Yelp Investment Thesis

Transcription

1 Yelp Investment Thesis

2 Agenda i. Company Overview ii. Investment Thesis iii. Industry Tailwinds iv. Revenue and Product Mix-shift v. Variant Perception vi. Valuation 2

3 Company Overview Value Proposition Yelp is the #1 business review site and the best way to find a local business Last quarter, Yelp attracted 168 million users onto its platform with more than half coming from mobile visits Frequent Yelp users demonstrate a high level of purchase intent: 89% of users make a purchase within 1 week of finding a business 30% 20% 10% 0% Mobile Reach Yelp Groupon TripAdvisor YP Sites FourSquare Angie's List Cumulative Reviews Source: Company filings Local Ad Revenue Business Model Local Revenue Retained Revenue Ad Delivery New Revenue Number of Existing Customers Inventory Levels Number of Salespeople Revenue Retained Ad Performance Quota Attainment 3

4 Revenue Breakdown Revenue by Segment Local Ad Revenue by Vertical Transactions 8% Brand Advertising 6% Other 5% Other 24% Home & Local 28% Local Advertising 81% Health 11% Shopping 10% Beauty & Fitness 12% Restaurants 15% The majority of revenue comes from Yelp s core local advertising product Transaction revenue is a relatively new and fast growing segment that poses substantial opportunity in a young /growing market Yelp s local ad revenue is spread across multiple verticals and not solely dependent on one single sector This provides protection for Yelp as some verticals experiences different peaks and troughs with their respective industry cycles Source: Company filings 4

5 Yelp Stock Price History Yelp is currently trading near its IPO price in Jul. 18, 2013: Yelp acquires online reservation service SeatMe for $12.7M Jul. 2, 2015: Yelp decides to stall sale of company 40 Feb. 10, 2015: Yelp acquires Eat24 for $134M in order to enter the food delivery business 20 IPO Price: $22.03 Jul. 28, 2015: Yelp announces discontinuation of display advertising by end of the year; will shift focus to native and local advertising 0 5

6 Investment Thesis Monetization will improve with mix-shift Transition from CPM to CPC is fueled by industry demand for CPC Sales-force productivity is increasing (through both focus and better products) U.S. Marketers spent roughly $31 Billion dollars on local advertising, but Yelp s local advertising revenue was $314 million in 2014 Yelp is an organic driver for Eat24 growth Competitors in the transaction industry lack one key advantage: Yelp Integrating delivery (transactions) elevates Yelp from a review site to a more comprehensive service Both top-line and bottom-line targets become easier to achieve due to the profitability of the transaction business Stickiness Mitigates Competition Risk Mobile platform allows for accelerated networking effects through increased traffic and engagement Mobile/App users are more sticky than desktop users Less competition for views/ clicks on mobile than desktop Yelp becomes the 1 st place to search Investment Recommendation While the street s perception towards Yelp s business initiatives is negative, we see tremendous upside to its growth strategy and an opportunity to purchase shares at a discount relative to their true value. 6

7 Industry Drivers Current Tailwinds By 2019, online and digital advertisements are expected to represent 35% of total ad spending (23% in 2014) Decline in the market share for traditional advertising channels (direct mail, yellow-pages, newspapers-print) This shift in local ad spending should benefit online and mobile advertising platforms Underpenetrated Market With only ~104,000 paying local advertising accounts, Yelp has only penetrated about 4% of its claimed local businesses Significant runway to be seen Local advertising business has historically been tough to penetrate Requires significant amounts of investment in sales force to meaningfully penetrate the market (small business take a while to adopt new technologies, therefore lengthening the sales cycle) Newer CPC offerings should attract more advertisers and help with retention Newspapers (Online) 3% Cable 5% Mobile 10% Online 13% Others 11% U.S. Local Advertising Spending by Channel (2019E): $159 Billion Radio 10% Direct Mail 24% TV 15% Newspapers (Print) 8% Yellow Pages (Print) 1% Growth in Local Advertising Accounts (mm) Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Source: Company filings, Wall Street Research Note: User numbers in millions 7

