Yelp Inc Down on Revenue Guidance – Earnings Analysis by Sindhu Subramaniam, Capital Cube

Yelp Inc (NYSE:YELP) shows strong growth in earnings at close to 256% from the same quarter last year. But revenue expectations came in at between 107 to 108 million compared to the expected 111 million. Though Yelp has gained vis-a-vis its IPO 3 years ago, aggressive expectations from tech startups does exert some downward pressure on stock performance.

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This report is effective October 22, 2014 and uses the limited information available as of that day to analyze company performance. Please refer to the other reports on CapitalCube for more detailed and up to date company analysis.

Yelp Inc. Class A reports preliminary financial results for the quarter ended September 30, 2014.Yelp Inc. Class A just reported its preliminary financial results based on which we provide a unique corporate earnings release based analysis of its performance. Our analysis focuses on the company’s performance for the same quarterly period on a year-on-year basis (unless stated otherwise).This earnings release follows the earnings announcements from the following peers of Yelp Inc (NYSE:YELP) Class A – Google Inc (NASDAQ:GOOGL) Class A and Yahoo! Inc. (NASDAQ:YHOO)..

Highlights

  • Summary numbers: Revenues of USD 102.46 million, Net Earnings of USD 3.64 million and EPS of USD 0.05. Performance focus on earnings: same period year-on-year change in earnings of 256.63% better than change in revenues of 67.46%
  • Gross margins now 93.97% from 93.01% compared to the same period last year, EBITDA margins now 8.93% from 2.02%
  • Earnings potentially benefiting from some unlocking of accruals: Year-on-year change in Operating Cash Flow of 172.38% trailed change in earnings.
  • Earnings growth from operating margin improvements as well as from unusual items

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

2013-09-30 2013-12-31 2014-03-31 2014-06-30 2014-09-30
Revenues 61.18 70.65 76.41 88.79 102.45
Revenue Growth (Qtr YOY) 68.21 71.66 65.62 61.36 67.46
Earnings -2.32 -2.07 -2.63 2.74 3.64
Earnings Growth (Qtr YOY) -15.46 61.09 45.09 412.41 256.63
Net Margin -3.80 -2.93 -3.45 3.09 3.55
EPS -0.04 -0.03 -0.04 0.04 0.05
Return on Equity -5.01 -2.42 -2.14 2.15 2.75
Return on Assets -4.40 -2.24 -2.01 2.02 2.57

Revenue Growth Versus Earnings Growth

Companies sometimes focus on growing their top-line (Sales or Revenues) more than their bottom-line i.e. Earnings or Net Income. Investors should look at revenue growth to understand a company’s ability to grow its market share, and earnings growth to look at the company’s ability to generate returns. Comparing revenue growth to earnings growth helps understand a couple of items: (1) A company’s focus on gaining market share vs. generating profits and (2) How additive or dilutive the revenue performance has been to earnings.YELP-US’s year-on-year change in top line compared to the same period last year of 67.46% trailed its change in earnings which was 256.63%. The company’s performance this period suggests a focus on boosting the bottom-line earnings. While the revenue performance could be higher, it is important to note that this change in revenues is among the highest in the peer group thus far. Also, for comparison purposes, revenues changed by 15.39% and earnings by 32.59% compared to the immediate last quarter.

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Earnings Growth Analysis

The company’s earnings growth has been influenced by the following factors: (1) Year-on-year improvements in gross margins from 93.01% to 93.97% and (2) better cost controls. As a result, operating margins (EBITDA margins) improved from 2.02% to 8.93% year-on-year. In addition, gross margins were 93.42% and EBITDA margins 8.07% in the immediate last quarter.

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Gross Margin Trend

Companies sometimes tradeoff for improvements in revenues and margins by extending friendlier terms to customers and vendors. One quick way to check against such activity is to compare the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is quite possible that the company’s performance is a result of truly delivering in the marketplace and not simply a prop up using the balance sheet.The company’s improvement in gross margins have come at the expense of a deterioration in working capital management, suggesting that the improvements in gross margins are likely trade-offs with the balance sheet and not strictly from operating decisions. Its working capital days have gone up to 324.95 from last year’s levels of 144.10 days.

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Operating Cash Flow Growth Versus Earnings Growth

Companies often post earnings numbers that are influenced by non-cash activities. One way to gauge the quality of the declared earnings number is to judge the deviation in the growth in earnings from the growth in operating cash flows. In general, an earnings growth rate that is higher compared to the operating cash flow growth implies a higher proportion of non-operating and even one-time activities – such activities are typically not sustainable over long periods.YELP-US’s year-on-year change in Operating Cash Flow of 172.38% trailed its change in earnings suggesting that the earnings number might have benefited from some unlocking of accruals. On a positive note, this change in Operating Cash Flow was better than the average among the declared results thus far in its peer group.

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Unusual Items

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in EBIT margins from -2.58% to 4.44% and (2) unusual items. The company’s pretax margins are now 4.63% compared to -2.96% for the same period last year.

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EPS Growth Versus Earnings Growth

YELP-US’s year-on-year change in Earnings per Share (EPS) of 225% is less than its change in earnings of 256.63%. This lower EPS growth suggests a likely larger dilution in the company’s shares this period. Moreover, the change in earnings is less than the average among the declared results thus far in its peer group suggesting that the company is losing ground in generating profits in this group.

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Supporting DataThe table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:

2013-09-30 2013-12-31 2014-03-31 2014-06-30 2014-09-30
Revenues 61.18 70.65 76.41 88.79 102.45
Revenue Growth (Qtr YOY) 68.21 71.66 65.62 61.36 67.46
Peer Average Revenue Growth (Qtr YOY) 5.93 18.68 10.61 13.35 11.11
Earnings -2.32 -2.07 -2.63 2.74 3.64
Earnings Growth (Qtr YOY) -15.46 61.09 45.09 412.41 256.63
Peer Average Earnings Growth (Qtr YOY) -15.46 27.89 9.81 36.65 256.63
Operating Cash Flow 6.99 9.32 9.32 10.67 19.05
Peer Average Operating Cash Flow 298.01 347.73 139.06 357.41 289.19
Operating Cash Flow Growth (Qtr YOY) 289.71 418.55 238.05 116.82 137.64
Peer Average Operating Cash Flow Growth (Qtr YOY) 111.48 10.82 1.61 15.74 10.71
Gross Margin 93.01 93.03 93.36 93.42 93.97
Peer Average Gross Margin 83.56 83.73 83.44 83.09 83.70
EBITDA Margin 2.02 2.29 -1.23 8.07 8.93
Peer Average EBITDA Margin 21.98 24.66 17.38 16.25 17.29
Net Margin -3.80 -2.93 -3.45 3.09 3.55
Peer Average Net Margin 19.87 20.06 23.68 21.88 18.14
Working Capital Days 144.10 315.54 472.75 389.86 324.95
Peer Average Working Capital Days 225.86 300.62 342.53 341.92 338.72
EPS -0.04 -0.03 -0.04 0.04 0.05
Peer Average EPS 0.28 0.33 0.29 0.26 4.09
EPS Growth (Qtr YOY) -33.33 62.50 50.00 500.00 225.00
Peer Average EPS Growth (Qtr YOY) -33.33 43.48 1.31 35.85 225.00
Return on Equity -5.01 -2.42 -2.14 2.15 2.75
Peer Average Return on Equity 8.99 10.85 9.55 8.40 12.33
Return

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