Yelp: 'One of the Most Challenging Periods in Our History'

A look at the review platform's second quarter financial results

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Yelp (YELP) recently reported results for the second quarter of fiscal 2020.

It was a difficult quarter, as expected given the widespread closures of many businesses around the United States, with revenues falling by more than 30% to $169 million on weakness among both SMB and multi-location customers. As CEO Jeremy Stoppelman noted during the call, the company is "confronting one of the most challenging periods in our history."

It has been a roller coaster start to the year, with revenues up 8% in January and up 15% in February, followed by a 5% decline in March, a 35% decline in both April and May and a 25% decline in June. The results improved slightly in the last month of the quarter, but there's a long way to go before Yelp is growing again.

In addition to the decline in revenues, the company saw a widespread decline in usage among end customers and advertisers. Paying advertiser locations and app unique devices both declined by more than 20% in the quarter. The only metric that bucked the trend was cumulative reviews, which is likely a reflection of the 80-20 rule at work. The majority of reviews come from a subset of devoted users who continued to be active on Yelp even during a pandemic.

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The change in user activity has most notably been seen in Restaurants, Yelp's highest frequency category for page views and searches. Despite "moderate improvements" in traffic throughout the quarter, Restaurants activity on the platform remains well below pre-pandemic levels. This led to a more than 60% decline in category revenues. Thankfully, as I've noted in the past, the Restaurants category is not particularly important for Yelp from a financial perspective. In the second quarter, it accounted for less than 10% of the company's revenues.

The positive for Yelp in the quarter was continued reason for optimism in Home & Local Services. The category, which accounted for nearly 50% of the company`s revenues in the second quarter, only declined low-single digits, with Home Services actually up a bit from the year ago period. This strength reflects demand as consumers spent more time in their homes during widespread lockdowns, as well as continued improvement in Yelp's ability to match demand (end users) with supply (local advertisers) through higher value offerings like Request-A-Quote. As management noted, this led to a significant improvement in business trends throughout the second quarter:

"After dropping 40% in March, page views and searches in the Home & Local Services category exceeded pre-pandemic levels by the end of the quarter."

Given the sudden change in business trends, Yelp was unable to match expense reductions with the decline in revenues. As a result, adjusted Ebitda declined by roughly 80% year-over-year, with Ebitda margins compressing by 1,500 basis points (led by Product Development and Sales & Marketing expense). Naturally, if revenue declines materialize in the coming quarters, which is probable, reductions in profitability are likely to continue in the back half of 2020.

As I noted at the end of the first quarter, Yelp began the transition to remote work in early March, with management "highly encouraged by the operational agility" achieved as they did so. Since then, Yelp has also worked to right-size its workforce for today's market reality. At quarter end, the company had total headcount of 3,600 people (down 33% from a year ago), inclusive of 1,850 salespeople (down 44% from a year ago). My hope is that the company will use this crisis as an opportunity to reassess its operating structure, most notably in high cost areas like San Francisco. My sense is that Yelp should be able to maintain a smaller and more productive sales team as they continue to lean into go-to-market channels like self-serve and multi-location.

While the company will continue to face challenges in the coming months, they will be doing so from a position of financial strength. At quarter's end, the company had more than $500 million in net cash on its balance sheet (roughly $7 per share). In my mind, there's no realistic scenario where Yelp faces financial hardships in the short term given their current financial position.

Conclusion

While the past few months have been disappointing, especially considering that the business model transition appeared to be working given the results in January and February, there's no crying over spilt milk. The company has started adjusting to a new reality and is hopefully in a position to act aggressively and capitalize upon opportunities as businesses around the country reopen.

I continue to believe that Yelp is likely to be an attractive investment from current levels, but I say that with the caveat that we may face some difficult times in the months and quarters ahead. The company's enterprise value is meaningfully below where it was at a few years ago. All that said, I continue to own a meaningful position in Yelp.

Disclosure: Long YELP

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