- Yelp is due to report Q3 FY 15 earnings on Oct. 28 after closing bell.
- The company has been facing growth woes due to its poor monetization rates in international markets.
- This is unlikely to change in the upcoming report which might keep Yelp shares depressed a lot longer.
Leading business review site Yelp (NYSE:YELP) is due to report Q3 FY 15 earnings on Oct. 28 after closing bell. The company said during its second quarter earnings call that it expects third quarter revenue of $139 million-$142 million, a 37% Y/Y growth and adjusted EBITDA of $12 million-$15 million. The consensus among analysts is for the company to report EPS of -$0.09 compared to $0.05 for the prior year quarter.
For the second quarter, Yelp reported revenue of $133.9 million, good for 51% Y/Y growth, and one that managed to narrowly beat consensus estimate of $133.5 million. Yelp earnings (GAAP) of $-0.02, however, badly missed estimate of $0.01.
Yelp Earnings Surprise History
Yelp lowered full year revenue guidance from an earlier range of $574 million to $579 million to a lower range of $544 million to $550 million. The lowered guidance triggered a huge selloff in Yelp shares which tanked 27% two days after the earnings call. Yelp shares are down 58.6% YTD in what has shaped to be an annus horribilis for the review company and its shareholders.
Bar Set High
Yelp is one of those rare companies that have frequently drawn the admiration and disdain of investors in almost equal measure. Yelp has for long been a stellar growth company, and its shares have in the past been priced for ultra-high growth. Despite sporting only thin or sometimes non-existent profits, Yelp has frequently received a get-out-of-jail pass from investors as long as its topline continued expanding at a brisk pace. But the company has also been scrutinized using plenty of metrics such as user growth, Average Revenue per Active Local Business (ARPALB), and conversion of claimed businesses to active businesses. Yelp has in the past managed to impress on all these counts despite its thin margins. And as long as these metrics pointed to healthy growth, everybody was happy.
Yelp bears have usually pointed to the company’s extremely high expenses (operating expenses have historically average 85% of revenues) as well as the company’s overall poor monetization rates despite having a huge user base. Out of more than 76 million business listings on its site, only about 98,000 business are active (advertise on Yelp). Moreover, Yelp’s international monetization rates have remained anemic at best. ARPALB in developed markets such as the U.S. and Europe clocks in at $7,449 compared to just $546 in less developed regions.
Now the big problem facing Yelp stock is that the bull case has pretty much collapsed while the bear thesis remains intact. The third quarter expected topline growth of 35% Y/Y is a pretty dramatic slowdown compared to 72% recorded during Q1 FY 14. And the downward revenue revision by the company did nothing to allay widely held fears by investors that Yelp’s growth story was close to becoming history. And while ARPALB in both domestic and international markets has been gradually improving, the huge gap between local and international monetization rates remains a big source of worry for investors since Yelp’s future growth hinges strongly on international markets where more than 70% of its listed businesses are located. Yelp has been rapidly expanding into international markets, but this has not translated into strong growth for the company. If anything, Yelp’s international efforts are primarily to blame for the company’s mounting losses.
Yelp is still growing at an impressive rate. Its ARPALB has been growing while its mobile app has been wining plenty of new customers for the company. But these developments might not be enough to make investors happy. The company is banking on international markets to drive growth, but its monetization rates there remain pretty sub-par.
Although a lot of negative news has already been priced into Yelp shares, it’s hard to see where positive catalysts will come from to give a boost to the shares. This implies that even if Yelp does manage to beat on top and bottom line expectations during the upcoming earnings call, the shares might only have limited upside, unless the company manages to pull off a huge beat. Yelp shares appear bound to remain depressed for a long time and investors should keep away.