Yelp Inc. (YELP) is under pressure (-8.5%) this morning after reporting Q4 earnings last night. In terms of quick background, Yelp operates one of the world's largest local business review apps. It connects people with local businesses by bringing "word of mouth" online and providing a platform for businesses and consumers to engage and transact.
Its app and website have been a platform for 100+ mln cumulative reviews of almost every type of local business in more than 30 countries. Consumers 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 from 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 anything else they want to ask. 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.
For example, businesses can register a business account for free and "claim" the Yelp business listing page for each of their locations, allowing them to enhance the page with additional information about their business and respond to reviews, among other features. Businesses can also pay for premium services to promote themselves through targeted search advertising, discounted offers and further enhancements to their business listing pages.
Yelp has been fairly active in terms of M&A. In 2017, it acquired Nowait and Turnstyle Analytics (now called Yelp WiFi). Yelp also announced a significant deal with GrubHub (GRUB). Yelp sold its Eat24 business to Grubhub for $287.5 mln in cash, booking a nice profit as it bought Eat24 for $134 mln in February 2015. In addition, Yelp and Grubhub have entered into a long-term strategic partnership in which Yelp will integrate online ordering from all Grubhub restaurants into Yelp's platform. The partnership is good for Yelp because it adds tens of thousands of order-ready restaurants to the Yelp Platform and increases the availability of food delivery via Yelp, which will drive usage and transaction velocity in Yelp's most highly-trafficked category.
Turning to the Q4 results, non-GAAP EPS fell 30% YoY to $0.19 from $0.27 in the prior year period. This was well below market expectations. Revenue rose 12.0% year/year to $218.2 mln, which was above prior guidance of $211-216 mln. Adjusted EBITDA fell 8% YoY to $41.6 mln, which was at the high end of prior guidance of $39-42 mln. Adjusted EBITDA margin fell to 19% from 23% in the prior year period.
In terms of guidance for Q1, YELP expects revenue of $218-221 mln, which is in-line with market expectations. YELP also expects Q1 adjusted EBITDA of $29-32 mln. For all of 2018, Yelp expects revenue of $935-965 mln, which also is in-line with market expectations. YELP expects 2018 adjusted EBITDA of $175-187 mln. Looking ahead, Yelp expects to grow advertising revenue in the home and local category faster than in other categories in 2018, partly as a function of the heightened appeal of Request-A-Quote.
In sum, it's unusual for a company to beat on revenue then miss badly on EPS. It indicates that expenses were a lot higher than expected. On the call, management made that clear. The primary factor for higher expenses was an increase in employees. YELP grew its advertising salesforce by roughly 250 people during Q4 and had 3,300 people in ad sales at year-end, up 32% from the year-end 2016.
And it sounds like there will be more spending in 2018. The company intends to invest in Yelp Reservations, Nowait and Yelp WiFi in order to increase user engagement and transaction activity within the restaurant category, as well as generate additional subscription revenue. These investments are expected to initially dampen adjusted EBITDA growth and margin expansion in 2018 but set up stronger financial growth in the long term. Specifically, Yelp is going city-by-city to build local density. Bottom line, it sounds like Yelp is ok taking a short term hit to margins/EPS to grow the business for the long term.