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Surprise, Yelp Rings in Profits

Posted on Wednesday, Aug 6th 2014

The growing importance of local review sites like Yelp (NYSE: YELP) can no longer be underestimated. Recent studies have revealed that for every additional star that is earned on Yelp by a local business, the business sees a 5% increase in revenues. The research has found that positive Yelp reviews saw revenues of independent restaurants improve while taking share away from branded, restaurant chains.

Yelp’s Financials
This is also helping Yelp improve their financials as the company delivered a rather surprising profit this quarter. Second quarter revenues grew 61% over the year to $88.8 million, ahead of the market’s expectations of $86.4 million. Yelp reported an EPS of $0.04 compared with a loss of $0.01 per share a year ago and the market’s forecast of a loss of $0.03 per share.

Among operating metrics, cumulative reviews grew 44% over the year to 61 million. Average monthly unique visitors to their site improved 27% to 138 million with mobile users growing 51% to 68 million. At the end of the quarter, Yelp’s active business accounts grew 55% to 79,900.

For the current quarter, Yelp forecast revenues of $98 million-$99 million with an adjusted EBITDA of $18-$19 million.  They expect to end the year with revenues of $372 million-$375 million and an adjusted EBITDA of $67 million-$69 million.

Yelp’s Market Expansion
Yelp continued to improve mobile and user engagement initiatives. Recently, they enhanced their messaging feature so that the users can now connect with each other. The private messaging has been extended for the community to be able to interact through desktop and mobile platforms. Recently, they also added the ability for businesses to be able to post video clips to their listings.

Last quarter, Yelp launched the Message the Business feature that lets consumers connect with businesses directly. Consumers can now ask businesses questions through Yelp. For restaurants, Yelp Message for Business helps consumers make reservations to the restaurants as well. This move would have helped Yelp compete better with restaurant reservation service OpenTable, which was recently acquired by Priceline.

As part of their market expansion efforts, they recently launched their services in Japan and Argentina besides opening an office in Ireland. Yelp is now available in 27 countries worldwide.

Yelp’s Worries
But all is not rosy at Yelp. Yelp recently complained about how the search giant Google is dishing up Google+ results first instead of Yelp’s. According to the report, even if the user typed Yelp in the search query, there were cases when Google’s search results showed the results through Google+ instead of showing the Yelp page. Yelp filed a complaint with the EU antitrust authority which is already evaluating similar complaints by other service providers.

Additionally, recent reports about Yelp highlight how the company keeps reviews more positive as it sends away negative reviews so that the restaurants are not affected. Yelp’s automated recommendation software weeds out reviews that it determines as not relevant. Their internal reports suggest that nearly 25% of the reviews that are submitted to Yelp are not published as they are identified as either being biased or because they were being mass posted from a single IP address.

Their stock is trading at $68.23 with a market capitalization of $4.9 billion. It touched a high of $101.75 in March this year. The acquisition of OpenTable helped spur the stock upwards and it rose 14% in June, but the interest seems to have waned since then.

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