Yelp Earnings: Performance Metrics Falter As Revenues Grow At An Anemic Pace

Yelp‘s (NYSE:YELP) reported its earnings for Q4 FY14 on February 5^TH. The company once again posted growth as revenues increased by 56% year over year (7% sequentially) to $109.9 million. Furthermore, Yelp reported a substantial improvement in net income, which grew to $32.7 million, as the company benefited from deferred tax asset adjustments. Yelp’s adjusted EBITDA also improved significantly to $25.1 million in Q3 FY14 compared to adjusted EBITDA of $10.40 million in prior-year quarter. However, as stated in our pre-earnings note, the company struggled to replicate the stellar growth it had posted in previous quarters. Most of it performance indicators declined on a sequential basis, albeit they were up compared to Q4 last year.  As a result, the stock is down by over 20% in today’s trading.

While the company reported 35% year-over-year growth in cumulative reviews to 71 million, and a 13% year-over-year increase in average unique monthly visitors to 159 million, the growth was anemic on a sequential basis indicating user and business fatigue. Additionally, the company reported that engagement on mobile devices flat-lined (on a sequential basis) as unique visitor from mobile stabilized at 72 million during the quarter. The bright spot in Yelp’s earnings was the growth in active local business accounts and claimed local business locations. While active local business accounts increased by 39% year over year to 93,700, claimed local businesses increased to 2.02 million. Overall, we are disappointed by Yelp’s results and think that the business seems to be maturing as organic expansion has taken a back seat. Below, we review Yelp’s Q4 FY 14 results by segment.

Check out our complete analysis of Yelp

Outlook for Q1 and 2015

For Q1 FY15, the company expects revenues to be in $114 – $116 million range, representing growth of approximately 51% compared to the first quarter of 2014. Adjusted EBITDA is expected to be in the range of $19 million to $21 million. For the full year, Yelp has announced considerable improvement in revenues, and projects net revenue to be in $538 – $543 million range, while adjusted EBITDA should be in $100 – $103 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 Q4 FY14, active local business accounts grew by 39% year over year to approximately 93,700. 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 enhances its appeal to advertisers and users alike. Beginning with the fourth quarter, the company has provided new metric called local advertising accounts. Local advertising accounts are defined as active local business accounts, excluding deal customers. Excluding the inorganic account additions associated with Qype, local advertising accounts grew 54% year over year to approximately 84,000. The revenue generated from this local advertising account metric comprises local revenue and the company believes will more accurately reflect its core advertising business. 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 Spain, Italy and France 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 affects both its local ads business and brand ads divsion, and during the quarter monthly unique visitors were stable at 135 million. However, 50% of these unique visitors (~72 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. During the quarter, 65% of all Yelp’s searches were via mobile and 56% of ad impressions were served on 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 future. 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 $61.17 price estimate on Yelp, which is 6% above with the current market price.

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