Reviewing Yelp’s Business In 2017

Yelp’s (NYSE:YELP) stock has increased by close to 11% over the past year, which has generally underperformed the broader market. During the year, the company continued to report solid growth across its local ad business. Furthermore, it streamlined its deal and transaction business by selling Eat24 to Grubhub, though it did lower its revenue guidance for 2017 due to the sale. In this note, we take a look back at the company’s 2017 so far and what to expect for 2018.

Meeting Expectations in 2017

During the first nine months of the year, Yelp’s revenue grew by 21% to $628.6 million. For the full year 2017, the company has lowered its net revenue guidance to $839-844 million, while adjusted EBITDA is expected to be in the $154 – $157 million range. This would translate to 18% year-over-year growth in revenues at the mid-point of the guidance and a 36% increase in adjusted EBITDA. The primary reasons for this growth are:

• Growth in Local Ad Business: During the first nine months, active local businesses, which pay Yelp a fee for advertising, grew to 155,000, a 17% increase compared to Q3. Trefis expects the company to exit with 163,000 active local business accounts in 2017, implying growth of over 20% in the year.
• Mature Cohorts To Drive Conversion: The number of claimed businesses, which have a listing with Yelp but do not pay for premium services, stands close to 4 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 in the coming years.
• Mobile Push To Help Growth: Many Yelp users check up on local businesses, particularly restaurants, when they are on the move, which has driven traction for the company’s mobile app as a result. In Q3, monthly unique visitors stood at 157 million, and 47% of these unique visitors (or around 73 million monthly users) used mobile devices to access Yelp’s services. Furthermore, Yelp’s app was installed on over 30 million devices, and its reach on mobile was close to 34% through the app and web. 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. Further adoption of Yelp’s mobile platform should drive growth in traffic, which in turn should lead to more businesses signing up. This could also help the company boost its ARPALB.

• 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 $11,332 (25% year-over-year growth) for regions where Yelp started offering services in 2005, and to $929 (21% year-over-year growth) for regions where Yelp services started in 2010. We forecast that the company’s 2017 ARPALB will improve by around 5%.

Deals, Partnership and Other (DPO) Revenues Will Continue To Improve

Yelp generates revenue from this division through transactions that 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 improve its offerings, and has introduced request-a-quote service to boost revenues for its listed businesses.

Trefis’s price estimate for Yelp stands at $38, which is around 15% below the current market price.

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