Yelp Inc. 2012 Q3 Form 10-Q Summary
Business Context and Reporting Period
Yelp connects consumers with local businesses through user-generated reviews, web services and mobile applications, and monetizes primarily through local and brand advertising. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, with comparisons to the corresponding 2011 periods.
- At quarter-end, Yelp operated in 53 U.S. and 43 international markets.
- Average monthly website unique visitors were 83.5 million, compared with 61.1 million in Q3 2011; the mobile application was used on approximately 8.2 million unique mobile devices monthly.
- Cumulative reviews increased to approximately 33.3 million from 22.4 million at September 30, 2011.
- Active local business accounts increased to approximately 36,000 from 19,000.
Financial Performance and Liquidity
| Metric | Q3 2012 | Q3 2011 | Change |
|---|
| Net revenue | $36.4 million | $22.3 million | +63% |
| Loss from operations | $(2.0) million | $(3.4) million | Improved |
| Net loss | $(2.0) million | $(3.8) million | Improved |
| Net loss per share | $(0.03) | $(0.24) | Improved |
| Adjusted EBITDA | $2.2 million | $(0.9) million | Improved |
| Metric | Nine months 2012 | Nine months 2011 | Change |
|---|
| Net revenue | $96.4 million | $58.4 million | +65% |
| Loss from operations | $(13.6) million | $(7.4) million | Worsened |
| Net loss | $(13.8) million | $(7.6) million | Worsened |
| Cash used in operating activities | $(1.7) million | $(0.3) million | Higher use |
| Adjusted EBITDA | $2.8 million | $(1.1) million | Improved |
- Q3 revenue comprised local advertising of $28.5 million, brand advertising of $5.9 million and other services of $2.0 million. Local advertising represented 78% of revenue, up from 71%.
- Q3 total costs and expenses were $38.3 million, or 105% of revenue, compared with 115% in Q3 2011. The operating loss margin improved to approximately 5% from 15%, while the net loss margin improved to approximately 6% from 17%.
- Nine-month costs and expenses were $110.0 million, or 114% of revenue, compared with 113% in the prior-year period; the operating loss margin was approximately 14% versus 13%.
- Stock-based compensation was $2.3 million in Q3 and $11.6 million for the nine months, compared with $1.5 million and $3.5 million, respectively, in the prior-year periods. Nine-month general and administrative expense included approximately $5.5 million from accelerated vesting of executive stock options related to the IPO.
- Cash and cash equivalents were $123.1 million at September 30, 2012, compared with $21.7 million at December 31, 2011. Restricted cash totaled $6.4 million, primarily associated with lease-related letters of credit.
- The IPO generated approximately $112.3 million of net cash proceeds during the first nine months. Investing cash outflows were $11.9 million, including $3.5 million for property, equipment and software, $2.3 million for website development and $6.0 million for restricted cash.
- Yelp reported no outstanding bank loans or credit facilities and no material capital lease obligations. Operating lease commitments totaled $69.6 million, including $7.1 million due within one year.
- Accumulated deficit was $55.1 million at September 30, 2012. Total stockholders’ equity was $143.0 million, compared with a deficit of $24.3 million at December 31, 2011, primarily reflecting the IPO and conversion of preferred stock.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven principally by an 81% increase in Q3 local advertising revenue, reflecting expansion of the sales force and more customers purchasing local advertising plans.
- Brand advertising revenue increased 28% in Q3, while other services revenue was essentially flat as growth in Yelp Deals, remnant advertising and partnerships offset reduced emphasis on emailed deals.
- Sales and marketing expense grew 43% in Q3 and 57% for the nine months, while product development expense grew 67% and 69%, respectively, reflecting continued hiring and investment in domestic and international expansion, technology and mobile products.
- General and administrative expense increased 47% in Q3 and 98% for the nine months, driven by headcount, consultants, legal costs and IPO-related stock compensation.
- The company improved Q3 GAAP losses and generated positive adjusted EBITDA, but remained loss-making for the first nine months and used cash in operations.
- The March 2012 IPO converted all redeemable convertible preferred stock into Class B common stock and created a dual-class structure. Class B shares carry ten votes per share and represented approximately 96.7% of voting power at September 30, 2012.
Guidance, Outlook, Risks and Unusual Items
- Management stated that Yelp did not expect to be profitable on a GAAP basis for fiscal 2012 because of continued investment and the Qype acquisition.
- Management expected operating expenses, technology infrastructure spending, sales and marketing costs and product development expense to increase in absolute dollars as the company pursued long-term growth.
- On October 23, 2012, Yelp acquired Qype, a Germany-based local-business review company, for approximately $47.5 million: $24.2 million in cash and 968,919 Class A shares valued at approximately $23.3 million. The transaction was to be recorded in Q4 2012.
- Management expected Qype to add approximately $0.9 million of Q4 revenue, approximately $2.0 million of Q4 operating expense and approximately $1.0 million of one-time restructuring and transaction costs. Yelp also paid approximately $1.3 million to retire Qype’s existing debt facility.
- Key risks include continued operating losses, dependence on advertising demand and search-engine traffic, competition from Google and other platforms, mobile monetization, international expansion and Qype integration, data privacy and security, user-generated-content litigation, intellectual-property claims, foreign exchange exposure and economic conditions affecting small-business advertising budgets.
- A consolidated local-business class action alleging manipulation of reviews was dismissed with prejudice, but plaintiffs appealed. A separate employee-related matter had a settlement of up to $1.3 million pending final court approval. Qype also faced Deutsche Telekom claims of approximately €1.5 million plus interest and approximately €118,400 plus interest.
- Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level as of September 30, 2012, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether rapid local advertising and user growth can continue while sales, product and infrastructure spending remains elevated.
- The path to GAAP profitability and the effect of stock-based compensation on reported earnings and dilution.
- Qype’s actual post-acquisition revenue contribution, integration costs, restructuring charges and international monetization.
- Cash burn, capital expenditures, restricted cash and the company’s ability to fund expansion without additional equity or debt financing.
- Exposure to Google search-ranking changes, mobile monetization challenges and competition in local advertising.
- Developments in the pending appeals, employee settlement and Qype-related litigation, including potential loss amounts that the filing states cannot currently be estimated.
- The implications of the dual-class capital structure, concentrated voting control and potential future conversion or sale of Class B shares.
