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We’re grinding on wrapping up our 2Q14 Macro themes presentation (call next Tuesday) so we’ll keep the March Employment review tight here.  Some notable callouts along with a visual summary below:


  • Decent Absolute, Bad Growth: Both the NFP and Private payroll figures missed the round +200K estimate.  While the absolute numbers (& the revisions) were decent, growth (2Y ave) in NFP and private payrolls posted their lowest rates since November 2012 and August 2011, respectively. 
  • No Policy Shift:  Okay absolute + better sequentially = no change on the current policy path in the immediate term.  Next FOMC meeting announcement is April 30th.  
  • Retracement:  We have added exactly 8.9M private payrolls since the Feb 2010 trough in NFP employment.  We officially eclipsed the prior Jan 2008 peak in total private employment for the first time this month
  • Wage Growth Slowing:  Ave hourly private sector earnings decelerated -10bps sequentially to +2.1% YoY.  Similarly, hourly earnings growth for non-supervisory and production employees decelerated -20bps sequentially on both a 1Y and 2Y basis.  A slowdown in wages does not augur strength for forward consumption growth (nominal PCE growth is running +3.0% as of Feb), particularly with savings rates near historic lows and wealth effect ebbing. 
  • Weather:  BLS reported 148K out of work due to bad weather in March.  This is up from the +117K reported in March of last year but exactly equal to the 10Y average of 148K.  Weather distortion was real but its rearview.
  • Seasonality:  1Q14 diverged negatively from the strong prior seasonal trends of the last 4 years.  Seasonality will shift to a modest headwind from here. 
  • State & Local Gov’t:  A 7th consecutive month of positive growth for collective state/local government employment.  Positive employment growth and higher spending at the federal level should continue to support aggregate gov’t sourced income growth in 2014 (~17% of total). 
  • Employment by Age:  All age cohorts (20-64YOA) showed accelerating employment growth in March.  For 1Q14, growth in total CPS employment is up 1.4% YoY – accelerating 80bps sequentially.  

















Christian B. Drake


YELP: Death of a Business Model

Takeaway: We're adding YELP Short to our Best Ideas List. Summary Below, More detail to follow on our Best Ideas Call


  1. Absurd Attrition Rate; Will Only Get Worse: YELP’s “repeat rate” is misleading.  YELP is losing almost 20% of its customers on a quarterly basis, potentially in excess of 90% annually.  Recent customer User Interface enhancements & macroeconomic headwinds are likely to exasperate the issue.

  2. TAM is a Fraction of What’s AdvertisedEstimates vary for YELP’s total addressable US market, ranging from 23M-27M….In reality, its closer to 170K. 
  3. 2014 Consensus Lofty/2015 Unattainable: Consensus revenues imply an acceleration in new account growth on a per-market basis and/or improving attrition rates through 2015, we're expecting the opposite.  Details below.  
  4. $30 Stock?: YELP trades at a premium to FB & LNKD on a 2014 P/S basis given lofty consensus growth expectations. Once growth expectations collapse, the stock will too.



YELP provides a quarterly metric called its customer repeat rate, which it defines as the percentage of its current customers that has advertised with YELP in the LTM.  That rate has hovered in the low 70% range since the company went public, with the remaining 30% being new customers.  What isn’t disclosed is how many of its customers that it is losing on a quarterly basis, but we have broken this down.


The math is simple.  Multiplying YELP’s active customers by its repeat rate will yield its recurring customers.  If that number is lower than its ending customer count from the prior quarter (i.e. the number of customer that have advertised in the LTM), then it lost customers. 


On a quarterly basis, YELP loses almost 20% of its customers.  However, management has stated that most of its customer contracts have 12-month terms (vs. 3 & 6-month contacts with higher CPMs).  If that is the case, YELP’s attrition rate is considerably higher, potentially in excess of 90% annually depending on the contract mix.  Put another way, the active customer base that YELP reported in 4Q13 is comprised almost entirely of new accounts signed in 2013: YELP added a total of 63K accounts in 2013; it ended 4Q13 with 67K in total.


YELP: Death of a Business Model - YELP   Customer Breakdown


The main reason is a mismatch between the sources of YELP’s advertising revenue and how people use its website.  Revenues are relatively distributed across 6 categories, but our proprietary survey suggests visitor use Yelp almost exclusively for restaurants.


YELP: Death of a Business Model - YELP   Ad Revenue vs. Usage Patterns 2


In turn what happens is that restaurants do not see a material uptick in traffic to their pages (because they are already getting the traffic), while the remaining categories don’t see a material lift in traffic-related revenues unless they charge a high enough ASP for their services to justify the advertising cost for limited traffic (e.g. Interior Designer). 


