Takeaway: We're now less concerned about a takeout, so we'll looking to put the short back on, but probably after the GRUB deal closes

KEY POINTS

  1. 2Q17 = ODD PRINT: The obvious highlight from 2Q was the big step-up in net account growth.  However, we estimate that YELP hit another all-time high in churn, both in absolute terms and attrition rate, despite its cryptic revenue retention comments to the contrary.  Conversely, YELP produced a particularly sharp surge in new account growth, well in excess of anything it had produced since 1Q16.  Mgmt suggested that new advertiser starts were "led by self-serve", which basically means that both salesforce productivity and related new account growth declined on a y/y basis.  Still, self-serve acct growth was very impressive, but to the point where we suspect that there was some specific promotional event around that growth given the sudden inexplicable surge in gross adds this quarter.  Long story short, we doubt this is the beginning on any sustainable trend; we've seen these headfakes in new acct growth before; the secular trend has only gotten worse. 
  2. THANK YOU: This GRUB deal is just dumb.  We get all the boilerplate reasons why this deal is a supposedly a win-win, but YELP gave up a lot here; so much so that we now have air cover to revisit the short again.  On the partnership specifically, YELP is basically trading away its traffic for a larger restaurant network, which YELP could have replicated on its own (ex delivery), at least a lot easier than GRUB could have acquired the traffic that YELP will be providing them.  The corresponding sale of Eat24 to GRUB is probably worse since there is no guarantee that YELP will be able to replicate the associated revenues in transaction fees from GRUB since YELP will likely need a material increase in transaction volume to offset the lower take-rate, which is actually a fixed fee.  In short, all YELP is really doing is empowering a competitor to strengthen its foothold in the one area (transactional) that could have helped it diversify away from its Local Advertising business. That said, we suspect the odds of a takeout have declined precipitously for that reason.  We'll be looking to revisit the short after the deal closes and is incorporated into guidance/estimates.  

YELP | Thank You (2Q17) - YELP   New LAA Scenario 2Q17

YELP | Thank You (2Q17) - YELP   Attrition 2Q17 v2

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

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet