Will Advertising Revenues Continue To Drive Earnings For Yelp Through 2018?

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Yelp (NYSE:YELP) announced its second quarter results on August 8, reporting a 12% increase in net revenues to $234 million. Advertising revenues increased over 20% on a y-o-y basis to $226 million, while other revenues combined fell over 60% to $8.7 million. In recent quarters, Yelp has reported steady growth in advertising revenues driven by a corresponding increase in paying advertising accounts. This trend continued through the current year, with a 31% annual increase in paying accounts to 194,000 by the end of June, up from 148,000 in the prior year period. Additionally, claimed business locations – or businesses that are listed for free on Yelp – were also up to 4,593 from 3,753 in the June quarter of last year.

We have created an interactive dashboard on what to expect from Yelp through 2018. You can modify the revenues from each business segment and margin expectations to see how the EPS would be affected for the year

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As Yelp’s advertiser base increases and mobile engagement continues to improve, we expect it to translate to ad revenue growth. We forecast ad revenues to increase 19-20% to around $920 million for the year. On the other hand, transaction services and other revenues business are expected to continue to decline on a y-o-y basis since the company sold Eat24 to GrubHub for nearly $290 million last year.

In addition to net revenue growth, we expect Yelp’s adjusted EBITDA margin to expand by around 5-6 percentage points to over 25% for the year given the elimination of the low-margin transaction business. However, the company’s net income (GAAP) and EPS are forecast to be over 60% lower on a y-o-y basis to $60 million and $0.67 per share, respectively. It should be noted that Yelp’s net income (GAAP) was significantly higher on a y-o-y basis due to a $165 million increase in net income due to a gain on disposal of business unit. As a result, year-over-year comparisons on net income and EPS are tougher this year.

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