therefore do not include user interactions with ads sold through our advertising partnerships. We do not expect the exclusion of such user interactions to materially affect this metric. Because we generate revenue primarily from the sale of performance-based ads, our ability to increase our revenue depends largely on our ability to increase the number and/or price of ad clicks. We report the year-over-year percentage change in ad clicks on a quarterly basis as a measure of our success in monetizing more of our consumer traffic and delivering more value to advertisers.
The following table presents year-over-year changes in our ad clicks for the periods indicated (expressed as a percentage):
Three Months Ended September 30, 2022 2021 Ad Clicks (15)% 28% Average CPC We define average CPC as revenue from our performance-based ad products - excluding certain revenue adjustments that do not impact the outcome of an auction for an individual ad click, such as refunds, as well as revenue from our advertising partnerships - divided by the total number of ad clicks for a given three-month period. Average CPC, when viewed together with ad clicks, provides important insight into the value we deliver to advertisers, which we believe is a significant factor in our ability to retain both revenue and customers. For example, a positive change in ad clicks for a given three-month period combined with lower growth or a negative change in average CPC over the same period would indicate that we delivered more ad clicks at lower prices, thereby delivering more value to our advertisers; we would typically expect this to have a positive impact on retention. In the three months endedSeptember 30, 2022 , ad clicks remained consistent with the second quarter, but decreased by 15% from the prior-year period, which had continued to benefit from reopening tailwinds and elevated consumer spending. We saw strong advertiser demand for our performance-based ad products, and, as a result, average CPC in the three months endedSeptember 30, 2022 increased 36% year over year. 27
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We believe that average CPC and ad clicks together reflect one of the largest dynamics affecting our advertising revenue performance. These metrics reflect, among other things, the interplay of advertiser demand and consumer behavior on our platform, each of which is currently subject to complex macroeconomic pressures that we expect to continue to cause volatility in these metrics in the near term.
The following table presents year-over-year changes in our average CPC for the periods indicated (expressed as a percentage):
Three Months Ended September 30, 2022 2021 Average CPC 36% (1)%
Advertising Revenue by Category
Our advertising revenue comprises revenue from the sale of our advertising products, including the resale of our advertising products by partners and syndicated ads appearing on third-party platforms.
To reflect our strategic focus on creating two differentiated experiences onYelp , we provide a quarterly breakdown of our advertising revenue attributable to businesses in two high-level category groupings: Services and Restaurants, Retail & Other. Our Services categories consist of home, local, auto, professional, pets, events, real estate and financial services. Our Restaurants, Retail & Other categories consist of restaurants, shopping, beauty & fitness, health and other. Advertising revenue by category for the three and nine months endedSeptember 30, 2022 reflects our updated methodology for determining the business category with which advertising revenue is associated based on the business category of each advertising location rather than the business category of the business account that paid for the advertising. While business locations associated with a single payment account are generally part of the same business, they may offer a variety or a combination of services that differ by location; accordingly, we believe our updated methodology provides a more precise breakdown of our advertising revenue between our Services and Restaurants, Retail & Other categories. The categorization of business locations can change over time and historical business categories for individual business locations are not available; as a result, it is impracticable to apply our updated methodology to prior-year amounts based on the business categorizations in effect during the prior-year period. However, applying our updated methodology to the three and nine months endedSeptember 30, 2021 based on the current business categories of the associated advertising locations does not result in a materially different breakdown than previously reported for such periods. Due to the differences between the types of business categories comprising our Services and Restaurants, Retail & Other categories, we do not believe a significant number of businesses are re-categorized such that they move from one high-level category grouping to the other, and so do not believe the result would be materially different based on the then-current categorizations.
