KEY TAKEAWAYS
- New highs in both gross/net adds...and churn: Heading into the print, we were concerned about a spike in net adds given our expectation for a surge in gross adds from the initial rollout of selling non-term ad packages, while intra-quarter churn wouldn't be recognized until the following quarter given the way YELP reports its accounts (received revenue vs. ending accounts). YELP did report both record gross and net adds, but churn also hit a new high, which we weren't expecting. The disconnect was the timing of when its salesforce started selling these ad packages. What we learned off the call was that ~40% of its reps were selling these packages in 4Q17 (vs. ~75% by the end of 1Q17), which helps explain the surge in 4Q gross adds and the subsequent spike in churn in 1Q.
- The game is moving much faster: The game hasn't changed. YELP still needs to drive gross adds in excess of its churn, which is the overwhelming majority of its accounts on an annual basis. However, because it is now selling, if not emphasizing, these non-term contracts, the window to do so is a lot tighter. Previously when YELP was primarily selling annual contracts, it had roughly 4 quarters to accumulate enough new accounts offset the inevitable churn of its year-ago gross adds...for no other reason than those accounts couldn't cancel. Now those accounts can hop off within a matter of a month, so instead of having to replace those accounts over the course of a year, it has to do so in as short as a quarter. So while some will look to 1Q gross/net adds and extrapolate that into improving prospects, it's really just a higher hurdle for 2Q...and so an and so forth until YELP reports declining net adds (provided it doesn't pull the metric first).
- Sifting through the other noise: YELP claims to have "significantly reduced account cancellations since early 2017", which means nothing since churn and flat out cancelling your account are two different things (e.g. not advertising vs. deleting your account). Improving "revenue retention" means nothing until mgmt defines what that actually means. A $23M annual run rate for Request-a-Quote is simply the amount of ad inventory that is at risk if YELP actually pursues a take-rate model. Self-serve was launched in early 2016 and remains its fastest growing channel, but the associated revenues are likely in the low-teens since the collective ad revenue b/w multi-location and self-serve is nearly a 1/3 of total advertising revenue, yet the former has historically been reported at ~20% of ad revenue.
We still expect YELP to miss and/or cut the guide in 2H18. However the range of scenarios has expanded considerably given the historical highs in both 1Q18 gross adds and churn. We're still in the process of stress-testing our model, and plan to provide an update shortly. In the interim, let us know if you have any questions, or would like to discuss in more detail.