To illustrate, we delved into the BCG survey that YELP highlights on its official blog, which suggests that companies that advertise on YELP see increasing revenues ($23K on average vs. businesses without a YELP presence).  However, the incremental benefit varies by business type.


What’s more important is the incremental revenue an advertising business receives relative to those that have claimed their YELP page, but do not advertise. We have broken down the BCG survey in the table below to highlight this concept.  


YELP: Death of a Business Model - YELP   BCG Analysis


What’s interesting about the survey results is that it reinforces the our view that restaurants do not see enough of a yield to justify the ad spend; and once again, this analysis is based on the BCG survey that YELP highlights on its official blog.  While most of the remaining categories appear to offer a meaningful ROI, we suspect these results are not typical of most businesses on YELP.  If they are, why is YELP’s attrition rate so high?


There are two main drivers that we expect will lead to accelerating attrition: 1) YELP may be shooting itself in the foot with its new Revenue Estimator Tool, 2) Macroeconomic Headwinds will make it tougher for businesses to absorb advertising expenses.

  1. YELP’s Revenue Estimator Tool: Late in 1Q13 (3/25/13), YELP introduced a new tool for its businesses that estimates YELP-derived revenues based on the amount of estimated traffic YELP drives to the business.  While a nice feature, we suspect the tool may incite greater attrition since it will likely highlight the limited advertising ROI for these businesses.  The other risk is that the tool could grossly overestimate Yelp’s benefits to these businesses, which would reduce confidence in the disclosed revenue benefits (e.g. YELP calculates estimated business revenue on total leads, even though these leads are not mutually exclusive events).  As contracts come up for renewal, we suspect the revenue tool will only exasperate YELP’s attrition issue since it will make limited advertising ROI more tangible to its customers.
  2. Macroeconomic headwinds: The setup is getting worse.  Retail sales growth appear to be dropping sharply in 1Q14, and more importantly, input costs (i.e. commodities) are rising considerably YTD.  Collectively, small business margins will see increased pressure given reduced economies of scale; particularly for restaurants.  Some businesses may be forced to curb costs where they can; others will be taking a harder look at their P/L.  In either case, it will be that much harder for YELP to curb attrition; especially if its Revenue Estimator Tool highlights limited advertiser ROI.

YELP's Customer Dashboard Example

YELP: Death of a Business Model - YELP   Customer dash 2

YELP: Death of a Business Model - YELP   CRB Commodity Indexes


Consensus may argue that YELP’s total addressable market (TAM) is substantial, with a pool of 27M businesses in the US (22M Nonemployers, 7M Employers).  But after digging deeper into census data, YELP's TAM is considerably smaller.  Two things to consider 

  1. Can’t Afford: 75% of US businesses make under 100K annually (YELP’s annual ARPU is $4.2K)
  2. Wrong Audience: ~50% are B2B, largely outside the scope of YELP’s core audience

After netting out B2B-focused businesses with less than 100K in annual revenues, we estimate the total addressable US market is closer to 3.4M.  However, we doubt YELP approaches anything close to that. 


YELP currently has 67K paying businesses, which is only ~4.5% penetration of its 1.5M claimed business pages as of 1Q14.  In fact, YELP’s advertiser base has never exceeded 5.0% penetration of its claimed pages since the company has been public.  That alone suggests the demand just hasn’t been there.  So unless that changes, YELP’s realistic addressable market is 170K businesses (5% of the total 3.4M opportunity). 


That may sound crazy relative to the consensus narrative, but YP, which owns yellowpages.com, only has 575K active customers, and it is the largest local internet ad platform in the US. 


Based on its 67K current advertiser accounts, YELP has penetrated roughly 40% of realistic addressable market.  


YELP: Death of a Business Model - YELP   TAM

YELP: Death of a Business Model - YELP   Advertiser Penetration


The driving forces behind YELP’s revenues are new account growth and attrition.  In 2013, YELP averaged 31% y/y growth in new accounts on a per-market basis, and an average attrition rate of 18.7%.  As you can see in the table below, YELP will need to improve on one, if not, both of these metrics to hit 2014 estimates.  We expect deterioration on both fronts for the reason we laid out above.


YELP: Death of a Business Model - YELP   2014 Revenue Growth Scenario


However, it’s in 2015 when we expect YELP’s fundamentals to take a material turn for the worse.  It's attrition risk will increase alongside a waning opportunity for new account growth given increasing penetration.  Consensus is assuming revenues of $512M in 2015; a moderate deceleration to 43% revenue growth on a base of $358M in 2014 revenues.  In order to achieve consensus 2015 estimates, YELP will need to produce both accelerating new account growth on a per-market basis and improving customer retention vs. 2014.  We’re expecting revenues of $444M, 30% increase on our 2014 estimate of $342M, and we're being conservative.  In the table below, you can see the assumptions driving our model


YELP: Death of a Business Model - YELP   Hedgeye vs. Consensus 2

$30 STOCK?

