BEST IDEA UPDATE: SHORT YELP
INTERNET & MEDIA
FEBRUARY 2015
LEGAL
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FOR MORE INFORMATION CONTACT:
SALES@HEDGEYE.COM
203.562.6500
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BIGGER DATA = BETTER THESIS
TRADITIONAL SELL-SIDE
Evidence
(Little Data)
HEDGEYE INTERNET & MEDIA
EVIDENCE
(BIG DATA)
Weak
Argument
Assumptions
(Anecdotal)
Strong
Argument
Assumptions
(Anecdotal)
WE LET THE DATA TELL THE STORY
The data drives the thesis, that is our edge. We avoid saying anything unless we have the data to back it up,
and if we do, we don’t confuse theory, opinion, or assumption with fact.
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YELP BUSINESS OVERVIEW
•
Local Advertising (85% of 2014 Revenue)
– Product: native ads within search results
– Revenue Source: mostly local businesses
•
Brand Advertising (9% of 2014 Revenue)
– Product: Display ads on YELP’s site
– Revenue Source: Primarily regional and national companies
•
Other Services (6% of 2014 Revenue)
– Product: Tools to facilitate transactions, Deals & Gift Certificates
– Revenue Source: Partnership Agreements, Local Businesses
LOCAL ADVERTISING IS THE MAIN DRIVER
Historically, the largest source of both revenues and growth. This will be the focus of this presentation.
SOURCE: COMPANY FILINGS
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YELP THESIS SUMMARY
YELP: DEATH OF A BUSINESS MODEL
1.
Business Model: Hire enough new sales reps
to drive new account growth in excess of its
rampant attrition.
2.
Conclusion: YELP’s Business Model is only
sustainable if its TAM is large enough to
support it; it’s not.
3.
Outlook: Attrition will exert a greater impact
on its model moving forward. YELP’s
financials suggest that this has already
started.
RAMPANT ATTRITION + LIMITED TAM = DEATH OF A BUSINESS MODEL
YELP’s attrition risk will always grow with its account base. The burden of new account growth will become
more challenging against a limited TAM, leading to a precipitous slowdown in growth, and eventually declines.
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YELP SHORT: THESIS SUMMARY
1
ABSURD ATTRITION TO GET WORSE
2
TAM IS A FRACTION OF WHAT’S ADVERTISED
3
We estimate that YELP is losing the majority of its local advertising customers on an annual basis.
Baring a seismic shift in its business model, the risk will increase each year.
Estimates vary for YELP’s total addressable US market, YELP has estimated as high as 27M….In
reality, we believe peak quarterly penetration will not exceed 170K. Further, YP.com’s 600K
accounts is not the low-hanging fruit, it’s a pipe dream.
THE MODEL IS ALREADY BREAKING DOWN
YELP’s business model isn’t sustainable, and we’re already seeing signs that it’s breaking down.
The sell-side refuses to acknowledge YELP’s attrition issues, so they don’t understand the
burden of new account growth necessary to hit their 2015/2016 revenue estimates.
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YELP SHORT: THESIS SUMMARY
1
ABSURD ATTRITION TO GET WORSE
2
TAM IS A FRACTION OF WHAT’S ADVERTISED
3
2
We estimate that YELP is losing the majority of its local advertising customers on an annual basis.
Baring a seismic shift in its business model, the risk will increase each year.
Estimates vary for YELP’s total addressable US market, YELP has estimated as high as 27M….In
reality, we believe peak quarterly penetration will not exceed 170K. Further, YP.com’s 600K
accounts is not the low-hanging fruit, it’s a pipe dream.
THE MODEL IS ALREADY BREAKING DOWN
YELP’s business model isn’t sustainable, and we’re already seeing signs that it’s breaking down.
The sell-side refuses to acknowledge YELP’s attrition issues, so they don’t understand the
burden of new account growth necessary to hit their 2015/2016 revenue estimates.
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“Will retention become a bigger focus for us in the
future? Certainly although, we're still in such early days
that acquisition is going to be the primary focus of our
efforts for probably some long time to come now”
– Geoff Donaker – YELP COO
ATTRITION EXPLAINED
CUSTOMER REPEAT RATE EXPLAINED
“Our customer repeat rate, defined as a
percentage of current customers who
advertised with us in the past twelve months”
Prior Quarter:
9 accounts
Current Quarter:
10 accounts
DATA SOURCE: COMPANY TRANSCRIPTS, HEDGEYE ESTIMATES
Repeat Rate: 70%
7 repeating
+ 3 new
10 accounts
Attrition:
7 repeating
- 9 prior
-2 accounts
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ATTRITION EXAMPLE
4Q14 EXAMPLE (unadjusted)
1.
YELP had 86K customers in 3Q14
2. YELP had 94K customers in 4Q14
3. 4Q14 Customer Repeat Rate was 75%
1. 4Q14 Repeating Customers: 70K (94K x 75%)
2. 4Q14 New Customers: 23K (94K x 25%)
4. YELP had 86K customers in 3Q14, but only
70K repeating customers in 4Q14, so it lost
~16K customers (70K-86K) , or 18.5% of its
customers from 3Q14.
THE CUSTOMER REPEAT RATE IS A MEASURE OF MIX, NOT RETENTION
Any time YELP’s Repeating Customers (calculated using its stated Repeat Rate) are less than its Active
Customers from the prior quarter, it lost customers.
DATA SOURCE: COMPANY REPORTS & HEDGEYE ESTIMATES
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ATTRITION IS A RECURRING THEME
LOSES A SIGNIFICANT PORTION EACH QUARTER
Every quarter since the company has gone public, it has lost a significant portion of its members on quarterly
basis. YELP’s is losing almost 20% of its total customers every quarter since 1Q12.
DATA SOURCE: COMPANY REPORTS & HEDGEYE ESTIMATES
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ANNUAL ATTRITION IS ABSURD
Lost/Starting Customers: 90%
New/Ending Customers: 95%
Lost/Starting Customers: 85%
New/Ending Customers: 88%
YELP LOSING ALMOST ALL ITS CUSTOMERS ANNUALLY
Since most of YELP’s contracts are on annual terms, it is losing the majority of its customers annually, while its
ending customer base is comprised almost entirely of new accounts signed during the course of the year.
DATA SOURCE: COMPANY REPORTS, HEDGEYE
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WHY IS ATTRITION SO HIGH?
NOT GETTING ENOUGH BUSINESS?
Digital Advertising Industry
Notes
1. Lead Rates: only 25% of leads
are legitimate
2. Conversion Rates: 79% of
marketing leads never convert to
sales
Sources: Gleanster Research, MarketingSherpa
ADS MAY NOT YIELD ENOUGH TRANSACTIONS…
This table is a scenario analysis of the number of YELP-driven sales transactions, based on varying lead and
conversion rates. The data output suggests a wide range of transactions on 500 impressions.
SOURCES: GLEANSTER RESEARCH, MARKETINGSHERPA
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COST OF CONVERSION TOO HIGH?
Digital Advertising Industry
Notes
1. Lead Rates: only 25% of leads
are legitimate
2. Conversion Rates: 79% of
marketing leads never convert to
sales
Sources: Gleanster Research, MarketingSherpa
ADS DON’T MAKE SENSE FOR ALL BUSINESSES
This is the same table, but measuring the advertising cost to acquire those transactions. YELP ads do not make
sense unless the business has an Average Gross Profit/Transaction > Cost Per Conversion.
SOURCES: GLEANSTER RESEARCH, MARKETINGSHERPA
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BCG STUDY SHOWS VARYING YIELD…
Note: BCG’s Incremental Revenue
Analysis for YELP businesses
compares Advertising Businesses
(green bars) and Businesses with
Claimed Pages (blue bars) vs.
businesses that do not have a
YELP presence
REVENUE BENEFITS VARY BY BUSINESS TYPES
These metrics compare incremental revenues for businesses that either advertise or have claimed pages vs.
those without a YELP presence at all. Note that YELP helped finance the study.
DATA SOURCE: BCG STUDY
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INCREMENTAL IS WHAT MATTERS
YELP Average Local Ad ARPU
Note: What the study should have
compared is the advertiser ROI vs.
a business that has claimed a
page, not vs. a business that
doesn’t have a YELP presence.
WE NEED TO COMPARE THE GREEN AND BLUE BARS AFTER AD COSTS
What matters is the incremental revenue an Advertising Business gets over a Claimed Business. After
considering advertising costs, the yield for some is limited and/or negative.
DATA SOURCE: BCG STUDY, YELP OFFICIAL BLOG
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INCREMENTAL SALES MIXED, BUT…
THESE ARE REVENUES, NOT PROFITS
We aggregated the BCG data and sorted the results based on YELP’s revenue concentration. Outside of
Restaurants and Beauty & Fitness, the results look favorable, but these are revenues, not profits….
DATA SOURCE: BCG STUDY, YELP OFFICIAL BLOG
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…PROFITS TELL A DIFFERENT STORY
INCREMENTAL GROSS PROFIT MAY NOT JUSTIFY COST
YELP’s core market is local businesses; many lack economies of scale and inherently have lower profit
margins. The BCG study suggests the ROI from YELP Local Advertising would be negative in many cases.
DATA SOURCE: BCG STUDY, YELP OFFICIAL BLOG
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CAN’T TRUST THE CPC ROI METRIC
Not Mutually Exclusive Events
CLAIMS OF +500% CPC ROI LIKELY BASED ON SAME MATH
This is a snapshot of YELP’s business dashboard for its customers. The tool grossly exaggerates revenues
because it is not calculated off of conversions, but rather leads that are NOT mutually exclusive events.
DATA SOURCE: YELP
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WHY ATTRITION WILL GET WORSE
BECAUSE IT HAS MORE CUSTOMERS (IT’S THAT SIMPLE)
Since 1Q12, YELP’s attrition rate has averaged 18.7% with a standard deviation of 60bps. Barring a seismic
shift in retention, YELP will lose more customers simply because its customer base is larger.
DATA SOURCE: COMPANY REPORTS & HEDGEYE ESTIMATES
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YELP SHORT: THESIS SUMMARY
1
ABSURD ATTRITION TO GET WORSE
2
TAM IS A FRACTION OF WHAT’S ADVERTISED
3
2
We estimate that YELP is losing the majority of its local advertising customers on an annual basis.
Baring a seismic shift in its business model, the risk will increase each year.
Estimates vary for YELP’s total addressable US market, YELP has estimated as high as 27M….In
reality, we believe peak quarterly penetration will not exceed 170K. Further, YP.com’s 600K
accounts is not the low-hanging fruit, it’s a pipe dream.
THE MODEL IS ALREADY BREAKING DOWN
YELP’s business model isn’t sustainable, and we’re already seeing signs that it’s breaking down.
The sell-side refuses to acknowledge YELP’s attrition issues, so they don’t understand the
burden of new account growth necessary to hit their 2015/2016 revenue estimates.
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YELP’S ADDRESSABLE US MARKET…
Criteria for Advertising with YELP
1. Affordability: Minimum cost $3,600 annually
2. Retail: vs. B2B
YELP Estimate for
US Local Business
Opportunity
Composition of US Market (27M Total Businesses)
1. Affordability: 75% earn < $100K in annual revenue
2. Retail: 47% are primarily B2B companies
NOT ALL BUSINESSES ARE APPLICABLE
YELP’s audience is primarily retail (our survey suggests 70% use exclusively for restaurants); B2B companies
aren’t likely to advertise. Most earn less than 100K, so YELP’s smallest ad program would be prohibitive.
DATA SOURCE: CENSUS, COMPANY REPORTS (27 TAM ESTIMATE FROM YELP MAY 2012 INVESTOR CONFERENCE PRESENTATION)
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TAM MUCH SMALLER THAN IMPLIED
?
