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Yelp’s Shares Zoom As Alexa Looms

DATE POSTED:August 10, 2018

Though normally the firm behind the review, today (Aug. 10) was Yelp‘s turn to solicit investor reviews as it reported its Q2 earnings.

The reviews were good — very good, in fact. Yelp’s share jumped 29 percent following a big beat on earnings. The firm reported earnings of 12 cents per share when Wall Street was looking for a mere penny per share. Revenue also came in stronger than expected at $235 million, instead of the $232 million analysts and investors were predicting before the release. According to Yelp, those bigger-than-expected revenues were driven by a strong performance across Yelp’s advertising business.

“Yelp had a strong second quarter, with advertising revenue growing 21 percent year over year,” CEO Jeremy Stoppelman told investors. “The decision to move away from fixed-term contracts has opened our sales funnel, and we’re executing well, adding a record number of advertising accounts during the second quarter.”

That 21 percent increase amounts to $226 million in total Q2 revenue. Yelp said the number of active devices using its app rose 15 percent year over year to more than 32 million. JPMorgan analyst Doug Anmuth was pleased with both the results and Yelp’s potential ahead.

“Strong 2Q … Home and local services ad revenue accelerated for the third straight quarter as request-a-quote (RAQ) adoption and monetization remains strong,” Anmuth said to clients Thursday (Aug. 9). “Yelp remains one of our top SMID-cap ideas, as we believe the company has a significant opportunity ahead in the large and growing local ad market.”

Investors were pleased and surprised by the forecast, and by Yelp’s increased predictions for its performance during the back half of the year. Yelp said it expects revenue in the range of $242 million to $246 million during Q3, from a previous forecast of $230 million to $233 million. For 2018 as a whole, Yelp is now predicting full-year revenue in the range of $952 million to $967 million, up from a previous forecast of $943 million to $967 million.

A Great Day In A Rough Year 

To say Yelp had a great day yesterday is to bury the lead a bit. In fact, Yelp had its best day since 2012, according to reports, and investors were particularly enthused at the revenue possibilities opened up by Yelp’s restructuring of its advertising contracts — away from fixed-term and toward non-term. The stronger-than-expected returns from advertising seem to bear out the better revenue potential of the non-term contracts.

One analyst, though, had his doubts on that point: Brian Nowak, analyst at Morgan Stanley, noted that it’s really a bit early to make massive decisions on Yelp’s worth based on its new model, given how newness of the model.

“Transition to non-term contracts accelerated paying advertiser growth, although the sustainability of this growth and stickiness of these new customers [are] still uncertain,” Nowak said.

Yelp’s year, so far, has been a bit of a roller coaster. Going into its earnings announcements, Yelp’s shares were down year on year by 9 percent versus the S&P 500 (where it is listed), which is up 7 percent on the year. The good news is that yesterday’s performance has taken Yelp out of the red for 2018— and with Wednesday’s (Aug. 8) gains, the stock is now up 15 percent year on year.

However, it goes to show that Yelp’s status in the market is fragile. Though a much beloved and trusted site when it comes to local reviews and listings, the company faces a competitive landscape — where it has been battling one incredibly formidable big tech competitor for almost a decade, and is about to start battling another for market share.

Competitors Old And New 

The fact that Yelp and Google have had a long, contentious relationship is not a secret — it has been one of tech’s longer-term and more vituperative fights.

Yelp has long been accusing Google of stealing its aggregated reviews illegitimately, with Google using its control over its ubiquitous search algorithm to bury (and, thus, punish) the placement-on-page results of services like Yelp that compete for local search results. Mostly, Yelp’s Stoppelman told OZY, Google abuses its size, scale and dominance of the search market as it pleases, and insulates itself from the consequences of those choices by “creating an ecosystem of politicians, think tanks and startups to protect its dominance.”

Google, according to the same report, denies that it changes algorithms to put competitors at a disadvantage: “Our responsibility is to deliver the best results possible to our users, not specific placements for sites within our results. We understand that those sites whose ranking falls will be unhappy and may complain publicly.”

Nevertheless, Google is much larger than Yelp, which is not itself a micro-firm. Yelp is on track to net $1 billion in revenue this year and has a market capitalization of $3.7 billion. That’s not a bad-sized firm, though less than half of 1 percent of Google’s size.

Amazon — with its Alexa voice assistant — has also recently entered the local business database game. Today, hundreds of millions of users flock to Yelp to read the reviews and get guidance on local professionals. However, as more consumers are talking to Amazon’s Alexa or Google’s Home Assistant, Yelp runs the risk of being knocked out of the loop by evolving customer preferences. That’s especially because, Stoppelman noted, Google presently (and Amazon shortly) has the ability to use its voice-assistant technology to virtually recreate Yelp’s business directory, using the magic of a robocall (Google Assistants can call a local business to ask for various pieces of data, all without the business knowing it is talking to a robot).

“They can literally call the whole world,” Stoppelman said.

It seems that if Amazon and Google become the trusted methods of discovery for consumers, as opposed to sitting down and looking at a screen, Yelp is in some trouble. Though it is a rough fate Yelp is hoping to avoid, Yelp’s Director of Business Development David McKie told Karen Webster in a conversation late last year that Yelp has spent more than half-a-decade developing it’s utility to its customer base beyond being merely a hub for very detailed reviews.

“We offer consumers a great way to use Yelp that can make it easier to interact with the merchants they want to support. We have been enabling transactions directly for six years,” McKie said.

Today, he noted, customers can transact with more than 100,000 merchants directly — though some of those are bookings, while others are direct and complete financial transactions. For example, Grubhub is also now integrated into Yelp’s platform, which gives Yelp users the chance to order from Grubhub’s network without leaving the Yelp platform. McKie told Webster that, when looking at its internal metrics, it’s clear that looking on Yelp is correlated with an order shortly after: 80 percent of customers who visit take an action within a week, and 42 percent take an action within one day.

“And there is really a wide variety of merchants that are on offer,” said McKie. “Some are the things most people are familiar with, like food apps for pickup and delivery, but you can also buy tickets to the Giants game or book and pay for things like massages.”

The problem is that none of those things will make Yelp the size of Google or Amazon, or give it the kind of interconnected ecosystems that those brands are building — and increasingly building around the local commerce experience at the heart of Yelp’s business model. And though they have a lot of pull now, it seems even services like Grubhub are more benefitted by Yelp than Yelp is helped by them.

Yelp is hoping that a slightly more human touch might remain more appealing to customers. As of its latest earnings, that bet is bearing out.

Going forward as the voice ecosystem evolves? We’ll keep you posted.