YELP | New Noise, Same Story (2Q16)

08/10/16 09:41AM EDT

KEY POINTS

  1. 2Q16 = ALGO STUNT ↑ SELF-SERVE ↓: 2Q was largely driven by the 1Q algorithm change.  ARPU accelerated again in 2Q16 (up 7% vs. 4% in 1Q16).  While mgmt suggested that there was “no step function kind of improvement” in 2Q ARPU, YELP probably saw an incremental tailwind from the algo change unless it was implemented exactly on Jan 1st of this year.  The other ARPU tailwind is slowing new account growth, which translates to higher % of LAAs paying a full quarter’s worth of revenue.  Interestingly, promo/self-serve accounts may already be losing steam.  Mgmt’s comments on 2Q16 salesforce-driven small-biz account growth of nearly 30% vs. its 2Q16 LAA growth of 32%, suggest YELP ended 2Q with +2K accounts that were driven by a combination of self-serve and multi-location.  Mgmt had suggested that a “meaningful percentage” of its 10K net new LAAs in 1Q16 were self-serve.  Collectively, we suspect that means self-serve growth either sputtered out in 2Q, or YELP already lost the bulk of its new self-serve accts from 1Q; the subtle spike in its 2Q churn suggests it may be the latter.
  2. NEW NOISE, SAME STORY: Mgmt is doing a much better job talking up the story, but when you break it down, not much has changed.  Revenue growth of 30-40% in its longest-tenured markets isn’t a surprise since those are its largest markets (est. 50% of TAM), and YELP is still ramping its salesforce at a ~40% growth rate.  Having ~75% revenue visibility into its following quarter is just a reflection of the portion of customer base that is locked into annual contracts.  Increased revenue retention in 2Q16 is a result of higher ad budget fulfillment (revenue) from the algo stunt (LAA churn increased).  Improving salesforce productivity (on revenue) is backward looking since it’s a reflection of past account wins that history suggests YELP will eventually lose, which is why we measure productivity on the new account side (more below).  All in, mgmt hasn't introduced much to the story outside of noise; most of which we've all already heard.
  3. WHAT'S CHANGED? The COO has decided to retire at age 42, and is being replaced internally.  Mgmt talked up National/Multi-Location Advertising & Transactional, but the core Local Ad business still represents 70% of its revenue.  That story YTD can be boiled down to the the algo change & sell-self serve; the former is just a one year benefit, the latter has already emerged as a headfake of a growth driver.  Meanwhile the core business continues to deteriorate, specifically on new LAA growth that continues to track below its rate of salesforce hiring; despite being partially aided by self-serve.  Remember, that its new LAA growth today is essentially a glimpse into YELP’s 2017 base business since YELP will lose most of the accounts that it entered 2016 with as those contracts lapse.  We remain on the sidelines for now since we do not believe we have a short catalyst until the 4Q16 release at the earliest.  We also suspect mgmt may still be shopping the company.  Meanwhile, we're not entertaining a long since there hasn't been any real fundamental improvement, and the runway on the long trade (i.e. the algo stunt masked as a fundamental inflection) is only 1-2 more quarters at best. 

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

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet

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