- Yelp earnings Q3 2015 exceeded both top and bottom line expectations.
- Yelp's losses, however, keep on expanding.
- Can Yelp climb its wall of worry by demonstrating a clear path to profitability?
The world’s leading business review site, Yelp (NYSE:YELP) reported third quarter fiscal 2015 results that managed to beat both top and bottom line expectations. Yelp reported revenue of $143.2 million, good for 40.2% Y/Y growth, and non-GAAP EPS of $0.03 excluding one-time items. The reported revenue was $2.18 million better than the consensus while EPS topped estimates by a healthy $0.12. Yelp reported adjusted EBITDA of $12.5 million compared to $20.1 million a year ago.
On a GAAP basis, however, Yelp’s EPS came in worse than expectations. The company reported a quarterly loss of $8.1 million, or $0.11 per share, compared to consensus of -$0.08. The company had reported a profit of $3.6 million, or $0.05 per share, during last year’s comparable quarter.
Yelp gave guidance of $149.5 million to $154.5 million for Q4 revenue, and $545.5 million to $551.5 million for the full year, both of which were roughly in line with consensus for Q4 revenue of $152 million and full year revenue of $546 million.
Yelp shares rallied 8% after hours, before giving back their gains and finishing the day about 3.4% up. Yelp stock is down almost 60% YTD.
Ad Revenue does the Trick for Yelp
Better-than-expected ad revenue did the trick for Yelp this time. Local ad revenue was up 36% Y/Y to $115.9 million. Yelp added about 27,700 new local advertising accounts to take its count to 104,200, 37% better than a year ago. Expectations were that the company’s local advertising accounts would stand at 102,500 by the end of the quarter. Yelp attributed the growth to its mobile app, saying that it represents 70% engagement across its entire ecosystem.
Yelp also touted its native advertising products that deliver healthy ROI for marketers. Yelp demonstrated in its earnings slides that the average marketer spends $267 per month on CPC or CPM ads on its platform, but realized monthly revenue from ad-driven leads of $983, a healthy ROI of 269%.
Climbing a Wall of Worry
The rather weak gains by Yelp shares aptly demonstrate how the company has had to climb a wall of worry over the past few quarters. While Yelp’s growth in local advertising accounts is commendable, it still represents less than 1% of the more than 76 million businesses listed on its site. And, while Yelp’s Average Revenue per Active Local Business, or ARPALB, is growing, the growth is weak at best. ARPALB during the quarter clocked in at $1,112, representing just 9% growth, way lower than top line growth. This implies that the company is relying heavily on new local active account additions for its growth.
But perhaps the most worrying part is that Yelp’s operating expenses, which have traditionally averaged around 85% of revenue and in the process have put pressure on profit margins, are showing no signs of slowing down. The biggest culprit is Sales and Marketing expenses, by far the company’s biggest line item. Yelp’s S&M expenses came in at $82.95 million, or 57.8% of revenue. S&M expenses grew 52% Y/Y, 17.6% faster than top line growth. Yelp has been spending heavily in a bid to expand into international markets. But the big problem is that the company’s monetization rates in international markets remains very anemic. Only about 5% of Yelp’s revenue comes from international markets, with ARPALB in the U.S. being about 14 times bigger than ARPALB in international markets.
At this rate, it appears as if Yelp’s losses will keep expanding. With no clear path to profitability, it’s going to be hard for Yelp stock price to make any meaningful long-term gains. Until the company can demonstrate that it can monetize its international markets better, Yelp shares are likely to remain a value trap.