KEY POINTS
- 4Q17 = 4Q16: History repeats itself. YELP guided to consensus 2018 revenues despite barely getting to 4Q17 Advertising estimates. But YELP ate it on its EBITDA guide, which suggests it will continue investing heavy into its salesforce for fear of not getting to its revenue guide. On 4Q17, the source of the beat came on Transaction revenue since consensus wasn't factoring in lingering Eat24 revenue. Advertising showed mixed trends with both its new account growth and attrition rate accelerating; the former hitting a new absolute highs, the latter approaching historical peaks. The common denominator was likely YELP allowing its salesforce to sell ad packages without contracted term lengths (2nd bullet). YELP also doubled-down on its RAQ take-rate commentary, which is a new level of insanity as it relates to this mgmt team. There is a reason why neither of its main competitors in the Home & Local space have never even flirted with the idea. See our last earnings note and most recent deck for context.
- AND INTO THE FIRE: YELP's salesforce can now sell ad packages without contracted term lengths. Reason being is that its core salesforce-driven new account growth has been declining on a y/y basis for at least the prior two quarters despite accelerating sales rep headcount growth; rendering its core growth driver obsolete (see deck below). However, YELP has been able to re-couple salesforce growth with gross adds by removing the term commitment. But in doing so, YELP has now created a much bigger issue: there is now less of barrier to churn without the contracted terms lengths. So instead of SMBs being baited into an annual contract that they can't get out of, they can now churn off as soon as the realize Yelp advertising is a cash suck. This means the burden for new account growth to mitigate churn has only intensified, which also means that any sudden surges in gross adds like YELP saw in 4Q17 is an increasingly bearish signal. Put another way, gross adds in any given quarter may now wind up being the following quarter's churn. In short, YELP is accelerating the timing of its inevitable net account declines.
- BUT TOO CLOSE TO A DROWNING MAN: We all heard the apprehension in mgmt's commentary regarding the flexibility around contract terms...this is a Hail Mary. But as it relates to M&A, YELP is effectively financing the premium on its take-out via its cash. YELP reported $845M in cash, which is ~22% of its market cap of yesterday's close. That basically means a suitor could effectively acquire YELP at its market cap since much of any premium required to do so would come back to them via YELP's cash balances. That said, the lower YELP trades, the more it subsidizes its own take-out. Regardless of suitability or likelihood, we can't discount this risk.
DECK & REPLAY: CLICK HERE
Let us know if you have any questions or would like to discuss in more detail.