8 Paid Local Advertising Products Yelp Ads SeatMe Call to Action Search-based advertising: Yelp places local business ads in front of users who are looking to make a purchase similar to what that business provides Demonstrated significant ROI for advertisers using this product based off generated leads Source: Company filings Allows customers to make reservations directly from the Yelp platform Number of restaurants using SeatMe has grown from 500 to ~18,000 within the past 6 quarters (in comparison, OpenTable has ~25,000 restaurants) Far cheaper than alternatives Ability to take customers directly to an order form or website from Yelp page Directly able to measure how many leads you are generating Can customize for specifically mobile or web 8

9 Local Advertising Subscription vs. CPC Yelp s local advertising revenue can be broken up into its self-service and full-service products Full-Service Yelp s core subscription-based advertising product Based on the number of advertising impressions that Yelp displays for the business Requires businesses to commit to a year long contract that is billed monthly (~$50 $1,000 monthly budget) % % % % % % 50% 40% 30% 20% 10% 0 0% Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 CPC Revenue CPC Revenue % of Local Revenue Self-Service Cost-per-click based advertising Growing much faster than the legacy product as local advertisers are becoming more comfortable with digital advertising and prefer performance based pricing We see the trend towards the CPC based product continuing as advertisers tend to be satisfied with the performance based product Improve customer relations Gives businesses more flexibility with their budgets and a better value relative to the subscription model CPC model should increase advertisers ROI Source: Company filings 9

10 High Growth in Online Ordering Online ordering adds values to users by: Expanded Choices Convenience Control and Transparency Superior Service Free to Use Online orders have high value add for restaurants: More Orders at Full Menu Prices Low Risk/High Return Insight from Order Data Reach New Customers Higher Margin Takeout Online vs. Call-In Takeout Orders Paper Menus & Phones, 95% Online Orders, 5% $67B Spent by US consumers of take-out annually $8.5 - $9.5B total market opportunity based on 13-14% commission rate Yelp has potential to generate value by connecting its user base to a number of restaurants through Eat24 Restaurants 446,000 25,000 30,000 Locations Nationwide 1,500 Cities 800 Cities Market Data Users: 168mm Market Cap: $1.92B Users: 750, E Revenue: $44mm Acquisition Cost: $127mm Revenue Growth y/y: 73% Users: 6mm 2015E Revenue: $361mm Market Cap: $2.13B Revenue Growth y/y: 46% Source: Company Filings 10

11 Mobile Stickiness Most reviews relative to competitors When it comes to mobile, Yelp is a clear leader with ~30% penetration of U.S. smartphones Much higher than key competitors and still plenty of room for growth 70% of page views come from the native app 1 ~56% of new reviews are coming from the mobile app Mobile users are more engaged 14M App Unique Devices 39% y/y 20M We see mobile as an opportunity for 3 reasons: Clear leader amongst peers Higher degree of interaction Mobile stickiness reduces the competition risks Q3'14 Q3'15 Source: Company filings, ComScore Note: (1) Page views include business lisgng pages, business photo pages, and search lisgngs 11

12 Variant Perception Street Perception Phasing out brand advertising will hurt earnings and near-term revenue and profitability Little monetization of large user and business base (currently only 4% use advertising services) Sales Staff Productivity and Churn Low barriers to entry and competition Transaction revenues Transaction revenues are small Company at disadvantage due to not being first movers in the space Diversification businesses are expensive and inefficient Our Views Brand advertising revenue is a relatively small part of total revenues Move will improve user experience, especially in mobile application Fundamental change in monetarization structures Shift from CPM to CPC marketing Wider adoption of marketing services from businesses More competition on advertising from businesses Slower growth in CPM revenues mask growth Higher demand for CPC Maturation of cohorts Older cohorts have consistently higher expenditures High synergy between core business and new businesses Integrating reviews, deals and orders will drive user experience Bundling these services together will offer better opportunities to businesses Taking of market share of GRUB, GRPN, PCLN etc. 12

13 Comparable Companies (metrics in millions) (1) Source: Thomson Reuters, Company filings, StaGsta, Factset Note: (1) Users defined as Unique Monthly Visitors (the number of users that use the service in a given month as opposed to a single user visigng the website more than once); UMV is equivalent to Monthly AcGve Users (MAU) 13

