Earnings Review: Will Yelp's Fortunes Turn Around?

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Yelp (NYSE: YELP) has slowly and steadily evolved into a force to reckon with in the online consumer reviews space. But the business of crowd-sourced reviews and local advertising seems to be attracting big names like Facebook and Google (NASDAQ: GOOG). In spite of growing revenues at a rapid rate of more than 63% year-over-year, Yelp faces serious challenges in terms of rolling out a profit in a business with limited barriers to entry.  

Growth across the Board 

Yelp's monthly unique visitors are up 37% year-over-year and finished Q3 of 2012 at 84 million. The company's business model of user generated content by operating as a social media site has paid off remarkably and that too, with minimal content acquisition costs. The number of reviews on its platform was up 49% year-over-year to end Q3 with more than 33.3 million reviews.  

The majority of Yelp's revenues flow in from local advertising from small businesses, and contributed 78% of total revenues in Q3. With a strong sales-force in place, the company's paying local business accounts are up 82% and now has roughly 35,500 customers. Going forward in Q4 and 2013, all of the key metrics of Yelp especially unique visitors, reviews and the number of paying local accounts should see steady growth. 

Yelp is even poised to grow its international presence as well with the buy-out of Germany-based rival, Qype in 2012. The Qype acquisition gives Yelp the ability to tap into big markets like Germany, Brazil and UK etc. without building out its own platform from scratch. Qype also brings a lot of additional content and traffic to the table as well, and might be a good source of revenue growth for the company in the long term. 

Will Mobile Monetization Take-Off?

Yelp has built up a strong mobile presence in part due to its integration with iOS 6.  Almost 45% of all Yelp's search queries comes in from mobile-based devices at the end of Q3, 2012 and almost certainly this number will notch up over time. However, Yelp's monetization of the 8+ million users of the mobile app is minimal, but the company's management team intends to place Local advertisements with mobile search results, because of a higher click-through rate on mobile. 

Yelp is ready to address the secular shift towards mobile with a pretty solid position. But can the company convince small businesses to advertise on mobile? In the last twelve months, ~77% of its total revenues came in from local advertisements, and only 17% of revenues came in from brand advertisements. The ability to convince small mom-pop stores and other small local businesses to post ads on mobile might pose headwinds for Yelp, and will be a key factor for its long-run success. 

Rivalry amongst Existing Competitors

Google's online review platform, Google+ Local is a big competitor for Yelp. As most of Yelp's traffic comes in from Google's search engine, it poses a great risk for the company as Google has put together Zagat, Frommer's, Google+ and Google Maps as a holistic consumer reviews platform. As restaurants are a major category for Yelp, the Google+ Local can be more of formidable competitor down the road. 

In addition to Google, leading travel advisory platform, TripAdvisor (NASDAQ: TRIP) poses strong threats to Yelp. TripAdvisor is the world's largest travel site and has millions of reviews and listings of restaurants and hotels for travelers on its platform. TripAdvisor has more than 57 million unique visitors and has content syndication partnerships with leading hotels and restaurants and can pose more incremental threats for Yelp down the road.

Also, Yelp competes with Groupon for Daily deals especially for the restaurant category, and many other smaller and regional competitors like Urbanspoon, Foursquare, Seamless etc. All these companies directly compete with Yelp not only for reviews and users, but more importantly, for local advertising dollars. 

New Entrants 

With limited barriers to entry, the space can get more crowded down the road. Facebook's (NASDAQ: FB) recently launched "Graph Search" tool is still in its early stages, and will be a big threat for Yelp once it gains momentum. Mark Zuckerberg has stated that the company is now collecting data and will be launching on a much larger scale.

The graph search function will allow users to screen and search in a more social context, by getting users and their friends to post reviews on places they have visited, as well as the existing data of restaurant check-ins, pictures and other reviews. Facebook has a large number of small businesses with fan pages, which will aid significantly in building out such a platform.   

Q4 Guidance and Consensus

The Management's guidance range for revenues came in at $40-$40.5 million, which leads to a full year revenue of $136-$137 million. As a result, the revenue growth is expected to be in range of 62%-65%. Yelp is not expected to be profitable for Q4 or the year ending 2012, and thus the Adjusted EBITDA, which is a gimmicky accounting metric, is expected to be in the $3.5-$4.0 million range.  

The sell-side has projected a net loss as well, and has an EPS consensus of ($0.04) on revenues of $40.29 million. According to public filings, Yelp has not earned a net profit since its inception. With the pretty rich valuation of Yelp, if the top line revenues don't live up to investor expectations, the stock can go spiraling down. 

The Takeaway

Yelp has been achieving strong growth all around with reviews, visitors and business accounts. However, the company's losses haven’t stopped yet and might continue at least for a few more quarters. With strong external threats from existing rivals and new entrants, achieving market share alone might not be enough for Yelp. In order for the company's fortunes to turnaround, Yelp needs to post solid bottom line numbers in the near-term.  

ishfaque has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and TripAdvisor. The Motley Fool owns shares of Facebook, Google, and TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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