Yelp Earnings: Key Performance Indicators Suggest Sluggish Growth
Yelp (NYSE:YELP) reported its earnings for Q1 FY15 on April 29th. The company once again posted growth as revenues increased by 55% year over year (7.84% sequentially) to $118.50 million. Yelp reported a sequential decline in net income to a loss of $1.28 million. However, adjusted EBITDA improved significantly to $16.3 million compared to $8.51 million in the prior year quarter. As stated in our pre-earnings note, the company continued to report sub-par growth. Most of its performance indicators declined on a sequential basis, albeit they were up compared to Q1 of last year. As a result, the stock was down by over 16% in after market hour trading.
While the company reported 36% year-over-year growth in cumulative reviews to 77 million, the sequential growth was stalled at a paltry 8.5%. Furthermore, average unique monthly visitors grew by 7.5% year over year to 142.46 million, indicating user and business fatigue. Engagement on mobile devices increased as unique visitors from mobile grew to 78.96 million during the quarter. One of the bright spots in Yelp’s earnings was growth in active local business accounts and claimed local business locations. While active local business accounts increased 7.5% year over year to 90,200, claimed local businesses increased to 2.19 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 Q1 FY 15 results by segment.
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Outlook for Q2 and 2015
For Q2 FY15, the company expects revenues in $131-$134 million range, representing growth of approximately 50% compared to the second quarter of 2014. Adjusted EBITDA is expected to be in the range of $22 million to $24 million. For the full year, Yelp has announced a considerable improvement in revenues and projects net revenue between $574 million and $579 million, and adjusted EBITDA in $102-$105 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 Q1 FY15, active local advertising business accounts grew by 42% year over year to approximately 90,200, driven by international expansion underway and assimilation of Eat24 and SeatMe business, which enhances Yelp’s appeal to users and advertisers alike. Furthermore, the company said that revenue from international markets is expected to gain traction in the coming quarters as it monetizes these regions. The company expects to achieve revenue of $1 billion by 2017. However, we believe that as the company monetizes existing regions, and expands to new territories, its selling, general and administration (SG&A) and marketing costs will increase and lower the company’s profitability and cash flow as a percent of sales.
Mobile To Bolster Revenues
Unique visitor is one of the primary drivers for Yelp as it affects both its local ads business and brand ads division, and during the quarter monthly unique visitors grew to 142 million. However, most of the growth was due to 30% growth in mobile unique visitors (~78.96 million monthly users). In Q1, more than 50% of its reviews and photos were contributed via the mobile app. Additionally, 65% of all Yelp’s searches were via mobile and mobile app installation grew by to ~16 million users. 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 the adoption of Yelp’s mobile platform will drive this growth in unique visitors.
We are currently in the process of updating our Yelp model. At present we have a $53 price estimate on Yelp, which is 2% above with the current market price (price during trading hours.
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