Here's the question-and-answer portion from our daily institutional Morning Call hosted by Hedgeye CEO Keith McCullough and Senior Macro Analyst Darius Dale. Keith answers questions on markets, hedge fund performance and even youth hockey.
Takeaway: We had a good conversation with YELP’s CFO…We are reiterating the Short
- INCREMENTAL COMPANY DETAILS: We have included some notes below to assist you with your models.
- ATTRITION ISSUES?: We are now more confident that the attrition issues we have been highlighting are occurring.
- 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
- 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).
- 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)
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).
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
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Client Talking Points
Consensus bullishness on the Nikkei and bearishness on the Yen continues to be one of the worst macro positions of the year. The Bank of Japan didn’t deliver the drugs overnight (60-70 TRILLION Yens still not enough!) so the Yen is breaking out to fresh year-to-date highs versus the US Dollar and the Nikkei was down for the fifth day in the last six to -13.1% YTD (Fed mins should be dovish next).
Got #StrongCurrency = Strong People (Consumption)? With the #StrongPound testing year-to-date highs in Q2 versus the US Dollar, UK Retail Sales for April were a barn burner of +6.9% year-over-year – that’s a 10 year high, reminding the Keynesians that they have the whole FX burning for 1920’s “export demand” completely wrong. It’s 2014.
Our breakout signals for both Brent and WTIC have been confirmed in the last two weeks as WTIC inflates another +0.8% this morning to $103.21 – one more #InflationAccelerating tax on American Consumers for Memorial Day weekend (unless, of course, you roll with Bernanke using car service for non-inflationary $400,000 Fed whispering sessions).
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Top Long Ideas
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.
Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.
Three for the Road
TWEET OF THE DAY
COMMODITIES: US growth stocks -1.7% yesterday vs Commodities up #InflationAccelerating @KeithMcCullough
QUOTE OF THE DAY
"It's how you deal with failure that determines how you achieve success." - David Feherty
STAT OF THE DAY
During his eight years as steward of the world’s largest economy, Ben Bernanke’s salary was about $200,000 a year. Now he makes that in just a few hours speaking to bankers, hedge fund billionaires and leaders of industry. This year alone, he is poised to make millions of dollars from speaking engagements. (New York Times)
Tickers: LVS, PNK, SGMS, WYNN, HT, NCLH, SNOW
EVENTS TO WATCH
Wednesday, May 21
- East Coast Gaming Congress
Wednesday, May 21 - Thursday May 22
- G2E Asia - The Venetian Macao
Thursday May 23
- Codere 1Q conf call
Thursday May 27
- Aristocrat F1H 2014 conf call
LVS – (WSJ) is conducting a search for a new President and Chief Operating Officer as current COO Michael Leven's contract expires at the end of this year.
Takeaway: Mike has done an excellent job but he is 76 so we are not surprised he is considering retirement. This is a critical new hire. Sheldon won't be around forever either?
PNK – withdrew its application for a proposed casino near Thruway Exit 23 near Albany NY (the Capital region) as its development partner chose a Global Gaming is the proposed operator.
Takeaway: Better to withdraw today and receive the $1 million application deposit refund than lose the deposit.
SGMS – is attempting to issue $375 million of 7-year senior subordinated notes via private placement debt to QIBs. UOP is to repay existing 9.25% senior subordinated notes due in 2019.
Takeaway: We are keenly watching this placement as we expect BYD to be in the market in August with a refinancing transaction.
WYNN – appointed Stephen Cootey as the company’s CFO, SVP and Treasurer, effective immediately. Cootey has served as the company’s Treasurer since February 2014, and as the company’s SVP - Finance from January 2014 to May 2014. Prior to WYNN, Cootey was VP Corporate Finance at Las Vegas Sands.
Takeaway: A widely telegraphed promotion. Mr. Cootey was previously an investment banker and debt money manager.
HT – holder GRS Advisors discloses 6.2% stake and intends to engage management in discussions to identify opportunities to increase HT's valuation and share price.
Takeaway: A new, more management friendly form of activism?
NCLH – announced "Norwegian NEXT" and will spend more than $250 million through 2015 to enhance dining, drinking, entertainment and other aspects of its cruise product.
Takeaway: You have to spend to keep up with the cutthroat competition. It is the right decision for NCL but it's still cash out the door.
Prestige Cruise Holdings – (Cruise News) recent commentary indicates Prestige has approved the construction of two new ships or Oceania Cruises by Fincantieri. The new vessels will be sister ships for the Marina and the Riviera.
Takeaway: Pipeline of new ships is growing.
SNOW – announced the resignation of Juan Perez, SVP and Corporate Controller effective May 15, 2014.
Takeaway: Yesterday, we found it very curious to read a Form 4 filing on behalf of Mr. Perez indicating he forfeited shares and without further explanation from the company until the 8K filing. Also seems unusual given SNOW's recent IPO and Mr. Perez joining SNOW in September 2011.
American Gaming Association - (WSJ) Withdrew support on online gambling
AGA CEO Geoff Freeman said disagreements among casino operators over online gambling is "an issue that the association cannot lead on" so it has withdrawn from the fight.
Takeaway: Another blow to hopes of federal legalization of internet gambling. Adelson is cheering somewhere (we think from Macau).
Massachusetts – Massachusetts Gaming Commission is delaying the Boston region casino license again. It will now hand out the license between end of August and beginning of September to give communities enough time to finalize mitigation agreements with Wynn or Mohegan Sun. Commission still plans to issue the Western Region license (MGM Springfield - sole bidder) on June 13.
Takeaway: Award of license to MGM remains on track although groundbreak probably won't happen until the Repeal issue is resolved.
Online Gaming in California – the Pechanga and San Manuel Native American tribes are working to bring online poker legislation to the California legislature.
Takeaway: Will be a slow moving legislative process in California
China - (WSJ) unveiled details of its plans to let private capital take part in major infrastructure projects. The reform commission listed a total of 80 such projects, covering railways, gas pipelines, telecommunications and clean energy
Takeaway: Would appear the Chinese Central is fiscally constrained.
China - Zhu Baoliang, head of the State Information Center's economic forecasting department, said the rising cost of borrowing is weighing on China's enterprises, especially real estate developers. Zhu called for more flexibility in the PBoC's monetary policy, including cutting the reserve-requirement ratio for banks
Takeaway: Still waiting for the RRR cut
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.
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