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YELP: The New Major Red Flag (1Q15)

Takeaway: Declining Salesforce. The fact this is even remotely an issue suggest this story is going to turn much sooner than we initially expected

KEY POINTS

  1. MUCH WORSE THAN WE EXPECTED: We expected YELP to bounce off a beat and high 2Q guidance with support from inorganic tailwinds.  It did the opposite.  What’s worse is that YELP maintained 2015 Revenue guidance; which is not only lofty to begin with, but also means the sell-side is going to up their estimates for 2H15; ultimately increasing the hurdle. 
  2. THE NEW MAJOR RED FLAG: We estimate that YELP’s salesforce sequentially declined this quarter.  Given that the company guided to growing its salesforce by 40% in 2015, but only achieved 25% y/y growth, we believe YELP experienced a heightened level of sales rep attrition in excess of what’s implied in by the net figures.  But more importantly, It doesn’t matter why this is happening, what matters is that this is an issue at all (next section). 
  3. PULLING THE THREADWhile we expected our primary read this quarter to be salesforce productivity, we weren't expecting a decline in its salesforce itself.  Remember that YELP’s business model is predicated on hiring enough sales reps to drive new account growth in excess of its rampant attrition.  That said, the only thing preventing declining revenue for YELP is its growing salesforce.  The fact this is even remotely an issue suggest this story is going to turn much sooner, and get much uglier, than we initially expected. 

 

MUCH WORSE THAN WE EXPECTED

We expected YELP to beat and guide high for 2Q with support from inorganic tailwinds.  It did the opposite. YELP missed both Local and Brand Advertising revenue estimates, with Other revenues surging well ahead of estimates on what was likely understated implied guidance on the Eat24 acquisition. 

 

Delving into its Local Advertising metrics is somewhat trickier now that YELP pulled its legacy ALBA metric for its new Local Advertising Accounts (LAA) metric.  The issue is that we can’t construct a sufficient time series since mgmt only provided us limited history for its new customer repeat rate metric (5 quarters). At a very minimum, there’s no denying that the majority of its attrition is coming from its core Local Advertising segment.

 

More importantly, YELP shot itself in the foot (again) by maintaining 2015 revenue guidance; which was lofty to begin with, but also means the sell-side is going to up their estimates for 2H15 since 1H15 fell short of their expectations;. See scenario analysis below for more detail.

 

YELP: The New Major Red Flag (1Q15) - YELP   Att Mix

YELP: The New Major Red Flag (1Q15) - YELP   2015 Local Scen Analysis 1Q15 

 

THE NEW RED FLAG

We estimate that YELP’s salesforce sequentially declined this quarter.  Given that the company guided to growing its salesforce by 40% in 2015, but only achieved 25% y/y growth, we believe YELP experienced a heightened level of sales rep attrition in excess of what’s implied by the net figures

 

We suspect there are two explanations behind its elevated attrition

  1. Too many mouths to feed: YELP's salesforce is already large enough to canvas the US in call volume.  Hiring more reps just means more mouths to feed from the same trough (see note below).
  2. Not enough food: YELP may have switched its commission benchmark from gross to net revenue, which drastically lowers the commission pool given its rampant attrition.

But more importantly, It doesn’t matter why this is happening, what matters is that this is an issue at all (next section) 

 

YELP: Salesforce Productivity?

03/16/15 08:10 AM EDT

[click here]

 

Pulling the thread

While we expected our primary read this quarter to be salesforce productivity, we weren't expecting a decline in its salesforce itself.  Remember that YELP’s business model is predicated on hiring enough sales reps to drive new account growth in excess of its rampant attrition. 

 

That said, the only thing preventing declining revenue for YELP is its growing salesforce.  The fact this is even remotely an issue is a major problem, especially since salesforce productivity was already on the decline to begin with.  If YELP is already having difficulty sustaining its salesforce, then the story is going to turn much sooner, and get much uglier, than we initially expected. 

