Why Yelp, Inc. Is Tumbling After a Solid Quarter

By Markets Fool.com

Yelp might be pleased with its second-quarter performance, but the market sure doesn't share its optimism. Shares of the local-business-review specialist plunged more than 16% in Tuesday's after-hours trading following Yelp's latest report.

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The headline numbers
Quarterly revenue grew 51% year over year to $133.9 million, and adjusted earnings before interest, taxes, depreciation, and amortization jumped 32% to $22.7 million. That performance translated to adjusted net income of $9.4 million, or $0.12 per share. Analysts were less optimistic, with consensus expectations calling for slightly lower revenue of $133.5 million, and significantly lower adjusted earnings of $0.01 per share.

"Consumers are increasingly turning to apps when using their mobile phones," noted Yelp CEO Jeremy Stoppelman, "and we are excited about the growth we've seen in app usage which accelerated to 51% year over year. We believe our rich content married with our highly differentiated local advertising product will position us well to capture a meaningful share of the large local market."

A solid business ...
Local advertising accounts increased 40% over the same year-ago period to 97,100, up from 90,200 last quarter and driving 43% growth in local advertising revenue to $107.9 million. Based on Yelp's internal calculations, local advertisers receive on average a 270% return on investment for their advertising dollars, which the company says demonstrates "the compelling nature of its highly relevant, native advertising products."

Meanwhile, transactions revenue -- which was previously included in Yelp's "Other" revenue segment -- skyrocketed to $11.3 million, up from $1.2 million in the same year-ago period thanks to Yelp's recent acquisition of online food ordering specialist Eat24. For perspective, between its Feb. 10 acquisition and the end of Q1, Eat24 contributed around $5 million in revenue to Yelp's results last quarter.

Next, cumulative reviews increased 35% year over year to roughly 83 million, up from 77 million three months ago. AndYelp's overall unique visitors rose 8.2% year over year toroughly 162 million, including a 3.3% decline in desktop unique visitors to 79.2 million, anda 22% increase in mobile unique visitors to 82.8 million.Note that mobile visitors exceeded the number of desktop visitors for the first time in Q2. And while the declines in desktop visitors remained steady, investors are more likely concerned knowing growth in mobile visitors decelerated from 29% last quarter.

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Finally, brand advertising revenue fell 8% year over year to $8.3 million, extending its long-standing trend of comprising an ever smaller slice of Yelp's total revenue.It should come as no surprise, then, that Yelp also announced plans to phase out its brand advertising product by the end of this year. This move should allow Yelp both to better focus on both itsmore promising local advertising products and improve its customer experience.

... in transition
Unfortunately for investors, Yelp followed up by issuing lighter-than-expected guidance.

For the current quarter, Yelp anticipates revenue in the range of $139 million to $142 million, or year-over-year growth of roughly 37% at the midpoint, and adjusted EBITDA should be in the range of $12 million to $15 million. By contrast, Wall Street was modeling Q3 earnings of roughly $0.04 per share and much higher revenue of $152.7 million.

For the full year, Yelp expects revenue of $544 million to $550 million, or growth of roughly 45% over 2014 at the midpoint, while full-year adjusted EBITDA should be $72 million to $78 million. Both ranges represent significant reductions from Yelp's previous forecast provided in April, when it told investors to expect 2015 revenue of $574 million to $579 million, and adjusted EBITDA of $102 million to $105 million. Analysts were looking for full-year revenue of $571 million and adjusted earnings of $0.13 per share.

According to Yelp CFO Rob Krolik during the subsequent conference call, roughly two-thirds of that revenue reduction is due to lower-than-expected growth in Yelp's sales headcount, while roughly one-third is due to the aforementioned phase-out of brand advertising products.

Nonetheless, Krolik insisted: "Our core local advertising business remains strong, and we are investing in Yelp's future. We expect local advertising will continue to be our primary driver of growth as we work toward our goal of generating one billion dollars of revenue of 2017."

That's all well and good, and it's encouraging that Yelp is steadfastly holding to that $1 billion goal. But for now, as long as Yelp is reducing its 2015 revenue guidance so far below Wall Street's models, it's no surprise that the market is taking a step back today.

The article Why Yelp, Inc. Is Tumbling After a Solid Quarter originally appeared on Fool.com.

Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Yelp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.