KEY POINTS
- 3Q18 = The Gig's Up: Not sure how anyone with any semblance of intellectual honesty can actually refute YELP's attrition issues when its 3,700 sales reps couldn't muster any net account growth in 3Q18. YELP's attrition rate accelerated to a new high as it has each quarter throughout 2018 as it migrated more of its reps over to the non-term model. But what's more concerning is the sequential decline in gross adds, especially since it onboarded 400 new reps this quarter. The problem with the non-term model (outside of amplified churn) is that YELP is essentially training its TAM in short order that YELP advertising just doesn't work. Put another way, YELP is exhausting its TAM at an accelerated rate, and the sequential decline in gross adds suggests its TAM isn't nearly as large as many would have believed.
- Double-Digit Revenue Growth? We wouldn't put much stock in mgmt's 2019 growth expectations. Remember YELP just raised its 2018 revenue guide on the 2Q18 print while simultaneously guiding light for 3Q18, which it missed anyway. So calling for double-digit 2019 revenue growth when its 4Q18 guide suggests its revenue may sequentially decline seems like a leap of faith (we're trying to be polite). The problem with 2019 is that non-term will be fully baked into the comps, and YELP was barely able to comp the comp in 3Q18...on 1Q18 gross adds. We also learned during the call that YELP stopped selling ad packages with contracted term lengths in May, so its account mix heading into 2019 will be heavily skewed toward an untethered account base when YELP just showed us that ramping sales rep isn't the growth driver that it used to be. What's far more likely is declining revenue growth by 2H19, if not sooner.
- Next Stop is Restructuring (or Take Under): We're referring to profitability, which was previously sourced from its contracted term lengths since its customers couldn't churn off at will. There is a growing risk that YELP's reps may not be able to generate enough revenue to cover YELP's total cost structure, let alone their own salaries, as non-term becomes a growing mix of YELP's account base. Put simply, the trade-off for greater salesforce productivity (gross adds) may not be worth the decline in the lifetime value of those accounts. For context, we estimate that nearly all of YELP's EBITDA growth through 1H18 was sourced from the divestiture of Eat24, which produced an EBITDA loss of -$5.6M in 1H17 (note that Eat24 is still in its reported EBITDA comps). We can't repeat the analysis for 3Q18 since we don't have the 3Q17 data, but we doubt much has changed since. As we mentioned earlier, the model will be predominately non-term next year, so YELP could see declining if not negative 2019 EBITDA.
DECK & REPLAY
- YELP | Short Thesis Refresh | 9/5/2018 | CLICK HERE
Please see the above deck/replay below for supporting data and analysis on our YELP short thesis. Let us know if you have any questions or would like to discuss in more detail.
