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The Call @ Hedgeye | March 28, 2024

Takeaway: Underlying detail points to core deterioration against lofty 2017 estimates. The 2016 YELP recovery trade is likely over.

KEY POINTS

  1. 3Q16 = GOOD PRINT: YELP beat 3Q estimates and issued 4Q guidance largely in line with the street.  Local Advertising produced most of the upside, which was driven by ARPU given inline Local Advertising Accounts (LAAs).  ARPU accelerated again (up 9% vs. 7% in 2Q); the bulk of that growth was likely driven by its algorithim change, while the acceleration was likely due to its higher customer repeat rate (i.e. higher % of LAAs paying a full quarter's worth of revenue).  Transactional revenue continued to growth at a +30% rate in the second quarter after lapping the Eat24 acquisition, and YELP also returned to y/y revenue growth in its Other segment.  All in a good print at face value.
  2. SCARY OMEN: We’re referring to new account growth, which decelerated alongside slowing sales rep growth.  Remember that self-serve LAAs are inflating this metric, so the actual salesforce-driven new LAA metric may be considerably worse.  For context, if self-serve represented any more than 15% of YELP’s new account growth this quarter, then we estimate that its salesforce-driven new LAA account growth actually declined on a y/y basis, which is a scary omen considering how YELP’s model works.  Remember that in order for YELP to drive Local revenue growth, it must continually generate new account growth in excess of its rampant attrition, which we estimate is the overwhelming majority of its customers on an annual basis.  That said, new LAA growth may be heading toward decline as early as 1Q17 once YELP laps its self-serve promo launch, which means its core Local Ad revenues could be heading toward decline starting in 2018.
  3. THOUGHTS INTO 2017: Remember, YELP’s two main 2016 growth drivers will fade into 2017.  The algorithm tailwind was a one-time ARPU step-up that YELP will comp past in 1Q17, which is also when YELP will start lapping the launch of its self-serve promotions.  That said, YELP’s core Local Advertising segment, which represents almost 90% of its revenue, is reverting back to its former LAA growth story.  Consensus is still looking for 25% y/y growth in Local Advertising revenue in 2017, which is a stretch considering the fading 2016 tailwinds mentioned above and its declining salesforce productivity (new LAAs/rep on a 1Q lag) dating back to 4Q15.  Note that any further deceleration in salesforce growth could accelerate the timing of declining new LAA growth, which would exacerbate YELP's 2017 growth headwinds.  It’s probably safe to say that the 2016 YELP recovery trade is over.  We will be looking for an entry point on the short side, likely ahead of the next print.

YELP | Scary Omen (3Q16) - YELP   New LAA Scenario

YELP | Scary Omen (3Q16) - YELP   TTM New LAA 3Q16

YELP | Scary Omen (3Q16) - YELP   Cumulative Attrition 3Q16

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

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet