- BofA/Merrill, Cowen, JMP, Morgan Stanley, Oppenheimer, Raymond James, and Topeka have downgraded YELP after the company provided weak Q3/2015 guidance to go with mixed Q2 results, stated it's pulling out of the brand ad market to focus on local/native ad sales, and disclosed co-founder/chairman Max Levchin is stepping down from the board.
- In addition to its sales guidance, Yelp's adjusted EBITDA outlook is getting plenty of attention. Full-year adjusted EBITDA guidance has been cut to $72M-$78M from $102M-$105M, and Q3 guidance of $12M-$15M is well below a reported Q2 level of $22.7M (+32% Y/Y). The company's decision to cut it 2015 salesforce growth target to 30% from 40% is also getting some criticism.
- On the earnings call (transcript), Yelp mentioned its brand ad pullout will have a disproportionate impact on EBITDA, given brand ad sales are higher-margin. The relatively low ROI/margins for Yelp's ad sales to local businesses relative to ad sales involving larger companies has long been an investor concern.
- Also: International traffic (recently hurt by Google algorithm changes) fell 3% Y/Y, and international still only accounts for 2% of revenue. On the other hand, Yelp notes (citing comScore) it now has a 30% U.S. smartphone reach, and total monthly unique devices using Yelp's apps rose 51% Y/Y to 18M. A U.S. TV ad campaign is on tap.
- "[F]ewer sales people + lower productivity = fewer local ad dollars," writes Morgan Stanley's Brian Nowak, discussing his downgrade. Pact Crest's Evan Wilson: "While Yelp stopped disclosing its total unique visitors for the first time, it did disclose that desktop users declined and growth is slowing significantly on mobile. As we've seen across the space, this is a recipe for margin disappointment."
- Cantor's Youssef Squali remains a believer. "The local online ad opportunity remains substantial and the number of players with scale, brand and network effect is limited, in our view, positioning Yelp as a prime beneficiary both as an operator and an acquisition target." SunTrust's Bob Peck thinks short-covering could limit further downside - 10.9M shares (17% of the float) were shorted as of July 15.
- Is the bad news priced in? Shares now go for only 2.7x the midpoint of Yelp's 2015 revenue guidance range, after backing out net cash.