27 MILLION…OR A QUESTIONABLE 3 MILLION
We pulled the Census data where YELP is getting its TAM estimate, and we filtered it by companies with more
than 100K in revenue and those that cater to YELP’s audience. 3.4 million is still optimistic.
DATA SOURCE: CENSUS.GOV
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BUT HOW MUCH CAN IT PENETRATE?
Note: 2011 New/Lost Account metrics are estimates
ATTRITION WILL ALWAYS DRAG ON PENETRATION
Given YELP’s attrition problems, which will only intensify as its business grows, we can’t see how it could
ever penetrate more than its peak historical rate of 5%, or 170K peak quarterly accounts.
DATA SOURCE: COMPANY REPORTS
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YP.COM IS A PIPE DREAM
YELP
YP.com
DXM
FEWER PRODUCTS – B2B EXPOSURE + HIGHER PRICE = SMALLER TAM
YELP has implied that YP’s account base is the low-hanging fruit. Yet, the breadth of YELP’s offering is far
more limited, and often more expensive; meaning its TAM is considerably smaller.
DATA SOURCE: YELP FILINGS, COMPANY WEBSITES
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YELP SHORT: THESIS SUMMARY
1
ABSURD ATTRITION TO GET WORSE
2
TAM IS A FRACTION OF WHAT’S ADVERTISED
3
2
We estimate that YELP is losing the majority of its local advertising customers on an annual basis.
Baring a seismic shift in its business model, the risk will increase each year.
Estimates vary for YELP’s total addressable US market, YELP has estimated as high as 27M….In
reality, we believe peak quarterly penetration will not exceed 170K. Further, YP.com’s 600K
accounts is not the low-hanging fruit, it’s a pipe dream.
THE MODEL IS ALREADY BREAKING DOWN
YELP’s business model isn’t sustainable, and we’re already seeing signs that it’s breaking down.
The sell-side refuses to acknowledge YELP’s attrition issues, so they don’t understand the
burden of new account growth necessary to hit their 2015/2016 revenue estimates.
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YELP’S KEY FUNDAMENTAL DRIVERS
Key Drivers
1. New Accounts
2. Lost Accounts
The spread between the two =
YELP’s Q/Q Account Growth
EVERYTHING ELSE IS JUST NOISE
YELP’s attrition issues have gone unnoticed because new account growth has been exceeding losses. But with
increasing base of advertising accounts to lose, and highly penetrated TAM, things are going to get ugly.
DATA SOURCE: COMPANY REPORTS & HEDGEYE ESTIMATES
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NEW ACCOUNTS MUST ACCELERATE
THE ATTRITION RISK GROWS EACH YEAR
As the starting customer base grows, the attrition risk grows with it. To compensate, new account growth needs
to accelerate in absolute terms, but in 2015 specifically, the growth rate needs to accelerate too. BUT…
DATA SOURCE: COMPANY REPORTS & HEDGEYE ESTIMATES
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THE DEATH OF A BUSINESS MODEL
SALESFORCE OUTGROWING THEIR PRODUCTIVITY
YELP’s attrition issues have gone unnoticed because its aggressive salesforce increases have driven enough
new account growth to compensate. That story is over, which means the model is broken…
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ALREADY AT PEAK COVERAGE?
CALL VOLUME IS NOT AN INVESTABLE THESIS
Two perspectives: First is all potential YELP businesses (see TAM slide 28), Second is YELP’s claimed
business pages. This could be why YELP’s salesforce productivity has been on the decline lately.
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2015 ESTIMATES ARE INSANE
2014 Averages
• New Account Growth (y/y): 38%*
• Quarterly Attrition Rate: 18.5%**
* The 2014 average excludes the 2.2K accounts migrated from
Qype in 4Q13, actual 2014 new account growth was 32%. New
account growth in 4Q14 was 30% (16% ex Qype).
** YELP’s historical quarterly attrition average (1Q12-4Q14) is 18.7%
with a standard deviation of 0.6%, and a range of 17.8% to 19.4%.
Note: We have raised our estimates by $37M to account for the
EatMe acquisition.
