Yelp Earnings: Local Ads And Mobile Traffic Boost Revenues

Yelp (NYSE:YELP) reported its earnings for Q3 FY15 on October 28th. The company’s revenues improved to $143 million, a 40% growth in topline and above its guided range. Yelp reported a sequential and year on year decline in net income to a loss of $8 million. Additionally, adjusted EBITDA declined to $12.5 million compared to $20.1 million in the prior year quarter. Most of its performance indicators grew at a tepid rate on a sequential basis, albeit they were up in double digits compared to Q3 of last year. While the company reported 35% year-over-year growth in cumulative reviews to 90 million, the sequential growth was stalled at a paltry 7.8%. Furthermore, average unique monthly desktop visitors declined by 0.35% year over year to 78.9 million, indicating lower engagement among desktop users. Engagement on mobile devices increased as unique visitors from mobile grew to 89.23 million during the quarter, establishing the fact that users tend to use Yelp’s mobile app on the move. Below we review Yelp’s Q3 FY 15 results by segment.

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Outlook for Q4 and 2015 Revised Downwards

For Q4 FY15, the company expects revenues in $149.5-$154.5 million range, representing growth of approximately 38% compared to the fourth quarter of 2014. Adjusted EBITDA is expected to be in the range of $20 million to $24 million. For the full year, Yelp projects net revenue between $545.5 million and $551.5 million. Adjusted EBITDA is revised down to $72 million -$76 million compared to $72-$78 million range earlier.

Local Ads Division Performance

The local ads division makes up 73% 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 FY15, active local advertising business accounts grew by 37% year over year to approximately 104,000, 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, as discussed earlier, 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.

Transaction Activity On The Platform Increases

Over the past few years, Yelp had implemented a number of call to action initiatives such as placing orders from within the app after a user has browsed throught he catalog of business. These efforts have borne fruit. Consumers are increasingly transacting directly on Yelp, as demonstrated by approximately 170% year over year growth in the number of platform transactions in the third quarter. Furthermore, assimilation of SeatMe and Eat24 boosted transaction revenues. While Eat24’s revenue grew 73% in the third quarter, Yelp had over 17,000 restaurants accepting reservations through paid SeatMe or free Yelp reservations product.

Average Revenue Per Local Business Grows

Average revenue per active local business (ARPALB) is one of the most important drivers in our valuation for Yelp’s locals ads business. According to Yelp, the monetization rate of a city or region increases with time as more businesses sign up for premium services such as dedicated webpages and call to action to promote their products or services. The company’s ARPALB improved to $8013 for regions where Yelp started offering services in 2005, and to $2234 for regions where Yelp services started in 2007-2008. ^[1]  However, as Yelp introduces its services in new regions, we expect ARPALB to grow at a slower pace, as new regions such as Latin Americas have less spending power compared to the U.S., and fewer businesses in these regions are willing to pay for premium Yelp services. As a result, we expect that the blended ARPALB will grow at a slower rate in the coming years.

Mobile Fillips Revenues

Unique visitor is one of the primary drivers for Yelp as it affects its local ads business, deals and partnership division, and during the quarter monthly unique visitors grew to 168 million. However, most of the growth was due to 7.8% growth in mobile unique visitors (~89 million monthly users). According to ComScore data for September 2015, Yelp has about 30% reach among smartphone users and was one of the top 25 mobile web and app properties in the U.S.. In Q3, more than 56% of new reviews were from mobile app. Additionally, mobile app installation grew by to 20 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.

We have revised our price estimate to $30.29 for Yelp, which is 37% above with the current market price after the trading hours.

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1. Q3 Presentation Slides, 28^th October [↩]