Yelp Earnings: Revenue Grows But Exit From International Business impacts Performance Metrics

Yelp‘s (NYSE:YELP) announced its earnings for Q4 FY16 on February 9th and the company once again reported rapid growth, as revenues grew by 27% year over year to $195 million. However, the stock price declined by over 9% in the aftermarket hour trading as the hangover from exiting international markets impacted growth for paying locals business accounts. Nevertheless, Yelp reported a substantial improvement in net income that grew to $8.26 million. Yelp’s Adjusted EBITDA also improved significantly to $45 million in Q4 FY16 compared to adjusted EBITDA of $18 million in the prior-year quarter. Additionally, the company reported 5% marginal growth in cumulative reviews to 121 million. Overall, we are concerned about Yelp’s business as growth might elude the company over the long term. Below, we review Yelp’s guidance and Q4 FY 16 results by segment.

Check out our complete analysis of Yelp

Outlook for Q1 and 2017

For the first quarter of 2017, net revenue is expected to be in the range of $195 million to $199 million, representing at the midpoint of the range growth of approximately 25% compared to the first quarter of 2016. Adjusted EBITDA is expected to be in the range of $25 million to $28 million.

For the full year of 2017, net revenue is expected to be in the range of $880 million to $900 million, representing growth at the midpoint of the range of approximately 25% compared to full year 2016. Adjusted EBITDA is expected to be in the range of $150 million to $165 million.

Strength In Domestic Markets Boosts Revenues Once More, But Concerns For The Future Mount

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 Q4 FY16, active local business accounts grew marginally by 2% to 137,800. Additionally, claimed business locations, businesses that are listed for free on Yelp, witnessed tepid growth of 5.4% year over year to approximately 3.363 million in Q4. The primary reasons for growth in this driver was the Yelp’s presence in the domestic local market. Furthermore, Yelp has the highest reach among mobile users with nearly 34% smartphone users using the mobile application. During the quarter, the local ads revenues grew by 34% year over year to $176.5 million. The company continues to innovate with its local ads offering and has recently intensified its marketing efforts to engage both advertisers and users. 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.

The biggest concern for the company is that, since it will only operate in the U.S. market, the performance metrics will suffer in the future as its addressable market has shrunk. Its total addressable market (TAM) now stands at $19 billion or 12.8% of $149 billion of the expected U.S. local ad spending in 2017. Nevertheless, Yelp has room to grow as its revenues account for only 4.7% of the TAM.

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.

According to Yelp, the number of Yelp Eat24 orders, Yelp Platform transactions and Yelp Reservations bookings grew 40% in 2016 and transactions per user increased by more than one-third. During the quarter, transaction revenue grew 18.6% year to year to $16.6 million, and remained strong across both Eat24 and the Yelp Platform. We believe that its services will drive revenues at DPO division going ahead.  The company has stated that growing transaction activity remains a top strategic objective for 2017. Since the start of 2017, Yelp extended Request-A-Quote service to its users, thus connecting millions of users with the merchants and service providers they’re looking for.

We are currently in the process of updating our Yelp model. At present we have a $34.89 price estimate on Yelp, which is 7.5% below its current market price.

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