Yelp Earnings Preview:Focus On Growth Across Local Ads Division

Yelp (NYSE:YELP) is set to release its Q1 2015 earnings on Wednesday, April 29^th. Although the company continues to report good growth for its revenues, its performance metrics declined on a sequential basis in Q4, indicating that growth across its businesses is slowing down. Additionally, 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 slowed in Q1 as well. In this earnings announcement, growth in the local ads business will once again be the key focal point, and we will continue to monitor the monetization rate of its existing and new markets. Additionally, revenue growth from mobile devices and the Deal, Partnership and Other services (DPO) business will be critical for the future as these services to form a significant portion of Yelp’s revenues in the coming quarters.

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 a 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.

Growth In Local Ads Business To Continue

The local ads business currently accounts for around 80% of Yelp’s stock value, according to our estimates, and is its biggest revenue source. During 2014, active advertising local business accounts grew by 55% year over year to approximately 84,000, slower than expected. 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 international markets, we expect the active local business accounts to grow in the coming quarters. Additionally, the number of claimed businesses, which have a listing with Yelp but do not pay for any of the premium services, stands at over 1.9 million. Most of these businesses are in regions where Yelp has been operational for more than five years. Considering that mature markets witness higher conversion rates from claimed businesses to active businesses, we expect strong growth in active business accounts from these regions.

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 $3800 in 2014 to $4537 by 2021, as the monetization rate in older markets 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 has added countries in Asia (Taiwan) and Europe to its addressed markets. As a result, international traffic grew over 40% year over year to approximately 30.8 million unique visitors on a monthly average basis in 2014. Furthermore, the company said that revenue from international markets is expected to gain traction in the coming quarters as it monetizes regions such as markets in Italy which were setup three years ago. 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. However, we believe that as the company expands to new territories, it’s selling, general and administration (SG&A) and marketing costs will increase and lower company’s profitability and cash-flow as a percent of sales.

Growth In Mobile Ads Metrics In Focus

Most of the users have a tendency to check up on local businesses particularly restaurants when they are on a move. As a result, Yelp’s mobile app has gained traction in the recent quarters. For example, in 2014 monthly mobile unique visitors grew to 72 million. Furthermore, 45% of new reviews and 56% of the ad impressions 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 coming years. We believe the adoption of Yelp’s mobile platform will drive the growth in unique visitors across Yelp’s site and app, which in turn will lead to more businesses signing up for Yelp. In this earnings announcement, we continue to monitor the growth in unique user count for Yelp’s mobile app.

Growth In Revenues From Deals Platform

Yelp’s deal, partnership and other services (DPO) division contributes 5.7% to its value, according to our model. 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 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 $53, which is 5% above its current market price.

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