Yelp (NYSE:YELP) is set to release its Q4 2015 earnings on Monday, February 8th.  Yelp’s stock continues to underperform the broad market as it did in 2015. Although, the company continues to report good revenue growth, its performance metrics have grown at a decreasing pace — indicating that growth across its businesses is slowing down. Nevertheless, most of Yelp’s growth stems from the adoption of its mobile app. Because user base growth for its app continues, we believe that revenue for the company grew in Q4, and for the FY2015. However, the pace of local ads growth slowed due to international expansion that directly impacts the monetization rate of the division. In this earnings announcement, we continue to monitor the monetization rate of its existing and new markets, from both mobile and desktop ads.
Outlook for 2015 and Q4
For Q4 FY15, the company guided revenues to be in the $149.5-$154.5 million range, representing growth of approximately 38% at the midpoint compared to the fourth quarter of 2014. Adjusted EBITDA is expected to be in the range of $20 million to $24 million. For the full year, Yelp projected net revenue to be between $545.5 million and $551.5 million. Adjusted EBITDA was revised down to the $72 million -$76 million range compared to the prior range of $72-$78 million.
Growth In Local Ads Business To Continue, But Profitability A Concern
The local ads business currently accounts for around 73% of Yelp’s stock value, according to our estimates, and is its biggest revenue source. During Q3 2015, active advertising local business accounts grew by 37% year over year to approximately 104,000, slower than expected.
The number of claimed businesses, which have a listing with Yelp, but do not pay for any premium services, stands at over 2.69 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. Furthermore, the company had stated in its earlier announcement that the monetization rate for a mature cohort (region) is higher than the newer ones. Therefore, we expect average revenue per active business account, which is a function of the duration of Yelp’s services in a region, to grow during the quarter.
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 profits and cash-flow as a percent of sales.
Growth In Mobile Ads Metrics To Boost Revenue
Most users tend to check up on local businesses, particularly restaurants, when they are on the move. As a result, Yelp’s mobile app has gained traction in the recent quarters. For example, in Q3, monthly unique visitors grew to 168 million. Furthermore, 51% of these unique visitors (~89 million monthly users) used mobile devices to access Yelp’s services. Additionally, 56% of new reviews and 58% of the ad impressions came from mobile devices. Considering the rampant growth in 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 to the Yelp site, which in turn will lead to more businesses signing up for Yelp. In this earnings announcement, we will continue to monitor growth in unique user count for Yelp’s mobile app.
Transaction Activity On The Platform To Increase
Over the past few years, Yelp had implemented a number of call to action initiatives such as placing orders from within the app after a user has browsed through the catalog of business. These efforts have borne fruit. Consumers are increasingly transacting directly on Yelp, as demonstrated by approximately 170% year over year growth in the number of platform transactions in the third quarter. Furthermore, assimilation of SeatMe and Eat24 boosted transaction revenues. While Eat24’s revenue grew 73% in the third quarter, Yelp had over 17,000 restaurants accepting reservations through paid SeatMe or free Yelp reservations product. We expect that the transaction activity on Yelp grew in Q4 as well, and the company would continue report higher revenue for the deals division.
Our price estimate for Yelp stands at $30.29, which is 54% above its current market price.