Yelp’s Business Model Continues to Struggle

According to IAB’s H1 report for this year, Internet advertising in the U.S. grew 14% over the year to $17 billion. Internet advertising growth was driven by an improvement in mobile advertising, which grew 95% to $1.2 billion during the period. Digital video ads grew 18% to over $1 billion, and display ad revenues grew 33% to $5.6 billion. The report reveals that although bigger players are continuing to remain the larger contributor of advertising spending, spending by small businesses is picking up. Overall, retail advertisers accounted for 20% of the total ad spend.

Yelp’s Financials
Yelp’s, (NYSE:YELP) Q3 revenues grew 63% over the year to $36.4 million, meeting market expectations. Loss per share of $0.03 was also in line with the Street’s target and was significantly better than previous year’s loss of $0.24 per share.

During the quarter, revenues from local advertising grew 81% over the year to $28.5 million in 2011. Revenues from brand advertising grew 28% to $5.9 million, and Yelp Deals and other services brought in the balance of $2 million. Yelp averaged 84 million monthly unique visitors accessing their database of more than 33 million local reviews. Mobile use is on the increase, and the company saw an average of 8.2 million unique mobile devices access their site last quarter, recording a 64% increase over the year.

For the current quarter, Yelp expects revenues of $40 million-$40.5 million with adjusted EBITDA of $1.25 million-$1.5 million. The Street was looking for revenues of $40.8 million. The company raised its full-year guidance and now expect revenues of $136.4 million-$136.9 million with adjusted EBITDA of $3.5 million-$4 million. The market projects the year’s revenues at $136.3 million.

Yelp’s International Expansion
Yelp is looking at international markets to increase revenues. Recently it launched yelp.com.tr, its Turkey-focused site. Through the site, users in Turkey can now join Yelp’s member base and access Yelp’s free mobile apps. Initially, Yelp will focus on growing in Istanbul, and it will soon extend the site to support twelve languages including English, Danish, Dutch, French, Finnish, German, Italian, Norwegian, Spanish, Swedish, Polish, and Turkish.

Earlier this quarter, it acquired Qype, a European online local recommendations site for an estimated $50 million. Germany-based Qype will help Yelp build traffic and online content in Europe and will help them get access into Brazil, Germany and UK. Qype has reviews for more than 2 million local places in Europe and is accessed by 15 million unique visitors per month across 13 countries.

During the quarter, Yelp also launched operations in Helsinki and Singapore. Yelp is now available in 96 markets that span 19 countries.

Yelp’s Increasing Costs
Although Yelp’s revenues and market reach may be reporting a strong growth, its margins are under heavy pressure. Yelp’s sales and marketing expenses grew 43% over the year and accounted for 63% of revenues. The heightened competition is adding to these expenses. Recently, Facebook also entered the local reviews market with its offering, Nearby. Earlier this year, Google acquired Zagat and recently made Zagat reviews available free on its search engine.

Another worry for Yelp is poor monetization rates. According to the company’s reports, nearly 43 of its markets do not contribute any revenues. Analysts believe that there are more than 27 million addressable businesses for Yelp, of which its earns revenues from merely 35,000 businesses.

This disappointing profitability performance is hurting Yelp’s stock, which is trading at $18.45 with a market capitalization of $1.17 billion. It has fallen more than 75% since it reached a high of $31.96 earlier this year.