What to Expect When Yelp Inc Reports Earnings?

Yelp (YELP 1.25%) is set to report its fourth-quarter earnings results on Wednesday. The company surged on the momentum provided by Facebook's (META -0.24%) results last week, as mobile ad revenue grew tremendously at the largest social network company. Yelp, which caters to the multibillion local business market, will look to replicate Facebook's success as it competes with Google (GOOGL 9.74%) and other social networks for advertising dollars.

Yelp has 57,000 local businesses advertising on its platform, but millions of companies have a presence on its site. In the last year, the company has really stepped up its efforts to improve its penetration of its market, but has paled in comparison to Facebook. Facebook reported that it has over 1 million advertisers, most of which are small local businesses, and has 25 million small businesses with a presence on its network. Google, the advertising giant that it is, saw record revenue last quarter on an increase in the number of clicks on its advertisements.

Stats on Yelp

Source: Yahoo! Finance.

The Street reviews Yelp
Since the company's last earnings report, the consensus estimate decreased by a penny. In the last thirty days, however, one analyst improved his outlook for Wednesday's report. The stock is up almost 9% since its last earnings report despite pressure from a secondary offering. Comparatively, the S&P 500 has been flat in the same period.

For the third quarter, Yelp reported revenue of $61.2 million, topping the analysts' consensus estimate of $59.4 million, but fell short of estimates when it reported a loss of $0.04 per share. The earnings miss coupled with the announced secondary offering sent shares down.

For the fourth quarter, Yelp guided for revenue between $66 million and $67 million, below analysts' expectations. Yelp has consistently guided for revenue well below its actual results, however, so the inconsistency between estimates and the company's own guidance is not unusual.

Fighting for small business dollars
Yelp's biggest source of revenue comes from local businesses that choose to promote their business through the platform. In the third quarter, it grew local advertising revenue 80% year over year.

To continue growing, Yelp invests heavily in informing small businesses of its platform. Sales and marketing expenses were a whopping 56% of revenue in the third quarter, which is actually an improvement from the year ago period. Yelp should continue to demonstrate the leverage in its business model by continually decreasing that ratio.

Comparatively, Facebook's marketing and sales expenses accounted for just 11.3% of its total revenue in the fourth quarter. Its model for getting small business advertisers is simple, and its basic product has a much lower minimum ad-spend than Yelp.

Although Yelp has increased its flexibility when it comes to advertising products, its most popular product costs $300 per month for 12 months. Some businesses simply can't commit to that amount, which is one reason Facebook is able to succeed at attracting so many more advertisers.

Google, too offers significant flexibility with its advertising products, and has been aggressively attacking the local business market the last few years. Its acquisition of Zagat and the introductions of Google Now on iOS and City Explorer represent a threat to Yelp, but nothing Yelp management feels is significant. The biggest threat is businesses choosing Google's Adwords over Yelp.

What to watch for
When Yelp reports its fourth-quarter results, watch for Yelp to continue growing in key areas outside of financials such as reviews, unique visits, mobile visits, and business accounts. Also, look at its international growth as the company further integrates its Qype acquisition and develops its business in Portugal. As Yelp expands its total addressable market, it should see revenue grow, but also look for signs that it's moving toward deeper market penetration as well as expanding its revenue through different verticals.