What's happening: Shares of Yelp (NYSE:YELP) collapsed on Wednesday after the company reported its second-quarter earnings. The company's results were mixed; revenue of $133.9 million was slightly ahead of analyst estimates, but a GAAP EPS loss of $0.02 missed by three cents.
Guidance also fell well short of expectations for both the third quarter and the full year. Yelp expects third-quarter revenue of $139 million to $142 million, well below the $152.7 million analysts were expecting. For the full year, guidance of $544 million to $550 million fell short of the $571.2 million average analyst estimate.
At 12:10 p.m. Wednesday, the stock was down about 28% from the previous close.
Why it's happening: Yelp's revenue grew 51% year over year during the second quarter, driven by 43% growth in its local advertising business. Brand advertising revenue declined by 8% year over year, and the company expects local advertising to be its primary driver of growth going forward. Transactions revenue rose by nearly a factor of 10, to $11.3 million, mostly due to Yelp's acquisition of Eat24 during the first quarter.
This revenue growth wasn't enough to convince investors that things are on the right track. Yelp reported an essentially breakeven operating income during the quarter, down from $3.1 million during the same period last year. Net income fell from $2.7 million during the second quarter of 2014 to a loss of $1.3 million.
Yelp plans to completely phase out its Brand advertising product this year, which accounted for $8.3 million of revenue during the second quarter. The company's guidance reflects this, and it's one reason why it came up short of analyst expectations.
Investors are clearly disappointed in Yelp's weak guidance and its decline in profitability during the second quarter. A 28% drop in the stock price may seem extreme, but with revenue growth slowing and profits nowhere to be seen, it's not surprising that the stock was punished so severely.
Timothy Green 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.