YELP INC annual report, FY2012

Yelp Inc. 2012 Form 10-K Summary

Business context and reporting period

Yelp operates an online and mobile platform connecting consumers with local businesses through user-generated reviews, business listings and advertising. This filing covers the fiscal year ended December 31, 2012, including fourth-quarter results. Yelp completed its initial public offering in March 2012 and acquired Qype GmbH on October 23, 2012.

Fourth-quarter average monthly website unique visitors: 86.3 million, up 31% year over year.
Mobile application usage: approximately 9.2 million unique mobile devices monthly.
Cumulative reviews: 36.0 million, up 45% year over year.
Claimed business locations: approximately 994,000, up 64%.
Active local business accounts: approximately 39,800, up 68%.
Markets: 53 in the United States and 44 internationally.

Financial performance and key metrics

Metric	Year ended December 31, 2012	2011	Change
Net revenue	$137.6 million	$83.3 million	Up 65%
Local advertising revenue	$109.2 million	$58.5 million	Up 87%
Brand advertising revenue	$20.6 million	$17.7 million	Up 16%
Other services revenue	$7.8 million	$7.1 million	Up 10%
Total costs and expenses	$156.3 million	$99.5 million	Up 57%
Loss from operations	$(18.8) million	$(16.2) million	Higher loss
Net loss	$(19.1) million	$(16.7) million	Higher loss
Adjusted EBITDA	$4.6 million	$(1.1) million	Improved
Operating cash flow	$(0.1) million	$0.3 million	Declined

Revenue mix shifted toward local advertising, which represented 79% of 2012 revenue versus 70% in 2011. Brand advertising declined to 15% from 21%, while other services represented 6% versus 9%.

Approximate 2012 margins were 92.8% before cost of revenue, a negative 13.6% operating margin and a negative 13.9% net margin. The filing does not present a conventional gross profit subtotal; the first margin figure is derived from revenue less reported cost of revenue.

Fourth-quarter 2012 revenue was $41.2 million, up from $24.9 million in the fourth quarter of 2011. Fourth-quarter net loss was $5.3 million, compared with $9.0 million, and adjusted EBITDA was $1.8 million, compared with approximately breakeven in the prior-year quarter. Fourth-quarter operating expenses included $1.3 million of Qype-related restructuring and integration costs.

Cash flow, liquidity and capital structure

Cash and cash equivalents at December 31, 2012 were $95.1 million, including $87.3 million in money market funds.
Operating activities used $0.1 million of cash; investing activities used $40.6 million; financing activities provided $114.2 million.
The IPO generated approximately $111.4 million of net proceeds. Qype required approximately $24.1 million of net cash consideration, and Qype debt of approximately $1.3 million was repaid.
Yelp reported no outstanding bank loans or credit facilities, no material capital lease obligations and no off-balance-sheet arrangements.
Working capital was $90.3 million, total liabilities were $22.0 million and stockholders’ equity was $165.7 million.
Operating lease commitments totaled $77.2 million, including $8.7 million due within one year.
Management believed available cash and expected operating cash flow would fund working capital and anticipated capital expenditures for at least the next 12 months, while cautioning that additional financing could become necessary.

Material changes versus the prior comparable period

Revenue growth remained strong but slowed from 74% in 2011 to 65% in 2012.
Local advertising became substantially more important, growing 87% and accounting for most revenue growth.
Adjusted EBITDA improved from a $1.1 million loss to $4.6 million, although GAAP net loss increased to $19.1 million.
Sales and marketing expense rose 58% to $85.9 million, product development rose 77% to $20.5 million and general and administrative expense rose 83% to $31.5 million.
Stock-based compensation increased to $14.9 million from $4.9 million, including a significant increase in general and administrative expense associated primarily with accelerated vesting of executive options following the IPO.
Qype added $48.1 million of goodwill and $5.9 million of intangible assets at year-end, and resulted in $1.3 million of restructuring and integration costs. Qype contributed only limited 2012 results because it was acquired late in the fourth quarter.
International revenue represented approximately 2.2% of 2012 revenue; substantially all 2011 revenue was generated in the United States.
Cash increased substantially from $21.7 million to $95.1 million, primarily due to IPO proceeds rather than operating cash generation.

Guidance, outlook, commentary and risks

Management stated that it did not expect Yelp to be profitable in the near term because it intended to continue investing in sales, marketing, product development, technology infrastructure and international expansion.
Expected annual capital expenditures were $6 million to $8 million for the next two years, with an additional approximately $7 million expected in 2013 for the San Francisco headquarters build-out.
Management expected Qype to contribute approximately $6 million of revenue and approximately $6 million of operating expense in 2013.
Yelp expects sales and marketing to remain its largest expense as it expands its sales force and enters new markets.
Key risks include dependence on advertising by small and medium-sized businesses, reliance on Google and other search engines for traffic, uncertain mobile monetization, intense competition, content quality and review-filtering issues, service interruptions and security breaches, privacy and user-generated-content regulation, foreign exchange exposure, and the integration of Qype.
Material contingencies include an appeal in litigation alleging review manipulation, claims involving Qype and Deutsche Telekom of approximately €1.5 million plus interest and approximately €118,400 plus interest, and ordinary-course intellectual property and other claims. The company stated that it did not currently expect these matters to have a material adverse effect, but some outcomes could not be estimated reliably.
Yelp settled an employee litigation matter for approximately $0.8 million without admitting liability.
The dual-class structure gives Class B holders 10 votes per share and approximately 94.5% of voting power as of December 31, 2012. Yelp did not plan to pay cash dividends for the foreseeable future.

Most important facts for investors to verify

Whether rapid revenue growth can continue as mature U.S. market cohorts slow and expansion shifts toward smaller or international markets.
Whether adjusted EBITDA improvement converts into sustainable positive operating cash flow without relying on equity financing.
Local advertiser retention, customer acquisition costs, average revenue per advertiser and the conversion of claimed business locations into paying accounts.
The effectiveness and economics of mobile advertising as mobile usage increases.
Qype integration progress, actual incremental revenue and expenses, restructuring completion and potential goodwill impairment.
Exposure to Google search-ranking changes, competitive local-search products and review-quality or review-manipulation allegations.
Cash requirements associated with planned capital expenditures, headquarters construction, lease commitments and international expansion.
Stock-based compensation, option dilution and the concentrated voting control of Class B stockholders.