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INVITE | P Best Idea Long | Call TODAY at 1pm EDT

Takeaway: We will host a conference call TODAY at 1pm EDT to present P as a new Best Idea Long. Dialing Instructions below.

INVITE | P Best Idea Long | Call TODAY at 1pm EDT - P   Best Idea Long Image

KEY POINTS OF DISCUSSION

  1. AD MODEL IS SO POORLY MONETIZED THAT: P’s ad-supported model hasn't produce any real operating leverage/cash flow to date, and is now more expensive to run post Web IV.  P’s 2Q results reinforce our long-standing view that revenue growth is tied to its salesforce growth, meaning the ad model may never get off the ground. That said...
  2. VERY LITTLE SUB CONVERSION GOES A LONG WAY: The sub model is far more lucrative from both a revenue and margin perspective.  The stark difference b/w the two models means the expanded sub launch is a massive growth opportunity, particularly in the initial years, maybe more depending on how aggressively P commits to it.
  3. P = CALL OPTION: Basically a hedged bet: mgmt either executes on its sub expansion (new deals + revenue) or is forced to entertain acquisition offers if can’t do so, which should buoy the stock at a minimum.  The former offers more upside, but the stock should end up much higher either way by this time next year, if not sooner.

 

 

Participating Dialing Instructions

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Confirmation Number: 13643964

Subscriber: CLICK HERE to access event details.


INVITE | P Best Idea Long | Call Thursday at 1pm EDT

Takeaway: We will host a conference call Thursday August 25th at 1pm EDT to present P as a new Best Idea Long.

 

INVITE | P Best Idea Long | Call Thursday at 1pm EDT - P   Best Idea Long Image

KEY POINTS OF DISCUSSION

  1. AD MODEL IS SO POORLY MONETIZED THAT: P’s ad-supported model hasn't produce any real operating leverage/cash flow to date, and is now more expensive to run post Web IV.  P’s 2Q results reinforce our long-standing view that revenue growth is tied to its salesforce growth, meaning the ad model may never get off the ground.
  2. VERY LITTLE SUB CONVERSION GOES A LONG WAY: The sub model is far more lucrative from both a revenue and margin perspective.  The stark difference b/w the two models means the expanded sub launch is a massive growth opportunity, particularly in the initial years, maybe more depending on how aggressively P commits to it.
  3. P = CALL OPTION: Basically a hedged bet: mgmt either executes on its sub expansion (new deals + revenue) or is forced to entertain acquisition offers if can’t do so, which should buoy the stock at a minimum.  The former offers more upside, but the stock should end up much higher either way by this time next year, if not sooner.

 Attendance on this call is limited. Ping  for more information.


EVENT | Pandora Media (P) Best Idea Long

Thursday, August 25th at 1:00PM ET

Watch a replay below:

CLICK HERE to access an audio-only replay. 

CLICK HERE to access the associated slides. 

 

 

 

 


P | New Best Idea (Long)

Takeaway: We're buying into what we hope will be a bigger model transition, but if P doesn't execute, growing take-out pressure should buoy the stock

SUMMARY: We're not fans of P's ad-supported model, but mgmt's recent/recurring comments around up-selling its users along the demand curve suggest P may see the ad model as more of a funnel rather than a longer-term opportunity, even though mgmt would never publicly admit to it.  We're hoping P's interactive foray is part of a concerted push to prioritize the sub model, but the longer-term sub opportunity really depends on how aggressively P plans to pursue it.  However, we're going long the initial-year ramp of its interactive/expanded subscription launch, with expected headlines around direct license agreements likely propelling the stock higher in the interim.  But if P can't get its interactive deals in place in order to launch by 4Q16/1Q17, we expect increasing take-out pressure and/or speculation to buoy the stock, if not force P to entertain offers.  We're adding P as a Best Idea Long with an expected holding period through 2017.  We will be hosting a call Thursday, August 25th at 1pm EDT to run through our analysis in more detail.

  

