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Takeaway: 2Q14 showed signs of deterioration, but 2015 remains the key inflection point. Till then, we need to fade the noise in between.

KEY POINTS

  1. DON’T GET BAITED: Certain metrics will be optically appealing, but largely misleading after considering the details behind them.  After the 2Q14 call, management introduced some new metrics, which are meaningless since there is no supporting detail behind them.  Expecting more of the same; be careful.
  2. 2015 IS AROUND THE CORNER: Consensus estimates are outside the realm of reason.  YELP will need an acceleration in new account growth and historically low attrition to hit consensus estimates, which are calling for 46% revenue growth.  Our bull case is calling for 31%; bear case for 23%. 

DON’T GET BAITED

  1. Rising Customer Repeat Rate is NOT good: This is a measure of customer MIX, not retention.  We suspect this number to rise from a slowing contribution of new accounts.
  2. ARPU Should Surge for the Same Reason: Customer Repeat Rate and ARPU are directly correlated.  That is because the higher the Customer Repeat Rate, the less new customers signed intra-quarter that have paid less than a full-quarter of revenue.  In short, ARPU is a reflection of MIX as well
  3. Careful with Cohort Growth: YELP reported an acceleration across each of its 3 main cohorts last quarter, yet incurred a sharp deceleration in its remaining cohorts.  We suspect management has redeployed more of its salesforce to focus on the early cohorts, which if true, speaks volumes to its realistic TAM.
  4. “Subscription/Contract-Based Advertisers" Means Nothing: That is because management will not provide detail into what’s included in this metric; specifically the contribution from SeatMe, which management stopped providing account metrics for in 2Q14.
  5. 4Q14 Guidance Could Go Either Way: We thought its last guidance raise was an ill-advised move, and we're not expecting upside to 3Q14.  We can't say how management will approach 4Q14: it can choose to make a bet on its accelerated sales rep hires (up 63% y/y in 2Q14), or rebase expectations heading into 2015.  The latter would be the smarter move.

2015 IS AROUND THE CORNER

Our analysis has always pointed to 2H14 as the period when the model would start breaking down.  While we saw signs of deterioration in 2Q14, the 3Q14 guidance raise was much higher than we expected, and makes us wonder if we were too early in calling the inflection.  However, 2015 remains the key inflection point.  Consensus growth estimates are so aggressive that it really doesn’t matter what happens in 2014. 

Their mistake is simple: If you don’t understand the attrition element to the story, you can’t understand the excessive number of new accounts required to hit 2015 estimates.  YELP will need to produce both an acceleration in new account growth and historically low attrition to hit consensus estimates, which are calling for 46% revenue growth.  Our bull case is calling for 31%; bear case for 23%. 

For more detail, see note below.  Let us know if you have any questions, would like to discuss in more detail, or would like to see our slide deck on YELP.

Hesham Shaaban, CFA

@HedgeyeInternet

YELP: Winter is Here 

07/31/14 07:40 AM EDT

http://app.hedgeye.com/feed_items/37093