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Why Yelp Stock Dropped 21.4% in November

By Steve Symington – Dec 11, 2018 at 7:23PM

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The local business review specialist plummeted after a painful quarter. Here's what investors need to know.

What happened

Shares of Yelp (YELP 0.54%) declined 21.4% in November, according to data from S&P Global Market Intelligence, after the local business review site announced disappointing third-quarter 2018 results.

Yelp stock dropped more than 26% on Nov. 9, the first trading day after Yelp announced its third-quarter revenue had climbed a modest 8% to $241.1 million, while adjusted EBITDA grew 17.2% to $50.3 million.  By comparison, Yelp's own guidance, provided in August, called for higher revenue of $242 million to $246 million, and adjusted EBITDA of $49 million to $52 million. 

Yelp logo with various cartoon drawings of local goods, including beer, shoes, and shopping bags


So what

To be fair, Yelp's top-line growth would have been more pronounced had it not been for a steep decline in transactions segment revenue to $3 million from $18 million in the same year-ago period, driven by its sale of Eat24 to Grubhub. Meanwhile, Yelp's advertising revenue grew 16% to $233 million, as paying advertiser accounts grew 25% to 194,000. Other revenue also climbed 50% to $6 million, thanks to improved productivity from the sales teams of Yelp Reservations, Yelp Nowait, and Yelp WiFi.

However, Yelp's core advertising business fell below expectations, a combination of "lower-than-planned sales headcount, adjustments to sales promotions, a now-resolved technical issue in [Yelp's] lead assignment system, and a lower success rate in reaching key decision makers in outbound sales calls," according to Yelp CEO Jeremy Stoppelman.

Stoppelman added that the impact these issues had on Yelp's growth was more pronounced under its recent shift to more flexible non-term ad contracts than it would have been under its old model.

Now what

In the meantime, Yelp told investors its fourth-quarter revenue should be in the range of $239 million to $243 million, good for year-over-year growth of roughly 10.3% at the midpoint. As such, Yelp also lowered its full-year outlook for 2018 revenue to arrive in the range of $938 million to $942 million, down from $952 million to $967 million before, with adjusted EBITDA of $178 million to $180 million, down from $186 million to $192 million previously.

Since then, Yelp has attempted to take advantage of its depressed share price by not only completing its previous $200 million share repurchase program, which was originally authorized in July 2017, but also by approving a new $250 million repurchase program at the end of last month.

That's not to say all investors are happy. More recently, Yelp has also found itself in the position of tactfully handling a request from activist shareholder SQN Investors to shake up the company's board or consider putting the company up for sale in response to what SQN called its "repeated strategic and operational missteps."

It seems unlikely that Yelp will voluntarily fulfill SQN's request. But given Yelp's steep stock-price decline last month after its revenue and earnings shortfall, it's hard to blame SQN for making its displeasure known.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.

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