BECAUSE THEY WON’T CONSIDER YELP’S ATTRITION ISSUES
YELP would need to produce historically low Attrition Rates and accelerate its new account growth rate over
2014 levels to hit 2015 estimates, and this is based on Consensus 2014 Estimates, not Hedgeye’s.
DATA SOURCE: BLOOMBERG & HEDGEYE ESTIMATES
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HEDGEYE VS. CONSENSUS
BULL CASE = BEST CASE
BEAR CASE ≠ WORST CASE
The Model Drivers are in BLUE text. Both cases assume new account growth continues to accelerate in
absolute terms, and annual attrition rates improve. Only way YELP beats estimates is via acquisition.
DATA SOURCE: BLOOMBERG
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STOCK: $34-$37 BY YEAR END
TRANSLATES TO ONLY 1.0X-1.5X TURNS ON OUR BASE CASE 2015 REVENUES
YELP is well past the days of double-digit P/S multiples, but some may see these charts as a buying opportunity.
Decide for yourself, but understand the setup. The first time YELP doesn’t raise guidance, the stock craters.
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YELP: DEATH OF A BUSINESS MODEL
1.
Business Model: Hire enough new sales reps
to drive new account growth in excess of its
rampant attrition.
2.
Conclusion: YELP’s Business Model is only
sustainable if its TAM is large enough to
support it; it’s not.
3.
Outlook: Attrition will exert a greater impact
on its model moving forward. YELP’s
financials suggest this has already started.
RAMPANT ATTRITION + LIMITED TAM = DEATH OF A BUSINESS MODEL
YELP’s attrition risk will always grow with its account base. The burden of new account growth will become
more challenging against a limited TAM, leading to a precipitous slowdown in growth, and eventually declines.
HEDGEYE 37
SHORT RISK: HIDING THE BODIES
• Developments: YELP acquired two international companies (10/28/14), then acquired Eat24 (2/10/15).
• Near-Term Risk to the Short: If YELP chooses to juice its Local Advertising Revenue & Local Advertising
Account metric with its acquired Eat24 service, which is a transactional business that YELP has historically
categorized in Other Services segment. Same could have been said for SeatMe (see below). Also, YELP may
have understated the expected contribution from Eat24 in its guidance raise (make the core business look
better).
• Precedent:
1. Shady Accounting: YELP acquired SeatMe (reservation service) in 3Q13. Beginning in 2014, it
reclassified those accounts into its Active Local Business accounts, then stopped disclosing its SeatMe
accounts in 2Q14…
2. Pulling Data: YELP will no longer provide its legacy account metric (Active Local Business Accounts)
starting in 2015 in favor of a new one focusing only on accounts contributing to Local Advertising
Revenues. There is no reason it can’t provide both, unless to buy itself some deniability.
MASKING ATTRITION ISSUES WITH ACQUISITIONS & SHADY DISCLOSURE
YELP has been saying anything it can to deny its attrition issues. Now, YELP is trying to manipulate the data
itself. However, YELP can’t continue this buy-and-bury approach indefinitely, so this is only a near-term risk.
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QUESTIONS FOR YELP MANAGEMENT
1. Retention: What percentage of your current customers have been advertising with
YELP for more than a year? (derivative of its “Customer Repeat Rate”)
2. Pulling Data?: Why is YELP pulling its legacy Active Local Business Account metric
in favor of Local Advertising Account metric. Why not provide both?
3. Eat24 Accounts: What segment will Eat24 revenues be recognized, and will these
businesses be included in Local Advertising Account metric?
4. SeatMe Accounts: How many paying SeatMe customers do you currently have, and
why did you stop providing the metric in 2Q14?
NOT ALLOWED TO PLEAD THE 5TH
1st question directly addresses its attrition issues, 2nd addresses how YELP plans to disguise them. 3rd and 4th
are about transparency. There is no reason to dodge these questions unless something is terribly wrong…
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FOR MORE INFORMATION, CONTACT US AT:
SALES@HEDGEYE.COM
(203) 562-6500
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