Reviewing Yelp’s  Performance  in 2016

Yelp’s (NYSE:YELP) stock has increased by close to 32% over the past year. As a result, the stock has also out-performed the broader markets. While the return on Nasdaq’s composite index has been 2.2% year to date, Yelp’s return has been 19.1%. The rise in stock price can be attributed to a host of reasons, ranging from the turnaround in Yelp’s operations to its announcement that it will be rolling back its international operations. However, other factors have also led to the gyration in the stock price during the year. In this note, we will review factors that have led to the rise in stock price and business performance of the company.
Check out our complete analysis of Yelp

On the Block

Yelp has been trying to sell itself over the past two years. In 2016, Yelp once tested the markets for its potential sale. However, it failed to generate much interest in the market and the company rolled back its efforts. However, in the third quarter of the year, the company announced a stock conversion of its Class A and Class B shares in to a single class of common stock. ^[1]. Through this move, Yelp has potentially removed a hurdle that might have been a hindrance for its acquisition.

Going forward, Trefis believes that Yelp remains a takeover target in the coming year.  With the company restructuring its business, Yelp’s profit is expected to increase in the coming quarters. This would not only boost its valuation, but also attract more suitors in the future.

Halting International Expansion

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.

Due to this wind down, its Total addressable market has shrunk from 74 million local businesses to 21 million. However, since most of the revenue for the company comes from the US. 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. Going forward, as it halts operations overseas, Trefis expects a significant increase in operating profit margins and cash flows.

Beats Expectations in 2016

For majority of the year, Yelp beat the market expectations. During the first nine months, Yelp’s revenue grew to $518.4 million. With each earnings announcement the company has revised its top-line and profitability guidance upwards. For the full year 2016, Yelp projects net revenue to be in $709 – $713 million range, while adjusted EBITDA should be in $111 – $115 million range. This would translate into a 30% year-over-year growth in revenues and 61.4% increase in adjusted EBITDA. The primary reason for this improvement is as follows:

• Growth in Local Ads Business: During the first nine months, active local business, which pay Yelp a fee for advertising, grew to 135,000, a 39% growth compared to Q3. Trefis expect the company to exit with 144,000 active local business accounts in 2016, a growth of over 48% in the year.
• Mature Cohorts To Drive Conversion: The number of claimed businesses, which have a listing with Yelp but do not pay for any of the premium services, stands at over 3.3 million in the first nine months of the year. 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.
• Mobile Push To Help Growth: 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 Q3 monthly unique visitors grew to 165 million. Furthermore, 51% of these unique visitors (~83 million monthly users) used mobile devices for accessing Yelp’s services. 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.

• Average Revenue Per Active Business To Grow: 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 a call to action to promote products or services. The company’s ARPALB improved to $10,475(25% year-over-year growth) for regions where Yelp started offering services in 2005, and to $842 (35% year-over-year growth) for regions where Yelp services started in 2010. ^[2]

• Deals, Partnership and Other (DPO) services revenues will continue to improve: 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. The Company continues to innovate with its 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. During the first nine months, transaction revenue grew 53.51% year to year to $45.9 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.

Trefis’s price estimate for Yelp stands at $34.89, which is 4.3% below the current market price.

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1. Yelp announces conversion of Class A and Class B common stock into a single class of common stock, September 23 2016 [↩]
2. Yelp Q3 2016 Investor Presentation [↩]