Yelp Pre-Earning: Focus On Growth

Yelp (NYSE:YELP) is set to release its Q4 2013 earnings and full-year results on February 5. Over the past year, the stock price has rallied by over 280%, reflecting bullish investor sentiment, target price upgrades from Wall Street firms and expansion of the core business. 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. One of the key trends emerging in online ads market is the prevalent use of mobiles for ads, and the company is aggressively targeting mobile ads for revenues. As over 60% of all Yelp’s searches were via mobile, we are on a lookout for growth in mobile usage across its property. Moreover, we will be on the lookout for any key takeaways regarding its expansion process outside the U.S.
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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 Local Ads Business In Focus

The local ads business currently accounts for around 80% 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. In the third quarter, Yelp reported 60% year-over-year growth in active business accounts to 57,200. The primary drivers for Yelp’s account growth are its international expansion efforts and the cumulative increase in reviews on the Yelp site for its existing markets.  This content 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. We expect that the number of active business accounts will continue to grow as Yelp expands. However, we expect average revenue per active business account for Yelp to decline from $2,700 in 2012 to $2,500, by the end of our forecast period. In this earnings announcement, we continue to monitor these performance metrics to ascertain whether the company will be able to maintain its growth trajectory going forward. Additionally, we also want to know Yelp’s strategy for growth in 2014.

Mobile Ads To Boost Revenues

According to eMarketer, most of the growth in online ads is attributed to the growth in mobile ads. ^[1]  It expects that mobile ad spending will overtake desktop in the U.S. by 2017. Yelp had taken prudent steps such as display ads for mobile app to tap into the this growing market. As a result, 62% of all Yelp’s searches were via mobile and 46% of ads impression was served on mobile devices in Q3. Additionally, 33% of its unique visitors (~13 million monthly unique mobile users) used mobile devices for accessing Yelp’s services.

We expect this trend to continue in Q4 and the company to report growth in traffic from mobile device. We expect that revenues from mobile ads will boost overall revenues for the company.

Revenue Growth From Deals Platform In Focus

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.

At present, we have a $44.44 price estimate for Yelp, which is 40% below its current market price.

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1. Most Digital Ad Growth Now Goes to Mobile as Desktop Growth Falters, December 17 2013, www.emarketer.com [↩]
2. See Yelp Can Cook Up More Growth With Local Delivery Services for more on these services [↩]