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Takeaway: We're expecting mgmt to fall on its sword, but the buy side may be too. The latter is a mild risk, but not enough to consider covering.

KEY POINTS

  1. 2Q15 PRINT = DISASTER: We suspect the reason why YELP left 2015 guidance in tact after missing 1Q revenues and guiding light for 2Q15 was because it was shopping itself, and it's much easier to do so when chalking up its recent weakness as temporary.  We suspect that will come back to bite them on this print.  YELP will need a massive acceleration in new account growth and record low attrition to hit consensus Local Advertising estimates, particularly in 2H15.  We're expecting YELP to miss 2Q Local Advertising estimates, guide light for 3Q15, and cut 2015 guidance. 
  2. BUT AN EXPECTED DISASTER? We're getting minimal buy-side pushback lately, and the sell-side isn't stepping up to endorse the name pre-print as they usually do.  The stock is down an additional 10% since the news broke that YELP is supposedly not shopping itself anymore (after selling off ~10% that day).  YELP is now lower than it was post 1Q15 release, and short interest is now back to pre-takeout rumor levels.  We're not expecting a squeeze on anything short of a beat and raise, but need to flag the risk regardless.  
  3. THIS ISN'T TEMPORARY: We’re expecting mgmt to use lingering issues with its 1Q15 salesforce territory redistribution as the scapegoat. The issue is the model itself, which is predicated on hiring enough new sales reps to drive new account growth in excess of its rampant attrition.  YELP's TAM isn't large enough to support its model, which has manifested into a persistent decline in salesforce productivity, and is now devolving into a mounting exodus of its sales reps (see note below).  That latter means that the model is unraveling, and the story is going to get much uglier than we initially expected.  

Let us know if you have questions, or would like to discuss further.

Hesham Shaaban, CFA

@HedgeyeInternet

YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]