Strong Growth In Advertiser Accounts Should Have Driven Yelp’s Q1 Results

Yelp (NYSE:YELP) reports its Q1 earnings on Thursday, May 9. We will primarily be looking at how well the management fared in  achieving the long-term goals it laid out at the end of 2018. The results should also show if the company’s new approach for its sales force has meaningfully boosted the number of advertisers on its platform. Per Trefis estimates, Yelp’s shares have a fair value of $44, which is roughly 10% ahead of the current market price. Our interactive dashboard on Yelp’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation, and see all of our Technology company data here.

A Quick Look At Yelp’s Revenue Sources

Yelp connects businesses and consumers in the U.S., and makes money by selling advertising space on its platform. Yelp has a single operating and reporting segment; however, the company does break down its revenue ($943 million in 2018) in three sub-segments based on the type of services provided:

1. Advertising (2018 revenue of $907 million, 96% of total): The company offers to build free profiles for businesses and provides additional bells and whistles (including branded profiles, enhanced profiles, verification tags, search and ads) on a paid basis.
2. Transactions (2018 revenue of $14 million, ~1% of total): Yelp earns commissions on transactions that the company facilitates across the Yelp Platform, Eat24 and the partnership with Grubhub, Yelp Deals and Gift certificates.
3. Other services (2018 revenue of $22 million, ~2% of total): Other services revenue is generated through subscription, licencing payments for access to Yelp data and revenue from partnerships.

Yelp added $227 million in total revenues from 2016 to 2018 (CAGR of 15%)

1. Revenue growth was driven by the advertising segment, with growth in additions to active advertiser accounts partially offset by weakness in average revenue per advertiser
2. Transaction and other services revenues have declined over this period due to sale of Eat24 business

How Have Yelp’s Key Operating Metrics Trended Over Recent Quarters, And What Is The Expectation For Q1?

• In Q4, advertising revenue increased to $235 million (+12% y-o-y), driven by a 17% y-o-y increase in paying advertiser accounts despite a 4% y-o-y decrease in average revenue per account. In Q1, we expect advertising revenue to grow to $251 million (+17% y-o-y), driven by an expected 25% y-o-y increase in paying advertiser accounts despite an expected 6% y-o-y decrease in average revenue per account.
  • In Q4, paying advertiser accounts grew to 191,000 (+17% y-o-y). In Q1, we expect this number to grow to 222,000
• In Q4, transaction and other revenues declined to $9 million (-12% y-o-y) on account of the divestment of Eat24 to GrubHub and business restructuring. In Q1, we expect the number to remain flat y-o-y at $9 million.
• We expect Yelp’s Q1 net margin figure to be 1.5%, which should result in a positive net income figure for the quarter as opposed to a net loss a year ago.

We forecast Yelp’s EPS figure for full-year 2019 to be $1.02. Taken together with our forward P/E multiple of 43 for the company, this works out to a $44 per share price estimate for the company’s stock, which is around 10% higher than the current market price.

Do not agree with our forecast? Create your own price forecast for the Yelp by changing the base inputs (blue dots) on our interactive dashboard.