YELP - Yelp Inc

[scorpioncapital]

I looked at their ebitda forecast for this year and since they have marginal 'i' and 't' it's 'da' minus capex. If you exclude the huge stock compensation then you must use the 85 m fully diluted count so with the drop I'd eyeball around 80 m FCF and a market cap of 2.1 b or 26x fcf. Not cheap but quite a bit less than yesterday!

[villainx]

Thanks again. I get the positiveness and the continued engagement from call and what I've read about the quarter. 

 

I still use Yelp a lot for restaurants.  Is there a good Yelp substitute? TripAdvisor is similar in certain ways (both are having a hard time).  Honest question in that I might have onset of old man syndrome and can't keep up with tech or what kids use these days.  As in, I don't know if I use Yelp because it has good utility or ... old habit and I simply don't know what competition is out there. 

 

I wonder if the extortion/criticism stuff is still ongoing, past reputation, and or real/fake.  Never had to use them on the inventory end. 

 

I wonder if their business can be fixed.  My user perspective experience with Yelp is that it's better than average but not great.  As mentioned, their ads aren't particularly useful.  And the app experience is much better than the desktop web.  Overall, I like what it does and what it tries to do.

 

 

 

[scorpioncapital]

I think there is more runway for raters than the commoditized, capital intensive items they rate. They may both end up in the same place but I can't see owning a hotel, restaurant, bond, debt as lucrative as owning a credit rating agency, a ranking site, a bond rater or something along these lines. If the price is right and there are some advantages. Probably for Yelp one has to ask what is the network effect strength here? And if not huge, position size accordingly and pay attention to multiples paid. Btw, many of these websites remind of something like Tegna, they are all glorified advertising sites like newspapers might have had in the old days. There was a reputation, a place to go. I don't see advertising sites as particularly lucrative unless attached to a function that has huge monopoly power - say Google search. How earth shattering is Yelp ratings or Tripadvisor? Sure lots of people use them today, but can you see through the fog of time to how this will play out? I'm so not confident that my position size is roughly 1/50 to 1/40 my Berkshire stake.

 

 

 

 

[Bluedevilvalue]

Welp...not the best quarter. Especially contrasted against TRIP.

 

What was the most surprising to me is the no net local advertiser growth. The whole point of shifting their ad model to shorter term contracts was to ramp up ad accts fairly quickly. Nope. Rejected by the rim

 

This quote below, to me, indicates that the model's success is hinged on the outside sales force and boots on the ground. Their ad revenue probably can never be as high margin as FB's and goog's because of this.

 

We do not believe that there was any one single factor behind the new sales shortfall relative to our expectations. Instead, a number of smaller, compounding issues arose, including slower-than-expected sales head count growth, a change in advertising promotions, a technical issue in flowing leads to our reps and a lower success rate in contacting business decision-makers by our outbound sales calls

 

But, with that being said, the company is only trading at ~10x EV / EBITDA here. Theyre still growing app users. The local services niche is valuable. I don't think this business is dying. But i'll probably sit this one out until there's more traction.

 

Anybody considering adding here or still long?

[SlowAppreciation]

Welp...not the best quarter. Especially contrasted against TRIP.

 

What was the most surprising to me is the no net local advertiser growth. The whole point of shifting their ad model to shorter term contracts was to ramp up ad accts fairly quickly. Nope. Rejected by the rim

 

This quote below, to me, indicates that the model's success is hinged on the outside sales force and boots on the ground. Their ad revenue probably can never be as high margin as FB's and goog's because of this.

 

We do not believe that there was any one single factor behind the new sales shortfall relative to our expectations. Instead, a number of smaller, compounding issues arose, including slower-than-expected sales head count growth, a change in advertising promotions, a technical issue in flowing leads to our reps and a lower success rate in contacting business decision-makers by our outbound sales calls

 

But, with that being said, the company is only trading at ~10x EV / EBITDA here. Theyre still growing app users. The local services niche is valuable. I don't think this business is dying. But i'll probably sit this one out until there's more traction.

 

Anybody considering adding here or still long?

 

FB and GOOG are high-margin and receive operating leverage because their ad products are fairly self service for small advertisers. And then their large advertisers spend a lot of money—more than enough to justify having a dedicated "boots on the ground" sales force to support them. I don't foresee how Yelp gets there....

