Hedgeye Macro Analyst Darius Dale shares the top three things in CEO Keith McCullough's macro notebook this morning.
Takeaway: Declining Salesforce. The fact this is even remotely an issue suggest this story is going to turn much sooner than we initially expected
- 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.
- 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).
- 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 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.
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
- 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).
- 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
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.
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
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Client Talking Points
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.
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.
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.
|FIXED INCOME||30%||INTL CURRENCIES||6%|
Top Long Ideas
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.
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.
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
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.
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.
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....
“Confusion now hath made his masterpiece!”
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.
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:
- On Growth – ‘our forecasts continue to be too high, but it’s all “transitory” because it snows in the winter time’
- On Inflation – ‘our forecasts on 2% inflation were wrong, but that’s transitory too – everything we get wrong is’
- 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%
Oil (WTI) 52.96-59.69
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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