Yelp Earnings Preview: Revenue Growth From Local Ads, Mobile and DPO In Focus

Yelp (NYSE:YELP) is set to release its Q3 2014 earnings on  Wednesday, October 22^nd. While the company continues to report good growth in its core local ads business, the pace of this growth is directly related to the duration of its presence in the regions where Yelp operates. In the last few years, Yelp has expanded to regions outside the U.S, where the purchasing power of businesses and users is low compared to the U.S. Therefore, we believe that the pace of local ads growth will slow down as cohorts within the U.S. mature, and revenues from newer regions kicks in. Therefore, in this earnings announcement, growth in the local ads business will be the key focal point, and will give us a fair indication of the expected revenue growth in the coming quarters. Furthermore, we will continue to monitor revenue growth from mobile devices and the Deal, Partnership and Other services (DPO) business as we expect the revenues from these services to form a significant portion of division’s revenues in the coming quarters.

Check out our complete analysis of Yelp

Outlook for Q3 and 2014

For Q3 FY14, the company expects revenues to be in $98 – $99 million range, representing growth of approximately 61% compared to the third quarter of 2013. Adjusted EBITDA is expected to be in the range of $18 million to $19 million. For the full year, Yelp has announced an improvement in guidance, and projects net revenue to be in $372 – $375 million range, while adjusted EBITDA should be in $67 – $69 million range.

Growth In Local Ads Business To Continue

The local ads business currently accounts for around 80% of Yelp’s stock value, in our view, and is its biggest revenue source. During Q2 FY14, active local business accounts grew by 55% year over year to approximately 80,000. 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. As the company continues to expand in internationals markets, we expect the active local business accounts to grow in the coming quarters. Furthermore, we expect average revenue per active business account, which is a function of the duration of Yelp’s services in a region, to grow from $2,890 in 2013 to $3,250 by 2021, as the monetization rate in older cohorts increases. With this earnings announcement, we will continue to monitor these performance metrics to ascertain whether the company will be able to maintain its growth trajectory going forward.

Revenue Share From International Operations To Increase

Recently, the company added Hong Kong, which is one of the most densely populated cities in the world, into its addressed markets. As a result of this and other expansions, international traffic, which grew over 80% year over year to approximately 31 million unique visitors on a monthly average basis in Q2, has become an important indicator for Yelp’s expected revenue growth. Revenue from international markets now contributes nearly 30% to Yelp’s top line and at some point will exceed revenues from the U.S. 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.

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 revenue. While Yelp has been using display ads to monetize its websites, it launched display ads for its mobile platform last year (2013). Yelp reported that 50% of unique visitors (~68 million monthly users) used mobile devices for accessing Yelp’s services in Q2 FY14, and 40% 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 aim to quantify the revenue generated through mobile display ads. We expect that Yelp will continue to report growth in monthly mobile users in Q3, and are closely following this number in the upcoming earnings announcement.

Growth In Revenues From Deals Platform

Yelp’s deal, partnership and other services (DPO) division contributes 5.6% to its value. 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 Q2, Yelp reported 27% year-over-year growth in deals revenues to $4 million. 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. 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 2021.

Our price estimate for Yelp stands at $60.44, which is 11% 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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