YELP INC quarterly report, Q1 FY2014

Yelp Inc. 2014 Q1 Form 10-Q Summary

Business Context and Reporting Period

Yelp connects consumers with local businesses through user-generated reviews, its website and mobile applications. The filing covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013. Yelp operated as one reporting segment, with substantially most revenue generated in the United States.

Approximately 56.9 million cumulative reviews and 132.5 million average monthly website unique visitors.
Approximately 10.9 million unique mobile devices used the mobile application on a monthly average basis.
Active local business accounts increased to approximately 74,000 from 45,000.
Employees totaled 2,154, up 46% year over year.

Financial Performance and Liquidity

Metric	Q1 2014	Q1 2013	Change
Net revenue	$76.4 million	$46.1 million	Up 66%
Loss from operations	$(4.6) million	$(4.6) million	Approximately flat
Net loss	$(2.6) million	$(4.8) million	Improved $2.2 million
Basic and diluted loss per share	$(0.04)	$(0.08)	Improved
Adjusted EBITDA	$8.5 million	$3.2 million	Up 166%
Cash flow from operations	$9.3 million	$(0.2) million	Improved $9.5 million

Revenue mix remained consistent: local advertising represented 85% of revenue, brand advertising 10%, and other services 5%.
Local advertising revenue increased 67% to $65.2 million; brand advertising increased 57% to $7.5 million; other services increased 56% to $3.8 million.
Operating margin improved to approximately negative 6.0% from negative 9.9%; net margin improved to approximately negative 3.4% from negative 10.4%.
Adjusted EBITDA margin increased to approximately 11.1% from 6.9%. Adjusted EBITDA excludes stock-based compensation, depreciation and amortization, taxes, other income or expense, and restructuring and integration costs.
Cash and cash equivalents were $399.3 million at March 31, 2014, including $360.7 million in money market funds. Restricted cash was $3.7 million.
Yelp reported no outstanding bank loans, credit facilities, long-term borrowings, or material capital lease obligations.
Operating lease obligations totaled $110.0 million, including $17.7 million due within one year.

Material Changes Versus the Prior Comparable Period

Revenue growth was driven primarily by expansion of the sales force and a significant increase in local advertising customers.
Sales and marketing expense increased 60% to $45.1 million, although it declined to 59% of revenue from 61%.
Product development expense increased 93% to $14.0 million and rose to 18% of revenue from 16%, reflecting increased engineering and product investment.
General and administrative expense increased 50% to $13.2 million but declined to 17% of revenue from 19%.
Stock-based compensation increased to $9.5 million from $5.2 million and was a significant contributor to the difference between GAAP net loss and adjusted EBITDA.
Restructuring and integration expense declined to zero from $0.7 million as the Qype restructuring was completed during 2013.
Capital spending and capitalized website and software development costs increased substantially. Investing cash outflows were $6.2 million versus $1.9 million in the prior period.

Outlook, Commentary, Risks, and Unusual Items

Management expected continued heavy investment in sales and marketing, product development, technology infrastructure, domestic and international expansion, and SeatMe integration.
Management expected cost of revenue, sales and marketing, product development, general and administrative expense, and depreciation and amortization to increase in absolute terms. No specific revenue or earnings guidance was provided in the filing text.
Management believed existing cash and expected operating cash flow would meet working capital and anticipated capital expenditure requirements for at least the next 12 months, but noted that additional financing could be required for growth initiatives, acquisitions, or other business challenges.
Q1 2014 included a $2.0 million income tax benefit, primarily from releasing a valuation allowance on foreign net operating losses. U.S. tax benefits on current losses were not recognized because realization was considered unlikely by year-end.
A consolidated lawsuit alleging manipulation of reviews to coerce advertising purchases had been dismissed with prejudice, but plaintiffs’ appeal remained pending before the Ninth Circuit. The potential loss could not be reasonably estimated.
Key risks include continued operating losses, dependence on advertising revenue and search-engine traffic, intense competition including from Google, mobile monetization challenges, international expansion, service interruptions, privacy and data-security obligations, intellectual-property claims, acquisition integration, and volatility in advertising spending.
Yelp disclosed no off-balance-sheet arrangements. Its disclosure controls and procedures were assessed as effective at a reasonable assurance level.

Important Facts for Investors to Verify

Whether rapid 66% revenue growth can continue as the company expands into smaller domestic markets and international markets.
Whether sales, product, infrastructure, and employee-related investments can be scaled without prolonging GAAP operating losses.
The sustainability and quality of positive operating cash flow, particularly after capital expenditures and capitalized software costs.
The effect of $9.5 million in quarterly stock-based compensation and future equity dilution from outstanding options, restricted awards, and employee plans.
The outcome and potential financial exposure of the pending Ninth Circuit appeal and other intellectual-property, privacy, consumer-protection, and platform-content claims.
The ability to monetize growing mobile usage while maintaining user engagement and protecting traffic from search-engine algorithm or product changes.
The impact of the dual-class structure, under which Class B holders controlled approximately 64% of voting power at March 31, 2014.