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Takeaway: We have received this question from a few of our subscribers. 3 things to consider

THE KEY QUESTION

Why can’t YELP just accelerate sales rep hiring even further to sustain its revenue growth trajectory? 

KEY POINTS

  1. THE MODEL IS ALREADY FAILING: YELP’s model is predicated on hiring more and more sales reps to drive enough new account growth to offset its rampant attrition.  2014 already showed us that its business model is starting to fail.  YELP is now at the point where it can’t produce account growth in excess of the rate that it is hiring sales reps.  That means its business model isn’t sustainable over the long haul; likely because its TAM isn’t large enough to support it.
  2. THE OTHER ATTRITION ISSUE: Data from Glassdoor and LinkedIn suggest that YELP’s salesforce is a revolving door as well.  That means YELP needs to add an ever-increasing number of new inexperienced reps to offset its rampant sales rep turnover as well...in order to drive enough new account growth to offset its rampant account attrition.  As the company becomes larger, this will only get tougher to achieve.
  3. ALREADY AT PEAK COVERAGE? YELP’s salesforce operates in a boiler-room setup: high-frequency cold-calling (+80 daily calls often cited on Glassdoor reviews).  We estimate that YELP’s current salesforce has grown to the point where it can canvas the company's entire U.S TAM in less than a month, which means that YELP’s strategy of rampant sales rep hiring will only lead to the same prospects just receiving more and more calls. 

 

THE MODEL IS ALREADY FAILING

YELP’s model is predicated on hiring more and more sales reps to drive enough new account growth to offset its rampant attrition, which has gone largely unnoticed for this very reason.  

2014 marked a major inflection for the company.  YELP is now at the point where it can’t produce account growth in excess of the rate that it is hiring sales reps.  So the better question is why is the happening? The answer is that YELP’s TAM isn’t large enough to support its business model; if it was, this wouldn’t be happening.  In short, the model is failing.  We delve into YELP’s TAM in greater detail in the note below.

YELP: The Key Question - YELP   Reps vs. New Acct

YELP: The Key Question - YELP   Reps vs. Net Acct

THE OTHER ATTRITION ISSUE

The recurring theme from employee reviews on Glassdoor.com is that YELP’s salesforce is a revolving door as well (link).  LinkedIn employee count metrics appear to corroborate YELP’s employee turnover issues as well: 2,977 current employees vs. 3,411 former employees for a company that had less than 1,000 employees in 1Q12. 

YELP’s revenue growth is largely driven by the size of its salesforce, so this creates another challenge for the company.  In short, YELP needs to add an ever-increasing number of new inexperienced reps to offset its rampant sales rep turnover as well...in order to drive enough new account growth to offset rampant account attrition.  As the company becomes larger, this will only get tougher to achieve.

ALREADY AT PEAK COVERAGE?

Management has repeatedly stated that its focus is on account acquisition, likely because it genuinely believes that its TAM is as large as they say it is (last hard estimate was 27M).   

However, as we detail in the table below, YELP’s TAM is roughly 3.4M under a best-case scenario given that the overwhelming majority of businesses in the US can't afford YELP’s cheapest ad package (~$300/month), and half are B2B companies outside YELP’s purview (see note link below for additional detail).

YELP: The Key Question - YELP   US TAM 1 

It’s important to note that YELP’s salesforce operates in a boiler-room setup: high-frequency cold-calling (+80 daily calls often cited in reviews on Glassdoor.com).  We estimate that YELP’s current salesforce has grown to the point where it can canvas its entire U.S TAM in a little less than a month, which means that YELP’s strategy of rampant sales rep hiring will only lead to the same prospects just receiving more and more calls.  

We're not arguing that additional prospect touch points are futile, but the yield from this incremental call volume will progressively deteriorate.

<chart6> 

For a detailed breakdown of our YELP TAM analysis, see note below.  

YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]

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

Hesham Shaaban, CFA

@HedgeyeInternet