 

YELP: The New Major Red Flag (1Q15) - YELP   Lost annual

YELP: The New Major Red Flag (1Q15) - YELP   sales productivity 1Q15

 

 

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

 

Hesham Shaaban, CFA

@HedgeyeInternet


Macro Pain Trades = #On

Client Talking Points

EURO

There was a big multi-standard deviation move in the EUR/USD straight up to $1.12 now; from $1.05 (our initial 2015 target) that’s one heck of a bounce – European stocks did not enjoy that. We highly doubt ECB President Mario Draghi is going to sit on his hands, especially with plenty of European economic data losing rate of change gains.

10YR YIELDS

There was a big multi-standard deviation move in German Bund Yields (they doubled off the all-time lows!) definitely had its impact on the rates market – so now, like in FX, risk ranges for sovereign rates (our leading indicator for volatility) are widening – there should be plenty of chop to risk manage from here.

RUSSELL 2000

Inasmuch as European stocks don’t like Up Euro, U.S. Growth Investors (especially the domestic consumer) don’t like Down Dollar, because that equals rising gas prices – this is the 1st immediate-term TRADE breakdown signal in the Russell of 2015 – we wouldn’t buy the dip either.

Asset Allocation

CASH 40% US EQUITIES 10%
INTL EQUITIES 12% COMMODITIES 2%
FIXED INCOME 30% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MTW

The Dodge Construction Starts Index accelerated at its highest rate since 1982. The index was driven largely by non-building projects, which was 74% higher for the first three months compared to last year. The Architecture Billings Index (ABI), a survey of architects, increased ~3% month-over-month and ~5% year-over-year for March. The ABI Index typically leads nonresidential and residential construction spending by 9-12 months. More importantly, the ABI Index leads Manitowoc Crane Orders by 2 quarters. This suggests MTW’s crane sales should see a pickup in the first half of the year. MTW reports April 29th after the close. Earnings Call will be held at 10:00am eastern time the following day.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Housing went 4 for 4 in a data heavy calendar for the sector this week with demand improving across both the new and existing markets and the fledgling acceleration in price growth finding some positive confirmation. The builder stocks had a choppy week of performance as investors held mixed opinions of earnings reports and management commentary out of DHI and PHM but, from a fundamental data perspective, the Trend remains one of discrete improvement.

TLT

Ten-year rates dipped 12bps on the week (forward-looking growth expectations) and the USD got crushed for a 1.5% loss. Growth and inflation expectations get priced in AHEAD of the more dovish policy tone resulting from any sign of deterioration in the labor market. Wednesday’s Fed meeting will be the next catalyst that will steer the market’s expectation on forward-looking growth and inflation. We expect the dots (forward-looking federal fund rate expectations) to be pushed out….again.

Three for the Road

TWEET OF THE DAY

MUST SEE TV 9AM ET Hedgeye CEO @KeithMcCullough + @MariaBartiromo go deep on markets, #Fed, #economy etc @FoxBusiness

@Hedgeye

QUOTE OF THE DAY

I am not on this earth by chance. I am here for a purpose and that purpose is to grow into a mountain, not shrink to a grain of sand.

-Og Mandino

STAT OF THE DAY

Restaurants are being charged $5,100 to broadcast the Mayweather-Pacquiao boxing match, Buffalo Wild Wings executives said during its earnings call Tuesday.


CHART OF THE DAY: How Does It All End?

CHART OF THE DAY: How Does It All End? - z 04.30.15 chart

 

Editor's Note: This is a brief excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe.

 

...The Fed has effectively reduced the timing of its first rate hike to the most lagging of #LateCycle economic indicators. And now you literally have to guess what the next jobs number is going to be....

 


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Confusion's Masterpiece

“Confusion now hath made his masterpiece!”

-William Shakespeare

 

Oh boy, are macro markets confused by the collision of central plans now!

 

Shakespeare fans will remember the aforementioned quote from Act II (Scene 3) of Macbeth. It’s a great metaphor to use in answering the question I get from most long-term risk managers: “How does this all end?

 

While it would be reckless to predict precisely how it ends, I have a pretty good idea how the beginning of the end looks – confusing. Confusion in the timing of central planning breeds contempt. And that perpetuates volatility which, in due course, crushes confidence.