The following table presents our advertising revenue by category for the periods indicated (in thousands, except percentages):
Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 % Change 2022 2021 % Change Services$ 180,957 $ 157,319 15%$ 515,518 $ 450,528 14% Restaurants, Retail & Other 112,707 99,511 13% 324,901 273,250 19% Total Advertising Revenue$ 293,664 $ 256,830 14%$ 840,419 $ 723,778 16%
Paying Advertising Locations By Category
Paying advertising locations comprise all business locations associated with a business account from which we recognized advertising revenue in a given month, excluding business accounts that purchased advertising through partner programs other thanYelp Ads Certified Partners , averaged over a given three-month period. We also provide a breakdown of paying advertising locations between our Services categories and Restaurants, Retail & Other categories. 28
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We provide our paying advertising locations on a quarterly basis as a measure of the reach and scale of our business; however, this metric may exhibit short-term volatility as a result of factors such as seasonality and macroeconomic conditions. For example, macroeconomic factors, such as ongoing concerns about COVID-19 and its variants as well as labor and supply chain challenges, have had a predominant negative impact on Restaurants, Retail & Other paying advertising locations in recent quarters. Short-term fluctuations in paying advertising locations may also reflect the acquisition or loss of single advertising accounts associated with large numbers of locations, or the pausing/restarting of advertising campaigns by such multi-location advertisers.
The following table presents the number of paying advertising locations by category during the periods indicated (in thousands, except percentages):
Three Months Ended September 30, 2022 2021 % Change Services 238 231 3% Restaurants, Retail & Other 334 304 10% Total Paying Advertising Locations 572 535 7%
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates and assumptions are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from those estimates. Due to macroeconomic conditions and other factors, certain estimates and assumptions have required and may continue to require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, these estimates may materially change in future periods.
We believe that the assumptions and estimates associated with revenue recognition, website and internal-use software development costs and income taxes have the greatest potential impact on our consolidated financial statements. There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report.
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Results of Operations
The following table sets forth our results of operations for the periods indicated (in thousands, except percentages). The period-to-period comparison of financial results is not necessarily indicative of the results of operations to be anticipated for the full year 2022 or any future period. Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 $ Change % Change(1) 2022 2021 $ Change % Change(1) Condensed Consolidated Statements of Operations Data: Net revenue by product: Advertising revenue by category(3): Services$ 180,957 $ 157,319 $ 23,638 15 %$ 515,518 $ 450,528 $ 64,990 14 % Restaurants, Retail & Other 112,707 99,511 13,196 13 % 324,901 273,250 51,651 19 % Advertising 293,664 256,830 36,834 14 % 840,419 723,778 116,641 16 % Transactions 3,652 3,001 651 22 % 10,772 10,330 442 4 % Other 11,575 9,324 2,251 24 % 33,212 24,331 8,881 37 % Total net revenue 308,891 269,155 39,736 15 % 884,403 758,439 125,964 17 % Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below) 26,805 21,185 5,620 27 % 77,222 54,052 23,170 43 % Sales and marketing 133,061 114,295 18,766 16 % 388,570 340,845 47,725 14 % Product development 75,803 69,402 6,401 9 % 233,336 206,089 27,247 13 % General and administrative 48,381 30,001 18,380 61 % 126,141 106,957 19,184 18 % Depreciation and amortization 11,417 12,627 (1,210) (10) % 34,165 38,543 (4,378) (11) % Restructuring - - - NM(2) - 32 (32) (100) % Total costs and expenses 295,467 247,510 47,957 19 % 859,434 746,518 112,916 15 % Income from operations 13,424 21,645 (8,221) (38) % 24,969 11,921 13,048 109 % Other income, net 2,691 331 2,360 713 % 4,947 1,578 3,369 213 % Income before income taxes 16,115 21,976 (5,861) (27) % 29,916 13,499 16,417 122 % Provision for (benefit from) income taxes 7,007 3,911 3,096 79 % 13,714 (2,982) 16,696 (560) % Net income$ 9,108 $ 18,065 $ (8,957) (50) %$ 16,202 $ 16,481 $ (279) (2) %
(1) Percentage changes are calculated based on rounded numbers and may not recalculate exactly due to rounding.
(2) Percentage change is not meaningful.
