Yelp Earnings Preview Q3 2014

  • Yelp is scheduled to report its Q3 2014 earnings on October 22nd after the market close.
  • Analyst consensus estimates earnings of 3 cents per share on revenue of $98.9 million.
  • The company will report in-line with estimates and is more of a long term play which will benefit from the growth opportunity in the local business online advertising.

Yelp Earnings Preview Q3 2014

Yelp (NYSE:YELP) is expected to release its Q3 2014 earnings after the market closes on October 22. This is a big release for Yelp. The online local business directory surprised analysts in the last quarter by recording its first-ever quarter of profitability. Analysts had expected loss of $0.03 per share. Instead, the company came through with a profit of $0.04 per share.

In the month after the second quarter earnings surprise, Yelp's shares rose by nearly 20%. Since then, though, Yelp has gotten caught in the turmoil and volatility that has permeated the overall market. Yelp is down 11.36% over the past month and down 2.44% on the year. Another earnings surprise would help Yelp finish the year strongly and show some resiliency against further market stress.

Yelp acquiring growth on three fronts

As much as analysts would love to see an earnings surprise, most realize that Yelp is a long-term growth story. Yelp is a pioneer in the digital marketing space for local businesses. Founded as a review site, Yelp now allows local businesses to interact and engage with customers online. Its revenue comes from paid advertising and from businesses who purchase extra features for their Yelp profile.

Yelp is currently trying to drive growth through three different initiatives: community engagement, geographic growth, and closing the loop with online marketing. Yelp is enhancing the community aspect of the site by implementing features that are commonly found on social media platforms. Users can "follow" or "friend" each other. They can "like" or "LOL" certain recommendations or reviews. Users can share a business's info with just a simple click. All of this engagement fosters online word-of-mouth advertising for subscriber businesses.

On the second initiative, Yelp is adding new geographic locations at a fast clip. In September, Yelp announced that it would launch in Hong Kong by the end of the year. That's on top of the four new markets that were added in the second quarter of 2014. As of now, Yelp is in 124 markets, 63 of which are international.

Finally, Yelp is trying to close the loop on the buying process. The company doesn't just want to promote local business; it wants to be a complete business management system at every stage of the buying cycle. In the past year, Yelp has launched a reservation system so that users can book appointments with businesses right inside of Yelp. It also launched a messaging system so users can communicate with businesses about order issues, again, from inside Yelp.

Analysts looking at key metrics

Yelp analyst estimates for the third quarter are around $0.03 per share. While analysts will look primarily at the company's earnings, they'll also watch a few other metrics. One is cumulative reviews, which grew by 44 percent year-over-year from Q2 2013 to Q2 2014. They'll also look at unique visitors and active business accounts, which grew by 27 percent and 55 percent, respectively, over that same period.

There's no question that Yelp is a leader in a market with substantial growth potential. The company has 80,000 active business accounts. However, that's just a small portion of the potential market. There are more than 66 million local businesses in current Yelp markets. There's clearly room for much deeper penetration.

Yelp should be able to earn more of that business as it expands its offerings and as businesses shift from off-line to online advertising spending. According to Yelp, businesses will spend $145 billion in advertising in 2016, but only $37 billion will be spent online. Again, there's great potential for growth in that space.

Yelp earnings will mostly meet expectations and come in at $0.03 per share. While that should help the company's stock in the short-term, I like the company as more of a long-term play. It's in great position to take advantage of the rapidly growing local business advertising market.

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