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Will Yelp End Up In Google’s Pocket After All?

Posted on Friday, Feb 20th 2015

A BIA/Kesley report published in 2014 estimated the local digital media ad spending to grow 13.1% to $35 billion in 2015. The report includes both desktop and mobile ad dollars in its computation. The growth is phenomenal considering that total local media ad spend growth is estimated to be a mere 1.6%. The report estimates that by the end of 2015, the share of digital advertising for local media spend will grow to nearly 25% compared with 22.6% in 2014.

Yelp’s Financials

This trend is reflected in the financials of local reviews site Yelp (NYSE: YELP). Fourth quarter revenues grew 56% over the year to $109.9 million, ahead of the market’s expectations of $108.4 million. EPS of $0.08 was also a cent ahead of the market’s forecast.

For the year, Yelp saw revenues grow 62% to $377.5 million and EPS improving from $0.28 a year ago to $0.69.

For the current quarter, Yelp projected revenues of $114 million-$116 million, in line with the Street’s forecast of $115 million. Yelp expects to end the year with revenues of $538 million-$543 million, ahead of the Street’s expectations of $539 million. Yelp gave an EBITDA outlook of $19 million-$21 million for the quarter and $100 million-$103 million for the year.

While financial results were impressive, operational metrics were not. For the quarter, active local business accounts on the site grew 39% to 93,700 and local advertising accounts grew 48% over the year to approximately 84,000, but fell from 86,200 reported a quarter ago. Yelp’s average monthly unique visitors grew 13% over the year but fell 3% over the quarter to 135 million. Mobile usage remains impressive with monthly mobile unique visitors growing 37% to 72 million. Yelp plans to address the decline by spending on marketing efforts during the current year. They are planning on spending an additional $20 million this year on marketing, thus leading to a flat EBITDA.

Yelp’s Acquisition

Last week, Yelp announced its decision to purchase online food ordering service Eat24 for an estimated $134 million. Eat24 has a Web and mobile app that enables its users to order food online from its inventory of 30,000 restaurants spread across 1,500 cities in the country. Yelp had earlier partnered with Eat24 to allow Yelp users to order takeout or delivery directly through Yelp’s Web or mobile app. The agreement allowed users to order from restaurants that were already listed on Eat24.

The move is expected to be the next logical step for Yelp after it had acquired restaurant seating service SeatMe last year. Eat24 has a wider West Coast presence. But Yelp also has a similar agreement with an East Coast-focused service Delivery.com.

The market was particularly pleased with the acquisition. As Wunderlich Securities noted in their report, the move will help Yelp in “closing the loop between local businesses and consumers.”

The online restaurant services market is becoming attractive to several players. Last year, Priceline acquired online reservation site OpenTable. Besides reservations, OpenTable also provides local restaurant reviews. Additionally, bigger giants like Facebook and Google also have eyes on the local reviews market. As competition gets tougher, Yelp appears to be making the right moves for now.

Back in 2011, Google had even attempted to buy Yelp at an estimated $550 million. The talks had reached near the end when Yelp walked out on Google. Since then, there is no doubt that Yelp’s valuation has risen, but so has Google’s appetite. In 2011 itself, after talks with Yelp fell through, Google bought Zagat. But it looks to me that Google may still be interested in buying Yelp. Google ended last year with over $64 billion as cash and cash equivalents. Yelp’s current valuation is a small price to pay for them.

Their stock is trading at $47.54 with a market capitalization of $3.45 billion. It touched a 52-week high of $101.75 in March 2014.

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