(3) Please refer to " -Key Metrics-Ad Revenue by Category " for information on a methodology change adopted in 2021.
Three and Nine Months Ended
Net Revenue
Advertising. We generate advertising revenue from the sale of our advertising products - including enhanced listing pages and performance and impression-based advertising in search results and elsewhere on our platform - to businesses of all sizes, from single-location local businesses to multi-location national businesses. Advertising revenue also includes revenue generated from the resale of our advertising products by certain partners and monetization of remnant advertising inventory through third-party ad networks. We present advertising revenue on a disaggregated basis for our high-level category groupings, Services and Restaurants, Retail & Other. Advertising revenue for the three and nine months endedSeptember 30, 2022 increased compared to the prior-year periods primarily due to higher customer spend, higher average revenue per location, and an increase in paying advertising locations in both our Services and Restaurants, Retail & Other categories. The increases in revenue from businesses in our Services categories for the three- and nine-month periods were primarily driven by the continued growth in our home services category, and with respect to the nine-month period, an improved retention rate of non-term advertisers' budgets. The increases in revenue from Restaurants, Retail & Other businesses were primarily attributable to growth in paying advertising locations. 30
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Transactions. We generate revenue from various transactions with consumers, primarily through our partnership integrations, which are mainly revenue-sharing arrangements that provide consumers with the ability to complete food ordering and delivery transactions through third parties directly onYelp . We earn a fee for acting as an agent for transactions placed through these integrations, which we record on a net basis and include in revenue upon completion of a transaction. Transactions revenue for the three and nine months endedSeptember 30, 2022 increased compared to the prior-year periods primarily due to an increase in the per-order transaction fee that we receive from Grubhub following the renewal of our partnership inMarch 2022 . This increase was partially offset by a lower volume of food takeout and delivery orders for both the three and nine months endedSeptember 30, 2022 compared to the prior-year periods. Other Revenue. We generate revenue through our subscription services, including ourYelp Reservations andYelp Guest Manager products. We also generate revenue through ourYelp Fusion andYelp Knowledge programs, which provide access toYelp data for a fee, as well as other non-advertising partnerships. Other revenue for the three and nine months endedSeptember 30, 2022 increased compared to the prior-year periods, primarily reflecting higher revenue from the continued growth of ourYelp Fusion program. The increases also reflect lower COVID-19 relief incentives - mainly in the form of waived subscription fees - for our subscription product customers in the current-year periods. Trends and Uncertainties of Net Revenue. Net revenue increased in the three months endedSeptember 30, 2022 compared to the three months endedJune 30, 2022 due to increased advertiser demand and the continued execution of our strategic initiatives. In our Services categories, we expect typical sequential seasonality in the fourth quarter associated with fewer consumer projects being initiated in the winter months. In our Restaurant, Retail & Other categories, evidence of increased caution among some multi-location advertisers emerged late in the third quarter as they responded to heightened macro uncertainties. As a result, we expect to see a more muted holiday season, with less incremental spend from these advertisers than we have seen in the past. We anticipate net revenue in the three months endingDecember 31, 2022 will remain relatively consistent with the third quarter of 2022.
Costs and Expenses
Cost of Revenue (exclusive of depreciation and amortization). Our cost of revenue consists primarily of credit card processing fees and website infrastructure expense, which includes website hosting costs and employee costs (including stock-based compensation expense) for the infrastructure teams responsible for operating our website and mobile app, and excludes depreciation and amortization expense. Cost of revenue also includes third-party advertising fulfillment costs.
Cost of revenue for the three and nine months ended
•increases in website infrastructure expense of
•increases in advertising fulfillment costs of
•increases in merchant credit card fees of
We expect cost of revenue to increase on an absolute dollar basis in 2022 compared to 2021.
Sales and Marketing. Our sales and marketing expenses primarily consist of employee costs (including sales commission and stock-based compensation expenses) for our sales and marketing employees. Sales and marketing expenses also include business and consumer acquisition marketing, community management, as well as allocated workplace and other supporting overhead costs.
