Yelp Earnings: Local Business Grows, Albeit At A Lower Pace

Yelp‘s (NYSE:YELP) announced its earnings for Q3 FY14 on October 22^nd. The company once again reported growth as revenues increased by 67% year over year to $102 million. However, Yelp reported a substantial improvement in net income, which grew to $3.63 million. Yelp’s Adjusted EBITDA also improved significantly to $20.1 million in Q3 FY14 compared to adjusted EBITDA of $8.1 million in prior-year quarter. In sum, the company continued to report good growth across all its performance metrics.

The company reported 41% growth in cumulative reviews to 67 million, and a 19% increase in average unique monthly visitors to 139 million. Additionally, the company reported high engagement on mobile devices as unique visitor from mobile increased to 73 million from 50 million. While active local business accounts increased by 55% year over year to 86,000, claimed local businesses increased to 1.9 million. Overall, we are encouraged by Yelp’s results and think that the business seems to be on the growth path. Below, we review Yelp’s Q3 FY 14 results by segment.

Check out our complete analysis of Yelp

Outlook for Q4 and 2014

For Q4 FY14, the company expects revenues to be in $107 – $108 million range, representing growth of approximately 52% compared to the fourth quarter of 2013. Adjusted EBITDA is expected to be in the range of $24 million to $25 million. For the full year, Yelp has announced an improvement in guidance, and projects net revenue to be in $375 – $376 million range, while adjusted EBITDA should be in $69.5 – $70.5 million range.

International Expansion Boosts Revenues and Costs

The local ads division makes up 80% of Yelp’s estimated value. One of the primary drivers for local ads division is the number of active business accounts on Yelp. During Q3 FY14, active local business accounts grew by 51% year over year to approximately 86,200. The primary reasons for growth in this driver are the international expansion under way and the increase in cumulative reviews on the Yelp site, which increases its appeal to advertisers and users alike. Recently, the company added Chile and Hong Kong to its addressed markets. As a result, international traffic grew over 40% year over year to approximately 30 million unique visitors on a monthly average basis. Furthermore, the company said that revenue from international markets is expected to gain traction in the coming quarters as it monetizes regions such as cohorts in Italy which were setup three years ago. We expect this expansion spree to bolster the number of active business accounts on Yelp to over 412,000 by 2021. However, we believe that as the company expands to new territories, its selling, general and administration (SG&A) and marketing costs will increase and lower company’s profitability and cash-flow as a percent of sales.

Mobile To Bolster Revenues

The unique visitor is one of the primary drivers for Yelp as it affect both its local ads business and Brand ads divsion, and during the quarter monthly unique visitors grew to 139 million. However, 50% of these unique visitors (~73 million monthly users) used mobile devices for accessing Yelp’s services. During the quarter, 45% of new reviews, which were close to 5 million, 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 in the futre. 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 $60.44 price estimate on Yelp, which is inline with the market price.

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