Yelp Inc. 2014 Form 10-K Summary
Business context and reporting period
Yelp operates a local-business discovery, review, advertising and transaction platform. Revenue is generated primarily from local and brand advertising, with additional revenue from transactions, partnerships, Yelp Deals and Gift Certificates. The filing covers the fiscal year ended December 31, 2014, including fourth-quarter results.
- Approximately 71.2 million cumulative reviews across 29 countries at year-end.
- Approximately 135.4 million average monthly unique visitors and 72.3 million mobile unique visitors in the fourth quarter.
- Approximately 2.0 million claimed local business locations and 84 thousand local advertising accounts at year-end.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change or observation |
|---|---|---|---|
| Net revenue | $377.5 million | $233.0 million | Up 62% |
| Local advertising revenue | $319.1 million | $193.0 million | Up 65%; 85% of total revenue |
| Brand advertising revenue | $34.5 million | $28.0 million | Up 23%; 9% of total revenue |
| Other services revenue | $23.9 million | $12.0 million | Up 99%; 6% of total revenue |
| Income from operations | $11.1 million | $(8.8) million | Improved to operating profitability |
| Net income | $36.5 million | $(10.1) million | Includes a $28.2 million valuation-allowance release |
| Adjusted EBITDA | $70.9 million | $29.4 million | Up approximately 141% |
| Operating cash flow | $57.9 million | $21.4 million | Improved materially |
| Capital expenditures and capitalized software | $40.4 million | $21.1 million | Significant investment in infrastructure and growth |
Fourth-quarter revenue was $109.9 million, up from $70.7 million in the fourth quarter of 2013. Fourth-quarter net income was $32.7 million, compared with a $2.1 million net loss in the prior-year quarter, primarily reflecting a $26.2 million valuation-allowance release. Fourth-quarter adjusted EBITDA was $25.1 million versus $10.4 million.
At December 31, 2014, Yelp had $247.3 million of cash and cash equivalents, $157.1 million of marketable securities at amortized cost and $386.8 million of working capital. The company reported no outstanding bank loans or credit facilities and no material capital lease obligations. Total liabilities were $41.5 million, while operating lease commitments totaled $343.4 million.
Cash used in investing activities was $228.7 million, principally due to $210.5 million of marketable-security purchases, $29.1 million of property and equipment purchases, $11.3 million of capitalized website and software development costs, and $14.3 million of acquisition spending, partly offset by $53.0 million of security maturities. Financing activities provided $29.5 million, primarily from employee option exercises and the employee stock purchase plan.
Material changes versus the prior comparable period
- Revenue growth remained strong but moderated to 62% from 69% in 2013.
- Local advertising continued to shift toward a larger share of revenue, while brand advertising declined as a percentage of revenue from 12% to 9%.
- Operating expenses increased substantially: sales and marketing rose 52%, product development 70% and general and administrative expense 36%.
- Sales and marketing expense declined to 53% of revenue from 57%, and general and administrative expense declined to 15% from 18%, producing operating leverage despite continued investment.
- Stock-based compensation increased to $42.3 million from $26.7 million and represented a significant non-cash expense.
- Cash declined by $142.5 million during the year as Yelp increased investments in marketable securities, acquisitions, infrastructure and restricted cash.
- Yelp acquired Cityvox and Restaurant Kritik in October 2014 for aggregate consideration of approximately $16.1 million, including contingent consideration. The acquisitions were not material individually or in aggregate to reported revenue and earnings.
- After year-end, on February 9, 2015, Yelp acquired Eat24 for approximately $134 million, consisting of approximately $75 million in cash and 1.4 million Class A shares, subject to customary adjustments.
Guidance, outlook, commentary and risks
Management expected approximately $25 million of capital expenditures in 2015 for office expansion, technology infrastructure and new features. The company expected operating expenses to continue increasing as it expanded sales, marketing, product development, international operations and its transaction platform. No specific revenue or earnings guidance was provided in the filing.
Management identified mobile usage, advertiser growth, international expansion, increased engagement, partner transactions and expansion of the sales force as key growth opportunities. However, management also expected traffic growth to slow as the business matured and noted that fourth-quarter traffic is typically weaker because of seasonality.
- Google search algorithm changes beginning in the second quarter of 2014 may have contributed to slower traffic growth and a fourth-quarter traffic decline. Google accounted for more than half of visits from Internet searches.
- Mobile traffic was increasingly important, but management stated that mobile monetization remained relatively immature and could be insufficient to offset declining personal-computer usage.
- The company depends heavily on local advertisers, many of which are small businesses with limited budgets, short-term advertising commitments and elevated exposure to economic downturns.
- Review quality, recommendation algorithms, fake or manipulated reviews, brand reputation and allegations that Yelp favors advertisers remain significant operating and legal risks.
- The company faces intense competition from Google, Yahoo, Bing, Facebook, regional review sites, traditional media and other advertising providers.
- Privacy, data protection, consumer-protection, advertising, gift-card and online-content regulations may increase costs or restrict products and practices.
- Yelp was defending consolidated securities class-action litigation filed in 2014; plaintiffs sought unspecified damages and other relief. Management did not believe the matter would have a material adverse effect, but the outcome was uncertain.
- The dual-class structure gives Class B shareholders 10 votes per share. Class B holders represented approximately 61% of voting power at December 31, 2014.
- The $36.5 million GAAP profit was materially affected by the $28.2 million release of deferred-tax valuation allowances; the effective tax rate was negative 223.3%.
Important facts for investors to verify
- Reconcile GAAP net income with adjusted EBITDA and non-GAAP net income, particularly the effects of $42.3 million of stock-based compensation and the $28.2 million tax valuation-allowance release.
- Assess whether revenue growth, advertiser additions and mobile engagement can offset slowing traffic growth and increasing sales, product and infrastructure costs.
- Review cash conversion, capital expenditures, marketable-security investments and the cash impact of the February 2015 Eat24 acquisition.
- Evaluate the sustainability and quality of local advertising revenue, including performance-based pricing and advertiser retention.
- Review operating lease commitments, contingent acquisition consideration, uncertain tax positions of $3.3 million and pending litigation.
- Consider the voting-control implications of the dual-class capital structure and the dilution potential from outstanding equity awards and future share issuance.