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Yelp, Inc. Plunges on Disappointing Guidance

By Sam Mattera - Jul 28, 2015 at 6:20PM

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Yelp's third-quarter and full-year sales outlook fell short of analyst expectations.

Shares of Yelp (YELP -1.92%) fell more than 16% in after-hours trading on Tuesday. The drop followed the release of Yelp's second-quarter earnings results. Although Yelp's revenue and earnings exceeded analyst expectations, its guidance fell short.

Let's dig in to Yelp's report.

Revenue continues to grow
Yelp earned an adjusted $0.12 per share in the second quarter, on net revenue of $133.9 million. Analysts had expected EPS of about $0.01 on revenue of roughly $133.5 million. Under generally accepted accounting principles, Yelp was unprofitable, losing $0.02 per share. Yet its revenue continues to grow, increasing 51% on an annual basis. Revenue growth is slowing, but not to a significant degree -- in the second quarter last year, Yelp posted revenue growth of 61%.

Yelp now has 97,100 local advertising accounts -- a 40% gain on a year-over-year basis. Those local advertisers continue to spend, with Yelp's local advertising revenue up 43% year over year. Brand advertising revenue came in at just $8.3 million, down 8% from last year. Yelp announced that it plans to phase out its brand advertising by the end of 2015.

Yelp's other revenue category previously included transactions revenue. With the acquisition of Eat24 earlier this year, Yelp has moved into the business of facilitating online takeout orders. Going forward, Yelp will break its transactions revenue out separately, to give investors an idea of its success in that business. In the second quarter, transactions revenue totaled $11.3 million -- less than 10% of Yelp's total revenue, but up from just over $1 million in the second quarter of 2014.

Traffic growth is slowing
Given Yelp's lack of consistent profitability, investors are likely interested more in its rate of growth. In addition to revenue, traffic growth remains a key metric for Yelp shareholders, as the size of Yelp's audience could dictate its long-term success. Unfortunately, Yelp's rate of traffic growth slowed down quite a bit in the second quarter.

On average, Yelp had 83 million mobile monthly unique visitors in the second quarter, an increase of 22% on an annual basis. But last quarter, Yelp's average monthly mobile unique visitors grew 29%, and in the same quarter last year, it grew 51%. Yelp now has more mobile visitors than desktop visitors, and in total, it averaged 162 million monthly unique visitors (desktop and mobile). That's up about 17% from the same quarter last year. But again, the total rate of growth is slowing -- Yelp's unique visitor growth was 27% in the second quarter of 2014.

2015 is looking worse than expected
Of course, as Yelp becomes more popular, its rate of growth is sure to slow. More damaging to shareholders may have been Yelp's guidance. For both the third quarter and the full year, Yelp doesn't expect to generate as much revenue as analysts had previously anticipated.

In the third quarter, Yelp expects to generate net revenue in the range of $139 million to $142 million, up about 37% on an annual basis. The analyst consensus, however, had pegged Yelp's third-quarter revenue at around $152.7 million -- 49% growth. For all of 2015, Yelp expects net revenue of around $544 million to $550 million, up 45% from 2014. Yet analysts had been expecting revenue of $571 million -- 51% growth.

More established companies may not have seen such a significant sell-off in response to disappointing guidance, but Yelp remains a relative upstart. The double-digit drop may be overdone, but it's understandable given Yelp's status as a growth-oriented stock. Any evidence of disappointing growth is likely to take an outsized toll on shares. Yelp's business continues to grow, and its audience continues to increase, but not as quickly as some had hoped.

Factoring in Tuesday's after-hours decline, Yelp shares are now down almost 60% in the past 12 months.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Yelp. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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