Earnings Review: Will Yelp Inc (YELP)’s Fortunes Turn Around?

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Yelp Inc (NYSE:YELP) has slowly and steadily evolved into a force to reckon with in the online consumer reviews space. But the business of crowd-sourced reviews and local advertising seems to be attracting big names like Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG) . In spite of growing revenues at a rapid rate of more than 63% year-over-year, Yelp faces serious challenges in terms of rolling out a profit in a business with limited barriers to entry.

Growth across the Board

Yelp's monthly unique visitors are up 37% year-over-year and finished Q3 of 2012 at 84 million. The company's business model of user generated content by operating as a social media site has paid off remarkably and that too, with minimal content acquisition costs. The number of reviews on its platform was up 49% year-over-year to end Q3 with more than 33.3 million reviews.

Yelp Inc (NYSE:YELP)The majority of Yelp's revenues flow in from local advertising from small businesses, and contributed 78% of total revenues in Q3. With a strong sales-force in place, the company's paying local business accounts are up 82% and now has roughly 35,500 customers. Going forward in Q4 and 2013, all of the key metrics of Yelp especially unique visitors, reviews and the number of paying local accounts should see steady growth.

Yelp is even poised to grow its international presence as well with the buy-out of Germany-based rival, Qype in 2012. The Qype acquisition gives Yelp the ability to tap into big markets like Germany, Brazil and UK etc. without building out its own platform from scratch. Qype also brings a lot of additional content and traffic to the table as well, and might be a good source of revenue growth for the company in the long term.

Will Mobile Monetization Take-Off?

Yelp has built up a strong mobile presence in part due to its integration with iOS 6.  Almost 45% of all Yelp's search queries comes in from mobile-based devices at the end of Q3, 2012 and almost certainly this number will notch up over time. However, Yelp's monetization of the 8+ million users of the mobile app is minimal, but the company's management team intends to place Local advertisements with mobile search results, because of a higher click-through rate on mobile.

Yelp is ready to address the secular shift towards mobile with a pretty solid position. But can the company convince small businesses to advertise on mobile? In the last twelve months, ~77% of its total revenues came in from local advertisements, and only 17% of revenues came in from brand advertisements. The ability to convince small mom-pop stores and other small local businesses to post ads on mobile might pose headwinds for Yelp, and will be a key factor for its long-run success.

Rivalry amongst Existing Competitors

Google's online review platform, Google+ Local is a big competitor for Yelp. As most of Yelp's traffic comes in from Google's search engine, it poses a great risk for the company as Google has put together Zagat, Frommer's, Google+ and Google Maps as a holistic consumer reviews platform. As restaurants are a major category for Yelp, the Google+ Local can be more of formidable competitor down the road.

In addition to Google, leading travel advisory platform, Tripadvisor Inc (NASDAQ:TRIP) poses strong threats to Yelp. TripAdvisor is the world's largest travel site and has millions of reviews and listings of restaurants and hotels for travelers on its platform. TripAdvisor has more than 57 million unique visitors and has content syndication partnerships with leading hotels and restaurants and can pose more incremental threats for Yelp down the road.

Also, Yelp competes with Groupon Inc (NASDAQ:GRPN) for Daily deals especially for the restaurant category, and many other smaller and regional competitors like Urbanspoon, Foursquare, Seamless etc. All these companies directly compete with Yelp not only for reviews and users, but more importantly, for local advertising dollars.

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