Yelp Inc. 2015 Q3 Form 10-Q Summary
Business Context and Reporting Period
Yelp connects consumers with local businesses through its website and mobile applications, offering local advertising, transactions, brand advertising and other services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Results include Eat24 from its February 9, 2015 acquisition and include Restaurant Kritik and Cityvox activity following their 2014 acquisitions.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net revenue | $143.6 million | $102.5 million | $396.0 million | $267.6 million |
| Revenue growth | 40% | 48% | ||
| Operating income (loss) | $(10.7) million | $4.5 million | $(14.9) million | $3.1 million |
| Net income (loss) | $(8.1) million | $3.6 million | $(10.7) million | $3.7 million |
| Diluted EPS | $(0.11) | $0.05 | $(0.14) | $0.05 |
| Adjusted EBITDA | $12.5 million | $20.1 million | $51.6 million | $45.8 million |
| Operating cash flow | Not separately provided | Not separately provided | $53.5 million | $39.0 million |
Q3 implied operating margin was approximately negative 7.5%, versus positive 4.4% in Q3 2014. Net margin was approximately negative 5.6%, versus positive 3.6%. For the nine-month period, implied operating margin was approximately negative 3.8%, versus positive 1.1%.
- Q3 revenue consisted of local advertising of $115.9 million, transactions of $12.0 million, brand advertising of $9.0 million and other services of $6.7 million.
- Local advertising grew 36% in Q3 and 43% for the nine-month period, primarily from more customers purchasing advertising plans and increased cost-per-click advertising.
- Transactions revenue increased 795% in Q3 and 680% for the nine-month period, primarily due to Eat24. Eat24 contributed $10.9 million of Q3 revenue and $26.3 million of nine-month revenue.
- Cost of revenue increased 131% in Q3 and 111% for the nine-month period, reaching 10% and 9% of revenue, respectively.
- Sales and marketing increased 52% in Q3 and 45% for the nine-month period; product development increased 64% and 71%, respectively.
- Stock-based compensation was $15.7 million in Q3 and $44.9 million for the nine-month period, compared with $10.9 million and $30.5 million, respectively, in the prior-year periods.
- Cash and cash equivalents were $171.8 million at September 30, 2015, supplemented by $197.1 million of short-term marketable securities. The company reported no bank loans or credit facilities and no debt or material capital lease obligations.
- Total assets were $764.4 million, including $174.0 million of goodwill and $41.1 million of intangible assets. Total liabilities were $67.9 million and stockholders’ equity was $696.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated through the addition of Eat24 and continued expansion of Yelp’s local advertising sales force.
- Profitability deteriorated despite revenue growth because sales and marketing, product development, infrastructure, hosting, transaction-processing and personnel costs grew faster than revenue.
- Adjusted EBITDA declined 38% in Q3 to $12.5 million, but increased 13% for the nine-month period to $51.6 million.
- Operating cash flow increased to $53.5 million from $39.0 million, aided by noncash stock compensation, depreciation and amortization, and increases in accrued liabilities.
- Investing cash outflow was $147.2 million, including $73.4 million of cash consideration for Eat24, $25.4 million of property and equipment purchases, $8.7 million of capitalized website and software development costs, and net purchases of investment securities.
- Cash declined by $75.5 million from December 31, 2014, primarily due to acquisition and investing activity.
- Headcount increased 39% year over year to 3,671 employees as of September 30, 2015.
- Mobile unique visitors increased to 89.2 million from 73.4 million, while desktop unique visitors declined to 78.9 million from 80.5 million. Local advertising accounts increased to 104,000 from 76,000.
Outlook, Commentary, Risks and Unusual Items
- Management expects to continue heavy investment in sales and marketing, product development, infrastructure, domestic expansion and international expansion. No specific numerical revenue or earnings guidance is provided in the filing.
- Yelp expanded television and digital advertising in Q3 and launched products including Yelp for Gear. Management expects sales and marketing to remain the largest expense for the foreseeable future.
- The company expects to phase out brand advertising products during the remainder of 2015 and redeploy resources toward local advertising and the consumer experience.
- Eat24 was acquired for total consideration of approximately $134.2 million, consisting of $75.0 million in cash and $59.2 million of Yelp Class A common stock. The purchase price allocation remained preliminary.
- Goodwill impairment testing performed during Q3 indicated no impairment.
- Yelp disclosed securities litigation, two putative class actions involving former Eat24 employees, ordinary-course legal proceedings and an IRS payroll tax audit covering 2013 and 2014. No formal payroll tax assessment had been received and no liability was recorded.
- Future minimum operating lease payments totaled $342.8 million, including $32.4 million due within one year. Future minimum sublease receipts were $12.0 million.
- Key operating risks include dependence on Google and other search engines for traffic, mobile monetization, competition, user engagement and review quality, advertiser retention, acquisition integration, data privacy and security, foreign exchange, regulatory and tax changes, litigation, and continued operating losses.
- Management stated that existing cash, marketable securities and expected operating cash flow should meet working capital and anticipated capital expenditure needs for at least the next 12 months, while noting that additional equity or debt financing could be required for growth initiatives or acquisitions.
Most Important Facts to Verify
- Whether rapid revenue growth can translate into sustainable GAAP profitability as sales, marketing, product and infrastructure spending continues.
- The contribution, margins, integration progress and potential liabilities associated with Eat24.
- Trends in mobile users, desktop traffic, cost-per-click advertising, local advertising accounts and advertiser retention.
- The impact of phasing out brand advertising and the ability of local advertising and transactions to replace that revenue.
- Cash consumption, capital expenditure requirements, lease commitments and the potential need for future financing.
- Potential outcomes of securities litigation, Eat24 employment claims, tax audits and possible state sales-tax obligations related to Eat24 transactions.
- The effect of search-engine algorithm changes, particularly Google’s treatment of mobile app-install interstitials, on traffic and monetization.
- The magnitude and sustainability of stock-based compensation, which was a significant component of expenses and operating cash flow adjustments.