When Yelp (NYSE:YELP) first began to expand its more flexible non-term advertising contracts early last year, the market wasn't quite sure what to think. After all, the new model immediately helped Yelp deliver a beat and raise with record advertiser account additions in the first quarter of 2018 -- but shares fell, as Wall Street remained skeptical if newer advertisers would be willing to stick around for the long haul.
Then, three months later, shares skyrocketed after Yelp's exceptional second-quarter results appeared to validate its approach, punctuated by accelerated growth as the local business-review specialist completed its transition.
The fun wouldn't last. In early November, Yelp stock plunged more than 20% in a single day after the company posted weaker-than-expected third-quarter results. Management blamed an array of "short-term operational issues" stemming from its new non-term model, while maintaining that the continuation of the model was still in Yelp's best interests over the long term.
However, previously patient shareholders aren't pleased. And on Wednesday, one in particular -- SQN Investors -- came out of the woodwork to make its demands known.
On one hand, SQN issued a press release chiding Yelp for its "dramatic underperformance after years of shifting strategy, missed opportunities, dismal execution, decreasing alignment with stockholders and poor corporate governance." On the other hand, SQN argued Yelp shares could climb as high as $55 to $65 -- up from around $36 and change today -- if the company were to implement a number of suggestions from the investment firm. Among them: refreshing the board of directors with three new members, repurchasing $500 million of stock, better aligning compensation with performance, and a number of other initiatives aimed at optimizing areas like monetization, sales efficiency, spending, head counts, and product gaps.
Alternatively, SQN believes Yelp could fetch $47 to $50 per share or more through an immediate private-equity buyout should it find a strategic suitor.
We're not activists, but...
Despite leveraging their 4%-plus stake in the company to urge change, SQN insists they're not activist investors. Rather, according to SQN founder Amish Mehta:
We are long-term investors and are now in our fourth year of investment in Yelp. We continue to believe Yelp has great potential to deliver significant value for its investors. However, after years of Yelp underperformance, we have lost patience and believe the Board needs fresh perspectives and stockholder representation. While we are not activists, and prefer to work constructively with Yelp on the reconstitution of its Board, we are prepared to take our recommendations directly to stockholders to seek their support.
Yelp, for its part, issued a press release in response later Wednesday, stating:
Yelp's Board and management team are focused on taking actions to deliver on our disciplined strategy to achieve sustained, long-term growth and create shareholder value. We value our shareholders' input and will continue to incorporate investor feedback as we work to capitalize on the opportunities before us and further ensure that our Board's composition best serves the strategic and operational goals of the business.
Yelp further pledged that while SQN engaged the Board with a separate letter in December, they will review the latest presentation, as well. Yelp added it's already in the process of evaluating the composition of its board, as well as "identifying additional Board candidates to help drive our strategy."
When Yelp fell badly short of expectations with its Q3 results in November, management suggested the company had already addressed many of the operational factors that hurt productivity. And in fact, each of the items they listed at the time -- namely, lower-than-expected head counts, adjustments to sales promotions, technical issues with their lead-assignment system, and low success rates with outbound sales calls -- directly correlate to much of SQN's list of strategic and operational recommendations.
Still, if Yelp can't find a middle ground with SQN in the coming weeks, we can be sure the company will have three new names at the ready in time for Yelp's March 8, 2019 nomination deadline for board candidates. At that point, whether SQN accepts the label or not, it would seem fair to say Yelp has created an activist investor through its recent missteps.