Yelp Inc. Form 10-Q Summary
Business Context and Reporting Period
Yelp connects consumers with local businesses through its website, mobile applications, advertising products and transaction services. This unaudited Form 10-Q covers the three months ended March 31, 2015, with comparisons to the three months ended March 31, 2014. Results include Eat24 from its February 9, 2015 acquisition and include the migrated content and traffic of Restaurant Kritik and Cityvox.
Financial Performance and Liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $118.5 million | $76.4 million | +55% |
| Local advertising revenue | $98.6 million | $65.2 million | +51% |
| Brand advertising revenue | $6.6 million | $7.5 million | -11% |
| Other services revenue | $13.3 million | $3.8 million | +254% |
| Loss from operations | $(4.2) million | $(4.6) million | Improved |
| Net loss | $(1.3) million | $(2.6) million | Improved |
| Basic and diluted loss per share | $(0.02) | $(0.04) | Improved |
| Adjusted EBITDA | $16.3 million | $8.5 million | +92% |
| Non-GAAP net income | $7.9 million | $5.5 million | +43% |
| Cash flow from operations | $25.6 million | $9.3 million | +175% |
Gross margin, calculated from reported revenue and cost of revenue, was approximately 92.7% in Q1 2015 versus 93.4% in Q1 2014. Operating margin improved to approximately negative 3.6% from negative 6.0%; net margin improved to approximately negative 1.1% from negative 3.4%.
Cash and cash equivalents were $172.6 million at March 31, 2015, compared with $247.3 million at December 31, 2014. Short- and long-term marketable securities totaled $175.1 million, and restricted cash was $17.9 million. The company had no bank loans, credit facilities, debt or material capital lease obligations. Total liabilities were $59.2 million and stockholders’ equity was $656.7 million.
Investing cash outflow was $103.7 million, primarily reflecting $71.5 million of cash consideration for Eat24, $36.1 million of marketable-security purchases and $10.9 million of property, equipment and software purchases. Financing cash inflow was $4.0 million, principally from employee stock-option exercises. Cash declined by $74.7 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by local advertising and the addition of Eat24-related services. Local advertising accounts increased to 90,000 from 63,000.
- Other services revenue increased substantially, primarily because of Eat24 and higher partnership, Yelp Deals and remnant advertising revenue.
- Sales and marketing expense rose 40% to $63.3 million, while product development expense rose 71% to $24.0 million, reflecting headcount, facilities and growth investments.
- General and administrative expense increased 51% to $19.9 million, including higher headcount, systems support and bad-debt expense.
- Stock-based compensation increased to $13.7 million from $9.5 million and represented a significant adjustment in the non-GAAP measures.
- Headcount reached 3,121 employees, up 45% year over year. Mobile unique visitors increased to 79.0 million from 61.2 million, while desktop unique visitors declined to 79.5 million from 82.2 million.
- Goodwill increased to $172.2 million from $67.3 million and intangible assets increased to $44.2 million from $5.8 million, principally due to the Eat24 acquisition.
- Foreign-currency translation losses of $7.9 million reduced comprehensive results in Q1 2015, compared with a $0.1 million loss in Q1 2014.
Outlook, Commentary, Risks and Unusual Items
Management stated that it intends to continue investing heavily in sales and marketing, product development, technology infrastructure, international expansion and the integration of Eat24. No numerical revenue, earnings or adjusted EBITDA guidance is provided in the filing. Management expects sales and marketing and product development expenses to increase for the foreseeable future.
Eat24 was acquired for approximately $134.2 million of total consideration, comprising $75.0 million in cash and approximately $59.2 million of Yelp Class A stock. Eat24 contributed $5.3 million of revenue and $0.4 million of net loss from the acquisition date through March 31, 2015. The purchase-price allocation remained preliminary, creating potential for measurement-period adjustments.
The company stated that existing cash, investments and expected operating cash flow should fund working-capital needs and anticipated capital expenditures for at least the next 12 months, although this assessment depends on assumptions that may prove incorrect. It may seek additional equity or debt financing for growth, acquisitions or infrastructure.
- Key operating risks include dependence on Google and other search engines for traffic, declining desktop usage, competition from large technology and advertising platforms, and the challenge of monetizing mobile usage.
- Growth depends on attracting users, maintaining review quality and expanding advertisers, particularly small and medium-sized businesses with limited or variable advertising budgets.
- Eat24 integration, potential food-ordering sales-tax obligations and the acquisition’s preliminary accounting are material areas to monitor.
- Legal matters include a securities class action that was dismissed on April 21, 2015, subject to plaintiffs’ right to amend, and a putative wage-and-hour class action filed by former Eat24 employees on April 23, 2015. Management does not currently expect existing proceedings to have a material adverse effect.
- Operating lease commitments totaled $298.8 million, including $29.7 million due within one year. The company reported no off-balance-sheet arrangements.
- Disclosure controls were deemed effective at March 31, 2015, while integration of Eat24 into the company’s internal-control environment remained ongoing.
Investor Verification Checklist
- Verify the sustainability of 55% revenue growth and the contribution and economics of Eat24 and other services.
- Assess whether continued sales, marketing, product and infrastructure spending can produce durable operating profitability.
- Reconcile GAAP losses with adjusted EBITDA and non-GAAP net income, particularly the effects of stock-based compensation and amortization.
- Monitor cash usage after the Eat24 acquisition, capital expenditures, marketable-security activity and available liquidity.
- Evaluate goodwill and acquired-intangible impairment exposure and the final Eat24 purchase-price allocation.
- Track mobile engagement, desktop traffic, advertiser-account growth and dependence on Google search rankings.
- Review potential Eat24 sales-tax liabilities, employment litigation and the status of the dismissed securities litigation.
- Consider foreign-exchange exposure, international expansion costs, dual-class voting control and the company’s substantial future lease commitments.