Ahead of Earnings, Red Flags In Yelp Inc

According to SEC document analysis firm footnoted, online review firm Yelp’s recent 10-K filing with the SEC raises a number of red flags. March 2nd is the deadline for quarterly SEC filings, and footnoted pointed out that Yelp’s 10-K was substantially revised again, as it was last year, as well as further modified in a 10-Q filing in October after an SEC comment letter.


All about traffic growth

The footnoted team highlights new language in Friday’s filing:

“As our traffic growth rate slows, our success will become increasingly dependent on our ability to increase levels of user engagement on our platform. This dependence may increase as the portion of our revenue derived from performance-based advertising increases. If user engagement decreases, our advertisers may stop or reduce the amount of advertising on our platform and our results of operations would be harmed.

They also note that in last Friday’s 10-K, the phrase “traffic growth” showed up seven times, while it was there just once in the October 10-Q. Of note, prior to that, the firm had not used the term since May of 2012. The significance of the new emphasis on “traffic growth” as a disclaimer is not clear, but it is clearly there at the request of the SEC.

Yelp management less than fully forthcoming

The March 2nd footnoted article also pointed out that the traffic growth issue was not discussed in much detail during the call by Yelp Inc (YELP)’s management or the analysts participating in the call. Then again, analysts cannot really be expected to ask those types of questions. That said, it seems like Yelp’s management should have had some inkling about what they were going to say in the 10-K to be filed just three weeks later.

Negative tax rate another red flag

Also of note in Yelp’s recent 10-L filing is that in footnote #14, the firm allowed that its effective tax rate for 2014 was -223.34%. This is a definite red flag. While Yelp’s unusually high negative tax rate was mentioned on the call and explained as related to the release of a one-time deferred tax allowance of $26.2 million, as footnoted says “…seeing a negative tax rate of over 200% should give anyone pause about some of the other numbers in the filing.”

What relevance to now? Yelp had some pretty rough earnings last week and the stock fell to its lowest level in two years on disappointing ad sales. Analysts at Evercore ISI note:

Our position on the stock is that material international penetration will be a challenge, traffic acquisition at home is getting harder and more expensive (thanks in part to stricter Google policies), and net customer adds are diminishing as a percentage of total active accounts, all pointing to limited margin leverage over time.


  • saif

    Hope this news is gonna hit yelp @90, Let’s see what market do tomorrow. I bought it at @56 and got stuck. Go Yelp…

  • UseHip

    Cool – I completely agree and have been building a local discovery app that I think makes a lot more sense. I’d love to share our web demo with you and get your feedback. My email is

  • DavieLand

    Just an interest. Since the above post, Yelp announced that it would like to be sold. Any company that thinks Yelp is a value deserves to lose the $4B price tag.

  • saif

    Is Yelp deceiving investors? Institution owns 102% shares, can any one tell me what is going in? Is SEC going to take action on red flags?

  • UseHip

    @DavieLand:disqus this is a super insightful take on this space! Is your background in this industry or do you just find it personally interesting?

  • DavieLand

    The items mention above are just the tip of the iceberg and Jeremy Stoppelman is the captain of the Yelptanic. In 2012 Yelp spent $50 million to purchase Qype in order to expand international markets. This Q1 report 2015 showed that international sales were 3% of Yelp’s revenues (international expenses exceeded revenues so overseas markets are still losing money).

    That’s a very poor return on an investment that was supposed to boost Yelp into profitability. It’s been nearly three years and no results. How can we believe that in the next two years, international markets will contribute to $1B in revenues? If you can not make money in one of the wealthiest markets in the world, what will you do in Malaysia (opened this week) where you can only hope to achieve expenses.

    The purchase of Eat24 at $134 million isn’t expected to deliver significant revenues as the industry has razor thin margins and GrubHub will give them a run for their money.

    When Yelp reports a 55% increase in revenues Q1 YOY, you have to take the 52% increase of operational expenses into consideration especially since at those increases, Yelp could not post a profit. All YOY appear to be great, but metrics appear to be flat. Look at the QtoQ growth and you will see that 50% growth is not mathematically possible. Wallstreet does not embrace a 10% growth rate (or negative growth rate) when 50% was promised.

    This quarter will be a test of marketing for this company. Just last month, Apple Maps has dropped Yelp from whole countries and has added TripAdvisor and Booking reviews to US search results. This will severely reduce the free exposure Yelp was getting from Apple Maps. This comes at a time when user growth is decreasing.

    Yelp is burning stock money for unprofitable acquisitions and to expand operations. At some point, it has to be making money to be self sustaining. So far in everything Yelp does, it costs more than it is earning. The one time deferred tax above is particularly disturbing as it makes Yelp look like it was actually making money. Based on this mirage, stockholders drove Yelp’s stock price to $100 all the while insiders cashed out of $91 million in stock. It is most likely the case that insiders have not purchase stock or invested in Yelp which is always a bad omen for any start up company as they have no stake in the outcome of their actions.

    As a majority of Yelp is institutionally owned, it will be soon time to pay the piper. With 6 million shares on record, Vanguard Funds could have lost $60 million on paper in the last earnings report alone. If they held the stock in Dec. 2014, they lost more than $100 million on paper. If the stock continues to drop, there will be a point they have to cut their losses or take profits which will add considerable volatility to Yelp stock.

    While overall visitor growth increased, desktop visitors decreased by 8%. This is unfortunate because it was replaced with mobile visitors which have 90% less profit potential because Yelp generates little ad revenue on a mobile screen because of size limitations. This alone could account for the Q1 loss.

    You mention competition? What about Zomato, the $1B review site that bought NexTable and Urban Spoon? Zomato also has a contract with Uber to provide transportation to restaurant goers. Restaurants like Zomato, they hate Yelp.

    More competition: Twizoo. Its genius programmers use data mining. In 3 months Twizoo accumulated more data than Yelp has in the last 10 years. Ironically for free, they gather the data Yelp users post to Twitter while Yelp spends millions to generate it. Twizoo advertising is free to restaurants as they only pay if a person actually shows up to the venue. Yelp demands $1,200 a month and guarantees no customers. Yelp promotes its PPC program which on a per click basis is nearly 10 times more expensive than Google’s and has generated complaints it is not targeted. Twizoo is opening in Yelp’s most lucrative markets of San Francisco, Chicago, New York and Washington, DC. What will restaurants say to free advertising?

    Last but not least is the profitable restaurant AroundMeApp with 25 million users a month in 200 countries. Interestingly, AroundMeApp has 4 employees while Yelp has 1,700 employees with a coverage of only 22 countries.

    Coming up is the “Billion Dollar Bully” documentary. The producer, Kaylie Milliken has recruited Jon Ingalls who worked on “Blackfish”, the documentary that nearly put Sea World out of business. Yelp not only reinforced its “Bully” name, but made a public relations blunder that will be a Harvard case study when it confronted a 2nd Grade school teacher on national television. As a result, Ms. Milliken raised 150% of her funding goal which gave her the money to hire nationally recognized talent. This documentary will continue to diminish the trust in Yelp.

    These are the real challenges Yelp is facing. It started with a near monopoly and could have been a great company, but without leadership and direction, it was cast adrift while fighting social battles like Memories Pizza fiasco rather than attending to business.