KEY POINTS
- 2017 OUTLOOK: When we think about what changed last year, it's mostly just better storytelling. What drove YELP's outperformance last year were two growth drivers that will start to fade in 1Q17. The first was the algorithm tailwind, which was a one-time annual ARPU step-up. The second was its push into its self-serve promotions. That said, YELP’s core Local Advertising segment is reverting back to its former LAA growth story. Meanwhile, consensus 2017 Local Advertising estimates are more than a stretch, particularly for 2H17 (detail below). So while the 1Q guide may come in ahead of expectations, the FY guide could go either way. But if mgmt chooses to rebase expectations on this print, it may be the only short catalyst this year, which is why we’re jumping in ahead of the print.
- TAKE-OUT RISK? There’s been more sell-side chatter lately on a YELP take-out. We can all make the argument that most internet companies would be interested in expanding more into the SMB market, but many of those that could actually afford YELP (e.g. GOOG, FB, AMZN) generally prefer to acquire multiple smaller strategic tuck-ins/lottery tickets rather than big-ticket acquisitions; +$3B toward YELP is a considerable opportunity cost in that respect. The only potential suitor that we thought was a somewhat of a risk was PCLN since it has the capital and is large enough to blow up YELP's model without making a dent in its own financials. But we suspect that risk is off the table following PCLN's announced Momondo acquistion for $550M last night, especially with a new CEO in place. Outside of PCLN, we’re struggling to think of another plausible suitor. If you can think of one, please let us know (not joking, we mean it).
2017 OUTLOOK
The story hasn’t really changed outside of better storytelling and two 2016 growth drivers that will fade into 2017. The first was the algorithm tailwind, which was a one-time annual ARPU step-up. The second is the push into its self-serve promotions. YELP will start comping past both in 1Q17. That said, YELP’s core Local Advertising segment, which represents almost 90% of its revenue, is reverting back to its former LAA growth story. In short that means that YELP must drive new account growth in excess of its rampant attrition, which we estimate is the overwhelming majority of its customers on an annual basis.
Consensus is looking for 2017 Local Advertising revenue growth of 27%, which doesn’t seem like a stretch vs. the 41% it averaged through 2016 YTD until you break it down. We estimate that if YELP’s quarterly attrition rates do not improve vs. 2016 YTD average (17.1%), YELP will have to produce accelerating new account growth from 3Q16 levels and sustain that rate throughout 2017 to hit consensus estimates (see scenario analysis below). We doubt that could happen unless YELP ramps salesforce growth well in excess of 2016 levels given that YELP has been in a period of protacted declines in salesforce productivity (new LAAs/rep on a 1Q lag), and that is inclusive of YELP's self-serve LAAs, which by definition has nothing to do with its salesforce. On that note, YELP’s new LAA growth (ex self-serve) may have already started declining on a y/y basis in 2016, and that just becomes more likely moving into 2017.
Note that we’re expecting our thesis to materialize closer to 2H17 than 1H17 since the algorithm tailwind should still carry a waning y/y benefit into 1Q17 (unless it went into effect exactly on 1/1/2016). So the 1Q guide may come in ahead of expectations barring an uptick in attrition. But there’s no telling how mgmt will approach the FY guide. If mgmt chooses to rebase expectations on this print, it may be the only short catalyst this year, which is why we’re jumping in ahead of the print.
TAKE-OUT RISK?
There’s been more sell-side chatter recently on a YELP take-out. We can all make the argument that most internet companies would be interested in expanding more into the SMB market, but those that could actually afford to dish out +$3B on YELP (e.g. GOOG, FB, AMZN) generally prefer to acquire multiple smaller strategic tuck-ins/lottery tickets rather than larger acquisitions, and +$3B toward YELP is a considerable opportunity cost in that respect.
Further, any would-be acquirer would also need to be large enough to blow up YELP’s model without making a dent in their own financials. YELP wouldn’t be an AWAY-type situation where the model was so undermonetized that all EXPE needed to do to unlock its value was to put the screws to AWAY’s sub base. YELP is so overmonetized (hence its attrition) that the only way to fix its model is to introduce lower-tiered/priced ad products in hopes that advertiser ROI improves, which would likely lead to declining revenue growth upon implementation since YELP would be replacing its churning accounts at a lower ARPU (probably why YELP hasn’t done so already).
The only company that may meet that criterion would be PCLN, which had previously shown a willingness to expand into Local when it acquired OPEN. But that didn’t go to plan given the goodwill write-off announced during its last print of $941M, which is nearly 40% what PCLN paid to acquire it. The risk of a PCLN take-out just declined with its announced $550M acquisition of Momondo after the close yesterday. With a new CEO in place, we don't see PCLN making multiple acquisitions this year, especially in the range of the +$3B necessary to take YELP out. Outside of PCLN, we’re struggling to think of another plasuible suitor. If you can think of one, please let us know (not joking, we mean it).
Let us know if you have any questions or would like to discuss in more detail.
