Management Says Yelp Is Just Getting Started

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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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Comments from our Foolish Readers

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  • Report this Comment On February 08, 2014, at 8:03 PM, JaiYen wrote:

    "the company spent heavily to grow that revenue, resulting in negative earnings per share."

    Hasn't this been the story of Yelp for the last decade? Won't this remain the story of Yelp until the bubble bursts?

  • Report this Comment On February 09, 2014, at 12:38 PM, adamlevy wrote:

    @JaiYen There's leverage in the business. The percentage of revenue that goes toward sales and marketing is still declining.

  • Report this Comment On February 09, 2014, at 3:12 PM, Bosco435 wrote:

    YELP stock of local business review website Yelp is up 340 percent this year even though it has never earned a quarterly profit.

    I am certainly not the only one that is concerned that we are repeating the mistakes of the late 1990s... “When you look at valuations and look at the lack of earnings and revenue, it seems to me much like the dot-com bubble,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc. who helps oversee $10.2 billion. “This market looks a little frothy and Twitter is the personification of a risky trade.” In fact, as the Wall Street Journal recently noted, we have seen some of these tech stocks crash more than once during the Internet age... "It's fascinating to me that today's mini-mania includes shares of Amazon, Netflix and Priceline that have previously peaked and crashed before—in some cases they've peaked and crashed twice before," says Darren Pollock, portfolio manager at Cheviot Value Management. "Stocks like these have again captured the imagination of speculators. We're skeptical that there is enough underlying intrinsic value to many of the highfliers to support today's prices." So how long will it be until the current tech bubble implodes?

  • Report this Comment On February 09, 2014, at 3:14 PM, Bosco435 wrote:

    YELP worth only $15 not $89 any time soon go down to $45. Insider and big fund all selling at top means going crash here.

  • Report this Comment On February 09, 2014, at 3:19 PM, Bosco435 wrote:

    I know you bought this stocks very high at $89 area now you are going lose so your hyping stocks again and again. You are not a Analyst you are a Scamer.

    It is not make sense

  • Report this Comment On February 10, 2014, at 3:18 AM, rafarules wrote:

    the fool does a disservice to its readers when it doesn't do any hard core probability analysis. yelp may succeed in the 1% scenario that a savior idiotically overpays for its business without a moat (such as yahoo or some other dumb company buying up Marc Cuban's broadcom or which lost the acquiring firm the billion it paid for it), or in the 5% chance that the business nails it just right and revenues grow from a really small projected $350mm run rate to a multibillion dollar annual revenue stream in a few years but there's the great likelihood some other site becomes more popular or google overtakes and makes yelp irrelevent or apple ditches yelp or yelp collapses as the bubble bursts and yelp can no longer rely on the equity or debt markets to bail it out of its incessant need for cash to fuel its profitless growth before some other review site becomes the flavor of the day. Will lawsuits from businesses who are sick of yelp screening out positive reviews until yelp is paid off by said businesses ever come to fruition? Many things can and probably will go wrong while the markets are pricing yelp for perfect execution. Institutions own over 120% of the float according to yahoo? Small float, easy for the evil long hedge funds or terribly run momentum based money management firms to push this higher via the short squeeze methodology. When there's nothing left to squeeze and every last retail investor has been drawn into buying a bubble such as yelp, the rush for the exits by the institutional money managers will leave bubble stocks like yelp probably falling hard and fast - see spring of 2000 if you want a peek into the future.

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Adam Levy

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania

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