YELP: Challenges Ahead - UBS

UBS Analyst, Eric Sheridan, sees challenges ahead for Yelp! (NYSE: YELP) as it enters an investment cycle to stave off competition at the same time it is replacing its CFO. The PT is cut to $17 from $26 but no change to Neutral rating.

With a lower than expected EBITDA guide for FY 2016 & a CFO transition ahead, Yelp's Q4 results introduced an elevated level of uncertainty around the progress and trajectory of the business (just as scaled competition turns focus to local). While Yelp has transitioned from a pure subscription model to a more performance-based ad platform, a long-tailed cycle of investments is required to fuel future growth.

Salesforce hiring, marketing spend to support the brand, International, are required to push a mobile first transition and face large cap competitors with larger cash balances and scaled ad business models. Yelp (like many SMID cap Internet names before it) continues to face the thorny transition to a new investor base as headwinds mount, deceleration & investments become the norm, and investors look to strategic value and/or absolute valuation metrics to calibrate the downside support.

Q4 Positives:

1) better than expected FY 2016 revenue guidance with growth exceeding ests at the midpoint

2) ramping of the CPC advertising business, with CPC revs now ~61% of Local Ad revs vs. 52% in Q3'15

3) +32% YoY growth in Local Advertising Accounts (to 111k vs UBSe107k)

4) better salesforce retention and hiring trends in Q4 (+40% vs +35% in Q3).

Q4 Negatives:

1) CFO stepping down adding to near to medium term uncertainty

2) Q4 EBITDA miss despite higher contribution from Brand Advertising (higher margin business), mainly driven by higher marketing/salesforce expenses

3) slowing traffic trends across Desktop UVs (-3.9% YoY vs-1.9% YoY in Q3), Mobile UVs (+18.7% YoY vs +21.5% YoY in Q3), and International (-2.9% vs. +1.4% in Q3)

4) mgmt commentary around increased marketing investments in 2016 (incremental $20mm YoY, particularly in 1H).

No change to Neutral rating but cutting the PT to $17 from $26).

For an analyst ratings summary and ratings history on Yelp click here. For more ratings news on Yelp click here.

Shares of Yelp closed at $16.06 yesterday.

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