Yelp Inc. 2013 Q2 Form 10-Q Summary
Business Context and Reporting Period
Yelp connects consumers with local businesses through user reviews, its website and mobile applications, and monetizes primarily through local and brand advertising. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Yelp operated in 56 U.S. and 50 international markets, with Qype markets in Ireland, Italy and Spain migrated to the Yelp platform.
- Approximately 42.5 million cumulative reviews.
- Approximately 108.1 million average monthly website visitors and 10.4 million unique mobile devices using the mobile application during the quarter.
- 51,000 active local business accounts and 1.22 million claimed local business locations.
- International revenue represented approximately 5% of first-half 2013 revenue.
Financial Performance and Key Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Net revenue | $55.0 million | $32.7 million | $101.2 million | $60.0 million |
| Revenue growth | 69% | — | 68% | — |
| Loss from operations | $(0.6) million | $(1.9) million | $(5.1) million | $(11.7) million |
| Net loss | $(0.9) million | $(2.0) million | $(5.7) million | $(11.8) million |
| Net loss per diluted share | $(0.01) | $(0.03) | $(0.09) | $(0.26) |
| Adjusted EBITDA | $7.8 million | $1.6 million | $11.0 million | $0.6 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $5.1 million | $(2.4) million |
- Q2 gross margin was approximately 93%; operating margin was approximately negative 1% and net margin approximately negative 2%. First-half gross margin was approximately 93%, operating margin approximately negative 5%, and net margin approximately negative 6%.
- Local advertising revenue increased 77% in Q2 and 79% year to date, driven primarily by more customers purchasing local advertising plans as the sales force expanded.
- Brand advertising revenue increased 24% in Q2 and 22% year to date. Other services revenue increased 87% in Q2 and 55% year to date.
- Sales and marketing remained the largest expense at $30.8 million in Q2, up 51%, while product development increased 84% to $8.0 million.
- Stock-based compensation was $5.7 million in Q2 and $10.9 million year to date, a significant contributor to the difference between GAAP net loss and adjusted EBITDA.
Liquidity, Cash Flow, Debt and Capital Resources
- Cash and cash equivalents were $96.8 million at June 30, 2013, compared with $95.1 million at December 31, 2012. Money market funds comprised $83.3 million of cash and cash equivalents.
- Operating cash flow was $5.1 million in the first six months of 2013, compared with cash used in operations of $2.4 million in the prior-year period.
- Investing cash flow was $(7.7) million, including $5.0 million for property, equipment and software, $2.1 million for capitalized website and software development, and $1.8 million added to restricted cash.
- Financing cash flow was $4.4 million, primarily from common-stock issuance related to stock-option exercises.
- Yelp reported no outstanding bank loans, credit facilities, debt or material capital lease obligations. It stated that existing cash and expected operating cash flow should fund working-capital needs and anticipated capital expenditures for at least the next 12 months, subject to assumptions and potential additional funding needs.
- Operating lease obligations totaled $90.8 million, including $11.2 million due within one year. Restricted cash supporting office lease letters of credit was $8.1 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated substantially, with first-half revenue rising 68% from the prior year.
- Operating and net losses narrowed materially despite continued investment in sales, marketing, product development and infrastructure.
- Adjusted EBITDA improved to $7.8 million in Q2 from $1.6 million and to $11.0 million year to date from $0.6 million.
- Operating cash flow turned positive, although capital expenditures and software development spending increased.
- Qype-related restructuring and integration costs totaled $0.7 million in the first half; the restructuring plan was substantially completed, with only immaterial additional expense expected.
- General and administrative expense increased 70% in Q2, partly due to headcount, stock compensation, consulting and bad-debt expense. Year-to-date growth was moderated by the absence of significant IPO-related stock-compensation acceleration recorded in 2012.
- Shares outstanding increased, with 39.2 million Class A and 25.9 million Class B shares outstanding at June 30, 2013. Class B shares carry ten votes per share and represented approximately 87% of voting power.
Outlook, Management Commentary, Risks and Unusual Items
- Management expected continued heavy investment in domestic and international sales and marketing, product development, technology infrastructure, Qype integration and new-market expansion. Sales and marketing was expected to remain the largest expense for the foreseeable future.
- Management expected cost of revenue to increase in absolute dollars but remain relatively stable as a percentage of revenue, while depreciation and amortization and product-development expense were expected to increase.
- On July 24, 2013, Yelp acquired SeatMe for approximately $2.2 million in cash and 260,901 Class A shares. Management expected minimal near-term revenue impact and approximately $0.6 million of additional operating expense in Q3 2013.
- Key business risks include dependence on advertising revenue and small-business advertisers, reliance on Google and other search engines for traffic, uncertain mobile monetization, intense competition, international expansion and acquisition integration, service disruptions and cybersecurity, privacy and regulatory obligations, foreign-exchange volatility, and continuing operating losses.
- Yelp remained exposed to legal contingencies, including an appeal of dismissed claims alleging manipulation of reviews to induce advertising purchases and a Qype directory-data fee dispute with Deutsche Telekom. The filing states that the potential loss from the review-related appeal could not be reasonably estimated.
- The company had an accumulated deficit of approximately $66.1 million and did not provide a formal profitability target or numerical full-year revenue guidance in the filing.
- Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level as of June 30, 2013.
Important Facts for Investors to Verify
- Whether high revenue growth continues as the company expands into smaller domestic markets and international markets.
- Whether revenue growth converts into sustainable GAAP profitability after stock-based compensation, infrastructure spending and sales-force expansion.
- Trends in active local business accounts, advertiser retention, customer acquisition costs and local advertising revenue.
- Mobile engagement and the effectiveness of mobile advertising monetization.
- Integration progress and financial impact from Qype and SeatMe, including restructuring costs and potential impairment of goodwill or acquired intangibles.
- Cash burn, capital expenditures, lease commitments and whether additional equity or debt financing becomes necessary.
- Developments in the pending legal matters, particularly the review-manipulation appeal and the Qype/Deutsche Telekom dispute.
- The impact of Google search-ranking changes, competition, privacy regulation, cybersecurity events and foreign-currency movements.