KEY POINTS
- LOCAL HAS HIT A WALL: Mgmt essentially confirmed a long-running suspicion of ours; that self-serve is masking a decline in its sales-force driven new LAA growth. Remember how the model works; YELP must continually drive new account growth in excess of its rampant attrition, which we estimate is the overwhelming majority of its accts on an annual basis. So when new acct growth starts declining, the risk of YELP reporting declining net LAA growth in the subsequent quarters increases exponentially. While this would seem like a remote possibility (especially following last quarter's results), YELP has actually come pretty close before.
- WHAT ABOUT SELF-SERVE/NATIONAL: We're not arguing against the runway for self-serve acct growth since the discounted/shorter-term nature of those accts increases YELP's odds of penetrating its claimed businesses. But that also means a choppier/lower ARPU product as evidenced by both the recent estimated all-time highs in its churn rate & its sequential declines in ARPU over the last two quarters. While National sounds promising, it may just be Local by another name. Now that YELP has been disclosing National metrics recently, we can see that National isn't really a new venture but a longer-running part of its business that has been growing largely inline with its core. All said, we don't take issue with either of the products/business lines per se, but we doubt they're not enough to compensate for its deteriorating core, especially over a protracted period.
- THEN THERE'S THE GRUB DEAL: All this deal is really doing is concentrating YELP's business around its core (see Point 1), while serving as a deterrent to an acquisition. There's no telling when (if ever) YELP will be able to replicate its divested Eat24 revenues under the GRUB deal. More importantly, GRUB will essentially control the transactional side of YELP's business for the next 5 years post-close as it relates online food orders, which is probably the bulk of its transactional opportunity since about half of YELP's web traffic comes from the restaurants category (but note that's inclusive of reservations). Further, a YELP acquisition would not relinquish its obligations to GRUB; ultimately inhibiting what a would-be acquirer could do with the asset (see agreement at end of recent 10-Q).
- BACK IN THE CROSS HAIRS: We're looking out to 2018 since the 2017 short opportunity may be played out following the FY guidance cut off the 1Q print. However, we're still struggling to get to 2H Local consensus estimates even after the sudden surge in 2Q account growth, which we suspect was driven by some specific promotional event since self-serve "led" its new account adds. Regarding 2018, we can't see how YELP gets to consensus Advertising estimates without 1) material improvement in its churn rate or 2) any slippage in its new account growth off of elevated 2Q levels from 3Q17 though year-end 2018. Further, we're not sure the street fully grasps that transactional revenues are heading toward declines next year given how much mgmt pumped up the Grubhub restaurant network. That in itself isn't a huge deal following a divestiture, but it becomes much bigger deal if YELP disappoints on its Ad business since the story will be largely confined to that segment moving forward. The question is the entry point, which we're still working through at the moment.
Let us know if you have any questions or would like to discuss in more detail.
