- CORE WEAKNESS: 2H15 Local Ad revenue estimates will be a stretch unless YELP can curb attrition rates below 1H15 levels. We’re expecting YELP to miss 3Q Local Ad Revenues, and guide light for 4Q15 revenue; that is unless it can sneak in some upside from its ancillary businesses. However, it appears that consensus is already assuming a 2H15 acceleration in Eat24 revenue growth, and is also modeling sequential improvement in Other revenues as well. It’s possible that YELP could sneak in some upside in Display revenues after guiding to $10M in 2H revenue (-56% y/y decline vs. -9% in 1H). Granted, mgmt is shuttering Display by year-end; but the question is whether we’ll see that impact so suddenly in 2H, especially in a seasonally stronger 4Q.
- 2016 IS AROUND THE CORNER: If YELP does guide high for 4Q, we really won’t know why until it actually reports 4Q results since YELP doesn’t typically guide by segment. That means consensus will likely raise the bar for 2016 estimates across the board (including Local), which is already a tall order. Remember that YELP’s core business is Local Advertising, and that will become a greater percentage of revenues if YELP is indeed shuttering the Display segment by 2016. That said, the only way YELP can hit Local Ad Revenue estimates through 2016 is if it can sustain its 2Q15 new account growth rate every quarter from 3Q15 through 4Q16, and that will also require historically low attrition (see slide below from our Best Idea update call).
- WHAT WE’RE KEYING IN ON: Its Salesforce, primarily its size, secondarily its productivity. Both speak to the size of YELP’s TAM and the viability of its model. Remember YELP's model is predicated on hiring enough new sales reps to drive new account growth in excess of its rampant attrition (the majority of its customers). If YELP can’t consistently grow its salesforce to plan (net of churn), then its model is unraveling, and it's basically game over (see note below). Note that YELP already cut it sales rep growth target for 2015 from 40% to 30% on its last call, but if it can't deliver on that in 2H15, 2016 will be that much more challenging.
Let us know if you have any questions, or would like to discuss further.