Sales and marketing expenses for the three and nine months ended
•increases of$16.4 million and$35.9 million , respectively, in employee costs due to higher average sales headcount as compared with the prior-year periods; and •increases in marketing and advertising costs of$4.4 million and$18.3 million , respectively, primarily reflecting our investment in business owner and consumer marketing.
These increases were partially offset by decreases in allocated workplace
operating costs of
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We expect sales and marketing expenses to continue to increase in 2022 compared to 2021 as we hire across our sales and marketing teams and invest in marketing initiatives. However, we expect sales and marketing expenses to decrease as a percentage of net revenue in 2022 compared to 2021. Product Development. Our product development expenses primarily consist of employee costs (including bonuses and stock-based compensation expense, net of capitalized employee costs associated with capitalized website and internal-use software development) for our engineers, product management and corporate infrastructure employees. In addition, product development expenses include allocated workplace and other supporting overhead costs. Product development expenses for the three and nine months endedSeptember 30, 2022 increased compared to the prior-year periods primarily due to increases in employee costs of$6.3 million and$28.5 million , respectively, as a result of higher average headcount. We expect product development expenses to continue to increase in 2022 compared to 2021 as we expand our product and engineering teams and invest to support our product initiatives, but decrease as a percentage of net revenue as our distributed operations and growth strategy provide leverage. General and Administrative. Our general and administrative expenses primarily consist of employee costs (including stock-based compensation expense) for our executive, finance, user operations, legal, people operations and other administrative employees. Our general and administrative expenses also include our provision for doubtful accounts, consulting costs, as well as workplace and other supporting overhead costs.
General and administrative expenses for the three and nine months ended
•increases in employee costs of
•increases in our provision for doubtful accounts of$3.0 million and$8.4 million , respectively, as a result of the increases in advertising revenue and the release of higher amounts of COVID-19-related bad debt reserves in the prior-year periods.
The increase for the three months ended
" Leases ," of the Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 in this Quarterly Report for further detail).
We expect general and administrative expenses to continue to increase in 2022 compared to 2021 to support the continued growth of our business. We expect general and administrative expenses as a percentage of net revenue to remain relatively consistent in 2022 compared to 2021.
Depreciation and Amortization. Depreciation and amortization expense primarily consists of depreciation on computer equipment, software, leasehold improvements, capitalized website and software development costs, and amortization of purchased intangible assets.
Depreciation and amortization expense for the three and nine months endedSeptember 30, 2022 decreased compared to the prior-year periods, primarily due to decreases in depreciation expense of leasehold improvements from asset retirements related to lease terminations and expirations and, to a lesser extent, lower amortization expense resulting from intangible assets that had become fully amortized since prior year.