KEY POINTS

  1. BIG OPPORTUNITY VS. WEAK CORE: The two themes here are ARPU and distribution costs; collectively where the ad-supported model struggles.  Regarding ARPU, P plans to offer new sub products at varying price points; very little sub conversion at pretty much any price point will go a very long way vs. P’s paltry ad-supported ARPU (TTM average of $1.12/month), especially in the initial year(s) following its expanded launch.  Regarding distribution costs, the sub commission rate (aka Apple Tax) tops out at 30%, but Apple just reduced the rate to 15% after the initial year.  Further, the commission only applies to in-app purchases; P's effective commission rate over the LTM is ~20%, so P can work around the tax.  P's ad-supported model on the other hand still hasn't achieved any leverage, and its 2Q results basically confirm that its revenue growth is tied to its salesforce growth (2nd note below).  P also paid out ~27% of its Ad revenue in Sales & Marketing expense over the LTM (ex commissions, direct marketing, and SBC).  In short, we're not buying the longer-term sub opportunity, but the initial-year upside of comping against the ad-supported model, which is so poorly monetized that very little sub conversion would really move the needle (1st note below).
  2. P = CALL OPTION: P reiterated its expected interactive launch date multiple times during its last call, suggesting that mgmt realizes it needs to go to market on schedule to appease the street; especially given growing pressure to sell the company amidst softening core fundamentals.  If P hopes to go market by late 4Q16/1Q17, we suspect it needs to strike at least one deal with one of the three majors before 3Q results.  Any deal announced with any of the major labels will likely drive the stock higher, especially since the street would likely assume that the rest will follow suit.  But there is a risk that the stock sells off if mgmt can’t get any deals done by the 3Q release and/or it pushes out its expected interactive launch date when it reports.  But if that happens, we expect certain activists to step up the pressure to sell the company, and any associated headlines should help put a floor into the stock.  Further, mgmt doesn’t really have many tools to fight off an activist effort; there are no super-voting class B shares, and mgmt doesn’t own enough of the common stock to have any real say.  So if the interactive opportunity doesn’t come to fruition as quickly as expected, we suspect the activist sell-camp may find growing support, and P may be forced to the table.  

 

Let us know if you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet  

 

 

P | Fixing the Story
04/06/16 08:47 AM EDT
[click here]

 

P | Call Option? (2Q16)
07/22/16 08:05 AM EDT
[click here]

 


YELP | New Noise, Same Story (2Q16)

Takeaway: Mgmt is doing a much better job selling its story to the street, but not much has changed. We're on sidelines till we get closer to 2017.

KEY POINTS

  1. 2Q16 = ALGO STUNT ↑ SELF-SERVE ↓: 2Q was largely driven by the 1Q algorithm change.  ARPU accelerated again in 2Q16 (up 7% vs. 4% in 1Q16).  While mgmt suggested that there was “no step function kind of improvement” in 2Q ARPU, YELP probably saw an incremental tailwind from the algo change unless it was implemented exactly on Jan 1st of this year.  The other ARPU tailwind is slowing new account growth, which translates to higher % of LAAs paying a full quarter’s worth of revenue.  Interestingly, promo/self-serve accounts may already be losing steam.  Mgmt’s comments on 2Q16 salesforce-driven small-biz account growth of nearly 30% vs. its 2Q16 LAA growth of 32%, suggest YELP ended 2Q with +2K accounts that were driven by a combination of self-serve and multi-location.  Mgmt had suggested that a “meaningful percentage” of its 10K net new LAAs in 1Q16 were self-serve.  Collectively, we suspect that means self-serve growth either sputtered out in 2Q, or YELP already lost the bulk of its new self-serve accts from 1Q; the subtle spike in its 2Q churn suggests it may be the latter.
  2. NEW NOISE, SAME STORY: Mgmt is doing a much better job talking up the story, but when you break it down, not much has changed.  Revenue growth of 30-40% in its longest-tenured markets isn’t a surprise since those are its largest markets (est. 50% of TAM), and YELP is still ramping its salesforce at a ~40% growth rate.  Having ~75% revenue visibility into its following quarter is just a reflection of the portion of customer base that is locked into annual contracts.  Increased revenue retention in 2Q16 is a result of higher ad budget fulfillment (revenue) from the algo stunt (LAA churn increased).  Improving salesforce productivity (on revenue) is backward looking since it’s a reflection of past account wins that history suggests YELP will eventually lose, which is why we measure productivity on the new account side (more below).  All in, mgmt hasn't introduced much to the story outside of noise; most of which we've all already heard.
  3. WHAT'S CHANGED? The COO has decided to retire at age 42, and is being replaced internally.  Mgmt talked up National/Multi-Location Advertising & Transactional, but the core Local Ad business still represents 70% of its revenue.  That story YTD can be boiled down to the the algo change & sell-self serve; the former is just a one year benefit, the latter has already emerged as a headfake of a growth driver.  Meanwhile the core business continues to deteriorate, specifically on new LAA growth that continues to track below its rate of salesforce hiring; despite being partially aided by self-serve.  Remember, that its new LAA growth today is essentially a glimpse into YELP’s 2017 base business since YELP will lose most of the accounts that it entered 2016 with as those contracts lapse.  We remain on the sidelines for now since we do not believe we have a short catalyst until the 4Q16 release at the earliest.  We also suspect mgmt may still be shopping the company.  Meanwhile, we're not entertaining a long since there hasn't been any real fundamental improvement, and the runway on the long trade (i.e. the algo stunt masked as a fundamental inflection) is only 1-2 more quarters at best. 

 

Let us know if you have questions, or would like to discuss in more detail.  

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet

 

YELP | New Noise, Same Story (2Q16) - YELP   New LAA invert vs. ARPA

YELP | New Noise, Same Story (2Q16) - YELP   LAA attrition   rate

YELP | New Noise, Same Story (2Q16) - YELP   LAA v s. Sales 2Q16 scen


YELP | Earnings Call Notes (2Q16)

INITIAL TAKEAWAY: 2Q was basically driven by the algorithm stunt implemented in 1Q.  Everything else was just noise; including mgmt’s efforts to change their message, which they are actually doing a decent job with.  Below are our notes from the call.  We’ll have a more detailed note out in the morning.