Confusion's Masterpiece - Card house cartoon 12.03.2014

 

Back to the Global Macro Grind

 

How confident are you in explaining how rates can ramp to the top-end of their respective ranges as the US Dollar goes straight down? In rate of change terms, German Bund Yields doubled in 48 hours! Irrespective of what the Fed said, did that have anything to do with the US move in rates? Big time.

 

Was the rates move linked to the currency and commodity move (Down Dollar = Up Oil, Energy Stocks)? I don’t think so. The FX (foreign currency) market move and Global Rates moves went in the opposite direction of what most correlation models would have predicted. #Fun? Not.

 

But isn’t this what we’ve all signed off on? Wasn’t central planning of markets supposed to be a “smoothing” exercise whereby all of us “smart” people could make linear-assumptions to drum up macro correlation models for all of our asset allocations and bonuses?

 

Let’s get real here. Macro markets just did.

 

Setting aside the non-linear-multi-standard-deviation-move in both German Bund Yields and the European Currency for a minute, let’s bring this discussion back to the USA and what the Federal Reserve said yesterday:

 

  1. On Growth – ‘our forecasts continue to be too high, but it’s all “transitory” because it snows in the winter time’
  2. On Inflation – ‘our forecasts on 2% inflation were wrong, but that’s transitory too – everything we get wrong is’
  3. On Timing –  ‘rate liftoff is data dependent on the labor market – so run money on best #NFPGuesses’

 

That last point isn’t a joke (neither are paraphrasing points 1 and 2). The Fed has effectively reduced the timing of its first rate hike to the most lagging of #LateCycle economic indicators. And now you literally have to guess what the next jobs number is going to be.

 

Since my research team cannot predict an un-predictable number (we’ve tried to build models to front-run BLS Labor report data and, trust me, I’d have a prediction if there was a repeatable #process to be accurate with one), guessing is the only option.

 

Confused yet? You should be. Much like the March 18th Fed decision on “to, or not to, be lower on rates for longer” the May 8th jobs report is a binary event:

 

A)     Jobs report “beats” useless forecasts of lagging indicator = Dollar Up, Rates Up, Oil Down (hard)

B)      Jobs report “misses” useless forecasts of lagging indicator = Dollar Down, Rates Down, Oil To Infinity And Beyond

 

“So”, as my hedge fund friends in Chicago would say, place your bets!

 

Oh, did I mention that this is only a 6-7 day trading bet? Dammit this is getting good! Not only do we have to now day-trade US monetary policy based on best-guesses, but we have to completely ignore this longer-term thing called the cycle, at the same time.

 

What happens if the June and/or July jobs reports are bad? What happens if the May report is bad? I can tell you one thing – the entirety of Old Wall Consensus isn’t predicting anything bad – every question I get on rates has to do with ‘what if it’s good?’

 

There is nothing good about confusion in macro market correlations when volatility accelerates. There is no risk management #process in guessing either. So I’m selling in May and getting the heck out of the way. For now, going to cash beats confusion.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-2.06%

SPX 2085-2117
RUT 1

VIX 12.96-14.91
USD 95.12-97.66

EUR/USD 1.05-1.12
Oil (WTI) 52.96-59.69

Gold 1180-1215

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Confusion's Masterpiece - z 04.30.15 chart


The Holy Grail

This note was originally published at 8am on April 16, 2015 for Hedgeye subscribers.

“We have a lot of rookies in the lineup.  More than anybody, I would say.  It’s going to be something new for them. They have to understand that it’s totally different hockey in the playoffs.  Starting with the fans, the intensity of the game, every mistake counts.”

-Jaromir Jagr

 

Last night the pursuit of Lord Stanley’s Cup began in earnest with the first series of games in the NHL Playoffs.  Certainly, the team at Hedgeye is over indexed to the love of the great game of hockey.  But whatever your athletic passion, it’s hard to deny that playoffs are an exciting time of year.

 

For those of you who don’t follow hockey closely, the quote at the outset is from one of the true iron men of the NHL.   At 43 years of age, Jagr was the oldest player to play in the NHL last season.  His first season was 1990 and with the exception of a few seasons in Russia, Jagr has been playing in the NHL ever since.  In fact, he is the only player in the history of the NHL to play in the playoffs as both a teenager and a 40-year old.