Other Income, Net
Other income, net consists primarily of the interest income earned on our cash, cash equivalents and marketable securities, the portion of our sublease income in excess of our lease cost, amortization of debt issuance costs, credit facility fees and foreign exchange gains and losses. Other income, net for the three and nine months endedSeptember 30, 2022 increased compared to the prior-year periods, primarily driven by higher interest income from our investments in money market funds due to increasing federal interest rates, net accretion on our investments in marketable securities, as well as higher tax incentives related to research and development activity in theUnited Kingdom . 32
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Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists of: federal and state income taxes inthe United States and income taxes in certain foreign jurisdictions; deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes; and the realization of net operating loss carryforwards. Provision for income taxes for the three and nine months endedSeptember 30, 2022 increased from the prior-year periods primarily due to an increase in the annual effective tax rate estimated for 2022 and decreases in discrete tax benefits from stock-based compensation in the current-year periods. The increase for the nine-month period also reflects an increase in year-to-date pre-tax income. As ofDecember 31, 2021 , we had approximately$40.5 million in net deferred tax assets ("DTAs"). As ofSeptember 30, 2022 , we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize these DTAs. However, it is possible that some or all of these DTAs will not be realized. Therefore, unless we are able to generate sufficient taxable income from our operations, a substantial valuation allowance may be required to reduce our DTAs, which would materially increase our expenses in the period in which we recognize the allowance and have a materially adverse impact on our consolidated financial statements. The exact timing and amount of the valuation allowance recognition are subject to change on the basis of the net income that we are able to actually achieve. We will continue to evaluate the possible recognition of a valuation allowance on a quarterly basis. Our GAAP tax rate is impacted by a number of factors that are not in our direct control and that are subject to quarterly variability, which limits our visibility into the applicable rate for future fiscal periods. While we currently expect our GAAP tax rate for 2022 to be a substantial positive rate - potentially exceeding our previous estimate of 38% - it ultimately depends on, among other things, the status of legislative efforts to repeal the requirement under theU.S. Tax Cuts and Jobs Act (the "Tax Act") to capitalize and amortize research and development expenses, which may result in a substantially lower rate if successful, as well as the amount of our stock-based compensation expense, which fluctuates based on our stock price. We do not plan to provide regular updates to our estimate of our 2022 GAAP tax rate given the uncertainty inherent in it as a result of these factors; however, we note that it may have a material and adverse impact on our cash flows in 2022 as well as future years.
Non-GAAP Financial Measures
Our condensed consolidated financial statements are prepared in accordance with GAAP. However, we have also disclosed below adjusted EBITDA and adjusted EBITDA margin, each of which is a non-GAAP financial measure. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. In particular, adjusted EBITDA should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of profitability or liquidity. Some of these limitations are: •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect all cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•adjusted EBITDA does not reflect the impact of the recording or release of valuation allowances or tax payments that may represent a reduction in cash available to us;
•adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
•adjusted EBITDA does not take into account any income or costs that management determines are not indicative of ongoing operating performance, such as restructuring costs and impairment charges; and
•other companies, including those in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA and adjusted EBITDA margin alongside other financial performance measures, net income (loss) and our other GAAP results. 33
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Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted to exclude: provision for (benefit from) income taxes; other income, net; depreciation and amortization; stock-based compensation expense; and, in certain periods, certain other income and expense items, such as restructuring costs and impairment charges.
Adjusted EBITDA margin. Adjusted EBITDA margin is a non-GAAP financial measure that we calculate as adjusted EBITDA divided by net revenue.
The following is a reconciliation of net income to adjusted EBITDA, as well as the calculation of net income margin and adjusted EBITDA margin, for each of the periods indicated (in thousands, except percentages): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Reconciliation of Net Income to Adjusted EBITDA: Net income$ 9,108 $ 18,065 $ 16,202 $ 16,481 Provision for (benefit from) income taxes 7,007 3,911 13,714 (2,982) Other income, net (2,691) (331) (4,947) (1,578) Depreciation and amortization 11,417 12,627 34,165 38,543 Stock-based compensation 38,632 36,442 119,753 116,546 Restructuring - - - 32 Asset impairment(1) 10,464 - 10,464 11,164 Adjusted EBITDA$ 73,937 $ 70,714 $ 189,351 $ 178,206 Net revenue$ 308,891 $ 269,155 $ 884,403 $ 758,439 Net income margin 3 % 7 % 2 % 2 % Adjusted EBITDA margin 24 % 26 % 21 % 23 %
(1) Recorded within general and administrative expenses on our Condensed Consolidated Statements of Operations.