14 Valuation Cases Bear Base Bull Local Ad Revenue 8% growth in claimed 4.1% monetization -5% growth in Rev/Acct 25% growth in claimed 4.4% monetization -2% growth in Rev/Acct 30% growth in claimed 4.6% monetization +1% growth in Rev/Acct Transaction Revenue 40% growth in % growth in % growth in 2016 Sales and Marketing Expense jumps by 200 bps Expense fall by 200 bps Expenses fall by 600 bps EBITDA/Rev Multiple 12.4x / 3x 15.4x / 3.4x 15.4x / 3.4x Current Price $25.50 Bear Case $21.66(-15%) Base Case $33.03(+30%) Bull Case $44.64 (+75%) Probability: 15% 60% 25% Upside: $34.25 (+34%) 14

15 Valuation Growth Assumptions Local Revenue continues to grow at a steady pace fueled by continued sales force expansion and productivity, as well as slightly higher monetization rate of claimed businesses as the CPC product becomes more popular. Transaction revenue has consistent growth rate for the second half of 2015 and continues to grow quickly as Eat24 becomes integrated with the Yelp platform 12x Yelp trades at a discount to peers in spite of having stronger top line growth 2016 EV / Revenue 10x 8x 6x 4x 2x IACI AOL SALE GOOGL P 0x 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% FB LNKD TRUE RUBI 3-year Forward Revenue CAGR Source: Wall Street Research, Thomson Reuters, Bloomberg, Berkeley Investment Group assumpgons TWTR YELP 15

16 Valuation (Cont.) EV/EBITDA (50%) EV/Revenue (50%) 16

17 Appendix i. Historical Financials i. Income Statement ii. Balance Sheet iii. Cash Flow Statement ii. Comparable Company Analysis iii. Catalysts for Growth iv. Distribution of Reviewed Businesses v. CPM vs. CPC vi. Sales Force & HR Concerns vii. Yelp Products Local Advertising viii. International Content ix. User Growth x. Customer Satisfaction xi. SeatMe xii. Cohort Analysis xiii. Valuation Model i. Income Statement Base Case ii. Income Statement Bull Case iii. Income Statement Bear Case iv. Revenue Assumptions v. Revenue Build Base Case xiv. Sum of the Parts Valuation 17

18 Historical Income Statement 18

19 Comparable 12 Yelp trades at a discount to peers in spite of having stronger top line growth 10 FB TWTR 2016 EV / Revenue AOL IACI GOOGL SALE P LNKD TRUE RUBI YELP 0 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 3-year Forward Revenue CAGR Source: Wall Street Research 21

20 Catalysts for Growth Sales Performance Yelp has been able to consistently grow its sales force and increase the productivity of the each sales rep on average Sales team has grown nearly 70% since Q Sales force productivity continues to increase Eat24 Integration Since Yelp acquired Eat24, the company has seen considerable growth in transaction revenue Eat24 is just beginning its integration with the Yelp platform Provides a one-stop-shop for customers looking to read reviews and place an order Beyond Restaurants Most people don t know that Yelp offers services beyond simply restaurant reviews Yelp is undermarketed 26% unaided brand awareness We know just the place Home & Local is the fastest growing vertical Revenue / Sale Rep Eat24 Annual Revenue 44 Increasing Brand Awareness Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun E Source: Company Filings 22

21 Distribution of Reviewed Businesses Travel & Hotel 4% Nightlife 4% Other 12% Shopping 23% Auto 4% Health 6% Arts, Entertainment & Events 7% Restaurants 19% Beauty & Fitness 9% Home & Local Services 12% Source: Company filings 23

22 Cost Per Impression vs. Cost Per Click If you re new to advertising your best bet is to bid on a CPC basis. This way, you are hedging against your exposure to low performing advertisements. While an ad optimizer could also use CPC to test their campaigns, an expert optimizer will at some point use CPM for extremely high performance ads. The reason is that when bidding on a CPC basis, you will never pay less than your bid rate. 24

