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Yelp (NYSE:YELP) is set to release its Q1 2014 earnings on Wednesday, April 30th. In the last three months, Yelp's stock price, after hitting a lifetime high of $101.75 has declined to $57.63, which is in line with our stock price estimate of $53.77. While the company continues to report good growth in its local ads business, we believe that the market was over estimating the growth rate for the company, and this may be the reason for the recent 45% correction in the stock price as the market tempered its expectation.

Therefore, we expect the growth in local ads business to be the key focal point in this earnings announcement. Furthermore, we will continue to monitor the growth for Deal, Partnership and Other services (DPO) business as the company had launched new services last year, and we expect the revenues from these services to form a significant portion of division's revenues this year. Moreover, we will be on the lookout for any key takeaways regarding its expansion process outside the U.S.

Outlook for Q1 and 2014

For Q1 FY14, the company guided revenues to be in $73.5 - $74.5 million range, representing growth of approximately 60% compared to the first quarter of 2013. Adjusted EBITDA is expected to be in the range of $8 million to $9 million. For the full year, Yelp projects net revenue to be in $353 - $358 million range, and adjusted EBITDA to be in $54 - $58 million range.

Growth In Local Ads Business In Focus

The local ads business currently accounts for around 80% of Yelp's stock value and is its biggest revenue source. Yelp's active business accounts have grown at a rapid rate, from 40,000 in 2012 to over 67,000 in 2013. The primary drivers for Yelp's account growth are its international expansion efforts and the cumulative increase in reviews on the Yelp site for its existing markets. The company has a total addressable market (TAM) of 73 million local businesses in the world, of which 53 million are present in North America, Europe and New Zealand. While Yelp continues to expand its presence in the U.S., it has also increased its reach to over 24 countries.

We expect that the number of active business accounts will continue to grow as Yelp expands. Furthermore, we expect average revenue per active business account for Yelp to grow from $2,890 in 2013 to $3,220, by 2020. In this earnings announcement, we continue to monitor these performance metrics to ascertain whether the company will be able to maintain its growth trajectory going forward.

Revenue Growth From Deals Platform In Focus

In a move to diversify its revenue stream, Yelp expanded its services in 2013 by introducing new features such as call to action, which lets a business promote its services by offering discounts, and delivery platform to its portfolio. While earlier Yelp was offering these services only in the U.S., and that too for a limited category i.e. food, it has expanded these services to other countries like Canada and encompasses other categories such as spas, yoga studios, salons and dentist appointments. If these delivery services gain traction among Yelp users, Yelp's DPO division can be an important growth driver going forward. In this earnings announcement, the focus will be on revenue growth from these services. Currently, Yelp's DPO division contributes only 6% to total revenues. However, we expect its contribution to increase to 8% by 2020.

Our price estimate for Yelp stands at $54, which is inline with the current market price. We invite the reader to adjust the model and create his or her own alternative valuation.

Disclosure: No positions

Source: Yelp Earnings Preview: Growth In Local Ads Business In Focus