KEY POINTS
- 1Q16 = LOOKED REALLY GOOD: YELP beat consensus 1Q revenue estimates, with Local beating consensus for the first time since 2014. YELP raised 2016 revenue guidance inline with the 1Q beat, and issued 2Q revenue guidance with the high end above consensus. YELP produced accelerating Local Ad Revenue growth of 40% (vs. 35% in 4Q15 ), while producing a surge in 1Q16 new account growth (34% vs. 22% in 4Q15). AdSense didn’t drive the Local Ad beat as we suspected might be the case; mgmt clarified that revenue was recognized in Other Services. Mgmt attributed the upside to better ad "budget fulfillment", which it suggested was due to a combination of better ad targeting and improvement in its auto-bidding algorithm (see link for context).
- BUT DRIVER CONCERNING: In short, better ad budget fulfillment means ARPU, which accelerated despite its declining q/q customer repeat rate, which is a natural ARPU headwind given the lower percentage of accounts paying a full quarter's worth of revenue. Further, the promotions (discounts) around its self-service accounts, which drove a "meaningful percentage" of its net account growth, further exacerbates the ARPU drag. Yet ARPU still accelerated, so net-net the ARPU increase on its repeating customers was a lot higher than its reported metrics would suggest at first glance. Translating back to English, that basically means YELP's customers are now either paying more in monthly advertising expense, or getting less ad clicks on that spend due to YELP's sudden algorithmic changes.
- MORE RED FLAGS: Remember the problem with the model is ROI. Local Ad customers aren't getting enough conversion off their ad spend, leading to YELP's rampant attrition issues (see note below). Algorithmic changes to jack up that CPC only makes the ROI problem worse, and is just another example of YELP's short-sighted attempts to chase consesnus at all costs. Futher, we're left wondering what "meaningful percentage" means when it comes to the self-serve portion of its net account growth. Remember self-serve by definition has nothing to do with YELP's salesforce, which continues to grow at a faster pace than YELP's new account growth (self-serve included). That said, we're wondering what 1Q16 new account growth would have been without these promotional add-ons, how many will remain into 2Q, and at what ARPU. We remain short, but need to monitor consensus estimates to time the next catalyst.
Let us know if you have questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
YELP: Grand Tales of ROI
02/13/15 01:34 PM EST
[click here]
