Yelp Delivers Another Profitable Quarter on Advertising Strength

Yelp Inc. (YELP +2.27%) announced better-than-expected third-quarter 2017 results on Wednesday after the market closed, highlighting another unexpected profit and strong growth in both traffic and advertiser accounts for its core local business review platform.

Yelp also issued seemingly conservative revenue guidance for the current quarter and reduced its outlook for the full year, causing shares to initially fall in after-hours trading. But management later explained that, on the heels of Yelp's sale of Eat24 to Grubhub (GRUB +0.00%), the outlook was essentially a reiteration of last quarter's strong guidance.

Let's dig deeper to see what drove Yelp's business as it started the second half of the year, as well as what shareholders should expect in the months ahead.

IMAGE SOURCE: YELP.

Yelp results: The raw numbers

Data source: Yelp.  

What happened with Yelp this quarter?

• On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation and restructuring costs, Yelp's net income was $25.4 million, or $0.29 per share, well above investors' expectations for an adjusted loss of $0.02 per share.
• Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 27% year over year to $42.8 million, above Yelp's latest guidance for $32 million to $35 million.
• Revenue was also above the high end of Yelp's guidance, which called for a range of $217 million to $222 million.
• By segment:
  • Advertising revenue climbed 18% year over year to $199.6 million.
  • Translactions revenue grew 16% to $18.5 million, primarily driven by Eat24.
  • Other services revenue climbed 207% to $4.3 million.
• App unique devices increased 21% year over year to $30 million on a monthly average basis.
• Cumulative reviews climbed 23% year over year to 142 million.
• Paying advertising accounts climbed 18% year over year to roughly 155,000.
• On October 10, 2017, Yelp completed its sale of Eat24 to GrubHub Inc. (GRUB +0.00%). Yelp received roughly $251.7 million in cash at closing, and another $28.8 million will be held in escrow for 18 months to secure Grubhub's rights of indemnification.

What management had to say

"We executed well in the third quarter, growing revenue by 19% and generating positive net income," added Yelp co-founder and CEO Jeremy Stoppelman. "Traffic growth continues to be healthy, with app unique devices growing 21% year over year, and our retention efforts have contributed to strong double-digit advertiser account growth."

Looking forward

For the fourth quarter of 2017, Yelp anticipates revenue in the range of $211 million to $216 million, and adjusted EBITDA of $39 million to $42 million. As such, Yelp revised its full-year guidance to call for revenue of $839 million to $844 million (down from $855 million to $865 million previously), and adjusted EBITDA of $154 million to $157 million (an increase from $143 million to $153 million previously).

But investors should keep in mind that this guidance reflects the sale of Eat24 to GrubHub, and a long-term partnership under which Yelp is integrating online ordering from GrubHub restaurants onto its local goods and services platform. The partnership dictates that Yelp will only recognize revenue via royalties on transactions originating on Yelp and sent over to Grubhub, which means sales under the deal will start out small. But the move is expected to nearly double online food ordering options on Yelp as it finishes the integration in early 2018.

"[If] you were to take the third quarter, fourth quarter, and pull out Eat24 from both periods," Stoppelman elaborated during the subsequent call, "the growth rate of the underlying Yelp business is comparable in that same period. So no big change in our views and outlook there."

With that in mind, there was nothing not to like about Yelp's performance from an investor's perspective. And it's no surprise to see shares trading up modestly to near a 52-week high in response today.