KEY POINTS
- 1Q15 = INORGANIC TAILWINDS: We’re expecting a top-line beat with support from inorganic tailwinds; 2Q15 revenue guidance should follow suit for the same reason. There will be a lot of noise distracting the street from the mounting pressure in its core Local Ad business, and without a clear downside catalyst, we wouldn’t be naked short into this print.
- SMOKE & MIRRORS: Any upside from acquisitions/ancillary businesses could provide a temporary distraction from its core Local Ad business, but we believe mgmt can only play that card once; consensus will raise the bar on any material upside. More importantly, we don’t believe the street will give YELP a pass if it misses on Local Advertising, or issues light quarterly guidance; both of which could we’re expecting on the 2Q print, latest 3Q.
- WHAT WE’RE KEYING IN ON: Salesforce productivity, which will be somewhat tougher to isolate since mgmt is pulling its legacy account metric, but we should be able to extract what we need from the print. If there was ever an admission that YELP’s business model is broken, it's that salesforce productivity has already seen a sustained decline, which speaks volumes to the size of its realistic TAM, and the viability of its model.
1Q15 = INORGANIC TAILWINDS
We’re expecting a top-line beat with support from a full quarter of revenues from its two international acquisitions from 4Q14, and potentially Eat24 revenues. 2Q guidance should follow suit for the same reason.
YELP reported a fairly strong surge in 4Q14 int’l revenues on 2 months of acquired revenue. While not a game changer, it could be enough to push Local Ad revenues over the line. On Eat24, all we know is that mgmt expects “60% plus growth in 2015” on $24.5M in 2014 revenues. The associated guidance raise of $36M (~11 months of revenue) on the announcement translates to exactly 60% growth, so the question is the magnitude and timing of that “plus”.
The takeaway is not that any of these acquisitions are a game changer; it’s really just how much of an incremental lift they can collectively contribute to results this year, particularly in 1Q15 when no one really know what to expect given the lack of historical context.
SMOKE AND MIRRORS
Any upside from acquisitions/ancillary businesses could provide a temporary distraction from its core Local Advertising business, but we believe mgmt can only play that card once. Consensus will raise the bar on any material upside, likely back-weighting its estimate raises into 2H15/2016.
More importantly, we don’t believe the street will give YELP a pass if it misses on Local Advertising, or issues light quarterly guidance; both of which we are expecting to occur on the 2Q15 release, 3Q15 at the latest.
We’re expecting attrition to exert greater influence across YELP’s model as it struggles to find enough new account growth to effectively mitigate that pressure. Our scenario analysis below illustrates this point, with YELP needing both a considerable acceleration in new account growth (ex Qype) and historically low attrition to hit consensus 2015 Local Advertising revenue.
WHAT WE’RE KEYING IN ON
Salesforce productivity, which will be somewhat tougher to isolate since mgmt is pulling its legacy account metric, but we should be able to extract what we need from the print.
Our Short thesis in a nutshell is that YELP's Local Advertising business model is unsustainable; it is plagued with rampant attrition, and YELP's TAM isn't large enough to support it.
If there was ever an admission that YELP’s business model is broken, it's that salesforce productivity has already seen a sustained decline, which speaks volumes to the size of its realistic TAM, and the viability of its model. For more detail, see the notes below.
YELP: Salesforce Productivity?
03/16/15 08:10 AM EDT
YELP: Debating TAM
06/30/14 01:10 PM EDT
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
@HedgeyeInternet
