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YELP: The Key Question

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.

 

YELP: The Key Question - YELP   TAM Coverage 

 

 

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


Cartoon of the Day: The Sound of Deflation

Cartoon of the Day: The Sound of Deflation - Deflation cartoon 12.29.2014

That sound you're hearing around the globe? Deflation.


Keith's Macro Notebook 12/29: Europe | UST 10YR | Russell 2000

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.62%

This Is a Much Bigger Risk Than Greece

Editor's note: This is a brief excerpt from Hedgeye research earlier this morning. For more information on how to become a subscriber click here.

 

*  *  *  *  *  *  *

Markets seem agitated by the Greek vote this morning. Worldwide deflation is the much bigger risk.

 

The Greek stock market continues to crash (it’s down -10% this morning to -34% year-to-date). But the more interesting breakdowns @Hedgeye TREND resistance are those in Italy’s MIB and Spain’s IBEX – don’t forget who #deflation hurts the most, #debtors (hence why central planning policies will do anything to try to avoid deflation).

 

This Is a Much Bigger Risk Than Greece - a1

 

On a related note, the best Big Macro, low-volatility, liquid long position to have on if you agree with us on global #GrowthSlowing and #Deflation is the Long Bond (TLT, EDV, etc). That’s been one of our best calls in 2014. But you have to be there on the pullbacks like we saw last week.

 

This Is a Much Bigger Risk Than Greece - a2

 

The UST 10YR Yield is -4 basis points to 2.21% this morning with no support to 2.05%.



European Banking Monitor: RED In Financials

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 

 

------ 

 

 

European Financial CDS - Swaps mostly widened in Europe last week.  Greek banks widened the most on fears that the parliamentary vote for a new president would fail.  News broke this morning that the vote did in fact fail.  That will force the country into snap elections in early 2015.

 

European Banking Monitor: RED In Financials  - chart1 euro financials cds

 

Sovereign CDS – We look at the move in swaps as of Friday's close so the Greek election news this morning is not reflected in these figures and has most swaps higher as of this morning. There was notable tightening in Portuguese sovereign swaps (-23 bps to 173 bps) and modest tightening in Italy and Spain.

 

European Banking Monitor: RED In Financials  - chart2 sovereign CDS

 

European Banking Monitor: RED In Financials  - chart3 sovereign CDS

 

European Banking Monitor: RED In Financials  - chart4 sovereign cds

 

Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 10 bps.

 

European Banking Monitor: RED In Financials  - chart5 euribor OIS spread

 

 

Matthew Hedrick 

Associate

 

Ben Ryan

Analyst

 

 

 


MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH

Takeaway: Risk is high and rising as our intermediate term risk gauge is almost completely red. This week we're calling out oil, China and Europe.

Key Takeaways:

Our heatmap below shows almost everything red across the intermediate duration. 10 of 12 signals are deteriorating while just 1 is improving. The main callouts this week are: 1) commodity prices continue to drop. The CRB Index was down 2.2% week-over-week and is now down 12.0% month-over-month as Saudi Arabia keeps its foot on the production gas, 2) Chinese steel prices and the Chinese interbank rate are both going the wrong way. Chinese steel prices are down 2.7% on the week and are down 6.7% on the month. Meanwhile, Chinese interbank rates are up 97 bps on the month, and 3) Europe is backsliding with Greece moving, once again, to the front burner with the announcement this morning that the parliamentary vote for a new president has failed, triggering snap elections in early 2015.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Negative / 1 of 12 improved / 10 out of 12 worsened / 1 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 15

 

1. U.S. Financial CDS -  Swaps widened for 24 out of 27 domestic financial institutions.  MBIA swaps showed the biggest increase for the second week in a row (+27 bps to 488 bps).  Meanwhile, Genworth swaps continue to widen, a trend sparked by their November 7 announcement of an impending charge of over $1 billion dollars pre-tax and continued by their December 17 announcement that they had not yet completed their annual review of long-term care insurance active life margins. Genworth swaps rose 13 bps to 459 bps.

 

Widened the least/ tightened the most WoW: RDN, TRV, TRV

Widened the most WoW: MBI, AIG, C

Tightened the most WoW: AIG, MTG, RDN

Widened the most MoM: GNW, C, MBI

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 1 2

 

2. European Financial CDS - Swaps mostly widened in Europe last week.  Greek banks widened the most on fears that the parliamentary vote for a new president would fail.  News broke this morning that the vote did in fact fail.  That will force the country into snap elections in early 2015.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 2

 

3. Asian Financial CDS - 9 out of 10 Asian bank CDS widened last week. Japanese and Indian bank swaps widened the most.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 17

 

4. Sovereign CDS – We look at the move in swaps as of Friday's close so the Greek election news this morning is not reflected in these figures and has most swaps higher as of this morning. There was notable tightening in Portuguese sovereign swaps (-23 bps to 173 bps) and modest tightening in Italy and Spain.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 18

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 3

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 74.8 bps last week, ending the week at 6.42% versus 7.17% the prior week.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1853.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 6

 

7. TED Spread Monitor – The TED spread rose 3.2 basis points last week, ending the week at 25.4 bps this week versus last week’s print of 22.21 bps.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 7

 

8. CRB Commodity Price Index – The CRB index fell -2.2%, ending the week at 235 versus 240 the prior week. As compared with the prior month, commodity prices have decreased -12.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 10 bps.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 6 basis points last week, ending the week at 3.549% versus last week’s print of 3.606%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 10

 

11. Chinese Steel – Steel prices in China fell 2.7% last week, or 76 yuan/ton, to 2756 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 151 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 2.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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