 

Bar/Restaurant owners are not likely to run self-service ad campaigns. My first job out of college was selling a yelp-like suite of software/services to local business like restaurants, bars, cleaners, etc. And it was a slog. They get pitched 5x a day on similar services, tend to not be technically inclined, and have way too many things going on to worry about "bid optimizations" and whatnot. Call 100 bars/restaurants in a day... see how many owners you can get on the phone, let alone how many meetings you can get, let alone how many times they show up for the meeting at the agreed to time. I would say 1 in 100. And then try getting them to run a self service ad campaign...

 

So your only option is the "boots on the ground" salesforce, but it's not going to scale because you don't have single large advertisers. Yelp's entire customer base is long-tail, small business owners. It's not like McDonalds or Cheesecake Factory is going to advertise there.

[Bluedevilvalue]

Welp...not the best quarter. Especially contrasted against TRIP.

 

What was the most surprising to me is the no net local advertiser growth. The whole point of shifting their ad model to shorter term contracts was to ramp up ad accts fairly quickly. Nope. Rejected by the rim

 

This quote below, to me, indicates that the model's success is hinged on the outside sales force and boots on the ground. Their ad revenue probably can never be as high margin as FB's and goog's because of this.

 

We do not believe that there was any one single factor behind the new sales shortfall relative to our expectations. Instead, a number of smaller, compounding issues arose, including slower-than-expected sales head count growth, a change in advertising promotions, a technical issue in flowing leads to our reps and a lower success rate in contacting business decision-makers by our outbound sales calls

 

But, with that being said, the company is only trading at ~10x EV / EBITDA here. Theyre still growing app users. The local services niche is valuable. I don't think this business is dying. But i'll probably sit this one out until there's more traction.

 

Anybody considering adding here or still long?

 

FB and GOOG are high-margin and receive operating leverage because their ad products are fairly self service for small advertisers. And then their large advertisers spend a lot of money—more than enough to justify having a dedicated "boots on the ground" sales force to support them. I don't foresee how Yelp gets there....

 

Bar/Restaurant owners are not likely to run self-service ad campaigns. My first job out of college was selling a yelp-like suite of software/services to local business like restaurants, bars, cleaners, etc. And it was a slog. They get pitched 5x a day on similar services, tend to not be technically inclined, and have way too many things going on to worry about "bid optimizations" and whatnot. Call 100 bars/restaurants in a day... see how many owners you can get on the phone, let alone how many meetings you can get, let alone how many times they show up for the meeting at the agreed to time. I would say 1 in 100. And then try getting them to run a self service ad campaign...

 

So your only option is the "boots on the ground" salesforce, but it's not going to scale because you don't have single large advertisers. Yelp's entire customer base is long-tail, small business owners. It's not like McDonalds or Cheesecake Factory is going to advertise there.

 

That's what it looks like. Really solid insight.

 

Is growth stalling because they've saturated their full target market or simply because theyre a business in transition and ironing out some kinks. I think it's both, but maybe more of the latter this past quarter.

 

What a lot of people don't realize about yelp is that theyre capitalizing more on home services businesses now than restaurants / bars. But there's so much competition across the board here. Without focus, I think it's going to be hard to survive the onslaught from TRIP, GOOG, ANGI, etc.

[SlowAppreciation]

I actually really like Yelp, but I just don't know if the advertising business model can ever be a real profit center for them.

 

Licensing reviews and places data could be interesting; and delivery is a no brainer (I think they have a partnership with GrubHub now?).

[Spekulatius]

I actually really like Yelp, but I just don't know if the advertising business model can ever be a real profit center for them.

 

Licensing reviews and places data could be interesting; and delivery is a no brainer (I think they have a partnership with GrubHub now?).

 

I like Yelp too and have been a user for many years. The business is a bit like Groupon that it doesn’t seem to scale well, because you need boots on the ground. As a user, I feel like Google search (from the map app) is catching up in terms or review depth and business seems to care more about the reputation there than on Yelp, indicating that they get the leads from Google.

[wisowis]

Someone above asked what would replace Yelp, and I believe the answer is Google Maps.

