Yelp Inc. Form 10-Q Summary
Business Context and Reporting Period
Yelp connects consumers with local businesses through user reviews, website traffic and mobile applications, and monetizes primarily through local and brand advertising. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods.
During the quarter, Yelp reported approximately 78.3 million average monthly website unique visitors, 7.2 million average monthly mobile devices, 30.3 million cumulative reviews and 32 thousand active local business accounts. Management stated that Yelp expected to remain unprofitable on a GAAP basis in 2012 while continuing to invest in sales, marketing, product development and expansion.
Financial Performance and Liquidity
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net revenue | $32.7 million | $19.6 million | $60.0 million | $36.1 million |
| Loss from operations | $(1.9) million | $(1.2) million | $(11.7) million | $(4.0) million |
| Net loss | $(2.0) million | $(1.2) million | $(11.8) million | $(3.9) million |
| Net loss per share | $(0.03) | $(0.08) | $(0.26) | $(0.27) |
| Adjusted EBITDA | $1.6 million | $0.6 million | $0.6 million | $(0.2) million |
| Net cash provided by (used in) operating activities | Not separately reported for the quarter | Not separately reported for the quarter | $(2.4) million | $0.8 million |
- Revenue increased 67% year over year in the quarter and 66% for the six-month period.
- Local advertising was the primary growth driver, increasing 89% in the quarter and 90% year to date; it represented 77% and 78% of revenue, respectively.
- Brand advertising increased 28% in the quarter and 20% year to date. Other services declined 3% in the quarter and increased 5% year to date.
- Calculated gross margin was approximately 93% in both 2012 periods and comparable 2011 periods, based on revenue less reported cost of revenue.
- Calculated operating margin was approximately negative 6% for the quarter and negative 19% for the six months, compared with approximately negative 6% and negative 11%, respectively, in the prior-year periods.
- Sales and marketing expense was $20.3 million for the quarter and $39.1 million year to date, or 62% and 65% of revenue. Product development was $4.3 million and $8.5 million, respectively.
- General and administrative expense increased to $16.7 million year to date from $7.2 million, primarily including $5.5 million of accelerated stock-based compensation related to two executives upon completion of the IPO.
- Cash and cash equivalents were $122.6 million at June 30, 2012, compared with $21.7 million at December 31, 2011. Restricted cash was $6.4 million.
- Yelp reported no outstanding bank loans, credit facilities, debt or material capital lease obligations.
- Operating cash use was $2.4 million, investing cash use was $9.5 million and financing cash provided was $113.0 million for the first six months.
Material Changes Versus the Prior Comparable Period
- The March 2012 initial public offering generated approximately $112.3 million of net financing proceeds in the cash flow statement. The notes state approximately $111.4 million of aggregate net proceeds after underwriting discounts and offering expenses; investors should reconcile the presentation.
- Preferred stock automatically converted into Class B common stock immediately before the IPO. At June 30, 2012, Yelp had approximately 8.2 million Class A shares and 53.0 million Class B shares outstanding.
- Stock-based compensation increased to $9.3 million for the six months from $2.1 million in the prior-year period, materially offsetting the reported GAAP loss in the adjusted EBITDA reconciliation.
- Headcount increased 48% year over year to 1,096 employees, supporting expanded sales, marketing, product and international operations.
- Restricted cash increased by $6.0 million, primarily in connection with new office leases. New or expanded leases contributed to total future operating lease obligations of approximately $71.7 million, including approximately $59.0 million associated with new leases.
- Operating cash flow deteriorated from $0.8 million provided in the first half of 2011 to $2.4 million used in the first half of 2012, despite substantially higher revenue.
Guidance, Outlook, Risks and Unusual Items
- Management expected revenue growth to continue but planned substantial ongoing investment in sales and marketing, product development, technology infrastructure, domestic expansion and international markets. It did not expect GAAP profitability in 2012.
- Management expected cost of revenue, product development, general and administrative expense, and depreciation and amortization to increase in absolute dollars. Sales and marketing costs were also expected to rise with market expansion.
- Yelp had not made a substantive effort to monetize international markets and had not generated significant international revenue. It also had not materially monetized its mobile application through mobile advertising.
- Key risks include dependence on Google and other search engines for traffic, competition from major technology and advertising companies, advertiser retention, uncertain international expansion, mobile monetization, platform availability and cybersecurity, privacy and user-generated-content regulation, intellectual property litigation, and continued operating losses.
- The company disclosed a consolidated appeal involving claims that Yelp manipulated reviews to coerce businesses into purchasing advertising. The underlying case had been dismissed with prejudice; the potential loss could not be reasonably estimated.
- A separate employee-related matter was subject to a settlement of up to $1.3 million awaiting final court approval.
- Yelp disclosed seven patent suits involving plaintiffs targeting multiple defendants, although management stated that outstanding legal matters were not expected to have a material adverse effect. The filing does not provide a clear aggregate potential exposure for those patent matters.
- Class B holders, including founders, directors, officers, employees and affiliates, held approximately 98.5% of voting power, creating substantial voting concentration. Approximately 53 million shares were expected to become eligible for sale after the IPO lock-up expiration, then anticipated for late August 2012.
- Disclosure controls and procedures were assessed as effective as of June 30, 2012, with no material change identified in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Reconcile the IPO net-proceeds amounts reported in the cash flow statement and the equity note.
- Assess whether rapid revenue growth can continue as local advertising becomes a larger share of revenue and the company expands into smaller and international markets.
- Monitor cash burn, operating leverage and the effect of substantial stock-based compensation on GAAP profitability and dilution.
- Review advertiser retention, customer acquisition costs, local advertising concentration and mobile monetization progress.
- Evaluate the financial and reputational implications of the pending litigation, patent claims, employee settlement and review-manipulation allegations.
- Consider the impact of the dual-class structure, concentrated voting control and the expected release of approximately 53 million locked-up shares.