Yelp Inc. (YELP) is trading sharply higher (+27%) today after reporting Q2 earnings/guidance results last night. It also announced a smart deal with GrubHub (GRUB).
In case you're not familiar, Yelp was founded in San Francisco in July 2004. Yelp is one of the world's largest local business review sites. 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. The reviews contributed to Yelp's platform cover a wide set of local business categories, including restaurants, shopping, beauty and fitness, arts, entertainment and events, home and local services, health, nightlife, etc. Yelp generates revenue primarily from the sale of advertising on its website and mobile app.
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.
Earnings Analysis and GrubHub Deal
Turning to the Q2 results, non-GAAP EPS rose 56% YoY to $0.25, from just $0.16 in the prior year period. This was above market expectations. Revenue rose 21.0% year/year to $209.9 mln, which was above prior guidance of $202-206 mln. Adjusted EBITDA rose 53% YoY to $42.9 mln, which was well above prior guidance of $32-35 mln. Adjusted EBITDA margin improved markedly to 21% from 16% in the prior year period.
In terms of guidance for Q3, YELP expects revenue of $217-222 mln, which is in-line with market expectations. YELP also expects Q3 adjusted EBITDA of $32-35 mln. For all of 2017, Yelp expects revenue of $855-865 mln, up slightly from prior guidance of $850-865 mln. YELP expects 2017 adjusted EBITDA of $143-153 mln, up from prior guidance of $130-145 mln.
GRUB Deal: In addition to earnings, Yelp also announced a significant deal with GrubHub (GRUB). Yelp has agreed to sell Eat24 to Grubhub for $287.5 mln in cash. In addition, Yelp and Grubhub will enter into a long-term strategic partnership in which Yelp will integrate online ordering from all Grubhub restaurants into Yelp's platform.
Sale of Eat24: The rationale is that adding Eat24's large diner base and thousands of restaurants to GRUB's platform will be a huge boost in terms of connecting takeout diners and restaurants. Together, Grubhub and Eat24 will form the largest network of restaurants offering online and mobile food ordering in the US. Extending Eat24's restaurants to Grubhub's sizable diner network will help drive new diners and incremental revenue to Eat24 restaurant partners.
Partnership: The long-term agreement with Yelp ensures that Grubhub has access to Yelp's enormous user base to help drive more diners to GRUB restaurants. Consumers will get a better experience with a wider selection of restaurants and better delivery options. It's good for restaurants as well as they receive increased online exposure and increased order volume. 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.
Conclusion: In sum, Yelp's Q2 results were quite good, but it seems that the deal with GrubHub is the main reason for the big jump in the stock today. Consider that Yelp bought Eat24 for $134 mln in cash and stock in February 2015. So just 2+ years later, they are selling it at more than a 100% profit, so Yelp shareholders are happy to see that. Also, the deal makes sense for GRUB as Eat24 has proven to be a capable rival and had been strengthened since Yelp acquired it. So to buy your main rival and join forces with its former parent is probably a smart way to go.