Key Takeaways From Yelp's Earnings Report

Digging deeper than the top and bottom line on Yelp's fourth-quarter earnings.

Feb 6, 2014 at 2:00PM

Yelp (NYSE:YELP) reported its fourth-quarter earnings after the bell on Wednesday. Earnings per share were in line with the consensus analyst estimates of -$0.03. Its revenue of $70.7 million beat analysts' expectations of $67.22 million.

The company is clearly succeeding at attracting advertising dollars from local advertisers, despite strong competition from Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL). It reported an increase in local advertisers to 67,000 from 57,000 last quarter.

Here are some key takeaways from Yelp's fourth-quarter report.

Acceleration in active business accounts
Yelp grew active business accounts very well in 2012, but the company was unable to continue that growth off the higher base. Active business account growth hovered between 61% and 63% during the first three quarters of 2013. In the fourth quarter, active local business accounts grew 69% year over year.

Another encouraging sign is that Yelp spent a smaller percentage of revenue to attract those extra advertisers than it did in the third quarter. Last quarter, it spent 55% of revenue on sales and marketing, compared to 56% in the third quarter. In the year-ago period, the company spent 62% of revenue on sales and marketing.

It spends heavily to attract businesses from sites like Facebook. Facebook has really focused on small businesses in the last year, and boasts that more than 1 million of them advertise on the platform. Its marketing is much simpler; it just asks business owners if they'd like to promote a post.

Google, too, is working diligently to attract smaller advertisers with its more flexible advertising products. Google continued to see its average ad price drop in the fourth quarter, but made up for it in volume. Yelp, meanwhile, is fine with letting Google and Facebook take the really small advertisers as it's continuing to grow its base of advertisers at higher minimum ad prices.

Qype integration
Yelp completed its integration of Qype, the European business review site, in the fourth quarter. After buying the company in October of 2012, the company integrated the site's reviews for France and the U.K. in the third quarter and migrated the 1.8 million German reviews to its platform last quarter. Additionally, the company expanded into Portugal last quarter.

With Qype fully integrated into Yelp, the company can leverage its popularity to continue expanding in Europe. International markets represent a big growth opportunity for the business. In the third quarter, the company generated just 5% of revenue from international markets. There's plenty of room for improvement there, and with the company now selling ads in Germany, the business should start growing considerably in 2014.

Strong outlook
Yelp's outlook for the first quarter of 2014 and the fiscal year is better than analysts had originally expected.

For the first quarter, the company expects to bring in $73.5 million to $74.5 million in net revenue. Analysts have been expecting $73.25 million. For the full year, management is looking for $353 million to $358 million, while analysts estimated $347.85 million for fiscal 2014.

The strong outlook is a sign that the company is expanding nicely, and local businesses are seeing the value in its platform. It may also indicate that the company's expansion into other verticals is beginning to pan out. Last year, the company started focusing on "closing the loop" with businesses, allowing customers to find the business, browse the menu, complete an order, or reserve a table from Yelp's platform.

Good eats
Yelp's earnings were fantastic, and the market rewarded the stock by sending shares up more than 7% at the time of this writing. As the company manages the competitive environment of online advertising for local businesses, it's good to see a strong outlook from Yelp.

It's also a good indicator that there continues to be leverage in the platform, as sales and marketing as a percentage of revenue decreased while local business accounts accelerated. After a strong performance from the stock in 2013, Yelp is looking strong at the start of 2014.

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