 

Google Maps has now replicated everything Yelp has to offer - photos, reviews, hours, menus, and, importantly, a large user base. Additionally, it has features that Yelp lacks; off the top of my head: hours in which locations are busy, faster Q&A through Google Maps notifications, better Google Maps navigation integration, 'Local Guides' program.

 

Yelp's moat was a large, valuable user base which they could leverage to apply extortion-level tactics against small business (https://www.cbc.ca/news/business/yelp-accused-of-bullying-businesses-into-paying-for-better-reviews-1.2899308). I think the tide is turning and these tactics will be increasingly less effective in the future as their moat erodes.

 

 

[LounginMKL]

We all like Yelp and most of us are using it to guide our consumption decisions. The company is not struggling with cumulating user reviews but has been under monetizing. Yelp is now opening up its sales funnel to get as many merchants onto its platform as possible. I actually think they are moving in the right direction (automating sales process and flex term).

 

A few monetization potentials:

- Request a quote- RFP process for local services. I've used Thumbtack ($1B+ valuation) and see the value prop.

- Yelp Reservation- like Open Table, bought by Booking.com for $2.6B.

- Grubhub/ Eat24- Delivery lead-gen for Grubhub; high-quality profit for Yelp.

Other transactional initiatives- auto repair booking, tee time booking, flower ordering.

 

Google is an easy boogeyman to throw out- it is well-resourced, has tons of smart people, and has eyeballs. What I've learned is that GOOG does not have a sales culture. If others have such a tough time selling to small merchants, I don't think GOOG is going to be the one to crack this problem. Also, at least in my circle, Yelp still has significant mindshare compare to Google Map.

 

From my experience, almost every merchant we yelp has a decent number of reviews to achieve statistical significance... For popular merchants, the number of reviews stops to matter after 200 reviews. I think it's about the consistency of having some reviews for every merchant that I search. I just Yelped my architect's 1-person shop, Yelp has 9 reviews vs Google's 0 review. I then looked at our local golf course- Yelp has tee time and large party event booking. Google has no business hour listed...

 

I am not a shareholder but think Yelp is moving in the right direction.

[johnny]

Recent app updates are a transparent, user-hostile attempt to try to desperately goose some low-quality conversions out of their ad inventory. Still the best source for reviews, but their business model tension is apparent--they don't want you using reviews to find food, they want you using ads.

[wisowis]

I noticed that Greenhaven Road Capital sold their position and commented on it in their latest letter:

 

 

I make it a practice to inform the partnership of significant new purchases in these letters. I want you to have a sense of what we own and why we own it, thus providing context to our historical and future returns. I tend not to highlight when we exit a company. However, in the case of Yelp (YELP), I think it is instructive. Yelp was a top five position for multiple quarters and I spent a fair amount of time in the previous letters explaining how I thought a tweak to their business model – getting rid of one-year contracts for advertisers – would increase trial of their product and ultimately grow their base of advertisers. The thesis passed a common-sense test and, in fact, the company was experiencing growth on a year-over-year basis as well as on a quarter-over-quarter basis. Given the operating leverage in the Yelp business model, I was quite excited by the possibility of sustained growth.

 

What happened? When Yelp reported their quarterly results, their paying advertiser accounts did not grow. They had 194,000 paying advertisers on June 30 and 194,000 on September 30. Not growing for one quarter is not a reason in itself to sell an investment we entered with a three- to five-year time horizon. However, in the context of a company that just made trying the product easier, it was disconcerting to see no growth at all in the number of advertisers. Management cited some operational issues that may in fact reverse themselves, and exiting maybe an over-reaction, but I just could not get over the fact that the advertiser count stayed flat despite the term changes and the activity of Yelp’s sales force, which totals over 3,000 people. So even with easier selling terms, three thousand salespeople could not grow the number of advertisers. It took that many people to just replace the advertisers that were leaving. Again, the issues at Yelp maybe temporary, and the Yelp valuation is not demanding, but 3,000+ salespeople running around, meeting business owners, and making phone calls to sell a more consumable package ending that quarter with a net result of no growth in advertisers does not give me cheery thoughts. Ultimately, the thesis that changing the contract terms will have great long-term benefits for the company may be true, but in the intermediate term, there are real product and execution risks.

