I shared some thoughts on Yelp Inc. (YELP, Financial) last February. The purpose of this article is to update my thinking; hopefully some readers will share their thoughts as well. Earlier this month, the company reported a 20% increase in second-quarter revenues to $209 million. Importantly, Yelp continues to see growth in engagement among users and advertisers alike: the number of reviews on the platform, app unique devices and paying advertising accounts all increased by roughly 20%.
Yelp continues to roll out features that move the platform beyond discovery. The goal is to leverage the unique advantage of its large audience and to move down the funnel closer to the point where users decide to spend their money. A notable example is the “Request a Quote” feature: in the second quarter, the number of requests increased approximately 50% sequentially.
On top of continued revenue growth and user engagement, Yelp showed some ability to control (and lever) costs in the quarter. In my previous article, I wrote the following:
"The largest expense line, Sales and Marketing, accounted for 71% of sales in 2010. In the ensuing four years, Yelp reported material operating leverage: Sales and Marketing fell to 65% of sales in 2011, 62% in 2012, 57% in 2013 and 53% in 2014. Against long-term guidance, Yelp was moving swiftly toward management’s long-term goal on the largest expense line.
But businesses don’t move in a straight line. In 2015, Sales and Marketing expense increased by approximately 200 basis points to 55% of sales. This raises an important question: was 2015 a blip on the radar or a sign of bigger issues at Yelp? Based on my research, I think it's likely to be a blip (although the pace of gains may slow materially from the 2011 to 2014 rate going forward)."
In the second quarter, Sales and Marketing expense only increased 11% (again, compared to 20% revenue growth). As a result, Sales and Marketing was equal to 50.4% of sales – an improvement of roughly 400 basis points from the year-ago period (and 500 basis points from the first quarter of 2017). In addition, Yelp continues to leverage General and Administrative expenses as well. This quarter was a big step in the right direction toward the long-term margin profile target.
In addition to quarterly results, Yelp announced it agreed to sell Eat24 to Grubhub Inc. (GRUB, Financial) for $288 million. As a reminder, Yelp bought Eat24 for $134 million back in 2015. From a purely financial perspective, you cannot complain with that result. As part of the deal, Yelp and Grubhub entered into a long-term partnership; Yelp will integrate online ordering from all Grubhub restaurants (which nearly doubles the number of restaurants you can order delivery from on the platform) and will receive a fixed fee per transaction from Grubhub. On both fronts – financially and strategically – I think this deal makes sense for Yelp.
At quarter-end, Yelp had $511 million in cash and short-term investments. Assuming the Eat24 deal closes, the company will have roughly $800 million in cash, or about $9 per share (and no debt). It looks like some will be spent on buybacks; along with the quarterly results, the board announced the approval of a $200 million repurchase authorization.
Conclusion
For fiscal 2017, management is guiding to $860 million in revenues (at the midpoint). If you accept the long-term margin profile management has presented, EBIT margins can reach approximately 20% long term (I include stock-based comp). By that math, normalized EBIT in fiscal 2017 will be around $170 million. At a 35% tax rate, I think normalized EPS is around $1.30 per share.
That puts the mulitple at ~25 times "normalized" earnings if you back out the net cash. I am not a buyer at today's price of $41 per share, but would be interested again if it took another big dive (as it did when the stock fell from nearly $100 per share in March 2014 to about $15 per share in Feburary 2016). I have no idea if that will ever happen, but I'm ready to buy some more if it does.
Disclosure: Long YELP.
