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Takeaway: Mgmt finally fell on its sword and cut guidance (among other things). This is just the beginning, and there is no fix w/o a hard landing

KEY POINTS

  1. 2Q15 PRINT = DISASTER: YELP missed 2Q Local Advertising estimates, guided light for 3Q, and cut 2015 guidance.  Interestingly, management decided to shutter its Brand Advertising segment, which is a questionable move given that this is segment is likely one of its only profit centers (even if it is declining)…maybe management hoped that by burning the cornfield, the street wouldn’t realize that the chickens (LAAs) are flying the coop. 
  2. JUST THE BEGINNING If YELP can’t grow its salesforce to plan, it’s basically game over.  YELP’s business model is predicated on driving new account growth in excess of its rampant attrition, which it achieves through aggressively ramping its salesforce every quarter.  YELP cut 2015 salesforce growth target after failing to grow to plan again in 2Q15.  The sell-side is going to blame the “unicorns”, but the more likely culprit is YELP’s TAM; it can’t support its model, which means it can't feed its salesforce either.
  3. NO FIX WITHOUT HARD LANDING: YELP’s model is broken, and mgmt can’t fix it unless it is willing to take a hard landing (down revenues).  YELP’s attrition can be attributed to poor ROI (note below); the easiest way to fix that is by introducing lower-tiered ad packages.  But the risk there is that it would need that many more brand new customers to offset its attrition (e.g. at half the price, it needs double new accounts).  In short, this is a secular short until mgmt is willing to go that route.      

2Q15 PRINT = DISASTER

YELP reported inline 2Q15 revenues, with Local Advertising falling short of estimates.  Account churn remained elevated at 17.1% of LAAs, with new account growth once struggling to keep pace with the rate that YELP is hiring sales reps.

YELP also issued light 3Q15 revenue guidance (off by $10M at the high end), and cut its 2015 guidance by ~$30M, which is naturally concentrated in 2H15 given that 2Q15 revenues were in line with guidance.  For context, YELP’s new guidance suggests 2H15 revenue growth of 39% vs. 53% previously.  YELP attributed its lower outlook to slower than expected salesforce increases and the shuttering of its Brand Advertising segment.

Management also decided to do a mid-year segment reorganization, parsing out its Other Services segment Transactions and Other Revenue (partnerships).  The big concern is that YELP is shuttering its Brand Advertising segment, which is a very questionable move given that this is segment is likely one of its only profit centers.  The revenue/sales rep is substantially higher than its Local segment; it doesn’t make sense to shutter the operation, even it is declining .  Maybe management hoped that by burning the cornfield, the street wouldn’t realize the chickens (LAAs) are flying the coop.

YELP: Seppuku (2Q15) - YELP   Acct vs. Sales 2Q15

YELP: Seppuku (2Q15) - YELP   LAA Attrition

 

JUST THE BEGINNING 

If YELP can’t grow its salesforce to plan, it’s basically game over.  YELP’s business model is predicated on driving new account growth in excess of its rampant attrition, which is nearly all of its accounts annually.  The only reason why the street hasn’t noticed its churn is because YELP hires sales rep at an accelerated rate every quarter. 

YELP just took down its 2015 salesforce growth target after failing to grow to plan again in 2Q15.  The sell-side is going to blame the “unicorns”, but the more likely culprit is YELP’s TAM; it's not large enough to support its model, which means it can't feed salesforce either.

As a reminder, whatever YELP reports in LAAs is comprised primarily of accounts that it signed within the LTM, and the more accounts YELP enters any period with, the more accounts it will lose, and the more brand new accounts it needs to offset that churn.  With new account growth slowing into the sub-30% range, and increasing difficulty onboarding reps, YELP’s attrition will exert increasing pressure across its model moving forward.  

YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]

YELP: Seppuku (2Q15) - YELP   Current vs. TTM new

YELP: Seppuku (2Q15) - YELP   Prior vs. TTM lost 

NO FIX WITHOUT HARD LANDING

YELP’s model is broken, and mgmt can’t fix it unless it is willing to take a hard landing (down revenues).  YELP’s attrition issues are likely due to poor ROI (note below); the easiest way to fix that is by introducing lower-tiered ad packages. 

But there is a reason why it hasn’t done so already (they really haven’t, the $50 package is for the enhanced profile).  If YELP introduced a lower tier, it would need that many more brand new customers to offset its attrition.  For example, a $150 package would require double the amount of brand new account to offset churn from existing customers today.    

In short, this is a secular short until mgmt is willing to right the ship.  But from what we've seen mgmt, that won't be happening anytime soon.

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

Hesham Shaaban, CFA

@HedgeyeInternet

YELP: Grand Tales of ROI

02/13/15 01:34 PM EST

[click here]