23 Sales Force and HR Concerns Street Concerns Yelp is dependent on a highly productive and growing sales force to be able to grow its revenue and reach more local businesses Yelp did not meet initial hiring goals (35% instead of 40%) for the first half of 2015 and subsequently lowered its yearly revenue guidance to account for lower than expected sales representatives Our View Yelp s sales force is extremely productive and has consistently been increasing its productivity quarter over quarter Many reps are leading with the CPC because it works with local advertisers. They have more offerings such as SeatMe, Eat24 & Yelp Deals. They have more products that are easier to sell Revenue / Sale Rep ,000 1,500 Sales Headcount CAGR: 65% , Source: Company Filings 25

24 Yelp Products Local Advertising Free Self Service Full-Service Pricing Plan NA CPC Subscription Respond to reviews Update business information Business analytics Upload photos Mobile app Yelp reservations Deals and gift certificates Check-In offers Yelp ads SeatMe Competitor ad removal + $50/month Slideshow +$25/month Call to action button +$50/month Featured video Call tracking Account Manager 26

25 Model Revenue (Base) 377, , , , , ,636 1,068,199 EBITDA (Base) 70,922 68, , , , , ,688 Revenue (Bull) 377, , ,976 1,030,665 1,294,849 1,483,345 1,578,589 EBITDA (Bull) 70,922 94, , , , , ,577 Revenue (Bear) 377, , , , , , ,298 EBITDA (Bear) 70,922 46,898 46,896 46,683 50,852 68,238 68,337 Case Return Weight Base 38.2% 55% Bull 81.4% 10% Bear -3.2% 35% Weighted return 28% 27

26 Assumptions COGS as % of Revenue 4.3% 6.5% 7.1% 7.1% 6.9% 6.3% 7.2% 9.6% 9.6% 10.0% 9.2% 8.5% 8.5% 8.5% 8.5% 8.5% Bear Case 12.0% 10.0% 10.0% 10.0% 10.0% 10.0% Base Case 10.0% 8.5% 8.5% 8.5% 8.5% 8.5% Bull Case 8.0% 7.0% 7.0% 7.0% 7.0% 7.0% Sales and Marketing as % of Revenue 68.8% 69.7% 63.6% 58.9% 52.3% 49.3% 49.2% 46.6% 53.9% 50.0% 50.0% 48.0% 47.0% 45.0% 44.0% 44.0% Bear Case 53.0% 52.0% 52.0% 52.0% 50.0% 50.0% Base Case 50.0% 48.0% 47.0% 45.0% 44.0% 44.0% Bull Case 47.0% 44.0% 44.0% 43.0% 42.0% 42.0% Product Development as % of Revenue 11.9% 13.2% 13.0% 13.6% 13.7% 13.3% 15.9% 15.1% 15.7% 16.0% 15.7% 15.0% 15.0% 14.0% 14.0% 14.0% Bear Case 18.0% 17.0% 18.0% 18.0% 18.0% 18.0% Base Case 16.0% 15.0% 15.0% 14.0% 14.0% 14.0% Bull Case 14.0% 14.0% 14.0% 13.0% 12.0% 12.0% General and Administrative as % of Revenue 17.2% 22.6% 17.7% 17.0% 14.4% 12.3% 13.9% 11.7% 12.0% 12.0% 12.3% 11.0% 10.0% 10.0% 10.0% 10.0% Bear Case 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% Base Case 12.0% 11.0% 10.0% 10.0% 10.0% 10.0% Bull Case 10.0% 9.0% 9.0% 9.0% 9.0% 9.0% Stock Based Comensation as % if Revenue 2.2% 3.0% 5.9% 10.8% 11.4% 11.2% 11.5% 11.6% 10.9% 11.0% 11.2% 10.0% 10.0% 10.0% 10.0% 10.0% Bear Case 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Base Case 11.0% 10.0% 10.0% 10.0% 10.0% 10.0% Bull Case 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% Depreciation and Amortization as % of Revenue 4.7% 4.9% 5.1% 5.3% 4.9% 4.7% 5.8% 5.4% 5.3% 5.5% 5.5% 4.5% 4.5% 4.5% 4.5% 4.5% Bear Case 6.5% 5.5% 5.5% 5.5% 5.5% 5.5% Base Case 5.5% 4.5% 4.5% 4.5% 4.5% 4.5% Bull Case 4.5% 4.0% 4.0% 4.0% 4.0% 4.0% 28

