Yelp Inc. 2013 Q3 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 Form 10-Q covers the three and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods.
- At quarter-end, Yelp reported approximately 47.3 million cumulative reviews, 117.4 million average monthly website visitors, 11.2 million average monthly mobile devices using its app, and 57,000 active local business accounts.
- Yelp operated in 60 U.S. markets and 51 international markets. Six Qype markets had been migrated to the Yelp platform.
- International revenue represented approximately 5% of nine-month revenue.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net revenue | $61.2 million | $36.4 million | $162.3 million | $96.4 million |
| Revenue growth | 68% | — | 68% | — |
| Loss from operations | $(1.8) million | $(2.0) million | $(6.9) million | $(13.6) million |
| Operating margin | (2.9)% | (5.4)% | (4.3)% | (14.1)% |
| Net loss | $(2.3) million | $(2.0) million | $(8.0) million | $(13.8) million |
| Net loss per share | $(0.04) | $(0.03) | $(0.12) | $(0.27) |
| Adjusted EBITDA | $8.1 million | $2.2 million | $19.0 million | $2.8 million |
| Adjusted EBITDA margin | 13.2% | 5.9% | 11.7% | 2.9% |
- Local advertising revenue increased 80% year over year in Q3 to $51.2 million and 79% for the first nine months to $134.9 million. Brand advertising rose 17% in Q3 and 20% year to date; other services rose 55% in both comparisons.
- Q3 total costs and expenses were $63.0 million, or 103% of revenue. Sales and marketing represented 56% of revenue, product development 18%, general and administrative 17%, and depreciation and amortization 5%.
- Net cash provided by operating activities was $12.1 million for the first nine months of 2013, compared with $1.7 million of cash used in the prior-year period.
- Investing activities used $15.5 million, including $9.5 million for property, equipment and software, $3.3 million for capitalized website and software development, and $2.1 million for the SeatMe acquisition.
- Financing activities provided $9.3 million, primarily from common stock issued upon stock-option exercises.
- Cash and cash equivalents were $101.2 million at September 30, 2013, compared with $95.1 million at December 31, 2012. Yelp had no outstanding bank loans, credit facilities, short-term investments or long-term debt.
- Total liabilities were $27.9 million and stockholders’ equity was $196.4 million. Restricted cash and lease-related letters of credit totaled $8.2 million.
- Accumulated deficit was $68.4 million. Stock-based compensation was $7.0 million in Q3 and $17.9 million for the first nine months, making adjusted EBITDA materially higher than GAAP operating results.
Material changes versus the prior comparable period
- Revenue growth remained strong at 68% year over year in both Q3 and the first nine months, led by expansion of the local advertising customer base and sales force.
- Operating losses narrowed despite substantial investment in growth. The Q3 operating margin improved to approximately negative 3% from negative 5%, while the nine-month margin improved to approximately negative 4% from negative 14%.
- Net loss improved for the first nine months but increased modestly in Q3, from $2.0 million to $2.3 million, partly reflecting higher income taxes and continued operating investment.
- Sales and marketing expense increased 60% in Q3 and 54% year to date, while product development increased 95% and 86%, respectively. Headcount reached 1,806, up 49% from September 30, 2012.
- Qype-related restructuring was substantially completed; $0.7 million of restructuring and integration expense was recorded in the first nine months, with only $55,000 of related liability remaining at quarter-end.
- Yelp acquired SeatMe on July 24, 2013 for approximately $11.8 million, consisting primarily of $2.2 million in cash and 260,901 Class A shares. The acquisition added approximately $10.3 million of goodwill and was intended to provide online reservation technology.
- Shares outstanding increased to 65.97 million from 63.51 million at December 31, 2012, reflecting stock issuance and option exercises.
Guidance, outlook, commentary, risks and unusual items
- Management expects to continue heavy investment in domestic and international sales and marketing, product development, technology infrastructure, Qype integration and SeatMe integration.
- Management expected SeatMe to have minimal near-term revenue impact but to increase operating expenses by approximately $0.5 million in Q4 2013.
- Yelp stated that existing cash and expected operating cash generation should fund working capital and anticipated capital expenditures for at least the next 12 months, while noting that additional equity or debt financing may be required for growth initiatives, acquisitions or other business needs.
- Principal business risks include dependence on Google and other search engines for traffic, competition from major technology and advertising companies, uncertain mobile monetization, advertiser retention and spending by small businesses, international expansion and currency exposure, service disruptions and cybersecurity incidents, privacy and regulatory changes, intellectual-property and user-content litigation, and integration of Qype and SeatMe.
- A consolidated class action concerning alleged manipulation of reviews and ratings remained on appeal in the Ninth Circuit; the filing states that the potential loss could not reasonably be estimated.
- Deutsche Telekom-related litigation involving Qype remained pending regarding approximately €441,900 of alleged additional 2009 directory-data fees plus interest. The filing states that the company did not believe existing legal matters would have a material adverse effect, although outcomes were uncertain.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether high revenue growth can continue as Yelp expands into smaller domestic markets and international markets.
- Whether sustained sales, marketing, product-development and infrastructure spending can produce GAAP profitability rather than only positive adjusted EBITDA.
- The effect of stock-based compensation and expected dilution from approximately 11.5 million outstanding stock options and other equity awards.
- Progress and economic benefits from integrating Qype and SeatMe, including SeatMe’s expected expense contribution.
- Trends in active local business accounts, advertiser retention, local advertising revenue and mobile monetization.
- Potential outcomes and costs of the review-manipulation appeal, Deutsche Telekom litigation, intellectual-property claims and other contingencies.
- Cash burn, capital expenditures, lease commitments of approximately $90.6 million, and any need for future equity or debt financing.