Yelp Is Investing in Its Future -- and the Market Isn't Happy

Yelp Inc. (YELP 0.61%) announced better-than-expected fourth-quarter 2017 results on Wednesday after the market closed, detailing continued healthy growth in traffic and advertising for its core business-review platform. But after Yelp followed with a warning on its near-term profitability, the market punished its stock with a 14% plunge.

Now that the dust has settled, let's take a closer look at what Yelp accomplished over the past few months, as well as why its guidance left investors wanting more.

IMAGE SOURCE: YELP.

Yelp results: The raw numbers

Data source: Yelp.

What happened with Yelp this quarter?

• Note Yelp's GAAP net income included a $164.8 million pre-tax gain on the sale of Eat24. Adjusted for one-time items, Yelp's net income was $16.8 million, or $0.19 per share. That's down from $0.27 per share in the same year-ago period, but arrived well above investors' expectations for adjusted earnings of $0.05 per share.
• Revenue was above the high end of guidance provided last quarter, which called for a range of $211 million to $216 million. 
• Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 8.2% year over year, to $41.6 million, but arrived near the high end of guidance for $39 million to $42 million.
• By segment:
  • Advertising revenue increased 18% year over year, to $208.4 million.
  • Transactions revenue fell 68%, to $5.2 million, primarily due to Yelp's sale of Eat24 to Grubhub in October.
  • Other services revenue more than doubled, to $4.6 million, driven by higher sales from Nowait and Yelp WiFi. 
• Cumulative reviews grew 23% year over year, to 148 million.
• App unique devices climbed 20%, to $29 million, on a monthly average basis.
• Paying advertising accounts rose 21%, to roughly 163,000.

What management had to say

"We finished 2017 strong with rising growth in new advertiser acquisition and continued improvements in revenue retention from the prior year," stated Yelp co-founder and CEO, Jeremy Stoppelman. "In 2018, we are focused on increasing consumer usage through deepening our product experience in the Restaurants category and attracting advertisers through expanding sales channels and increased ad product flexibility."

To that end, Yelp CFO Lanny Baker noted that Yelp plans to give businesses "greater control over their advertising messages and increased flexibility in contract term lengths."

What's more, Baker added that Yelp plans to increase investments aimed at growing its burgeoning Nowait, Yelp Reservations, and Yelp WiFi products. But those investments will come at a cost: Yelp expects to incur collective operating losses in the range of $20 million to $25 million from the three platforms in 2018. 

Looking forward

In the meantime, Yelp expects revenue in the first quarter in the range of $218 million to $221 million -- the midpoint of which is slightly above consensus estimates -- which should result in adjusted EBITDA of $29 million to $32 million. That's good for adjusted EBITDA margin of just 14%, marking a steep drop from 19% in the fourth quarter.

That said, Yelp also told investors to expect full-year 2018 revenue of $935 million to $965 million, in line with expectations and good for 12.2% growth at the midpoint. That should result in adjusted EBITDA for the year ranging from $175 million to $187 million, representing healthier adjusted EBITDA margin of 19.1%.

In the end, our short-sighted market certainly isn't happy about Yelp's underwhelming EBITDA guidance to start the year -- even though it resulted from Yelp's astute decision to forsake near-term profits in favor of focusing on long-term growth. Contrary to what the market's negative reaction might indicate, this was an admirable end-of-year performance from Yelp that should leave patient investors pleased with its position.