Yelp Earnings: Revenue Expansion Across Divisions Continues
Yelp‘s (NYSE:YELP) announced its earnings for Q1 FY14 on April 30th, and the company once again reported a rapid expansion of revenues as it grew by 65.6% year over year to $76.4 million. Yelp continued to report a net loss of $2.6 million in the quarter; however, this is substantial improvement compared to $4.79 million in Q1 FY13. Adjusted EBITDA for the first quarter of 2014 was approximately $8.5 million compared to adjusted EBITDA of $3.2 million for the first quarter of 2013. The company continued to report good growth across all its performance metrics. The company reported 46% growth in cumulative reviews to 57 million, and 30% increase in average unique monthly visitors to 132 million. Additionally, the company also reported high engagement on mobile devices as unique visitor from mobile increased to 61 million from 40 million. While active local business accounts increased by 65% year over year to 74,000, claimed local businesses increased to 1.6 million. Overall, we are encouraged by Yelp’s results and think that the business seems to be on the growth path. But we believe a substantially higher valuation can be supported if the company can sustain a higher growth rate in its local advertising segment, which is worth 86% of its estimated value. Below, we review Yelp’s Q1 FY 14 results by segment.
Check out our complete analysis of Yelp
Outlook for Q2 and 2014
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For Q2 FY14, the company expects revenues to be in $85 – $86 million range, representing growth of approximately 55% compared to the second quarter of 2013. Adjusted EBITDA is expected to be in the range of $11.5 million to $12.5 million. For the full year, Yelp has announced an improvement in guidance, and projects net revenue to be in $363 – $367 million range, while adjusted EBITDA should be in $56 – $60 million range.
International Expansion To Boost Revenues and Costs
The local ads division makes up 86% of Yelp’s estimated value. One of the primary drivers for local ads division is the number of active business accounts on Yelp. During Q1 FY14, active local business accounts grew by 65% year over year to approximately 74,000. The primary reasons for growth in this driver are the international expansion under way and the increase in cumulative reviews on the Yelp site, which increases its appeal to advertisers and users alike. Recently, the company added Japan and Mexico into its folds, and we expect this expansion spree to bolster the number of active business accounts on Yelp to over 412,000 by 2020. Furthermore, the total international traffic grew 95% year over year to 23% of total traffic, and international reviews grew 210% to comprise 11% of total reviews. However, we believe that as the company expands to new territories, its selling, general and administration (SG&A) and marketing costs will increase and lower company’s profitability and cash-flow as a percent of sales.
Deals Revenues Improves
Yelp’s deal, partnership and other services (DPO) division contributes 5.7% to its value. Currently, Yelp generates revenue from this division through any transaction that might occur on its website. 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. In Q1, Yelp reported 56% year-over-year growth in deals revenues to $7.5 million. In Q3 FY13, Yelp launched new initiatives to increase traction. These include a call-to-action, which offers discounts and a delivery platform that closes the loop between discovering a business on Yelp and making a purchase at that business. We believe that these newly launched services are gaining momentum and will drive revenues at DPO division going ahead.
Mobile Search To Bolster Brand Ads Division
Brand advertising is currently Yelp’s third largest source of revenue and makes up 4% of our stock price estimate. Yelp generates most of the revenues in this segment from display ads. The unique visitor is the primary driver for this division, and during the quarter monthly unique visitors grew to 132 million. However, 46% of these unique visitors (~61 million monthly users) used mobile devices for accessing Yelp’s services, and 51 million users now use Yelp’s app. During the quarter, 60% of all Yelp’s searches were via mobile and 35% of new reviews came from mobile devices. Considering the rampant growth in the usage of mobile devices, we expect the mobile platform to become a major revenue driver for Yelp’s brand ads division. The growing number of consumers searching for local businesses online constitutes Yelp’s existing market, and in addition to company’s global expansion plans, we believe adoption of Yelp’s mobile platform will drive this growth in unique visitors on the Yelp site.
We are currently in the process of updating our Yelp model. At present we have a $52 price estimate on Yelp, which is 20% below its current market price.
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