Liquidity and Capital Resources
Sources of Cash
As ofSeptember 30, 2022 , we had cash and cash equivalents of$331.0 million and marketable securities of$90.9 million . Cash and cash equivalents consist of cash, money market funds and investments with original maturities of three months or less. Our cash held internationally as ofSeptember 30, 2022 was$13.7 million . As ofSeptember 30, 2022 , we also had$10.0 million of investments in certificates of deposit with minority-owned financial institutions. InJuly 2022 , we began purchasing highly rated debt securities which are classified as available-for-sale on our condensed consolidated balance sheets. Our investment portfolio comprises highly rated marketable securities, and our investment policy limits the amount of credit exposure to any one issuer. The policy generally requires securities to be investment grade (i.e., rated 'A' or higher by bond rating firms) with the objective of minimizing the potential risk of principal loss. To date, we have been able to finance our operations and our acquisitions through proceeds from private and public financings, including our initial public offering inMarch 2012 and our follow-on offering inOctober 2013 , cash generated from operations, and, to a lesser extent, cash provided by the exercise of employee stock options and purchases under the Employee Stock Purchase Plan, as amended, as well as proceeds from our sale of Eat24 to Grubhub inOctober 2017 . We have the ability to access backup liquidity to fund working capital and for other capital requirements, as needed, through a three-year,$75.0 million senior unsecured revolving credit facility (including a$25.0 million letter of credit sub-limit) as part of our Credit Agreement withWells Fargo Bank, National Association which we entered into inMay 2020 (as amended by the Letter Agreement, dated as ofSeptember 27, 2022 , the "Credit Agreement"). As ofSeptember 30, 2022 , we had$20.5 million of letters of credit under the sub-limit related to lease agreements for certain office locations, which are required to be maintained and issued to the landlords of each facility, and$54.5 million remained available under the revolving credit facility as of that date. The cost of capital associated with this credit facility was not significantly more than the cost of capital that we would have expected prior to the onset of the COVID-19 pandemic. As ofSeptember 30, 2022 , we were in compliance with all covenants and there were no loans outstanding under the Credit Agreement. For more information about 34
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the terms of the Credit Agreement, including financial covenants, events of default and other limitations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" included under Part II, Item 7 in our Annual Report.
Material Cash Requirements
Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under "Risk Factors" included under Part I, Item 1A in our Annual Report, as updated by Part II, Item 1A of this Quarterly Report. We believe that our existing cash and cash equivalents, together with any cash generated from operations, will be sufficient to meet our material cash requirements in the next 12 months and beyond, including: working capital requirements; our anticipated repurchases of common stock pursuant to our stock repurchase program; payment of taxes related to the net share settlement of equity awards; payment of lease costs related to our operating leases; the potential payment of a higher amount of income taxes beginning in 2022, primarily due to the new requirement to amortize certain research and development expenses under the Tax Act; and purchases of property, equipment and software and website hosting services. However, this estimate is based on a number of assumptions that may prove to be materially different and we could exhaust our available cash and cash equivalents earlier than presently anticipated. We are not able to reasonably estimate the timing of future cash flow related to$29.5 million of uncertain tax position. We may be required to draw down funds from our revolving credit facility or seek additional funds through equity or debt financings to respond to business challenges associated with adverse macroeconomic conditions, including the ongoing COVID-19 pandemic, or other challenges, including the need to develop new features and products or enhance existing services, improve our operating infrastructure or acquire complementary businesses and technologies. We lease office facilities under operating lease agreements that expire from 2022 to 2031. Our cash requirements related to these lease agreements are$150.1 million , of which$46.4 million is expected to be paid within the next 12 months. The total lease obligations are partially offset by our future minimum rental receipts to be received under non-cancelable subleases of$46.0 million . See Note 8 , " Leas es ," of the Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 in this Quarterly Report for further detail on our operating lease obligations.
Our cash requirements related to purchase obligations consisting of
non-cancelable agreements to purchase goods and services required in the
ordinary course of business - primarily website hosting services - are
approximately
The cost of capital associated with any additional funds sought in the future might be adversely impacted by macroeconomic conditions, including persistent inflation and continued interest rate hikes, on our business. Additionally, amounts deposited with third-party financial institutions exceed theFederal Deposit Insurance Corporation andSecurities Investor Protection Corporation insurance limits, as applicable. These cash and cash equivalents could be impacted if the underlying financial institutions fail or are subjected to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to our cash and cash equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
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