Yelp Inc. 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 the platform primarily through local and brand advertising. This unaudited filing covers the quarter and six months ended June 30, 2014, with comparisons to the corresponding 2013 periods.
- Approximately 61.3 million cumulative reviews and 1.75 million claimed local business locations at June 30, 2014.
- Average monthly website unique visitors were 137.8 million, up from 108.1 million; mobile unique visitors were 67.9 million, up from 45.1 million.
- Active local business accounts increased to approximately 80,000 from 51,000.
- Yelp operated in 61 U.S. markets and 63 international markets; international revenue represented approximately 3% of second-quarter revenue.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Net revenue | $88.8 million | $55.0 million | $165.2 million | $101.2 million |
| Net income (loss) | $2.7 million | $(0.9) million | $0.1 million | $(5.7) million |
| Income (loss) from operations | $3.1 million | $(0.6) million | $(1.5) million | $(5.1) million |
| Adjusted EBITDA | $17.2 million | $7.8 million | $25.8 million | $11.0 million |
| Cash flow from operations | Not separately provided | Not separately provided | $20.0 million | $5.1 million |
- Second-quarter revenue increased 61%; six-month revenue increased 63%.
- Approximate second-quarter operating margin was 3.5%, compared with negative 1.1% in 2013. Six-month operating margin was approximately negative 0.9%, compared with negative 5.1%.
- Approximate second-quarter net margin was 3.1%, compared with negative 1.6%; six-month net margin was approximately 0.1%, compared with negative 5.6%.
- Local advertising generated $75.7 million in the quarter, up 69%; brand advertising generated $9.1 million, up 28%; other services generated $4.0 million, up 27%.
- Sales and marketing expense increased 55% to $47.8 million, product development increased 84% to $14.7 million, and general and administrative expense increased 31% to $13.3 million.
- Stock-based compensation was $10.1 million in the quarter and $19.5 million for the six months, compared with $5.7 million and $10.9 million, respectively, in 2013.
- Cash and cash equivalents were $290.4 million at June 30, 2014, supplemented by $122.1 million of marketable securities and $3.7 million of restricted cash.
- Cash declined from $389.8 million at December 31, 2013, principally because $122.2 million was invested in marketable securities. The company had no bank loans, credit facilities, debt, or material capital lease obligations.
- Six-month capital expenditures were $7.2 million, and capitalized website and internally developed software costs were $4.3 million.
- Total liabilities were $31.9 million and stockholders’ equity was $521.2 million at June 30, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by expansion of the local advertising customer base following sales-force expansion.
- Profitability improved substantially, with second-quarter operating and net income replacing losses in the prior-year quarter. The six-month period reached near break-even net income.
- Adjusted EBITDA more than doubled year over year for both the quarter and six months.
- Operating cash flow increased by $14.9 million to $20.0 million for the six months, despite increased investment in infrastructure and software.
- Expense growth remained significant, particularly in sales and marketing and product development, reflecting headcount expansion and continued market investment.
- The six-month tax benefit of $1.6 million included an approximately $2.0 million benefit from releasing a valuation allowance on foreign net operating losses. U.S. loss tax benefits were not recognized because management concluded they were unlikely to be realized by year-end.
- Restructuring and integration expense fell to zero from $0.7 million in the prior-year six-month period; the Qype restructuring was completed in 2013.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide clear numerical revenue or earnings guidance.
- Management expects continued heavy investment in domestic and international sales and marketing, product development, technology infrastructure, new products, and SeatMe integration. Sales and marketing is expected to remain the largest expense for the foreseeable future.
- Yelp launched Yelp Reservations and direct consumer-to-business messaging during the first half of 2014 and expected to expand transaction capabilities on the Yelp Platform.
- Management believes existing cash, cash generated from operations, and investments will fund working capital and anticipated property and equipment purchases for at least the next 12 months, but notes that additional capital could be required for growth initiatives, infrastructure, product development, or acquisitions.
- Operating lease commitments totaled $104.5 million, including $16.8 million due within one year.
- A putative class-action appeal concerning allegations that Yelp manipulated reviews to pressure businesses to advertise remained pending before the Ninth Circuit. The company could not estimate the probability or amount of any potential loss.
- Key business risks include dependence on search-engine traffic, especially Google; intense competition from Google and other platforms; difficulty monetizing mobile usage; advertiser retention and small-business economic sensitivity; rapid expansion and employee growth; service interruptions and cybersecurity incidents; privacy and regulatory requirements; foreign-exchange exposure; litigation and intellectual-property claims; and potential impairment of goodwill or acquired intangibles.
- The dual-class structure gives Class B holders approximately 63% of voting power, concentrating control among existing holders.
- ASU 2014-09, the new revenue-recognition standard, was scheduled to become effective in the first quarter of 2017. Yelp had not selected a transition method and was evaluating the impact.
Important Facts for Investors to Verify
- Whether rapid local advertising growth and increased active business accounts can continue as sales-force expansion reaches smaller and newer markets.
- Whether rising sales, product-development, infrastructure, and stock-based compensation costs remain proportionate to revenue growth.
- The sustainability of near-term profitability after excluding the six-month tax benefit and considering significant non-cash stock-based compensation.
- The composition, maturity, credit quality, and liquidity of the $122.1 million marketable-securities portfolio.
- The effect of Google search-algorithm changes and continuing dependence on unpaid search traffic.
- The status and potential exposure from the pending review-manipulation litigation and other intellectual-property, privacy, and platform-content claims.
- Execution of Yelp Reservations, the Yelp Platform, mobile monetization, international expansion, and SeatMe integration.
- Potential dilution from outstanding equity awards, employee stock purchases, and the dual-class capital structure.