Yelp Inc. Form 10-Q Summary
Business context and reporting period
Yelp connects consumers with local businesses through its website, mobile application, advertising products and transaction services. This unaudited filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Yelp acquired Eat24 on February 9, 2015, adding an online food-ordering platform. Eat24 contributed $5.3 million of revenue in the second quarter and $10.1 million for the first six months of 2015. The 2015 results also include the previously acquired Restaurant Kritik and Cityvox businesses.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $133.9 million | $88.8 million | $252.4 million | $165.2 million |
| Revenue growth | 51% | 53% | ||
| Operating income (loss) | $0.1 million | $3.1 million | ($4.2 million) | ($1.5 million) |
| Net income (loss) | ($1.3 million) | $2.7 million | ($2.6 million) | $0.1 million |
| Diluted EPS | ($0.02) | $0.04 | ($0.03) | $0.00 |
| Adjusted EBITDA | $22.7 million | $17.2 million | $39.1 million | $25.8 million |
| Cash flow from operations | $43.7 million | $20.0 million |
Q2 operating margin was approximately 0%, compared with 3.5% in Q2 2014. The six-month operating margin was approximately negative 1.7%, compared with negative 0.9% in the prior-year period. Q2 net margin was approximately negative 1.0%, compared with 3.1% in Q2 2014.
- Local advertising revenue increased 43% in Q2 and 47% year to date, driven primarily by growth in advertising accounts and expanded sales capacity.
- Transactions revenue increased 821% in Q2 and 619% year to date, primarily from Eat24.
- Brand advertising revenue declined 8% in Q2 and 10% year to date.
- Cost of revenue increased 123% in Q2 and 99% year to date, reaching 10% and 9% of revenue, respectively, versus 7% in both prior-year periods.
- Sales and marketing increased 42% in Q2 and 41% year to date; product development increased 79% and 75%, respectively.
- Stock-based compensation was $15.5 million in Q2 and $29.2 million year to date, compared with $10.1 million and $19.5 million in the comparable 2014 periods.
At June 30, 2015, Yelp had $181.5 million of cash and cash equivalents, $186.7 million of short-term marketable securities and $16.3 million of restricted cash. Total assets were $741.4 million and total liabilities were $55.2 million. Yelp reported no outstanding bank loans, credit facilities, debt or material capital lease obligations.
Year-to-date investing cash outflows were $126.1 million, including $73.4 million for the cash portion of the Eat24 acquisition, $18.1 million for property and equipment, $6.0 million for website and software development, and net purchases of investment securities. Financing cash inflows were $17.2 million, primarily from employee stock option exercises, the employee stock purchase plan and related tax benefits.
Material changes versus the prior comparable period
- Revenue growth accelerated through the addition of Eat24 and continued expansion of local advertising.
- Profitability deteriorated: Yelp moved from Q2 net income of $2.7 million to a net loss of $1.3 million, and from six-month net income of $0.1 million to a six-month net loss of $2.6 million.
- Operating expenses grew faster than revenue in several categories, particularly product development and infrastructure-related costs.
- Eat24 increased goodwill by approximately $110.9 million and intangible assets by approximately $39.6 million; the purchase price allocation remained preliminary.
- Cash and cash equivalents declined from $247.3 million at December 31, 2014 to $181.5 million at June 30, 2015, while marketable securities increased from $118.5 million to $186.7 million.
- Mobile unique visitors increased to 82.8 million from 67.9 million, while desktop unique visitors declined to 79.2 million from 81.9 million. Local advertising accounts increased to approximately 97,000 from 69,000.
Guidance, outlook, risks and unusual items
Management did not provide specific numerical revenue or earnings guidance in the filing. Yelp expects to continue investing heavily in sales and marketing, product development, technology infrastructure, international expansion and integration of Eat24. Sales and marketing and product development expenses are expected to increase for the foreseeable future.
Yelp began phasing out brand advertising products during 2015 and expected to complete the phase-out by year-end, citing weaker market trends and advertiser demand for more disruptive formats. Resources are expected to be redeployed toward local advertising and other initiatives.
- Key strategic priorities include increasing consumer traffic and engagement, expanding mobile usage, growing local advertising, and developing transaction products.
- Principal business risks include dependence on Google and other search engines for traffic, slowing desktop usage, competition from large technology and advertising platforms, and uncertainty regarding mobile monetization.
- Additional risks include integration of the larger and more complex Eat24 acquisition, potential sales-tax obligations related to Eat24 transactions, data-security and service-disruption risks, foreign currency exposure, regulatory changes involving privacy and online content, and possible impairment of goodwill or intangible assets.
- Pending litigation includes a securities class action, two wage-and-hour class actions involving former Eat24 employees, and ordinary-course claims. Management did not believe the ultimate outcomes would materially affect the company, but monetary exposure was not specified.
- Future minimum operating lease obligations totaled $304.9 million, including $30.6 million due within one year.
- Yelp reported an accumulated deficit of approximately $36.6 million and stated that continued losses are possible as it invests for growth. Management believed available cash, securities and operating cash flow would fund working capital and anticipated capital expenditures for at least the next 12 months, subject to assumptions that could prove incorrect.
Important facts for investors to verify
- Whether Eat24 integration produces sustainable transaction growth and acceptable margins after acquisition-related costs, amortization and infrastructure expenses.
- Whether local advertising growth and the 97,000-account base offset the planned elimination of brand advertising revenue.
- Whether operating expenses, particularly sales, marketing, product development and stock-based compensation, can be controlled as revenue scales.
- The quality and sustainability of operating cash flow, including the significant contribution from non-cash stock compensation and doubtful-account provisions.
- Potential tax liabilities associated with Eat24 sales-tax collection and the status of the IRS audit for taxable year 2012.
- Exposure from pending litigation, lease commitments, contingent acquisition consideration and any future goodwill or intangible-asset impairment.
- Trends in mobile engagement, desktop traffic, search-engine dependence and advertiser retention.