Yelp Q4 Earnings Release Signals Deeper Issues Ahead

  • Yelp delivered healthy Q4 2015 results which exceeded both top and bottom line estimates.
  • Yelp's fourth quarter EBITDA, as well as its 2016 EBITDA guidance, were disappointing.
  • Yelp is still plagued by very high sales and marketing costs, which are growing much faster than revenue.
  • Yelp's inability to turn a profit is likely to continue weighing heavily on the Yelp stock.

Shares of the world’s largest business review site Yelp (NYSE:YELP) were down sharply, falling by 10% in aftermarket trade after the company delivered a healthy Q4 2015 earnings beat but failed to impress on one key profitability metric: EBITDA. Yelp reported fourth quarter revenue of $153.7M, good for 39.9% Y/Y growth and $1.3M better than the consensus on Wall Street while its non-GAAP EPS of $0.11 was $0.14 better than estimates and represented a huge 42.1% Y/Y drop. On a GAAP basis, Yelp reported a net loss of $22.2M or EPS of -$0.29. Meanwhile, Yelp’s EBITDA (earnings before interest, taxes, depreciation, and amortization), a closely watched profitability metric for the company, fell 30.1% to $17.5M and thus failed to meet the company’s guidance of $20M-$24M for the quarter.

Local Advertising revenue grew 36% Y/Y to $125.9M while Transaction Revenue clocked in at $14M from $1.4M from the prior year’s comparable quarter courtesy of Yelp’s acquisition of Eat24 in 2015. Other revenues remained flat year over year at $6.8M. Yelp’s cumulative reviews grew 34% Y/Y to 95M. Yelp’s user device mix was a mixed bag with desktop users declining 4% Y/Y to 74.6M while mobile users grew 14.2%Y/Y to 65.9M.

Upbeat Revenue/Earnings Guidance, Weak EBITDA

Yelp said that it expects Q1 2016 revenue of $154M-$157M, good for 31%Y/Y growth at the mid-point and above a Wall Street consensus of $154.4M. Yelp said that it expects full-year revenue to clock in at $685M-$700M, good for 26% Y/Y growth at the mid-point and above Wall Street consensus of $687.4M.

Yelp issued weak EBITDA guidance that once again disappointed. The company said that it expects Q1 2016 EBITDA of $10M-$12M and full-year EBITDA of $90M-$105M. Although the company’s full-year EBITDA will be good for 41% Y/Y growth, it probably won’t be good enough to push the company out of the red zone where it has languished for years, thus the negative reaction by the market.

Yelp’s EBITDA has continued to come under intense pressure due to heavy spending by the company. The company’s GAAP costs/expenses shot up 57%Y/Y to $160.1M, thus badly eclipsing top line growth of 40%. Sales and Marketing expenses, the company’s biggest line item, rose 63% to $85.7M. Yelp has been spending heavily on S&M as it tries to expand into international markets, but so far the company has little to show for its efforts. During the fourth quarter, international markets contributed just $3M, or 2%, to the company’s top line. With such anemic performance in international markets, Yelp’s high marketing costs do not appear justified.

The market might also have been disillusioned by the fact that Yelp's projected full-year revenue growth of 26% will mark a dramatic slowdown of almost 20 percentage points in a single year from the 45.6% growth the company recorded in 2015. Although 26% revenue growth is still quite respectable, the market tends not to tolerate huge revenue slowdowns, especially when the company in question remains unprofitable.

The big problem here is that Yelp has been using Alphabet Inc-C (NASDAQ:GOOG) as a red herring to detract from the fact that the company still faces a huge monetization problem. Yelp has consistently been blaming its slowing revenue on Google’s tendency to localize local searches and favor its own review services such as Google+, thus denying review sites such as Yelp and TripAdvisor TripAdvisor (NASDAQ:TRIP) good visibility on SERP(search engine results placement). The real problem with Yelp is that though the site has tens of millions of listed businesses, only about 120K, or less than 1% of the total have claimed their listings on the site by advertising with Yelp. Yelp is still plagued by allegations of manipulating reviews and even extorting money from businesses, which does not augur well for the company’s reputation.

However, perhaps Yelp’s biggest problem is its continued failure to gain traction in international markets. Yelp’s ARPALB (Average Revenue per Active Local Business) in international markets is about 12 times smaller than it is in the U.S. This is the main reason why the company’s marketing expenses keep growing faster than its top line and in the process keep the company unprofitable. Yelp’s 2016 EBITDA guidance shows that this problem might not be about to go away anytime soon, and as long as Yelp remains unprofitable even as its top line shows serious signs of slowing down, it’s going to be an uphill climb for Yelp stock.

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