 

 

[JayGatsby]

I'd agree with Greenhaven at this point. I did own it for a while after starting this thread. It did ok, but I haven't owned it in a while. The company has invested everything into sales and nothing into engineering.

 

At this point I think Google has caught up to them in terms of reviews, but has a much better advertising platform. Yelp's aggressive sales push of an expensive but poorly engineered product has caused most businesses to dislike  them. On top of that, their fairly random "algorithm" has caused a lot of consumers not to trust them... most consumers seem to believe businesses can pay to manipulate the reviews.

 

Still value there, but the business needs to be sold. New owner would cut the entire outside sales force (no more cold calls), and build a true advertising platform that allows optimization by customer/category and also customer tracking. Facebook could get a get a good return on it.

[bizaro86]

I've talked to a number of business owners who have said the sales rep told them they needed to advertise to control the review stream on their business...

 

I think customers believe that you can pay to remove negative reviews on help because either:

1) that is true  OR

2) company reps say it's true

 

Personally, I never use it because of the nagging on mobile to download their app, which has an abhorrent list of required permissions. Now that I mostly use reviews on my phone I've switched 100% to Google reviews.

[JayGatsby]

I've talked to a number of business owners who have said the sales rep told them they needed to advertise to control the review stream on their business...

 

I think customers believe that you can pay to remove negative reviews on help because either:

1) that is true  OR

2) company reps say it's true

That isn't true, but I have no doubt some unscrupulous sales reps said it was true. For a while our business had 18 of 18 reviews filtered for no logical reason. We had one customer that was a "Yelp Elite" and hers was filtered as well. Right now we have 18 of 20 reviews filtered. I asked the sales rep to explain why all of our reviews would be filtered, and offered to pay for them to come back. They said the sales people aren't allowed to talk to the engineers.

 

So because of the perception you mention, Yelp has gone so far as to basically separate their company into two halves. Imagine a company where the sales people and the engineers aren't allowed to talk and you understand how screwed up this company's culture has become.

 

I think Google's approach of not really filtering reviews is the right one. That way nobody can accuse Google of anything. Since Google makes it so easy to review they get a lot of reviews and over time those reviews become pretty truthful. We've had two reviews deleted from Google, which a customer was over excited and submitted two reviews under two different accounts... can't really argue with that.

 

There's an activist (SQN) involved now, so maybe they can bring about change. There is value potential at this company. They have i) a ton of good data on businesses, and ii) a [large but shrinking (they stopped releasing their quarterly "data sheet" it looks like lol)] customer base that is actively trying to spend money. It needs an almost 100% turnover in employees though.

 

[mwtorock]

these so called value creator management guys only create value for themselves! who the *** pay them more than 100m a year? someone just said to me, 'yeah, but they are all options and stocks'. but that is real money out of shareholders.

 

it is probably more of problem of tech companies in general, but this is just ridiculous over 25m EBIT and 900m revenue.

[Jurgis]

Barron's had a positive article on Yelp: https://www.barrons.com/articles/yelp-stock-deserves-a-positive-review-51608836323

After which the stock popped 15% or so.

Looking at FCF, the stock seems cheap if we can assume at least a modest 7% growth.

OTOH, their growth has been dropping before Covid and it's unclear how much growth will resume after Covid.

Barron's claim that Yelp now has majority of revenues from non-restaurant home-and-local services. This is likely why 2020 results are not bad.

Still not sure if they can hold/sustain/grow these revenues. There's clearly competition from ANGI - although personally I don't think much of ANGI's reviews but then I don't think much of Yelp's reviews either.  :-\

Barron's claim that Yelp is looking to monetize more of the home-and-local services. If this works out, it could provide the growth.

 

In general and looking at this thread, I'm skeptical about the company and its management. It seems that they had a brand and a moat and if they did not squander it, then at least they did not manage it well. Seems similar to TRIP, where the brand and moat and value seems to be there but the company continuously underperforms goals and expectations.

 

I should go through the numbers to figure out the large difference between income and OCF/FCF.

 

Anyone has done recent work on this or has thoughts/input?  8)