In 2014, approximately 545 million unique visitors wrote 18 million reviews on 2 million businesses.
They have clocked year over year growth, and had a relatively strong return on equity (ROE) that is favorable to other businesses in their sector. Unfortunately, earlier this year, they suffered a stock price drop that caused analysts to reevaluate their revenue projections:
From Sameet Sinha – B. Riley & Co.:
In light of this departure, we do believe YELP “s goal of $1B in revenue in 2017 becomes more distant. After delivering 34% PF growth (ex-display business) in 2016, YELP would need to accelerate to 44% growth in 2017 to make the goal. We would need to see a massive acceleration in transactions for the company to achieve that goal. Consensus is looking for $858MM in 2017, so clearly expectations are low.
And Kerry Rice – Needham & Co says:
The transition to mobile and a CPC model have not negatively impacted monthly revenue/active local account, which remained constant for 2015 and Q4.
Mobile continues to drive page view growth. Management indicated that on average, Yelp app users view 10x more pages than website users. Monthly active app users in Q4 was flat at 20M compared with Q3, primarily due to seasonal weakness. Management expects growth to re-accelerate in 1Q16 as the seasonally strong quarters are ahead.
What this means is that post-IPO YELP has somehow managed to meet their projections (or at least be not far off), but only by cutting internal costs in order to increase sales and marketing spend. This lowers their already thin margins even more.
We can see evidence of that in a few places.
Return on Equity
Return on equity (ROE) measures the rate of return for ownership interest (shareholders’ equity) of common stock owners. It measures the efficiency of a firm at generating profits from each unit of shareholder equity, also known as net assets or assets minus liabilities.
We can see that while their ROE was on the rise after taking a significant hit in 2013, it has started to go down again.
Cost Cutting Measures
Through an open letter that went viral, an employee of one of Yelp’s subsidiary companies spoke about the low wages, poor conditions and low morale evident in the company. The company terminated the employee as a response, citing a violation of their code of conduct, but no matter how you slice it, this kind of thing starts people asking questions .
After a disappointing Q4 loss in 2015, their CFO is leaving the company. On the surface, this is an unknown – until a new CFO is in place, checks out the current state of the business and completes a new financial model, there is no way to tell where the future of the company will be. The current CFO can absolutely be considered responsible for the financial modeling of the company thusfar (that’s his job), which is why the next person to hold that position is very important.
Provided they find someone who can has a strong understanding of the conversion rates to paid-service accounts and the average revenues per account in the advertising industry and can create a realistic model for Yelp based on their past performance, they should be able to increase their margins again over time.
Yelp is a business that relies on B2B ad sales for revenue. In order to be successful, you must have a sales team to do that. At this point, they are a well known brand with enough consumer knowledge capital that those sales people don’t have to be particularly good in order to get a return, so they can get more value from less internal spend.
Even if the new CFO doesn’t change much of anything, they will still be able to continue their sales momentum at a lower cost ratio.
Originally Posted: https://www.quora.com/What-will-Yelps-long-term-margins-be-Will-they-always-be-a-low-margin-business-like-today-Is-a-high-cost-sales-team-fundamental-to-the-local-advertising-market-or-will-they-eventually-be-able-to-reduce-unit-costs-and-make-a-lot-of-profit
Originally Posted On: 2016-03-02