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Takeaway: We had a good conversation with YELP’s CFO…We are reiterating the Short

NOTE SUMMARY

  1. INCREMENTAL COMPANY DETAILS: We have included some notes below to assist you with your models.
  2. ATTRITION ISSUES?: We are now more confident that the attrition issues we have been highlighting are occurring.
  3. TOTAL ADDRESSABLE MARKET: We suspect that the company sincerely believes its TAM is as large as it has publicly stated.  We have previously detailed why this isn't the case, and we'll have follow-up note on this topic shortly. 

We spoke with Rob Krolik of YELP yesterday.  We believe he was very honest and forthcoming with us.  He answered pretty much all of our questions with the exception of one very important one, which we will get to below.  

INCREMENTAL COMPANY DETAILS

  1. Salesforce: YELP’s salesforce has been rising 50% y/y for about the past 8 quarters.  They now represent a little less than 60% of its total employee count of 2,156 (as of 1Q14).  Most of those reps focus on the Local Advertising Segment (Brand Advertising salesforce is fairly small).  The breakeven on those Local Ad reps is roughly 6-9 months (on a cash basis).
  2. Customers: Most customers sign 12 month contracts.  There is 2-3 month penalty for cancellation, but YELP doesn’t always enforce (e.g. client has financial problems or goes under).  The Active Local Business accounts reported by the company are essentially all of its customers excluding Brand Advertising; specifically all Local Advertising customers (which includes SeatMe as of 2014) and Other Services customers (Gift Certificates and Deals)

ATTRITION ISSUES?

Where we didn’t get a tremendous amount of detail was when we delved into its customer repeat rate, which is how we are backing into its attrition rate.  We did spend some time discussing this topic, and while he wouldn’t explicitly verify or refute our attrition thesis, he did say that YELP has never said that they are not losing customers after we delved into its reported numbers.

 

The question he wouldn’t answer, which is a spin off of its customer repeat rate metric: “How many of your current customers have been generating revenue for YELP for over a year?”

This is the most important question because it drives at the heart of the retention issue we have been highlighting.  We estimate that in any given period that the overwhelming majority of YELP’s reported Local Business Accounts are accounts the company has signed within the LTM (meaning YELP is losing the majority of its accounts after the first year).    

ADDRESSABLE MARKET

He did point out that total accounts continue to grow on a quarterly basis at a strong rate (there’s no denying that), and he reiterated YELP’s strategy of focusing on acquisition vs. retention given its large addressable market; highlighting YP.com as a reasonable opportunity (575K customers).

To be explicitly clear on this front, we believe Rob (and the company) sincerely believes that YELP’s TAM is as large as they have publicly stated.  We do not; we have gone into detail on why this isn’t the case in our original YELP Short Best Ideas note (with much greater detail in the deck). 

We will be publishing another note shortly with incremental detail on YELP’s TAM to emphasize this point. 

If you have any questions, or would like to discuss in more detail, let us know.

Hesham Shaaban, CFA

@HedgeyeInternet