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The Science of Hitting
The Science of Hitting
Articles (552) 

An Update on Yelp

Some thoughts on the business in the midst of evolution

August 13, 2019 | About:

Yelp (YELP) reported financial results for the second quarter of fiscal 2019 after the close on Thursday. Revenues increased 5% to $247 million, with a significant increase in ad clicks offset by a 25% decline in the average cost per click (CPC).

Yelp is seeing continued success among its largest customers, with a 21% increase in revenues from multi-location customers (“especially national advertisers”). I take some comfort in the idea that these customers are likely the most capable at understanding the efficacy of their spend (as noted on the conference call, multi-location advertisers account for roughly 25% of revenues). If they are spending more dollars on Yelp’s platform, it’s likely because they are seeing attractive ROI's.

User engagement continues to grow at a rapid pace, reaching 37 million app unique devices in the quarter (up 15% year-over-year), along with an 18% increase in cumulative reviews (to 192 million). As shown below, both of these metrics have increased consistently over the past five years.

In Restaurants, Yelp’s most trafficked category (accounting for roughly half of the platform’s engagement), the company continues to see user activity move beyond the legacy directory and review product. This includes reservations through Yelp Reservations and Waitlist (with the number of seated diners up 166% year-over-year to 2.4 million per month in the quarter) and online ordering through its long-term partnership with GrubHub (GRUB).

While Yelp is still largely known for restaurant reviews, these are not that important to the financials (the vertical accounted for 13% of advertising revenues in the quarter). Engagement in the quarter has propelled monetization across other categories by helping users discover and engage with other types of local businesses. For example, sales in Home & Local Services, Yelp’s most important vertical, increased by roughly 11% in the second quarter, fueled by offerings like Request A Quote. That service saw a 40% year-over-year increase in requests, with run rate revenues approaching $50 million (roughly 5% of Yelp’s business).

A shift towards self-serve ads and larger accounts means Yelp can generate the same dollar of ad revenues with fewer people. As a result, total headcount in the quarter was up 1% year-over-year, with the average number of salespeople declining 1%. The company is also benefiting from moving sales staff to locations outside of its headquarters in San Francisco (which is one of the most expensive places to live in the country and has employee costs that reflect that reality). As a result, Sales & Marketing increased by only 1% over the past year, accounting for 49% of revenues (down 200 basis points). Continuing to leverage Sales & Marketing expense through higher-productivity sales reps is necessary if Yelp is going to reach its 2023 financial targets.

Overall, adjusted EBITDA increased 17% in the quarter to $55 million. Year to date, EBITDA margins have expanded by roughly 300 basis points to 20%.

Yelp ended the quarter with $458 million in cash and equivalents and no long-term debt (that works out to roughly $6 per share of net cash). Management has been returning that capital to shareholders, with $400 million of repurchases in the first half of fiscal 2019. The result has been a more than 11% reduction in the diluted share count. As noted on the conference call, the company plans to continue to repurchase shares in the back half of the year.

Conclusion

In terms of engagement, Yelp has been delivering strong results for some time. That is largely understood by the people who follow the company (the numbers tell the story).

But what it appears has started to happen in recent quarters and may be less appreciated by the market is the evolution in the business model. The legacy business – salespeople calling mom and pop local businesses to sell them yearlong ad contracts – is becoming a smaller part of the business. It is being supplemented (or in some cases replaced) by multi-location advertisers (especially national brands), self-serve, non-term ads and incremental products for businesses like Request A Quote, Verified License, Business Highlights and Yelp Portfolios that help them get discovered by potential customers and tell their story. Long-term, what we’re seeing could potentially lead to economics that are much more favorable for Yelp.

By my math, even if the company falls well short of its publicly stated financial targets, it will earn somewhere around $3.5 in 2023 (that assumes roughly 8% annualized revenue growth, 27.5% EBITDA margins in the terminal period, and a small benefit from share repurchases). Said differently, the stock trades at roughly 10x earnings if you’re willing to look out a few years.

I’ve become incrementally more confident in the long-term story. I don’t own the stock at this point, but that could change in the near future – especially if Mr. Market got skittish and decided to push the stock back towards $30 per share. I’ll be ready to make a move if he does.

Disclosure: None.

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About the author:

The Science of Hitting
I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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