Yelp Inc. (YELP) reported earnings of 5 cents per share in the third quarter of 2014, beating the Zacks Consensus Estimate by couple of cents. It also reversed the year-ago loss of 4 cents per share and increased by a penny from the previous quarter. This improvement was primarily attributable to robust revenue growth.
However, share price plunged 13.1% ($9.23) to $61.00 in after-hours trading, primarily due to Yelp’s weak fourth quarter revenue outlook, which missed the street estimates.
Revenue
Revenues surged 67% from the year-ago quarter to $102.5 million, ahead of management’s guided range of $98 million to $99 million as well as the Zacks Consensus Estimate. Revenues improved approximately 15% sequentially.
Local revenue was $85.1 million, up 66% on a year-over-year basis while brand advertising revenues increased 35% year over year to $9.3 million. Other revenues soared 158% from the year-ago quarter to $8 million, primarily driven by the robust revenue growth from the Yelp-YP partnership.
International revenue contributed about 3% of revenues in the quarter. Total international traffic grew 40% year over year to approximately 30 million unique visitors on a monthly average basis. International traffic declined slightly on a sequential basis due to Google’s (GOOGL) algorithmic changes.
During the quarter, Yelp entered into Chile and Hong Kong. The company also introduced mobile review translation, which enables consumers around the world to translate reviews between any of its supported languages.
In the third quarter, Yelp recorded a 51% year-over-year increase in active local business accounts to 86,200. Cumulative reviews increased 40% from the year-ago quarter to 67 million. Near about 45% of the new reviews were contributed through mobile devices.
Average monthly unique visitors grew 19% on a year-over-year basis to 139 million in the quarter. Average monthly mobile unique visitors on the other hand grew 46% year over year to 73 million.
Margins
Yelp reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $20.1 million compared with $8.1 million in the year-ago quarter.
Sales and marketing expenses escalated 60% year over year to $54.6 million while product development costs flared up 55.2% year over year to $17.4 million. General & administrative expenses increased 44.1% from the year-ago quarter to $15.2 million.
Sales headcount grew 52% in the quarter on a year-over-year basis. The company intends to continue investing in sales and marketing going forward with an eye to explore the large market opportunity.
In the third quarter, Yelp reported an operating profit of $4.5 million versus a loss of $1.8 million in the year-ago quarter.
Net income was $3.6 million or earnings of 4 cents per share compared to net loss of $2.3 million or 4 cents per share in the year-ago quarter.
Balance Sheet & Cash Flow
Yelp exited the quarter with $364.1 million in cash & cash equivalents versus $290.4 million in the previous quarter. The company generated $19.9 million in cash from operations in the reported quarter, flat sequentially.
Guidance
For the fourth quarter of 2014, Yelp expects revenues in the range of $107 million to $108 million, representing 52% year-over-year growth. Other revenue is expected at $7 million, down sequentially. Brand revenue is expected to remain flat on a sequential basis.
Adjusted EBITDA is expected in the range of $24 million to $25 million for the fourth quarter.
For full-year 2014, net revenue is expected in the range of $375 million to $376 million, representing year-over-year growth of approximately 61%. The company also projected adjusted full-year EBITDA in the range of $69.5 million to $70.5 million (up from earlier outlook of $67 million to $69 million).
Our Take
Yelp reported a better-than-expected third quarter. However, management’s cautious revenue guidance for the fourth quarter will remain an overhang on the stock.
We remain encouraged by the company’s international expansion, which will beef up ad revenues. Additionally, its partnerships with Yahoo! (YHOO) and YP.com are positives.
However, slowing growth in active local business accounts remain a concern. Fierce competition from the likes of Facebook (FB) in the brand related revenue market and rising product development cost remain headwinds.
Currently, Yelp has a Zacks Rank #4 (Sell).
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