Yelp Plunges on “Short-Term” Advertising Weakness

released third-quarter 2018 results on Thursday after the market closed, and the market was not pleased. Shares of the local business-review specialist plummeted nearly 25% after it revealed disappointing quarterly growth and reduced its full-year outlook, stoking fears that the early momentum of its recent shift to flexible non-term ad contracts may not be sustainable.

Let’s dig deeper, then, to see exactly what Yelp had to say and what investors should be watching in the coming quarters.

Man in business suit watching red arrow line crash through a concrete floor.

IMAGE SOURCE: GETTY IMAGES.

Yelp results: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Growth
Revenue $241.1 million $223.3 million 8%
GAAP net income attributable to common stockholders $15 million $8 million 86.6%
GAAP earnings per diluted share $0.17 $0.09 88.9%

DATA SOURCE: YELP. GAAP = generally accepted accounting principles.

What happened with Yelp this quarter?

  • Revenue was below Yelp’s guidance provided in August, which called for a range of $242 million to $246 million.
  • Adjusted EBITDA grew 17.2% year over year, to $50.3 million, near the low end of guidance for a range of $49 million to $52 million.
  • By segment:
    • Advertising revenue climbed 16% year over year, to $233 million, driven by a larger local sales force and number of paying advertising accounts.
    • Transactions revenue declined $3 million from $18 million in the same year-ago period, primarily driven by the sale of Eat24 to GrubHub. Per a new agreement with GrubHub, Yelp is now paid a fee for Eat24 food orders originating on its platform.
    • Other services revenue climbed by 50%, to $6 million, driven by improved efficiency from combining Yelp Reservations and Yelp Nowait sales teams and improved productivity from the Yelp WiFi marketing sales team.
  • Cumulative reviews grew 20% year over year, to $171 million.
  • App unique devices rose 13%, to 34 million.
  • Paying advertiser accounts grew 25% year over year, to 194,000, but remained flat on a sequential basis from last quarter.

What management had to say

Yelp co-founder and CEO Jeremy Stoppelman explained:

While the shift to non-term advertising has opened our sales funnel, it has also made our results more sensitive to short-term operational issues. We have begun to address a number of the issues that impacted our third quarter results; however, we expect them to affect our fourth quarter results as well, as reflected in our Business Outlook. We remain positive about the move to more flexible and dynamic advertising terms, as we believe the shift greatly increases our long-term sales opportunity and opens up additional levers to expand Yelp’s sales reach and profit margins.

In the company’s latest letter to shareholders, Stoppelman elaborated:

We do not believe there was a single or predominant factor that led to the shortfall relative to our expectations, but rather a combination of smaller operational factors that negatively affected productivity. These issues crystallized in the second half of the third quarter, having an earlier and more concentrated effect on our results under our new local sales model than would have been the case prior to our transition to non-term contracts. These issues — many of which we have already moved to address — primarily included lower-than-planned sales headcount, adjustments to sales promotions, a now-resolved technical issue in our lead assignment system and a lower success rate in reaching key decision makers in outbound sales calls.

Looking forward

For the fourth quarter, Yelp expects revenue in the range of $239 million to $243 million, with adjusted EBITDA of $48 million to $50 million. With that in mind, Yelp decreased its full-year outlook to call for revenue of $938 million to $942 million — down from $952 million to $967 million previously — with adjusted EBITDA of $178 million to $180 million — down from $186 million to $192 million before.

Of course, while Yelp continues to justify its move to flexible non-term contracts as the best way to ensure sustained long-term growth, this quarter’s weakness isn’t convincing its many skeptics. Until Yelp can prove these issues are indeed short term in nature, I suspect the stock will remain under pressure.

[“source=forbes]