 

Being the wily vet that he is, Jagr’s aforementioned quote is spot on.  Whether in sport or business, you need to let the rookies play, but as their GM or boss you also need to realize that their experience is limited and when the intensity picks up during crunch time they need to know that every mistake does matter.   And if they don’t, the experience will teach them that very quickly.

 

Before we get into the macro grind today, I’ll give you my pick to win the holy grail of hockey.   Since the team Keith and I own with some friends, the Arizona Coyotes, is out of the running, I’m going with the New York Rangers over the Chicago Blackhawks with New York winning at home in game 5.

 

Who is your pick to win the Cup?

 

The Holy Grail - a. Jagr

 

Back to the Global Macro Grind

 

It seems that our friends at the IMF weren’t settled into their chairs watching playoffs last night.  The Financial Times is reporting this morning that the IMF is warning that the Fed’s first rate hike could lead to a so-called “Taper Tantrum”.  In effect, the IMF is concerned that volatility in U.S. rates will spike dramatically in conjunction with the first rate hike.

 

In the Chart of the Day we look at the U.S.  10-year yield versus U.S. unemployment going back as far as the data was available.   In stating the obvious, as the chart shows, we are certainly in an unprecedented period of monetary policy.   Will we get a massive spike in interest rate “vol” when the first hike happens?  It’s tough to say without a crystal ball.  But what IS already happening is a spike in opinions on when and how to raise rates.

 

On that front, the esteemed Bernank (aka former Fed Chair Ben Bernanke) weighed in this morning on when and how to guide rates higher.   Not surprisingly part of the Bernank’s plan is to keep the balance sheet larger for longer and also focus on the repo rate and other short-term money market rates.   Some of his views probably have credibility, but whatever happened to central bankers focusing on the data?!

 

Speaking of extremes, the Energy Information Administration (EIA) yesterday reported that crude inventories rose less than expected by a mere 1.3 million barrels on the week to 483 million barrels in total.  According to EIA records dating back to 1920, this is the most inventory the U.S. has had on hand since the 1930s (that was back when the NHL only had six teams for crying out loud!).

 

In conjunction with that, a Federal Reserve index showed that crude production rose 1.3% in March.  This increase took it to the highest level since 1973, which was before I was born and I’m no spring chicken.   If that isn’t enough, Iraq crude exports hit a record of 3.0 million barrels in March and the Saudi’s did exactly what they said they would do and took production up to 10.3 million barrels per day.

 

Earlier in the week we used a quote from Templeton about waiting to buy when there is blood in the street.  Certainly there is truth to that if we look at investing history.  When it comes to getting long of oil, due to the lack of storage, we may literally get a chance to buy it when it is in the streets!

 

In Europe, Greek’s clock is running down.  Yesterday, it was leaked that the Greeks approached the IMF about a rescheduling of repayments and were told categorically that no rescheduling of debt is possible.    As a result, yields on 2-year Greek notes spiked by more than 180 basis points to 25.7% and 10-year yields were up 100 basis points to 12.65%.  If the IMF wants interest rate volatility, they got it.

 

As for Greek catalysts, there are a couple to focus on:

  • The Eurogroup meeting next week on April 24th; and
  • The next payment to the IMF due on May 12th of 747 million euro.

Overtime for the Greek debt market is here! Let’s hope they have a good goaltender in PM Alexis Tsipras.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-1.96%

SPX 2083-2117
VIX 12.34-15.49
USD 98.01-100.24
EUR/USD 1.04-1.08
Oil (WTI) 48.19-56.69


Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Holy Grail - 04.16.15 chart


April 30, 2015

April 30, 2015 - Slide1

 

BULLISH TRENDS

April 30, 2015 - Slide2

April 30, 2015 - Slide3

April 30, 2015 - Slide4

 April 30, 2015 - Slide12

 

 

BEARISH TRENDS

April 30, 2015 - Slide5

April 30, 2015 - Slide6

April 30, 2015 - Slide7

April 30, 2015 - Slide8

April 30, 2015 - Slide9

April 30, 2015 - Slide10


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