Yelp Earnings Preview: Revenue Growth In Focus
Yelp (NYSE:YELP) is set to release its Q3 2013 earnings on October 29. In the last six months, the stock price has rallied by over 180%, reflecting bullish investor sentiment and target price upgrades from Wall Street firms. While the company continues to report good growth in its local ads business, we believe that the market is over valuing the company.
During the upcoming earnings call, we’ll continue to closely monitor growth in its local ads business and revenues from new services for deal, partnership and other services (DPO) business. Moreover, Yelp continues to expand outside the U.S., and we will be on the lookout for any key takeaways regarding this expansion process. The company is also aggressively targeting mobile ads for revenues as nearly 60% of all Yelp’s searches were via mobile in the previous quarter. In this earnings call, we’ll look at the growth in mobile usage across its property.
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International Expansion To Boost Local Ads Business
Yelp has been quite aggressively pursuing its international ambitions. During Q3 2013, Yelp expanded its services to Brazil, which marks its entry into Latin America. We expect Yelp to continue to move into additional new markets, which should lead to a significant increase in its local advertising revenues.
In Q2, active local business accounts grew 63% y-o-y, to approximately 51,000. We expect this trend to continue in Q3 as well, and will be closely watching this metric in the upcoming earnings announcement. However, as Yelp looks to expand internationally, the average revenue per active local business will decline because local businesses in new regions tend to spend less on ads compared to their counter parts in the U.S. We expect average revenue per active business account for Yelp to decline from $2,700 in 2012 to $2,400, by the end of our forecast period. Additionally, international expansion will also help Yelp attract more eyeballs from new markets, drive page views and brand advertising revenue.
Mobile Ad Revenue In Focus
Although Yelp has been successful in expanding its local ads business by inorganic and organic route, it still needs to monetize its properties more effectively to increase its overall revenues. Yelp has recently launched display ads for its mobile platform.
According to the Internet Advertising Bureau (IAB), Internet advertising experienced a double-digit growth in 2012, for a record $37 billion in revenues. [1] Mobile ads led this growth as revenues grew by 9% to $3.4 billion in 2012. Research firm Forrester predicts that ad spend on smart mobile devices (SMDs) will represent 29% of the total online ad spend in the U.S. by 2018. Additionally, Gartner has predicted that worldwide mobile ad revenue will exceed $11 billion in 2013.
Yelp reported that 40% of its ads impressions were served on mobile devices in Q2 FY13 and the mobile penetration for its app is on the rise as almost 60% of all Yelp’s searches were via mobile. With the mobile app now running display ads, this is likely to become a major revenue driver for Yelp’s brand ads division. In this earnings announcement, we are interested in the revenue generated through mobile display ads. Additionally, Yelp had over 10 million monthly unique mobile users in Q2. We expect that Yelp will continue to report growth in monthly mobile users in Q3, and will be closely following this number.
Revenue For Deal, Partnership And Other Services (DPO) Division
In a move to diversify its revenue stream, Yelp has expanded its services by introducing new features such as call to action and delivery platform to its portfolio. [2] Yelp plans to expand these services to encompass other categories such as spas, yoga studios, salons and dentist appointments going ahead. Yelp’s DPO division contributes only 6% to total revenues. If these delivery services gain traction among Yelp users, Yelp’s DPO division can be an important growth driver going forward. In this earnings announcement, the focus will be on revenue growth from these services.
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Notes:- IAB: Mobile Ads Captured 9% Of Online Ad Spend In 2012, April 16 2013, www.adexchanger.com [↩]
- See Yelp Can Cook Up More Growth With Local Delivery Services [↩]