Management Says Yelp Is Just Getting Started

67,200 down, tens of millions to go.

Feb 8, 2014 at 2:00PM

Yelp (NYSE:YELP) released it fourth-quarter earnings on Wednesday, and while it reported better-than-expected revenue growth, the company spent heavily to grow that revenue, resulting in negative earnings per share. The company very much remains in growth mode nearly 10 years after it was founded. Comparatively, Facebook (NASDAQ:FB), a company founded in the same year as Yelp, is already facing concerns that its user base is near saturation.

The business of local digital advertising is expected to grow from $26 billion in 2013 to $41 billion in 2017. Yelp will compete with the likes of Facebook and Google (NASDAQ:GOOGL) in this growing market, and as Yelp's management sees it, it's just getting started. 

The long term
On the conference call, CFO Rob Krolik was very vocal about the opportunity that lies ahead for Yelp. Here are a couple snippets:

67,000 businesses advertise with us today, which is a drop in the bucket compared to the opportunity. And over time our goal is to be the first place new local businesses turn to for advertising.

With 60,000-odd accounts and the notion of tens of millions of prospective advertiser accounts, we feel like we're very much still getting started.

Management iterated that it sees opportunity in attracting businesses away from offline advertising like the Yellow Pages, but the trend shows that offline advertising is already losing business to digital. BIA/Kelsey expects offline local advertising to decline slightly from 2012 through 2017, while all of the growth in local advertising comes from digital.

Winning the growing market
The growth in digital advertising means Yelp will really be battling Facebook and Google for advertisers. Facebook has made significant progress with small businesses in the last year, and it now boasts more than 1 million advertisers. Its success stems from its ability to provide a presence for businesses online and then simply ask them if they'd like to promote that presence.

Google, meanwhile, offers much more flexible advertising plans than Yelp typically promotes to its customers. It, too, has gone after the lucrative local advertising market more aggressively recently.

When asked about making more flexible and accessible advertising plans, Yelp COO Geoff Donaker mentioned that the company offers cost-per-click, or CPC, advertising for more advanced customers, and added the following:

We continue to ... experiment with new ad formats and price formats, and I think we can expect that to continue for the coming years.

Moreover, Yelp is working to show businesses the value of advertising on its platform with tools like Revenue Estimator. Donaker was keen to point out a study the company commissioned last year, quantifying the value Yelp provides to its customers.

Yelp advertisers generate an average of $23,000 in revenue from Yelp relative to $8,000 for those who can just claim their free accounts on Yelp.

The average ad spending for a business on Yelp is $4,200 per year, so advertisers are seeing an average return on investment of more than 250%.

Got to spend money to make money
Last quarter, Yelp spent 55% of its revenue on sales and marketing. That's an improvement from the year-ago period, when the company spent 62% of revenue. In 2014, the company doesn't plan to use that leverage to show better operating margin. Instead, it's focusing on continued growth. Here's what CFO Krolik had to say:

We want to hire some more sales people. We want to invest in technology and maybe even a little bit of marketing spend for experimental purposes. So, we see a great opportunity ahead of us, and we feel like now is the time to put the pedal to the metal on that.

Management is not slowing down, and is still primarily focused on extracting the most it can out of its most valuable market -- the U.S. -- even as it expands abroad. When questioned about whether the company's increased presence in Europe after integrating its Qype purchase would translate into a higher percentage of revenue from international markets, Krolik's response was to the point.

International is growing, and it's growing fairly rapidly, but I think as a percentage of the total, it's probably in line with how it has been trending over the last year: 4%-5% at the end of the day.

Monetization in Europe by Facebook and Google still lags that in the U.S. With limited resources, Yelp is going after the low-hanging fruit first.

Loving what they heard
Analysts loved what they heard from management about its 2014 outlook and the opportunity ahead of it. As a result, the stock skyrocketed 19% on Thursday. With the digital local ad market growing rapidly in the next few years, and millions of local businesses that have yet to advertise on the platform, Yelp looks like a strong company going forward.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Yelp. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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