Shares of Yelp (NYSE:YELP) were up 7% at 11:45 a.m. Thursday, following the release of the company's third-quarter results after-hours Wednesday. Yelp's revenue exceeded expectations, but it lost more money than anticipated. Yelp lost an adjusted $0.11 per share on net revenue of $143.6 million. Analysts had expected the company to lose around $0.09 per share on revenue of around $141 million.
Revenue growth slows
Yelp's revenue rose 40% on an annual basis in the third quarter, showing a sequential slowing of growth. Last quarter, Yelp enjoyed 51% revenue growth and, in the quarter before, 55%. Local advertising revenue remains Yelp's largest segment, generating about 80% of Yelp's sales, and its revenue rose about 36% on an annual basis. Yelp's transactions segment saw its revenue surge a massive 170%, but it's a new segment with most of its growth attributable to a recent acquisition. In February, Yelp acquired Eat24, an online food-ordering service, to facilitate restaurant sales directly through its website.
Yelp's brand advertising business declined 4% on an annual basis, generating $9 million, or about 6% of Yelp's sales. It's a segment Yelp's management is intentionally winding down, and it plans to exit brand advertising entirely by the end of the year.
Yelp's business increasingly depends on its app
Yelp has successfuly transitioned from a website-based business to one dependent on its mobile app. The number of unique mobile devices with the Yelp app rose 39% on an annual basis to 20 million. According to Yelp's management, its app represents about 70% of its engagement. Yelp's page views rose nearly 40% on an annual basis, the bulk of them coming from mobile devices.
Outlook is in line with expectations
Yelp expects to generate net revenue of around $149.5 million to $154.5 million in the fourth quarter, up about 38% on an annual basis. For the full year, it expects to bring in about $545.5 million to $551.5 million, up around 45% from 2014. Both figures are largely in line with analyst estimates. Wall Street had expected Yelp to post revenue of around $152.1 million next quarter, and $546 million for the full year.
In the third quarter, Yelp's potential profit was hit by growing costs. While its revenue rose 40% on an annual basis, its total costs and expenses rose nearly 58%. Sales and marketing costs were particularly high, up about 52% on an annual basis, and representing about 58% of Yelp's net revenue. In the same quarter last year, sales and marketing costs were around 53% of net revenue. In the past, Yelp's management has cited fierce competition for talent from other tech firms to explain its disappointing growth. The growing number of multibillion-dollar start-ups in the Bay area makes it more difficult for Yelp to hire, and it seems to be making it more expensive.
Overall, Yelp has had a difficult year. Before Wednesday's modest after-market rally, Yelp shares had fallen nearly 60% in 2015. Given that Yelp isn't profitable on a consistent basis, slower-than-expected growth has taken a toll on Yelp's valuation. In terms of its price-to-earnings ratio, Yelp is a cheaper stock today than it was six months ago, but it's not a value stock.
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.