Yelp’s (NYSE:YELP) results showed the effect of rapid expansion as revenue grew 68% y-o-y to $46.13 million in Q1. Apart from launching in Germany and the U.K. (through Qype acquisition), Yelp also expanded its presence to New Zealand, marking its entry into Asia-Pacific region. Yelp continued to report a net loss of $4.8 million in Q1 CY13, however, this is substantial improvement, as net loss decreased by 51% y-o-y from $9.83 million in Q1 CY12
In Q1 CY13,Yelp reported 42% growth in cumulative reviews to 39 million and 43% increase in average unique monthly visitors to 102 million. Active local business accounts also increased by 63% y-o-y to approximately 45,000.
After this quarter’s earnings announcement, our price estimate for Yelp has increased from $16 to $19.36, but it still remains substantially below the current market price. Overall, we are encouraged by Yelp’s results and think that the business seems to be on the growth path, but we would start believing in a substantially higher Yelp valuation if the company can sustain a higher growth rate in its local advertising segment, which is worth 78% of its total value.
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International Expansion To Add Active Business Account
The local ads division contributes ~80% to Yelp’s revenue and makes up 78% of Yelp’s estimated value. One of the primary driver for local ads division is the number of active business accounts on Yelp. During Q1 CY13, active local business accounts increased by 63% y-o-y, to approximately 45,000. The primary reasons for growth in this driver are Yelp’s international expansion efforts and increase in cumulative reviews on the Yelp site, which increases its appeal to advertisers and users alike.
In the past few quarters, Yelp has been on an international expansion spree through organic and inorganic route. In Q1, Yelp opened its operations in New Zealand and it continued to integrate Qype business into its platform, which resulted in an increase in active business accounts. We expect this trend to continue and the number of active business account on Yelp to increase from 40,000 in 2012 to over 181,000 by the end of our forecast period. However, we believe that the market is estimating an even higher growth rate, and thus, a higher valuation for Yelp.
Mobile Monetization Beats Brand Ads
The brand ads division is the second largest division and makes up ~11% of Yelp’s estimated value. In Q1 CY13, brand ads revenue grew 19% y-o-y to $4.8 million. One of the key contributors to this growth is the adoption Yelps’ mobile platform and its mobile app. Yelp’s mobile app continued to gain traction and had an install base of approximately 10 million devices in Q1. Yelp reported that 30% of its 102 million unique visitors (~10 million monthly unique mobile users) used its mobile devices for accessing its services. Yelp is “rapidly becoming a de facto search engine” as users prefer Yelp over other search options when it comes to reviews.
In our pre-earnings article, we had argued that Yelp should look to monetize its mobile platform by adding display ads to its repertoire. (See: Yelp’s Mobile Monetization And International Growth Are Keys To Earnings) In Q1, the company launched display ads on its mobile app for the first time, and we believe that this is a right step towards monetizing its mobile platform. Yelp continues to add new display advertisers such as Taco Bell, InterContinental Hotels and MillerCoors for its brand ads division.
It also beefed up its local search business by partnering with Bing to show up on local business pages. Yelp reported that 36% of its ads impression were served on mobile devices. Yelp’s mobile penetration is on the rise and almost 45% of all Yelp’s searches were via mobile. With the mobile app now running display ads, this is likely to become a major revenue driver for Yelp’s Brand ads division. 
Outlook for Q2CY2013 and 2013
For Q2 FY13, the company expects revenues to be in the range of $52.5 – $53.5 million, with an adjusted EBITDA of $4.5-$5 million. For the full year, it expects net revenue to be in the range of $215 – $218 million, and adjusted EBITDA is expected to be in the range of $21 – $23 million.