Yelp Earnings: Revenues Grows As The Company Winds Down International Business

Yelp‘s (NYSE:YELP) announced its earnings for Q3 FY16 on November 2nd and the company once again reported rapid growth, as revenues grew by 30% year over year to $186.2 million. However, Yelp reported a substantial improvement in net income that grew to $2 million. Yelp’s Adjusted EBITDA also improved significantly to $33.7 million in Q3 FY16 compared to adjusted EBITDA of $12.5 million in prior-year quarter. The company continued to report good growth across all its performance metrics. The company reported 29% growth in cumulative reviews to 115 million, and the company also reported high engagement on mobile devices as unique mobile visitors increased to 72 million from 69 million. Overall, we are encouraged by Yelp’s results and think that the business seems to be on the growth path. Below, we review Yelp’s guidance and Q3 FY 16 results by segment.

Check out our complete analysis of Yelp

Outlook for Q4 and 2016

For Q4 FY16, the company expects revenues to be in $191 – $195 million range, representing growth of approximately 26% compared to the fourth quarter of 2015. Adjusted EBITDA is expected to be in the range of $36 million to $40 million. For the full year, Yelp has announced an improvement in guidance, and projects net revenue to be in $709 – $713 million range, while adjusted EBITDA should be in $111 – $115 million range.

Strength In Domestic Markets Boosts Revenues As The Company Winds Down International Expansion

The local ads division makes up 76.3% 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 FY16, active local business accounts grew by 29.6% year over year to approximately 135,000. Additionally, claimed business locations, businesses that are listed for free on Yelp, grew by 35.9% to 3.19 million in Q3. The primary reasons for growth in this driver was the Yelp’s presence in the domestic local market and the increase in cumulative reviews on the Yelp site, which increases its appeal to advertisers and users alike. Furthermore, about 70% of paid views coming from the Yelp app in the third quarter, and the company is focused on driving high levels of app engagement for both consumers and business owners.  During the quarter, the local ads revenues grew by 41% year over year to $163.6 million. The company continues to innovate with its local ads offering and has recently introduced request-a-quote service to boost revenues for its listed businesses. Additionally, the company is expanding the distribution of its ad products and accelerating its push into the national channel by investing in products that unlock the power of Yelp data.

However, changes in the international distribution environment have impaired the near-term growth prospects of Yelp’s business overseas. As a result, the company is planning to wind down its sales and marketing activities outside the United States and Canada, and reallocate the financial resources toward its core business in North America. Yelp expects that a majority of this realignment will be completed before year-end with a small tail of revenue and minimal expense running off over the first few quarters of 2017. According to the company, 1% or about $5 million of Yelp’s revenue year to date came from the affected operations and regions.

While Yelp’s net operating investment in international was greater than $10 million in the first nine months of 2016, it anticipates incurring a one-time restructuring charge of approximately $2 million to $4 million during the fourth quarter of 2016, most of which is expected to be severance costs associated with up to 175 (international employees)  of its 4,350 worldwide employees.

Deals Revenues Improves

Yelp’s deal, partnership and other services (DPO) division contributes 6.2% to its value. Currently, Yelp generates revenue from this division through any transaction that might occur on its website. Furthermore, 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. During the quarter, transaction revenue grew 33% year to year to $16 million, and remained strong across both Eat24 and the Yelp Platform. The number of transactions on Yelp Platform was particularly strong, more than doubling year to year. We believe that its services will drive revenues at DPO division going ahead.  As an example, we cite call-to-action, which offers discounts and a delivery platform that closes the loop between discovering a business and transacting sales.

We are currently in the process of updating our Yelp model. At present we have a $31.11 price estimate on Yelp, which is 15% below its current market price.

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