Yelp's (YELP) Q3 Earnings Rise Y/Y, Revenues Miss, View Cut

Yelp Inc. (NYSE:YELP) reported third-quarter earnings of 17 cents per share compared with 9 cents per share in the year-ago quarter.

Net revenues increased 8.6% year over year to $241 million, which missed the Zacks Consensus Estimate of $246 million and also fell short of the guided range of $242-$246 million. Excluding revenues of Eat24, which the company sold to Grubhub (NYSE:GRUB) in October 2017, revenues grew 17% year over year.

Fewer new customer additions and slower-than-anticipated local Advertising revenue growth were dampeners. Transition to non-term advertising, which is expected to drive customer acquisition in the long run, is an overhang in the short run.

Management noted that the pace of new account growth slowed in the third quarter compared with what the company witnessed in the first half of 2018. Moreover, decline in salesforce productivity was a key headwind in the third quarter.

Given the unimpressive results, management lowered its outlook for fiscal 2018.

Top-Line Details

Advertising revenues (97% of total revenues) increased 16% year over year to $233 million. Paying advertiser accounts were 194K, up 25% year over year. On a sequential basis, it remained flat owing to the increase in cancellations. Slowdown in paying advertiser account adversely impacted the company’s results.

However, Yelp is increasingly benefiting from its Home and Local services, which came up with solid performance in the last reported quarter. Home & Local category was mainly driven by revenues from ‘Request-A-Quote’, which increased 27% sequentially.

The company introduced new advertising products and features to better serve customers. The launch of Yelp Verified, a new paid offering, will help boost revenue growth in the Home & Local Services category. Additionally, diversification in the company’s go-to-market strategy owing to growth in self-serve, national and third-party sales channels is a positive.

Transaction revenues plunged 84% year over year to $3 million due to the loss of revenues as a result of the sale of Eat24 to GrubHub. In the third quarter of 2017, Eat24 had contributed nearly all of its Transaction revenues.

However, the plunge in Transaction revenues was partially offset by revenues earned from GrubHub for transactions originating on Yelp platform.

Other services revenues soared 30% to $6 million, driven by growth of Yelp WiFi marketing platform and synergies from combining Yelp Reservations with Nowait sales team.

In the third quarter, cumulative reviews rose 20% year over year to more than 171 million. App unique devices grew 13% year over year to 34 million on a monthly average basis.

Yelp Inc. Price, Consensus and EPS Surprise

Yelp Inc. Price, Consensus and EPS Surprise | Yelp Inc. Quote

Operating Details

Sales and marketing (S&M) expenses increased 8% year over year to $122 million due to expenses corresponding to increase in the number of sales employees from the year-ago period.

Product development costs increased 17% to $54 million, driven by increase in headcount.

General & administrative (G&A) expenses increased 10% to $30 million year over year, driven by increase in headcount and bad debt expense due to growth in ad revenues.

Income from operations increased 50.6% from the year-ago period to $10.4 million. Operating margin of 4.3% increased 130 basis points (bps) on a year-over-year basis.

Yelp reported adjusted EBITDA of $50 million, up 17% year over year. Adjusted EBITDA margin expanded 200 bps to 21%.

Balance Sheet & Cash Flow

Yelp exited the third quarter with $837 million in cash, investments & marketable securities, down from $803 million at the end of the prior quarter.

Net cash flow from operating activities in the first nine months of 2018 was $116 million, compared with $128 million in the year-ago period.

During the third quarter, the company repurchased nearly 160K shares at an aggregate price of $6 million.

From the beginning of the year to Sep 30, the company repurchased 1.8 million shares for $72 million.

Guidance

For the fourth quarter, Yelp expects revenues between $239 million and $243 million. Adjusted EBITDA is expected in the range of $48-$50 million.

For fiscal 2018, net revenues are now anticipated to be in the range of $938-$942 million, compared with the earlier guided range of $952-$967 million. Adjusted EBITDA is expected to be $178 million to $180 million, down from the earlier projection of $186-$192 million.

Zacks Rank & Key Picks

Yelp currently has a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the broader technology sector are Intel Corporation (NASDAQ:INTC) and Twitter, Inc. (NYSE:TWTR) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Intel and Twitter is projected to be 8.4% and 22.1%, respectively.

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