Yelp Earnings Preview: What We Are Watching

Yelp (NYSE:YELP) is set to release its Q2 2014 earnings on July 30^th, Wednesday. We believe that, while the company continues to report good growth in its core local ads business, the market has been over estimating the growth rate for the company.  And this may be the reason for the recent 30% correction in the stock price, which declined from lifetime high of $101 to $68.68. We expect the growth in the  local ads business to be the key focal point in this earnings announcement. Furthermore, we will continue to monitor growth for the Deal, Partnership and Other services (DPO) business, as the company had launched new services last year,  We expect the revenues from these services to form a significant portion of division’s revenues this year. Recently, the company has expanded its footprint in the Latin American markets. In this earnings announcement, we will be on the lookout for any key takeaways regarding these expansion efforts.

Check out our complete analysis of Yelp

Outlook for Q2 and 2014

For Q2 FY14, the company expects revenues to be in $85 – $86 million range, representing growth of approximately 55% compared to the second quarter of 2013. Adjusted EBITDA is expected to be in the range of $11.5 million to $12.5 million. For the full year, Yelp has announced an improvement in guidance, and projects net revenue to be in $363 – $367 million range, while adjusted EBITDA should be in $56 – $60 million range.

Growth In Local Ads Business In Focus

The local ads business currently accounts for around 80% of Yelp’s stock value, in our view, and is its biggest revenue source. During Q1 FY14, active local business accounts grew by 65% year over year to approximately 74,000. 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. The company has a total addressable market (TAM) of 73 million local businesses in the world, of which 53 million are present in North America, Europe and New Zeland. Recently, the company added Brazil and Japan into its folds, and we expect this expansion spree to boost the number of active business accounts on Yelp to over 412,000 by 2020. Furthermore, we expect average revenue per active business account for Yelp to grow from $2,890 in 2013 to $3,220, by 2020. 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.

Revenue From International Expansion

As the company expands internationally, the total international traffic is expected to grow, which in turn will boost the revenue from international markets. While it is still early for Yelp to report any significant traction in revenues from international markets, we continue to closely monitor the revenue from these markets, as it will help us in ascertaining the monetization rate in newer regions.

Revenue Growth From Deals Platform In Focus

In a move to diversify its revenue stream, Yelp expanded its services in 2013 by introducing new features.  These include the Call to Action program, which lets a business promote its services by offering discounts, as well as a new delivery platform to serve its clients. Prior to this, Yelp was offering these services only in the U.S., and only for a limited category of products (i.e. food).  But now it has expanded these services to other countries like Canada and encompasses other categories such as spas, yoga studios, salons and dentist appointments. 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. Currently, Yelp’s DPO division contributes only 6% to total revenues. However, we expect its contribution to increase to 8% by 2020.

Growth In Mobile Ads Metrics In Focus

Although Yelp has been successful in expanding its local ads business by inorganic and organic means, it still needs to monetize its properties more effectively to increase its overall revenues. While Yelp has been using display ads to monetize its websites, it launched display ads for its mobile platform last year. Yelp reported that 60% of search queries were from mobile devices in Q1 FY14, and 35% of new reviews came from mobile devices. Considering the rampant growth in the usage of mobile devices, we expect the mobile platform to become a major revenue driver for Yelp’s brand ads division. In this earnings announcement, we want to know the revenue generated through mobile display ads. We expect that Yelp will continue to report growth in monthly mobile users in Q2, and are closely following this number in the upcoming earnings announcement.

Our price estimate for Yelp stands at $56.22, which is 20% below its current market price. We invite the reader to adjust the model and create his or her own alternative valuation.

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