What Investors Need to Know Going Into Yelp Inc Earnings

Yelp is spending heavily to beat big-name competition. How will that affect earnings?

Apr 29, 2014 at 3:30PM

Yelp (NYSE:YELP) is set to report its first-quarter earnings on Wednesday, after the stock price plummeted over the last seven weeks. The local business review site continues to put sales ahead of profits, as competition in the local ad market grows increasingly fierce. Yelp is spending to fend off local ad sales at Google (NASDAQ:GOOGL) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB).

Yelp finished 2013 with 67,000 advertising partners, and millions more companies with a presence on its platform. Growth in local ads is the key growth driver for Yelp, but Facebook has attracted a large number of small and local businesses to its advertising platform in the recent past as well, putting pressure on Yelp's salesforce. Meanwhile, Google has been implementing location-based features into its search results and advertising products.

Can Yelp continue growing in the face of big-name competition? Here's what we can expect from the company's upcoming earnings report.

Stats on Yelp

Analyst EPS Estimate

(0.06)

Year-Ago EPS

(0.10)

Revenue Estimate

$75.06 million

Change From Year-Ago Revenue

62.7%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance

The Street review
Yelp's 2014 outlook for the fiscal year and first quarter exceeded analysts expectations last quarter. The company guided for $73.5 million to $74.5 million in revenue for the first quarter where the Street expected just $73.25 million initially. While the Street consensus revenue estimate climbed from earlier projections, analysts dropped their EPS estimates from a $0.01 loss to $0.06.

The Street's pessimism is indicative of high salesforce spending and expansion cutting into profits. This is one metric to keep an eye on when Yelp reports.

Winning the local ad market
Yelp is heavily reliant on leveraging its platform to attract local ad revenue. In the fourth quarter, more than 80% of revenue came from local advertisers. Local ad revenue grew 71% in the quarter, which is slower than the 80% growth it saw in the previous quarter.

In order to continue growing at a rapid pace, Yelp partnered with one of its competitors -- YP. The partnership with YP allow Yelp to tap into the 575,000-strong customer base the directory publisher has gathered over the years. Meanwhile, YP gains access to Yelp's ad inventory, and the ability to enhance its customers listings on Yelp.

Additionally, the company continues to expand internationally. It completed the integration of European-base Qype in the fourth quarter, but international revenue still accounts for just 5% of the total. Look for strong international growth in the report.

Yelp has also done well attracting users on mobile devices. Most of those users, however, come through the mobile web via Google.

Google has taken steps to leverage its positions as the go to source for mobile web traffic by implementing more local search features into its search engine. Google is also stepping up its spending on a local sales force. Last year, the company added 13,000 new local sales reps. The company plans to add 20,000 more this year.

Facebook, too, has been stepping up its local search and advertising products. It rolled out Graph Search to mobile devices, which can incorporate GPS or location-based data. The company has over 1 million businesses advertising on its platform, most of which are small-to-medium sized businesses.

What to watch for
When Yelp reports, watch to see how its partnership with YP and international expansion affected local ad sales growth. The company will be hard pressed to continue posting the same growth levels as in the past few quarters, but it could surprise investors.

Additionally, keep an eye on the percentage of revenue the company spends on sales and marketing. It fell from over 60% in 2012 to the mid-50's in 2013. Watch for continued leverage in the business model.

Finally, watch for meaningful revenue from Yelp's "closing the loop" initiatives where it provides reservation and delivery services for businesses.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), and Yelp. The Motley Fool owns shares of Facebook and Google (A shares). 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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