YELP: Thoughts into the Print (4Q14)

Takeaway: We're expecting a light 2015 guidance release given lofty consensus estimates. Note that our short thesis extends well beyond 2015.

KEY POINTS

  1. CONSENSUS 2015 ESTIMATES BEYOND LOFTY: 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 consensus estimates, which will require both accelerating new account growth and record low attrition.
  2. EXPECTING LIGHT GUIDANCE, BUT: We’re expecting revenue growth of 32% under our bull case scenario (vs. consensus of 43%).  However, there are a few risks to being short the guidance release, but not enough to consider covering ahead of the print.
  3. IT’S MORE THAN JUST 2015: The problem with YELP’s business model is that its current account base is always the hurdle.  The more accounts it starts the year, the more accounts it will lose, and the more new accounts it must sign to generate growth.  We’re are already seeing signs that it’s model is failing, likely because its TAM isn’t large enough to support it. 

CONSENSUS 2015 ESTIMATES BEYOND LOFTY

Consensus estimates for 2015 remain outside the realm of reason.  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. 

In the table below, we created a scenario analysis flexing new account growth and average quarterly attrition for 2015.  For perspective, in 2014 YTD, YELP has achieved average new account growth of 40%, which was partially inflated by both the Qype account transition in 4Q13 and the reclassification of SeatMe accounts into Active Local Business Accounts beginning 2014.  YELP's average quarterly attrition in 2014 YTD was 18.5%.  

That said, YELP will need to produce both accelerating new account growth and historically low attrition rates to hit 2015 consensus estimates, which are calling for 43% revenue growth.

YELP: Thoughts into the Print (4Q14) - YELP   2015 Consensus Scenario Detail 3

EXPECTING LIGHT GUIDANCE, BUT

For 2015, we’re expecting revenue growth of 32% under our bull case, 23% under our bear case (vs. consensus of 43%).  We’re expecting guidance to come in light; especially since management had to essentially cut 2014 revenue guidance last quarter after factoring in the 3Q14 top-line beat.  However, there are a couple risks to being short the release.

The first is the two international acquisitions announced less than a week after its 3Q14 release.  YELP didn’t provide any financial detail on these acquisitions, so we’re not sure how much upside they might provide.

The second is the precipitous decline in commodity costs, which we have loosely linked to YELP’s attrition rate (although that relationship appears to have broken off this past quarter).  This is more of a callout than a legitimate concern.

 

YELP: Thoughts into the Print (4Q14) - YELP   CRB vs. Att Rate 3Q14


IT’S MORE THAN JUST 2015

The problem with YELP’s business model is that its current account base is always its hurdle.  YELP’s business model is predicated on hiring enough new sales reps to drive the new account growth necessary to compensate for its rampant attrition.  Since 1Q12, quarterly churn has averaged 18.8%, with a relatively tight standard deviation of 60bps. 

YELP: Thoughts into the Print (4Q14) - YELP   Attrition Rate 3Q14

That said, the more accounts YELP starts the year, the more accounts it will lose, and the more brand new accounts it must sign in the following year to generate its growth.  This strategy would be sustainable if YELP’s TAM was as large as management believed.  It’s not; we delve into its TAM in great detail in the note below.

YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]

More importantly, we are already starting to see signs that its model is failing.  YELP is now at the point where it can’t produce new account growth in excess of the rate that it is hiring sales reps, which may be the most glaring sign that its model is broken.    

YELP: Thoughts into the Print (4Q14) - YELP   Reps vs. New Acct 3Q14

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

Hesham Shaaban, CFA

@HedgeyeInternet