Yelp’s Stock Tanks By Almost 20% Due To Weak Revenue Guidance

Yelp‘s (NYSE:YELP) announced its earnings for Q1 on May 9th, and the company once again reported solid growth, as revenues grew by 24% year over year to $197 million. However, its stock price declined by over 22% in aftermarket trading (subsequently ending Wednesday’s trading down nearly 20%) as the company lowered its full-year revenue guidance. However, Yelp continued to report a substantial improvement in Adjusted EBITDA to $29 million in Q1 FY17 compared to adjusted EBITDA of $13 million in Q1 2016. Additionally, the company reported 26% growth in cumulative reviews to 127 million.

Overall, we are concerned about Yelp’s business as the company is struggling to retain its paying customers, which has led to the lowering of revenue guidance for 2017. Below we review Yelp’s guidance and Q1 results by segment.

Check out our complete analysis of Yelp

Outlook for Q2 2017

For the second quarter of 2017, net revenue is expected to be in the range of $202 million to $206 million, representing at the midpoint of the range growth of approximately 17.6% compared to the second quarter of 2016. Adjusted EBITDA is expected to be in the range of $32 million to $35 million.

Domestic Strength Boosts Revenues, Lower Retention Impacts Guidance

The local ads division makes up 75% of Yelp’s value, according to our estimates. One of the primary drivers for the local ads division is the number of active business accounts on Yelp. During fiscal Q1, paying advertising accounts grew 17% year-on-year and 3% quarter-on-quarter to 139,000. Additionally, claimed business locations, businesses that are listed for free on Yelp, witnessed growth of 26% year over year and 6% Q-o-Q to approximately 3.56 million in Q1. Yelp continued to witness strong adoption among mobile users with nearly 54% smartphone users either using the mobile application or mobile web for accessing Yelp’s services. As a result, the local ad revenues grew by 22% year over year to $177 million.

Yelp reported that its local ad revenues, which includes revenue generated by Yelp’s outbound sales teams, grew in the high teens in the first quarter due to growth in the number of paying accounts as well as high-single-digit growth in revenue per customer. Additionally, its national channel revenues, which currently account for over 20% of total ad revenue, grew in the high-20% range as franchise and mid-market customers increased their ad spending.

The self-serve business channel continued to be the fastest-growing vertical for Yelp, with year-to-year revenue growth in the 70% range in the first quarter. In addition to the growth in new customers, the company witnessed double-digit growth in revenue per customer.

Despite the revenue growth across all three primary channels, local, national, and self-serve, the growth was lower than the prior quarter as well as the prior year. The primary reasons for the slowdown in revenue growth were the carryover effect of soft local sales production in Q4 2016 and lower account retention in early 2017. The cumulative effect of these factors has led to lower revenue guidance for 2017. For the full year of 2017, the company has reduced its net revenue guidance from $880- $900 million range to $850-$865 million, representing growth at the midpoint of the range of approximately 20% compared to the full year 2016. Adjusted EBITDA guidance has also been revised down to $130-$145 million.

Deals Revenue Improves Due To More Transactions

Yelp’s deal, partnership, and other services (DPO) division contributes 6.2% to its value, per our estimates. 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.

During the quarter, transaction revenue grew 25% year-on-year to $18 million and remained strong across both Eat24 and the Yelp Platform. According to Yelp, the number of Yelp Eat24 orders, Yelp Platform transactions and Yelp Reservations bookings grew in excess of 50% in Q1 and now account for 30% of the total transaction volume.

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