Yelp (YELP 48.89, +10.73, +28.12%) is trading sharply higher today after
reporting Q2 earnings last night.
Yelp operates one of the world's largest local business review apps. It connects people with local businesses by providing an online version of "word of mouth" in the form of a platform where businesses and consumers can engage and make transactions.
Its app and website have been a platform for more than one hundred million cumulative reviews of almost every type of local business, from diners to carl dealerships to ski resorts, in more than 30 countries. Consumers can research area businesses; share their everyday local business experiences through reviews, tips, photos, and videos; and engage directly with businesses through reviews, phone calls, and Yelp's “Message the Business” feature. Yelp generates revenue primarily through advertising.
A growing service for Yelp is its Request-A-Quote feature, which allows consumers to message business owners directly with questions about the business or their services -- pricing, availability, offerings, or any other concerns. Yelp's platform is not just for consumers; it also provides businesses with a variety of free and paid services that help them engage with consumers and keep potential customers aware and informed.
Yelp has also been rolling out a big change in terms of its advertising billing. Basically, Yelp is shifting to non-term contracts from long-term (12-month) contracts. So, for example, if you own a flower shop and want to attract Yelp users to your store, you don't need to buy a full year of ads; instead, you can buy just what you need and cancel your service anytime. The goal of the shift is to reduce friction in the buying process. A lot of customers were balking at having to commit to long-term contracts. Also, non-term is the norm with competitors like Facebook and Google, so Yelp needed to adapt to remain competitive. After more than a decade of facilitating ad sales with term contracts, Yelp completed the transition to selling non-term ads across its Local salesforce in May 2018.
Yelp has seen an uptick in free trials when using its non-term strategy. A positive aspect of this is that this at least gets these customers in the Yelp ecosystem, enabling Yelp to continue to try to sell to them over time. All new customers are using Non-term contracts. Reportedly, the service is very popular with them, as customers prefer to have flexibility in terms of ad spending levels. Given the magnitude of the change, Yelp has been rolling out it slowly, but management feels good about the transition.
Turning to the Q2 results, Yelp reported GAAP EPS of $0.12/share, which is not comparable to analyst models (which are based on non-GAAP). We could not find a non-GAAP EPS number in the letter to shareholders, so it's hard to compare. However, they did report adjusted EBITDA of $46.9 mln, which was above prior guidance of $39-42 mln. As for revenue, that rose 11.9% year/year to $234.9 mln, which was above prior guidance of $230-233 mln. Yelp issued guidance for Q3 revenue at $242-246 mln with adjusted EBITDA of $49-52 mln. For FY18, the company sees FY18 revs of $952-967 mln and adjusted EBITDA of $186-192 mln.
Of course, everyone wants to know how the transition to non-term contracts is going. Yelp, as alluded to above, says it's pleased with how the transition has gone. Clients have responded well to the increased flexibility, and its salesforce has closed more new deals than ever before. Paying advertising accounts increased by nearly one-third from a year ago to 194,000, the fastest growth rate in two years.
By design, the transition to non-term advertising has accelerated deal volume, and although it has also amounted to some acceleration in account turnover, the net result has nevertheless been greater revenue for the company. The revenue growth is generating more profit dollars for Yelp; the contribution-margin of local non-term deals have been consistent with those from term contracts in the past thanks to Yelp’s time-tested variable-commission structure and an advanced deal scoring system.
Even as Yelp focused on this transition to non-term, it also made encouraging progress on growth initiatives in other areas. In Q2, Yelp more than doubled the number of diners seated via Yelp Reservations and Nowait compared to a year earlier, and Yelp accelerated food ordering growth into the mid-30% range year to year with the benefit of its partnership with Grubhub (GRUB). In Home & Local Services, Request-A-Quote helped Advertising revenue for the category surpass $75 mln in Q2, a more than 30% increase. In June, it launched Popular Dishes, a feature that scours more than one hundred million photos and reviews to surface the menu items Yelpers are most enthusiastic about and help to take the guesswork out of future ordering.
While Restaurants are a high-frequency category, Yelps is also enhancing monetization in high-value areas, in particular, Home & Local Services. To put some context around how valuable the category is to Yelp, consider that Advertising revenue per business location within the Home & Local Services category is about twice the average for all other categories combined. Ad revenue per Home & Local Service business pageview is also more than 5x that of all other categories combined. Finally, Yelp's Request-A-Quote lead volume grew 27% sequentially and topped 5.5 mln delivered requests in Q2.
Investors are clearly pleased with the Q2 results. This was the first quarter that the non-term advertising model was fully implemented (although not through the whole quarter; Q3 will be first full quarter where it's fully implemented), and the early results of it are quite promising. The concerns over customer churn from non-term deals seem to have been overblown. Also, the volume of new customer growth has been very brisk. And the nice thing is that even if a customer takes a free trial or cancels after three months, they are in the Yelp ecosystem and can be targeted in the future to come back. It's early, but the non-term model seems to be a winner for Yelp.
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