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Yelp, Inc. Tumbles After Another Impressive Quarter

By Steve Symington – Oct 22, 2014 at 12:28PM

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Yelp's "disappointing" fourth-quarter guidance is overshadowing solid Q3 results. Here's what Foolish investors need to know.

Another quarter, another solid beat and raise from local business review specialist Yelp (YELP 0.33%). But it still wasn't enough to appease the market.

Quarterly net revenue climbed a whopping 67% year over year to $102.5 million, which was well above the high end of Yelp's own guidance for sales of $99 million. That translated to Yelp's second consecutive (and second ever) profitable quarter as a public company, with net income of $3.6 million, or $0.05 per share. Meanwhile, adjusted earnings before interest, taxes, depreciation and amortization climbed almost 150% over the same period last year to $20.1 million. Analysts, on average, were looking for earnings of just $0.03 per share on revenue of $99 million.

As a result, Yelp also raised its full-year revenue guidance to a range of $375 million to $376 million -- up from its previous range of $372 million to $375 million, and roughly inline with analysts' expectations for $375.2 million.

A victim of its own success
So why are shares being punished with a 15% plunge in after-hours trading? Look no further than Yelp's fourth-quarter guidance, which predicts net revenue of $107 million to $108 million. The midpoint of that range represents growth of "just" 52% and sits below analysts' expectations for sales of $111 million. Yelp also said adjusted EBITDA should increase to a range of $24 million to $25 million. But in the end, given the extent of Yelp's Q3 beat, it's evident the market was hoping for more.

Of course, that hardly means Yelp is a fledgling business. When asked for additional color on that guidance, management explained that third-quarter revenue from the "Other" segment rose 158% to $8 million, primarily driven by a strategic agreement with ad platform specialist YP. That number significantly exceeded expectations, so management said:

Given this, we decided to take the opportunity to realign the partnership for everyone's benefit. As such, for modeling purposes, we expect "Other" revenue to be approximately $7 million in Q4. While it's still early, we've been pleased with the partnership and look forward to continuing the relationship.

In addition -- and just as I had wondered going into the report -- management noted that international traffic once again saw a slight sequential decline in Q3 as a result of negative SEO algorithm changes by Google. Still, despite having a presence in 29 countries, Yelp's young international business made up only around 3% of total sales last quarter. Management also reminded investors it takes time and patience to build the necessary base of traffic before the company can even start to consider monetizing any given site. Moreover, investors should be happy the algorithm changes didn't have a more significant effect on Yelp's core domestic operations.

Investing for the future
To put Yelp's slim profitability into perspective, investors should also keep in mind sales, marketing, and product development costs collectively rang up at around 70% of total sales. That's certainly high, but it represents a fulfilled promise from management to continue investing in the business to seize as much share as possible of Yelp's large addressable market.

Sure enough, Yelp also saw average monthly unique visitors grow by 1 million sequentially, and 19% year over year to roughly 139 million. As per usual, mobile users grew even faster, increasing by 5 million sequentially and 46% year over year to 73 million. Around 45% of all new reviews posted on Yelp last quarter came from a mobile device. Active local business accounts also rose 51% year over year to 86,200, up from 79,900 last quarter, which indicates that the businesses themselves continue to see Yelp's platform as an effective way to engage customers. 

In the end, the market got spooked by what seems to be a deceleration in Yelp's top-line growth. But considering that the effects of algorithm changes and its realigned partnership with YP should prove only temporary, it looks as if little has changed with regard to this thriving company's long-term story.

Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Google (A and C shares) and Yelp and owns shares of Google (A and C shares). We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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