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Yelp's Light Outlook Overshadows a Decent Start to 2019

Steve Symington, The Motley Fool

Yelp (NYSE: YELP) released first-quarter 2019 results on Thursday after the markets closed. The local business review specialist posted slightly higher-than-expected revenue growth and GAAP profitability as the company fine-tunes its transition to non-term advertising contracts that began around this time last year.

But Yelp also followed with seemingly conservative second-quarter revenue guidance, and shares are down around 6% in after-hours trading in response. Let's dig in for a better idea of what's driving Yelp right now.

Yelp front desk with company logo on wall behind it

Image source: Getty Images.

Yelp results: The raw numbers

Metric

Q1 2019

Q1 2018

Year-Over-Year Change

Revenue

$235.9 million

$223.1 million

5.7%

GAAP net income attributable to common stockholders

$1.4 million

($2.3 million)

N/A

GAAP earnings per diluted share

$0.02

($0.03)

N/A

Data source: Yelp. GAAP = generally accepted accounting principles. 

What happened with Yelp this quarter?

  • Revenue was near the high end of guidance provided in February for growth of 4% to 6%.
  • Adjusted EBITDA increased 19.4% to $39.3 million. Adjusted EBITDA margin expanded 2 percentage points to 17%, also near the high end of guidance for a 1- to 2-percentage-point increase.
  • By segment:  
    • Advertising revenue grew 6% to $227 million, driven by a higher number of paying advertising accounts (up 8% to 192,000) with Yelp's transition to selling non-term advertising contracts to local advertisers.
    • Transactions revenue declined 14% to $3 million, primarily due to Yelp's sale of Eat24 to Grubhub last year.
    • Other services revenue climbed 8% to $6 million, thanks to efficiencies gained by combining the sales and support teams of Yelp Reservations and Waitlist, as well as a higher number of restaurant customers.
  • Cumulative reviews grew 19% to 184 million.
  • App unique devices rose 16% to 35 million.
  • Yelp repurchased 2.8 million shares during the quarter for roughly $102 million, reducing its outstanding share count by 3.5%.

What management had to say

In his quarterly letter to shareholders, Yelp co-founder and CEO Jeremy Stoppelman wrote:

In 2019, Yelp is undertaking a series of business transitions designed to accelerate growth and drive stronger profitability. This year, we are focused on a handful of important initiatives including diversifying our go-to-market strategy, delivering new business products, driving greater monetization, and offering more value to our clients. We believe these efforts will establish a foundation to create long-term shareholder value. We are encouraged by the initial signs of success we have seen thus far.

Looking forward

For the second quarter, however, Yelp anticipates revenue will climb 4% to 6% year over year, shy of the roughly 6.6% increase most investors were expecting. The company also called for adjusted EBITDA margins to be roughly flat to up 1 percentage point year over year.

To be fair, the company did note recent improvements in ad clicks and cost-per-click for advertisers have resulted in higher retention and spending rates, and are expected to begin meaningfully contributing to top-line growth in the second half of the year. Yelp also pointed out certain cost-saving initiatives -- including an agreement to sublease 68,000 square feet of office space and reduce its sales footprint in San Francisco -- should help drive greater profitability later this year.

Yelp reiterated its full-year 2019 guidance for revenue to increase 8% to 10% from 2018, and for adjusted EBITDA margin expansion of 2 to 3 percentage points. As a reminder, last quarter the company also told investors it expects revenue growth to accelerate to a mid-teens percentage rate between this year and 2023.

Given its light guidance for the second quarter in the meantime, however, it's clear Yelp's skeptics will need to see more tangible proof that its growth initiatives are yielding fruit before they're willing to post a positive review of its shares.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends GRUB and Yelp. The Motley Fool has a disclosure policy.