KEY POINTS
- SELF-SERVE = WATERED-DOWN LOCAL: Self-serve (SS) is naturally a TAM expander since it's effectively a lower-priced product, but that also means it's a choppier/lower-annual ARPU product that can't compensate for the core on a like-for-like basis. So even if SS can mitigate declines in YELP's account base (PAAs), it may not be enough to mitigate declines in its Ad revenue, especially since YELP all but confirmed that its salesforce-driven new account growth started declining in 2Q17 (if not sooner).
- NATIONAL = LOCAL? YELP's ARPU metrics suggest National Advertising has been a long-running part of its business rather than a new venture. More importantly, we suspect most of YELP's National revenue is sourced from Local business owners rather than larger chains with a national or even regional presence. That said, we suspect they're being sold primarily by the same local reps and exhibiting comparable churn to the Local business since they're basically the same client (details below).
SELF-SERVE = WATERED-DOWN LOCAL
Self-serve (SS) is naturally a TAM expander since it's effectively a lower-priced product (month-to-month terms vs. annual contract, so less $ commitment). But that also means SS is a choppier/lower-annual ARPU product, so YELP needs a greater number of SS accts to offset churn in its core salesforce-driven business. For example, if a SS account has an average life of 3 months, YELP needs 4 of them to replace the revenue lost by each salesforce-driven acct that churns off. So even if SS can mitigate declines in YELPs account base (PAAs), it may not be enough to mitigate declines in its Ad revenue. Further, the burden for SS acct growth will only increase from here given that YELP has all but confirmed its core salesforce-driven new account growth started declining in 2Q17 (if not sooner).
The other thing that to consider is what's really driving SS. The sudden spurts that YELP has seen in new account growth suggests SS is being driven more by discrete events (e.g. periodic promotions) rather than some secular trend. For example, the spurt in new account growth that YELP saw in 1Q16 was likely driven by the promo for $100/$200 in free ads that YELP discussed during the 1Q16 call. We suspect YELP offered a more aggressive promo in 2Q17 given how sudden/sharp the inflection was in its new account growth rate in 2Q17, especially considering that "new advertiser starts were…led by self-serve". We have yet to hear a plausible alternative explanation; let us know if you have any thoughts here.
But if that is the case, then the question is how much more free advertising does YELP need to offer to drive new SS account growth (on a y/y basis) into 2018…then into 2019, 2020, etc. Ultimately, we see promos as a capped growth driver since there is only so much free advertising YELP can give away before it starts contraining its ad inventory, which we suspect is already an issue (see deck/replay below)
NATIONAL = LOCAL?
We understand that mgmt has been talking up National more frequently lately, but we don't believe it's a budding venture. YELP's ARPU metrics suggest it has been a longer-running part of its business for as far back as we can calculate the metric. YELP has suggested National represents roughly 20% of its Advertising revenue anytime it has disclosed the percentage dating back to 1Q16. If we hold that percentage constant and back out estimated National revenues from its ARPU calculation, the resulting figure is more inline with its typical $300/month ad package.
But more importantly, we suspect National is just an extension of its Local business, being sold primarily by the same Local reps to the same Local businesses. The composition of US establishments (according to Census) suggests that most multi-location firms do not have a national presence, if even a multi-state presence, since most establishments are owned by enterprises with a single-digit number of locations.
That said, we suspect the typical profile of YELP's "national" customer is a Local business owner with 2 or 3 establishments rather than regional/national business with a multi-state presence. In turn, we suspect they're exhibiting comparable dynamics to the core business since they're effectively the same client, especially since the National segment appears to be growing inline with its Local Advertising segment for at least the past 3 quarters (as far back as mgmt has reported those metrics).
Deck and Replay: CLICK HERE
See the above deck for more detail. Let us know if you have any questions or would like to discuss further.
