Yelp Earnings: Mobile Growth Slows, Guidance Tempers Expectations

Yelp (NYSE:YELP) reported its earnings for Q4 FY15 on February 8th and the results failed to enthuse investors, with guidance tempering expectations. As a result, the stock price declined by over 10% during the trading hours. The company’s revenues improved to $153.7 million, a 40% growth in the top-line. Yelp reported a sequential and year-on-year decline in net income to a loss of $22.2 million. Additionally, adjusted EBITDA declined to $17.5 million compared to $25.09 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 Q4 of last year. While the company reported 33.6% year-over-year growth in cumulative reviews to 95.2 million, the sequential growth was stalled at a paltry 6.2%. Furthermore, average unique monthly desktop visitors declined by 5.44% year over year to 74.60 million, indicating lower engagement among desktop users.  Furthermore, engagement on mobile devices decreased as unique visitors from mobile declined to 85.9 million during the quarter, indicating fatigue of user adoption. Below we review Yelp’s Q4 FY 15 results by segment.

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Outlook for Q1 and 2016 

For the first quarter of 2016, net revenue is expected to be in the range of $154 million to $157 million, representing growth of approximately 31% compared to the first quarter of 2015 at the the midpoint. Adjusted EBITDA is expected to be in the range of $10 million to $12 million.  For the full year of 2016, net revenue is expected to be in the range of $685 million to $700 million, representing growth of approximately 26% compared to full year 2015 at the midpoint. Adjusted EBITDA is expected to be in the range of $90 million to $105 million.  ((8-k, www.sec.gov))

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 Q4 FY15, active local advertising business accounts grew by 33% year over year to approximately 111,000, 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. BIA/Kelsey projects that the Yellow Pages industry will generate roughly $7 billion in 2016. The company expects to achieve revenue of over $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.

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 $8,476 for regions where Yelp started offering services in 2005, and to $2,431 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.

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 through he catalog of business.  In Q4, the company rolled out Request a Quote feature that resulted in 200% sequential growth in consumer queries. Furthermore, assimilation of SeatMe and Eat24 boosted transaction revenues. While Eat24’s revenue grew 80% in the FY2015, Yelp had over 20,000 restaurants accepting reservations through paid SeatMe (2700) or free Yelp reservations product.

Mobile Growth Slows

The unique visitor count 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 declined, on a sequential basis, to 160 million. While the mobile reach for Yelp’s app increased to 28%,  mobile user based queries declined by 3.8% sequentially. In Q3, more than 56% of new reviews were from the mobile app. Additionally, mobile app installation was stagnant at 20 million users sequentially. However, 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 are in the process of updating our model. At present, we estimate Yelp’s stock price at $30.29 for Yelp, which is 87% above with the current market price after the trading hours.

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1. Q4 Presentation Slides, 8^th February [↩]