KEY POINTS
- 3Q17 = SMOKE & MIRRORS: The 3Q17 print was a mixed bag. New PAA growth remained relatively elevated and outpaced its salesforce growth again (albeit at a smaller delta), but self-serve (SS) is skewing the trend, and likely masking y/y declines in new PAA growth its core salesforce-driven business. Mgmt touted improvement in account churn, which is true, but that's coming off of what we estimate to be all-time highs in attrition rates over the past two quarters; we suspect YELP's attrition baseline moving forward has stepped up following the algo stunt from last year (see deck for detail). Further, YELP's "revenue retention" comments are merely sound bites until mgmt explicitly defines what that actually means. Further, it appears that YELP did bury a guide-down in its core business via the Eat24 sale; we estimate that only ~$14M of the $18.5M 2017 (4Q17) revenue cut was attributable to Eat24.
- ENOUGH WITH REQUEST-A-QUOTE ALREADY: We're not sure how many times the sell-side can ask the same question and expect a different answer. Request-A-Quote (RAQ) is being used solely as Ad inventory within Home & Local (H&L) services; the street is hoping that is could evolve into more of a transactional service, which we doubt can work in H&L. Let's say that the $3B in estimated GMV from RAQ is accurate. If we assume a 10%-20% take rate, then RAQ is roughly a $450M opportunity at the mid-point, which sounds great vs. the $240M run-rate in H&L Ad revenue (both mgmt metrics). Now, we have to consider how much of that $3B is actually being closed, then how many of those businesses would actually remit payment back to YELP considering that 1) H&L services are inherently cash businesses (vs. credit cards) and 2) YELP would have no recourse to collect on those completed transactions. All said, we doubt YELP could extend RAQ beyond the Ad business without cannibalizing it. For context, YELP's typical monthly ad package runs around $300/month; HomeAdvisor charges an annual sub fee of ~$350 for comparable leads.
- KICKING THE CAN…AGAIN: Mgmt didn't do itself any favors the way it handled its guide since 2018 consensus expectations haven't come in all that much. Consensus 2018 Total revenue estimates are down by only ~$53M vs. Transactional revenue estimates of $87M prior to the print. Roughly 95% of Transaction revenues came from Eat24 in 1H17, so there is an implicit assumption for material revenue contribution from the Grubhub partnership, even though all YELP is getting is a take of its prior take on what we estimate is less 25% of Eat24's order volume. More importantly, it doesn't appear that consensus has brought down their 2018 Ad revenue estimates, which previously only allowed for limited slippage in new account growth while requiring sustainable improvement in churn rate throughout 2018. In short, YELP is walking into a comparable setup into 2018 as it did into 2017.
YELP | In the Crosshairs (Deck & Replay)
9/22/2017
[click here]
See the above deck for supporting detail/analysis. Let us know if you have any questions or would like to discuss further.
