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No Stars: It Sure Costs A Lot For Yelp to Attract Advertisers

Larry Barrett

Yelp (YELP), a pioneer of the booming online rating and review subculture, was originally known to local businesses as a really important website with a cool app. For it to have any staying power on Wall Street, it needs to become a really important app that also happens to have a cool website. And fast.

So far, Yelp has done a fine job of creating a love-hate feeling with most everyone – including its potential advertisers. And that reality is just one of several challenges facing the company as it wraps up its first year as a publicly held company.

Yelp’s total number of active local business accounts -- defined as local businesses from which the company recognized advertising revenue in the quarter -- surged 68% from the year-ago quarter to 39,800 in its recently completed fourth quarter. But Yelp is spending a ton of money on sales and marketing to reel in these accounts.

It reported sales and marketing expenses of $25.1 million in the fourth quarter to garner $41.2 million in revenue, not exactly the ratio most companies or investors covet. For 2013, it's projecting sales of between $210 million and $212 million, a 53% improvement from the prior year, but it's worth noting that Yelp spent $54.5 million on sales and marketing in 2011 to attract $83.3 million in sales and increased that sales and marketing outlay to $85.9 million last year to scoop up $137.6 million in total sales for 2012.

Advertising revenue, including brand advertising in the form of text and display ads as well as this local advertising, represents more than 90% of Yelp's total revenue. And of that advertising revenue, local advertising accounts for more than three-quarters of the total ads sold.

The site attracted more than 86 million unique visitors a month in its latest quarter and total active local business accounts improved 68% from the year-ago quarter to almost 40,000 accounts. So Yelp has and continues to build it. And they have come. But at a steep price.

YELP Revenue Quarterly Chart

And you can't blame investors or its pool of potential users and advertisers from looking over their shoulders at the horde of existing and looming competitors looking to take their cut of a local online advertising market that's expected to surge from $21 billion to more than $38 billion in the next three years.

Following its auspicious debut in March 2012 -- and despite the ensuing Facebook IPO flop and social media investing backlash -- the stock has done quite well for itself considering the company has never turned a profit in almost nine years of existence. It lost $5.3 million in its latest quarter and $19.1 million for the year. It's at best a three-star stock chart.

YELP Chart

The blessing and the curse of Yelp's popularity is that while local companies are aware of the site and how effective it can be for people looking for a bite to eat or a place to get their smog check, they're also spooked by the real or imagined potential for these forums to be abused or manipulated to paint their businesses in a poor light. Some have, unsuccessfully so far, lawyered up to defend their honor.

And when Google (GOOG), the lifeblood and facilitator of your traffic, starts making the same pitch to these local advertisers and integrates reviews from its recent Zagat acquisition with its Google+ social network, all the five-star reviews in the world aren't going to change where Yelp's reviews are going to show up on Google's search rankings.

Facebook (FB), too, with its social graph search function could impact Yelp. And there’s the existing competition from Foursquare and Angie's List (ANGI) and Craigslist and Yahoo Reviews (YHOO) and Urbanspoon and a million other blogs and local publications that quickly and cheaply build websites and provide a forum for reviewers and advertisers.

True, Yelp's got momentum. It garnered more than 36 million reviews by year's end, managed to get its branded content integrated into the new Apple Maps app on iOS 6, forged a partnership with Bing for its local business pages and can now be found in the high-end infotainment systems installed in new Mercedes and Lexus models. With the recent addition of Turkey and Poland, Yelp is now localized in 20 countries and it’s rapidly expanding into smaller U.S. markets.

The real key will be whether or not Yelp can convince companies to advertise on its mobile apps. It seems like a no-brainer, but most of these local businesses are of the small- and mid-sized variety with limited budgets, lots of options and, as CEO Jeremy Stoppelman has admitted, an aversion to performance-based ads. Yelp said 25% of its local ads in the fourth quarter were shown on mobile devices and its mobile app was used on roughly 9.2 million unique mobile devices each month.

Larry Barrett, a contributing editor at YCharts, has served as a senior writer and editor for websites and print publications including Financial Planning, InternetNews, Multichannel News, CNet and Baseline Magazine. He can be reached at editor@ycharts.com.

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