Yelp Q2 Earnings Preview: Local Ads Business To Grow, Albeit At A Slower Pace

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Yelp (NYSE:YELP) is set to release its Q2 2015 earnings on Tuesday, July 28th. Over the past three months, the stock price has declined by nearly 40% as the company failed to find any potential acquirers for its business. Although the company continues to report good revenue growth, its performance metrics have grown at a slower pace — indicating that growth across its businesses is slowing down. This is primarily due to its expansion to regions outside the U.S, where the purchasing power of businesses and users is low compared to the U.S. We believe that this trend continued in Q2 and the pace of local ads growth slowed as well. In this earnings announcement, growth in the local ads business will once again be the key focal point, and we will continue to monitor the monetization rate of its existing and new markets. Additionally, revenue growth from mobile devices and the Deal, Partnership and Other services (DPO) business will be critical for the future as these services will form a significant portion of Yelp’s revenues in the coming quarters.

Check out our complete analysis of Yelp

Outlook for Q2 and 2015

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For Q2 FY15, the company guided to revenues in $131-$134 million range, representing growth of approximately 50% compared to the second quarter of 2014. Adjusted EBITDA is expected to be in the range of $22 million to $24 million. For the full year, Yelp announced a considerable improvement in revenues, projecting net revenue between $574 million and $579 million and adjusted EBITDA in the $102-$105 million range.

Growth In Local Ads Business To Continue

The local ads business currently accounts for around 80% of Yelp’s stock value, according to our estimates, and is its biggest revenue source. During Q1 2015, active advertising local business accounts grew by 42% year over year to approximately 90,200, slower than expected. The primary drivers for Yelp’s account growth are its international expansion efforts and and the assimilation of the Eat24 and SeatMe businesses, which enhances Yelp’s appeal to users and advertisers alike. The company has a total addressable market (TAM) of 73 million local businesses in the world, of which 53 million are present in North America, Europe and New Zealand. As the company continues to expand in international markets, we expect the active local business accounts to grow in the coming quarters. 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 the company’s profitability and cash-flow as a percent of sales.

Additionally, the number of claimed businesses, which have a listing with Yelp but do not pay for any of the premium services, stands at over 1.9 million. 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. The company expects to achieve revenue of $1 billion by 2017.

Furthermore, we expect average revenue per active business account, which is a function of the duration of Yelp’s services in a region, to grow from $3,800 in 2014 to $4,537 by 2021, as the monetization rate in older markets increases. With this earnings announcement, we will continue to monitor these performance metrics to ascertain whether the company will be able to maintain its growth trajectory going forward.

Growth In Mobile Ads Metrics In Focus

Most of the users have a tendency to check up on local businesses particularly restaurants when they are on a move. As a result, Yelp’s mobile app has gained traction in the recent quarters. For example, in Q1 2015, monthly mobile unique visitors grew to 79 million. Furthermore, 50% of new reviews and 65% of the search queries came from mobile devices. Considering the rampant growth in the use of mobile devices, we expect the mobile platform to become a major revenue driver for Yelp in the coming years. We believe the adoption of Yelp’s mobile platform will drive growth in unique visitors across Yelp’s site and app, which in turn will lead to more businesses signing up for Yelp. In this earnings announcement, we will continue to monitor the growth in unique user count for Yelp’s mobile app.

Our price estimate for Yelp stands at $50.45, which is 39% above its current market price.

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