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Yelp Shows Why Valuation and Growth Concerns Kept Buyers Away

Sometimes investors worry when they see an analyst issue a key downgrade of a stock in the days or hours ahead of a company earnings report. Yelp Inc. (NYSE: YELP) was downgraded to Hold from Buy with a $33 price target, versus $33.73 close, at Deutsche Bank on Tuesday morning. Now the online reviews site has released earnings and Deutsche Bank looks justified for giving up on last minute hopes here for good news.

As a reminder, Yelp shares have been under pressure after it recently had to give up hope of finding a buyer at anything close to current share prices. Analysts had also been watering down those buyout hopes ahead of the search for a buyer being called off.

Yelp said that its net revenue was $133.9 million in the second quarter, up 51% over the second quarter of 2014. Yelp’s net loss in the second quarter of 2015 was -$1.3 million, or -$0.02 per share — versus net income of $2.7 million, or $0.04 per share, in the second quarter of 2014. The operating income used by Wall Street, the non-GAAP net income, was $9.4 million, or $0.12 per share, for the second quarter.

Thomson Reuters was calling for consensus expectations of $0.01 in operating EPS and $133.48 million in revenues. Yelp also signaled that its adjusted EBITDA was up 32% to $22.7 million, and its cumulative reviews grew by 35% year over year to approximately 83 million.

While Yelp said that the Mobile Unique Visitors surpassed the number of Desktop Unique Visitors for the first time, with growth of 22% year over year to approximately 83 million on a monthly average basis, some were likely hoping for more user growth in general. Local advertising accounts grew 40% year over year to approximately 97,1004.

Jeremy Stoppelman, Yelp’s CEO, said:

We continue to demonstrate solid topline growth, with total net revenue increasing 51% year over year to approximately $134 million. Consumers are increasingly turning to apps when using their mobile phones, and we are excited about the growth we’ve seen in app usage which accelerated to 51% year over year. We believe our rich content married with our highly-differentiated local advertising product will position us well to capture a meaningful share of the large local market.

The company’s CFO said he expects that Yelp’s local advertising will continue to be its primary driver of growth as the company works towards our goal of generating one billion dollars of revenue in 2017. Still, guidance looks short here.

For the third quarter of 2015, net revenue is expected to be in the range of $139 million to $142 million. This may be up 37% from last year at the mid-point, but Thomson Reuters has estimates at $152.66 million. Yelp’s adjusted EBITDA is expected to be in the range of $12 million to $15 million.

Yelp’s 2015 guidance put annual revenue in an expected range of $544 million to $550 million. While that is 45% growth or so, Thomson Reuters was calling for growth of about 51% to $571.16 million. Yelp’s adjusted EBITDA is expected to be in the range of $72 million to $78 million for the year.

When you see numbers like this in big widely used online companies you might expect more revenue and income for a market cap of $2.5 billion.

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Yelp shares closed down 0.6% at $33.51 on Tuesday, and the after-hours reaction was last seen down 13% at $29.06. Yelp already had a 52-week low of $32.36 that was hit on Tuesday, down from a 52-week high of $86.88. Yelp saw more than 1.1 million shares trade hands in the first 30 minutes of after-trading after its earnings report.

Even with the valuations having been sky high earlier, it is becoming even that much more clear as to why Yelp did not find any buyers willing to offer it a premium. The last time Yelp’s shares were under $30 was back in May of 2013. We had asked if the earnings bar was set too low or not. Apparently it wasn’t.

By Jon C. Ogg


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