YELP: Thoughts into the Print (1Q15)

Takeaway: The stock could see a bounce on this release, but at the cost of a much worse blow-up after the dust settles in 2Q15 (3Q15 latest).

KEY POINTS

  1. 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.
  2. 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.
  3. 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.

 

YELP: Thoughts into the Print (1Q15) - YELP   Int l rev 4Q14 

 

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.  

 

YELP: Thoughts into the Print (1Q15) - YELP   2015 Local Scen Anly 

 

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: Thoughts into the Print (1Q15) - YELP   New Acct vs. Sales 4Q14 3

 

YELP: Salesforce Productivity?

03/16/15 08:10 AM EDT

[click here]

 

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


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more