27 Customers Most reviews relative to competitors Businesses 168 million users that are using Yelp with the intent to make a purchase Targeted native advertisements that generate high ROI for local businesses Integrated Platform Read Review Interact with Data Make Purchases No more CPM businesses pay for performance (aka leads) Ability to interact with customers and improve social media presence 29

28 International Content Continues to Grow Globally Review Growth Relative to Community Manager Start International U.S. Source: Company filings Note: Bubble size = adult metro populagon 30

29 User Growth Overall User growth slowing, but mobile app users reaccelerating Possibly due to law of large numbers and traffic issues due to Google algo change However, engagement on mobile platforms remains healthy as over 50% of reviews and photos are contributed via mobile app % % 51% 44% 36% 37% 30% 16% 10% 15% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Yelp (Worldwide) Yelp Mobile Users (U.S) Yelp Reported Mobile App User Growth Reported Users Breakdown % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Source: Company filings, Wall Street Research, comscore, SFG Research Note: User numbers in millions Mobile Desktop 31

30 Customer Satisfaction How satisfied are SMBs with Yelp's Paid Ad Product? Effectiveness*of*Driving*New*Customers Satisfied 82% 90% Google Facebook 86% 89% 100% 100% 10% Dissatisfied 18% 0% 50% 100% Yelp Groupon OpenTable Newspaper website 19% 25% 83% 74% 65% 60% 49% 52% 74% 66% bp Improvement We see a trend towards rising customer satisfaction with Yelp s core local advertising product. (800 bp increase from 2013) SMBs intend to increase their Yelp spending by 6% in the NTM. A year ago, SMBs planned to decrease their spending by 18%. From 2013 to 2015 we see a 900bp increase in the percentage of SMBs observing improved customer traffic from Yelp s paid advertising product Yelp remains the third most effective channel to drive new customers (after Google and Facebook) Source: Wall Street Research 32

31 SeatMe SeatMe is an affordable cloud-based online reservation solution Table Management Online Reservations Streamlined Waitlists Create Targeted Guest Lists 135 million unique users 78% of Yelp users search for restaurants 89% of Yelp users make a purchase within a week SeatMe is far more affordable than competing products SeatMe has the Yelp network behind it 33

32 Cohort Analysis Growth potential in existing markets Cohort Cohort Cohort 34

33 IS Base Case 35

34 IS Bull Case 36

35 IS Bear Case 37

36 Revenue Build Base Case 38

37 Revenue Assumptions 39

38 Sum of the Parts Valuation We decided to include a sum of the parts valuagon to idengfy how much value we feel is coming from the fast growing transacgon based products segment of Yelp Transaction Based Revenue 2016 Local Ad Revenue Case Revenue Multiple Revenue Multiple Bear 58, , Base 79, , Bull 102, , Transaction Value Revenue 2016 EV/Revenue TR 982% $58,254 $174,762 $262,143 $349,524 $436,905 $524,286 $66,982 $200,946 $301,419 $401,892 $502,365 $602,838 $78,982 $236,946 $355,419 $473,892 $592,365 $710,838 $90,982 $272,946 $409,419 $545,892 $682,365 $818,838 $102,982 $308,946 $463,419 $617,892 $772,365 $926,838 Local Advertising Value Revenue 2016 EV/Revenue LA $519,040 $778,560 $1,038,080 $1,297,600 $1,557,120 $1,816,640 $588,882 $883,323 $1,177,765 $1,472,206 $1,766,647 $2,061,088 $628,882 $943,323 $1,257,765 $1,572,206 $1,886,647 $2,201,088 $668,882 $1,003,323 $1,337,765 $1,672,206 $2,006,647 $2,341,088 $708,882 $1,063,323 $1,417,765 $1,772,206 $2,126,647 $2,481,088 Revenue Return Sensitivity 0% $577, % -11.8% 6.5% 24.9% 43.2% $655, % -2.4% 18.5% 39.4% 60.3% $707, % 4.7% 27.6% 50.5% 73.4% $759, % 11.8% 36.7% 61.6% 86.6% $811, % 18.9% 45.8% 72.8% 99.7% 40