YELP’s trades at ~14x and 10x 2014 & 2015 revenues, respectively.  That multiple is justified only if you believe consensus growth expectations.  Below we relate the forward P/S multiples of the group to consensus revenue growth rates to illustrate this point


YELP: Death of a Business Model - YELP   Valuation Table


However, we do not believe YELP has the growth profile that the consensus assumes.  In 2015, we believe it can grow 30% (vs. consensus 43%).  On a growth-adjusted P/S basis, YELP should trade closer to LNKD (7.5x), if not lower, based on a more comparable growth profile. 


That said, YELP shouldn’t be trading anywhere above a 2015 P/S multiple of 7x; a more appropriate multiple would be in the 5x-6x range given our estimate for 30% growth in 2015, which would translate to $30-$36 stock based on our 2015 growth estimates.  We expect the stock to trade in this range once the street realizes YELP is a 20-30% grower, rather than a 40-50% grower.


The above analysis focuses on YELP’s core market: the US local ad market, which is the substantial majority of its revenues (~80%).  We plan to prove additional detail during our YELP Short Best Ideas Call (details to be announced shortly), as well as discuss the rest of its business model


In the interim, let us know if you have any questions, or would like to discuss in more detail



Hesham Shaaban, CFA


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Keith's Macro Notebook 4/4: USD UST10YR GOLD

LEISURE LETTER (04/04/2014)



Monday, April 7

  • Las Vegas - National Association of Broadcasters six-day convention and trade show with more than 90,000 people from 156 countries attending. 

Tuesday-Thursday, April 8-10

  • Mid-America Gaming Congress (Columbus, OH)

Wednesday, April 9

  • SHO Investor Day

Thursday, April 10

  • HST Investor Day



CZR - the Caesars Windsor casino shut down Thursday night as a result of a labor disruption - all gaming ceased at 8 p.m.  

TAKEAWAY:  A stroke of bad luck for Caesars. 


MGM – will now charge a $10 service fee when booking a room over the phone with an MGM Resorts hotel.  According to MGM Resorts International “modernized its policy, implementing a small fee on bookings utilizing the personalized, one-to-one customer service offered by our trained phone agents.” 

TAKEAWAY:  Another way to drive incremental room revenue without raising actual room rates. 


LVS – is increasing scrutiny of Macau junket operators according to comments made by LVS Company spokesman Ron Reese.

TAKEWAY:  Sheldon appears to be placating demands by the US Department of State and Treasury. The Asian based operators might have a leg up here not having to face the same scrutiny as the US companies. 


LVS - recently acquired a G450 to make a 17 aircraft fleet. Las Vegas Sands Corp. now operates 17 luxury jets, used primarily for transportation of the company’s executive officers and VIP guests of its properties. Most of the aircraft in the Las Vegas Sands fleet are owned by and registered to Las Vegas Sands Corp., and a few are registered to Interface Operations, LLC, a Massachusetts-based company owned by Sands CEO Sheldon Adelson

TAKEAWAY:  The fleet of aircraft both in the US as well as Southeast Asia continues to increase to meet the growing VIP segment demand. 


SGMS – inked a three year contract extension, beginning in February 2015, with the Delaware Lottery to provide lottery and central monitoring systems as well as a minimum 450 WMS VLTs at charitable gaming organizations across the state.

TAKEAWAY:  Synergy deal for SGMS


Stations Casino – today kicks off its $ 1million scratch & win promotion, which runs every Friday and Saturday in April.  According to their campaign, “Every scratch card wins. Guaranteed!”  Prizes range from cash, free slot play, bonus points, free buffets and more.

TAKEAWAY:  The competition for Las Vegas locals is fierce and we expect will increase as Stations Casino likely positions itself of an IPO. We'll have more commentary on this market next week when we're in Vegas.


LHO – acquired the 200-room Hotel Vitale, located in San Francisco, for $130 million. The 200-room hotel is the sixth San Francisco property acquired by LaSalle. 

TAKEAWAY:  Growth in occupancy and average daily rate across California (San Francisco) continues to outpace other markets.


RCL – while disembarking from St. Kitts, Independence of the Seas reported that two dock worker were killed when the ship was disembarking.  According to local reports, the wake from the ship’s azipods swamped a small tender and threw the two dock workers into the water.

TAKEAWAY:  Another mishap for RCL, but not likely to have any impact given the nature of the accident.


