Yelp Inc. 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
Yelp connects consumers with local businesses through user reviews, websites, mobile applications, advertising, and transaction-related services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the same periods in 2013.
- Approximately 139.4 million average monthly website unique visitors and 73.4 million mobile unique visitors during the quarter.
- Approximately 66.6 million cumulative reviews and 86,000 active local business accounts at September 30, 2014.
- Operations covered 61 U.S. markets and 66 international markets; international revenue represented approximately 3% of nine-month revenue.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $102.5 million | $61.2 million | $267.6 million | $162.3 million |
| Revenue growth | 67% | — | 65% | — |
| Income from operations | $4.5 million | $(1.8) million | $3.1 million | $(6.9) million |
| Operating margin | 4.4% | (2.9)% | 1.1% | (4.3)% |
| Net income attributable to common stockholders | $3.6 million | $(2.3) million | $3.7 million | $(8.0) million |
| Diluted EPS | $0.05 | $(0.04) | $0.05 | $(0.12) |
| Adjusted EBITDA | $20.1 million | $8.1 million | $45.8 million | $19.0 million |
| Adjusted EBITDA margin | 19.6% | 13.2% | 17.1% | 11.7% |
Revenue was driven primarily by local advertising. Q3 local advertising revenue increased 66% to $85.1 million, brand advertising increased 35% to $9.3 million, and other services increased 158% to $8.0 million. Local advertising represented 83% of quarterly revenue.
- Nine-month operating cash flow was $39.0 million, compared with $12.1 million in the prior-year period.
- Investing cash flow was $(159.1) million, primarily reflecting $148.4 million of marketable-security purchases, $12.7 million of property and equipment purchases, $8.0 million of capitalized website and software development costs, and a $9.8 million increase in restricted cash.
- Financing cash flow was $21.3 million, primarily from employee stock-option exercises and the employee stock purchase plan.
- Cash and cash equivalents were $290.6 million at September 30, 2014, supplemented by $127.1 million of marketable securities and $13.0 million of restricted cash.
- The company reported no outstanding bank loans or credit facilities and no material capital lease obligations. Total liabilities were $38.8 million, including $31.8 million of current liabilities.
- Operating lease commitments totaled $237.2 million, including $20.9 million due within one year.
Material Changes Versus the Prior Comparable Period
- Yelp moved from operating and net losses in the prior-year periods to operating and net profitability in 2014.
- Revenue growth substantially exceeded expense growth, improving the quarterly operating margin from negative 2.9% to positive 4.4%.
- Sales and marketing expense increased 60% in Q3 and 58% for the nine-month period, reflecting expanded sales headcount, commissions, facilities, and marketing investment.
- Product development expense increased 55% in Q3 and 74% for the nine-month period, while general and administrative expense increased 44% and 41%, respectively.
- Stock-based compensation increased to $10.9 million in Q3 and $30.5 million for the nine-month period, materially contributing to the difference between GAAP earnings and adjusted EBITDA.
- Cash declined by $99.2 million from year-end 2013, principally because the company shifted substantial cash into marketable securities and increased restricted cash.
- Restructuring and integration expense was zero in 2014 compared with $0.7 million for the first nine months of 2013; the Qype restructuring was completed in 2013.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a specific numerical revenue or earnings forecast. Management expects continued heavy investment in sales and marketing, product development, technology infrastructure, domestic and international expansion, and the integration of SeatMe. Management stated that existing cash and expected operating cash flow should fund working capital and anticipated capital expenditures for at least the next 12 months, while cautioning that additional financing could be needed for acquisitions, new products, infrastructure, or other business initiatives.
- Management expects sales and marketing to remain the largest expense for the foreseeable future and expects product development, depreciation, and infrastructure costs to increase.
- Key operating risks include reliance on Google and other search engines for traffic, intensifying competition from major technology and advertising platforms, uncertain mobile monetization, advertiser retention, and the ability to expand internationally.
- The company faces risks related to review authenticity, platform reputation, privacy and data protection, cybersecurity, service interruptions, intellectual property claims, regulatory changes, and third-party partnerships.
- Two putative securities class actions were filed in August 2014 alleging materially false or misleading statements concerning the company’s business and operations. Damages sought were unspecified.
- A previously dismissed business-review manipulation class action was affirmed on appeal by the Ninth Circuit in September 2014; a rehearing petition remained pending, and the potential loss could not be estimated.
- The company recorded a $2.0 million gross balance of unrecognized tax benefits at September 30, 2014.
- Foreign-currency translation reduced comprehensive income by $4.4 million in Q3 and $4.9 million for the nine-month period.
- The company has a dual-class structure; Class B shares carry ten votes per share, and Class B holders collectively controlled approximately 62% of voting power at September 30, 2014.
Important Facts for Investors to Verify
- Whether rapid revenue growth can continue as the company expands into smaller domestic markets and international markets.
- Whether sales and marketing and product-development spending can scale without reversing GAAP profitability.
- The sustainability of operating cash flow after excluding substantial non-cash stock compensation of $30.5 million for the first nine months.
- The effect of search-engine algorithm changes, particularly Google traffic exposure, on user growth and advertising demand.
- The status and potential financial impact of the securities litigation and the pending review-manipulation appeal.
- Future dilution from outstanding options, restricted stock, employee plans, and the company’s dual-class voting structure.
- Execution of mobile monetization, Yelp Platform partnerships, Yelp Reservations, and international expansion initiatives.