Yelp Earnings: Local Ads Business Continues To Deliver Growth

Yelp‘s (NYSE:YELP) results once again showed the effect of rapid expansion as revenue grew 68% y-o-y to $61 million in the quarter. Although, Yelp continued to report an operating loss of $1.78 million in the quarter, its adjusted EBITDA improved by 270% y-o-y to $8.1 million.

Furthermore, Yelp reported good growth for all its performance metrics. The company reported 40% growth in cumulative reviews to 47 million and 41% increase in average unique monthly visitors to 117 million. While active local business accounts increased by 60% y-o-y to 57,200, claimed local businesses increased to 1.3 million. Before the earnings announcement, the company filed a prospectus to issue additional common stock A in the coming months. While we believe that this will affect the stock price in the future, we are still in the process of updating Yelp’s model. In this article we will discuss Yelp’s Q3 results.

Check out our complete analysis of Yelp

Outlook for Q4 and 2013

For Q4 FY13, the company expects revenues to be in $66 – $67 million range, with an adjusted EBITDA of $9-$10 million. For the full year, Yelp has raised its net revenue guidance to $228 – $229 million, and adjusted EBITDA guidance to $28 – $29 million.

Growth In Active Business Accounts To Boost Local Ads Division

The local ads business currently accounts for around 75% of Yelps’s stock value and is its biggest revenue source. In last few years, active business accounts have grown at a rapid rate, from 9,000 in 2010 to over 40,000 in 2012. The local ads revenue for the company has tripled in the last two years from $48 million in 2010 to $138 million in 2012.

During the quarter, the revenue from this division grew 80% to $51 million, and active business account grew to 57, 400. The primary reasons for growth in this driver are Yelp’s international expansion efforts and an increase in cumulative reviews on the Yelp site, which increases its appeal to advertisers and users alike. While Yelp continues to expand its presence in the U.S., it has also increased its reach to over 23 countries. International business now accounts for over 5% of Yelp’s revenues and 18% of its traffic. Additionally, 8% of Yelp’s reviews came from outside the U.S.  We expect that the number of active business accounts will continue to grow as Yelp expands. According to a survey conducted by Nielsen, four out of five Yelp users say they visit the site when preparing to spend money. ^[1] As perceived value added by advertising with Yelp increases, we expect more unpaid accounts will sign up with Yelp’s paid services. We, therefore, expect the number of active business account to rise.

Expansion Plans To Weigh on Average Revenue Per Active Business

Average revenue per active local business (ARPALB) is one of the most important drivers in our valuation for Yelp’s locals ads business. According to Yelp, the monetization rate of a city or region increases with time. While ARPALB was at $3,800 for regions where Yelp started offering services in 2005, it was $210 for regions where Yelp services started 2010. As Yelp introduces its services in new regions, we expect that this trend will negatively impact average revenue. Additionally, as Yelp expands internationally, the average revenue will decline further as local businesses in these markets tend to spend less on ads compared to their counter parts in the U.S.

Deals Revenues Improves

Yelp’s deal, partnership and other services (DPO) division has been slow to take off. Currently, Yelp generates revenue from this division through any transaction that might occur on its website. Yelp’s deals platform allows merchants to promote themselves, and offer discounted goods and services on a real-time basis to consumers directly on Yelp’s website and mobile app. Yelp charges a fee on Yelp Deals for acting as an agent in these transactions.

In Q3, Yelp reported 55% y-o-y growth in deals revenues to $3.1 million. Recently, Yelp launched new initiatives such as call to action and delivery platform to close the loop between discovering a business on Yelp and making a purchase at that business. We believe that the newly launched services will drive revenues at DPO division going ahead.

Mobile Search To Bolster Brand Ads Division

Brand advertising is currently Yelp’s third largest source of revenue and makes up 10% of our stock price estimate. Yelp competes with Google, Yahoo, Facebook and AOL for display ads revenue. Unique visitor is the primary driver for this division, and during the quarter monthly unique visitors grew to 117 million.  Additionally, 33% of these unique visitors (~13 million monthly unique mobile users) used mobile devices for accessing Yelp’s services. During the quarter, 62% of all Yelp’s searches were via mobile and 46% of ads impression was served on mobile devices. Yelp has recently launched display ads for its mobile platform, and we expect the mobile platform to become a major revenue driver for Yelp’s brand ads division. The growing number of consumers searching for local businesses online constitutes Yelp’s existing market, and in addition to company’s global expansion plans, we believe adoption of Yelp’s mobile platform will drive this growth in unique visitors on the Yelp site.

We are currently in the process of updating our Yelp model. At present we have a $19 price estimate on Yelp, which is 70% below its current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Nielsen: 4 out of 5 Yelp users visit the site when preparing to spend money, June 26 2013, biz.yelp.com [↩]