KEY POINTS
- ALGO/PROMO NOISE: The two themes from 1Q (note below). The algorithm change should be a material ARPU tailwind through 2016, especially since YELP was able to drive accelerating 1Q ARPU growth despite the drag from the surge in new Local Advertising Account (LAA) growth, which was partially driven by discounting. The algo change may have had a limited impact in 1Q depending on when YELP implemented it, so there could be an incremental benefit in 2Q. The trajectory of its promotional LAAs is the bigger question. There’s no guarantee these LAAs stayed on in 2Q given YELP’s historical attrition issues; especially since we doubt many (if any) of these promo LAAs are under contract. The other question is how many more promo LAAs are left to capture since distribution isn't an issue for self-serve (e.g. email blasts). YELP may have already courted the bulk of those interested self-serve LAAs with the 1Q promo, so we can’t assume the 1Q LAA surge will continue through 2016. So while the algo stunt may get YELP over the line in 2Q, 2H16 consensus revenue largely depends on whether it can sustain its self-service promo trajectory, which we doubt will happen.
- MASKING MAJOR INFLECTION? YELP suggested that a “meaningful percentage” of its 1Q16 account growth was driven by these promo LAAs. If that percentage was anything over 10%, then its 1Q16 new LAA growth (ex promos) decelerated again on a y/y basis; if that percentage was over 25%, then new LAA growth declined on y/y basis. Either way, it's a major concern given that its salesforce growth has been accelerating on a y/y basis since 1Q15. But if it is the latter, then the YELP story took a major turn for the worse. Remember how YELP’s model works; it must continually drive new LAA growth in excess of its rampant attrition, which we estimate is nearly all of its LAAs on annual basis. That also means that whatever YELP reports as its LAAs in any given quarter is largely comprised of accounts it signed in the LTM. So if new LAA growth (ex promos) did decline on a y/y basis, and if that continues through 2016, then it could be facing a precipitous deceleration, if not declines, in 2017 revenue growth depending on its promotional LAA growth. But even then, those accounts generally come with lower ARPU by mgmt's own admission, and likely a shorter life (contract?), which means they can't effectively compensate for YELP's churn.
- AUGUST 9th? We find it odd that YELP is releasing 2Q results almost 2 weeks later than usual. Maybe we’re being paranoid, but we can’t see a reason for such a long delay unless mgmt was actively trying to work out some (any) deal before issuing 2Q results, especially considering Point 2 above. While we shrugged off the possibility of a take-out last year, YELP’s deflated stock + 1Q results makes it an easier pitch this year since the acceleration in revenue/LAA growth may present YELP as a challenged but recovering business (vs. a dying business model) that might work better under someone else’s umbrella. Yes, that sounds dumb to us too, but how many acquisitions have we all seen that just don’t make any sense. But we wouldn’t be chasing a take-out regardless of how hard YELP may be shopping itself; especially since this is just speculation. If YELP introduces any new red flags on the print/guide, we suspect much of its newfound optimism to get sucked out of the stock, and most of its potential suitors to lose interest as well.
YELP | More Red Flags (1Q16)
05/06/16 08:55 AM EDT
[click here]
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