INDUSTRY NEWS            

Singapore Tourism – Following the negative publicity from the missing Malaysia Airlines flight 370, Asia Travel Group is reporting a 40% drop in the number of Chinese group tours for Singapore.  SIngExpress Travel is reporting an “obvious drop” in their sales of Malaysia/Singapore tour packages whiles Super Travels Agency also reported a very sudden 20% decline versus last year.

TAKEAWAY:  A decline in Chinese tour travel to Singapore would be troubling, particularly for Genting Singapore 


Online Poker - Global online poker traffic has fallen 15% on a year-on-year basis during the first three months of 2014 despite the introduction of new regulated markets in the US, according to the latest set of figures from the PokerScout website. The lower first-quarter figures have also been accompanied by results that show global poker traffic has now fallen for seven weeks in a row, although the latest drop was reported to be less that the 3% and 4% declines recorded over the past two weeks.  PokerStars continues to lead the market with a seven-day average of 21,000 cash game players, while 888poker (2,300), PartyPoker (2,000) and the ipoker network (2,000) accommodate the next top positions. Full Tilt Poker completed the top five with 1,900 cash game players.

TAKEAWAY:   Could online poker interest be waning?                                     

Fight Night – the much awaited Pacquiao-Bradley rematch bout scheduled for April 12 at the MGM Grand is drawing near.

TAKEAWAY:  Interesting to us, rooms are still available at the MGM for Saturday, April 12th with rates starting at $260.


Eastern Massachusetts License Delayed - The state gambling commission will undertake a nearly month long process to determine how much influence the City of Boston will have over two casino proposals on the city’s border, potentially pushing the awarding of the Greater Boston resort casino license back to August or later.  Yesterday, the commission scheduled a hearing for May 1 on Boston’s status.  At stake is whether Boston qualifies under the 2011 casino law as a “host community” to a Wynn Resorts casino plan in Everett and a Mohegan Sun casino proposal at Suffolk Downs in Revere.  Host communities have the power to decide the fate of casino projects through binding referendum.

TAKEAWAY:  Delays probably good for PENN.


Kentucky – The Kentucky Horse Racing Commission unanimously approved applications by both Keeneland and the Red Mile to operate Instant racing (slot-like) devices at separate facilities at their Lexington locations. Keeneland’s application requested permission to operate 600 devices while Red Mile petitioned for 500 machines.

TAKEAWAY:  The Kentucky legislature continues to show no support for giving racetracks the authority to operate slot machines. These machines are the same ones at Kentucky Downs and Ellis Park.


Iowa Gaming Expansion – the Iowa Racing and Gaming commissioners visited Cedar Rapids Iowa on Thursday to hear the pitch by local developers for the proposed Cedar Crossing Casino.  The Iowa Racing and Gaming Commission recently received two studies both of which recommended the IRGC not issue any additional gaming licenses.  Iowa currently has 18 commercial and 3 tribal casinos operating across the state.  Both IRGC studies indicated ISLE’s Waterloo property would experience GGR cannibalization of between $9.2 million and $10 million. 

TAKEAWAY:  In our opinion, Iowa does not need an additional casino; however, this is politics and we have not idea how to handicap this outcome given the Argosy Sioux City events. 


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US. 

Equity Flows? Not Looking Good

Client Talking Points


There was a big overbought signal yesterday, so we signal buy EUR/USD again here. In the absence of a jobs print somewhere north of 230,000, I say you short USD and buy the long bond again today as US growth slows. Incidentally, we’re keeping a close eye on US domestic equity fund flows. They’ve seen outflows for two straight weeks with inflows into taxable bond funds for more than seven weeks.


The UST 10-year yield’s TREND resistance is now 2.82%. So the setup is simple. On a jobs whiff, I’d look for the US Dollar down, bond yields down – no support for the 10-year yield to 2.66%. Consensus expectations on these jobs numbers are high.


Gold is up +0.4% early this morning, making a series of higher-lows after holding Hedgeye TREND support of $1,270. Being long Gold (+7.4% year-to-date) or the Commodities (CRB Index up another +0.6% yesterday to +8.2% YTD) beats a flat Dow. #InflationAccelerating.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


CANADA: rockstar yr for the Canadians (Olympic Hockey) vs Americans (Dow) w/ the TSE +6.7% YTD @KeithMcCullough


"Happiness is not something readymade. It comes from your own actions." - Dalai Lama XIV


UK sales of new cars in March rose at their fastest pace for a decade, according to the Society of Motor Manufacturers and Traders. There were 464,824 new car registrations, a rise of 17.7% on a year earlier. The month also saw the biggest-ever rise in sales of alternatively-fueled vehicles, with sales soaring 63.8% compared to last year. (BBC)

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