 

CEO Prepared Remarks

  • Local Ad Revenue growth accelerated to 41% (vs. 40% in 1Q), exceeding expectations across sales channels, with slightly better revenue retention
  • 3 priorities for the year:
    • Driving awareness/engagement
      • TV/Online Ad spend
      • Request a quote feature drove over 1M consumer inquiries
      • Business owner app drove 1/3 of activity for business traffice
    • Growing core local advertiser business
      • Providing performance based solution for independent to national accts
      • Investing in client service teams
    • Developing transactional capabilities
      • Total transaction volume grew almost 50% y/y
      • Nearly 6M transactions across Eat2Q, Yelp reservations
      • Consumers can now transact w/ over 100K local businesses
  • Announced small investment in Nowait
    • Product helps restaurant to manage waitlists, over 4K restaurants using already
    • Wil be integrated on YELP platform, enabling consumers to see current wait times
  • Jed Nachman appointed to COO effective today
    • Donaker will be retiring, will be an advisor and retain seat on Board

 

CFO Prepared Remarks

  • YELP model is diversified, defensible core business
    • No customer represents > 0.5% of rev, largest product category 15% of rev
    • Revenue growth is still in the 30%-40% range in longest tenured markets
  • Business model provides significant near-term visibility
    • Entering 2Q, YELP had commitments representing ~75% of the local rev it expected
  • Core local Sales team
    • Produced over half of the y/y increase in Local Revenue
    • Grew small business advertisers nearly 30% y/y
  • National accounts
    • Higher rev/rep, rev/customer, and renewals than core local
    • Expanding sales team in this area
  • Self-serve
    • revenue more than doubled y/y, small part of Local rev, but strong growth in accounts
    • Lower budget commitments, tend to advertise more opportunistically
  • Revenue and adjusted EBITDA both exceeded expectations
    • Local ad revenue ahead of expectations, flowed through to EBITDA
  • Revenue up 38% y/y ex Brand, Local revenue up 41%
    • New account growth among smaller businesses was biggest driver
    • Saw slightly higher revenue retention across its customer base
    • Transaction up 37% y/y, now past year anniversary of Eat24
    • Other revenue flat q/q
  • Expenses
    • Cost of revenue up 16% y/y, gross margin % up 100bps
    • Sales and marketing up 39% y/y, 12M ad investment accounted for $7M of the increase
    • Sales & Market % of revenue was 54% vs. 60% in 2Q15
  • EBITDA up 24%vs. last year
  • Guidance (midpoints)
    • 2016 Revenue of $704 (vs. 696M prior), 2016 Adjusted EBITDA of $104M (vs. 99M prior)
    • 3Q rev of $182M, 3Q EBITDA of $26M

 

 

Q&A

  • Budget Fulfillment
    • "No step function kind of improvements"
  • User Growth softening
    • More of a function of general trends moving more toward apps, away from desktop/mobile
  • Guidance around $1B revenue target for 2017
    • Not sure when they will get to $1B, but not giving a timeframe as to when
  • Update on YP partnership
    • Portion of revenue in Other, no incremental color
  • Transactions accounts, over 100K, what is overlap b/w that and the LAAs
    • Dodged question
  • Slightly improved revenue retention, anything it can attribute to
    • Doing a little better than retention, within historical ranges
    • Are starting to experiment with client service reps in local
  • Commitments in place for 3Qs of guide
    • Quite a bit of visibility, a lot of annual contracts, multi-month contracts
    • No real change, just a fact of the business
  • Salesforce productivity across cohorts
    • No silver bullets, modest outperformance against expectations across all channels
    • Varity of segments impacting
  • Inventory constraints/sell-out in any regions?
    • dodged
  • YELP Knowledge launch, initial feedback
    • Data opens doors to have dialogue with certain companies it couldn’t have had otherwise
    • Note a game changer overnight
  • International Monetization improved
    • More focused on domestic, but making modest investments
  • Customer/ROI dashboard impact on retention
    • Not seeing direct correlation
  • Contributions by business lines
    • Multi-location business is about 20% of Local Revenue (referring to 1Q comment)
    • Bulk of local growth coming from adding new accounts
    • National is the inverse, mostly in the upsell
    • Seeing nice growth in self-serve, balanced b/w ARPU and account growth
  • Contract Duration
    • There is natural attrition once customers lapse annual contract
    • Going to let customers buy in the way they want to buy (3, 6 , 12-month contracts, and self-serve)
  • Guidance: 2H revenue is going up in excess of the 2Q beat, but adjusted EBITDA not up as much
    • Numerous investment opportunities
  • Salesforce Hiring tracking well closer to 40% vs. 25%-30% target, expecting to ramp up
    • Retention and hiring trends within historical ranges
    • Still expecting 20%-30% range for the full year

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