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Yelp Inc. (YELP - Snapshot Report) incurred a loss of 1 cent per share in the second quarter of 2013, narrower than the Zacks Consensus Estimate of a loss of 4 cents per share and better than the 3 cents loss reported in the year-ago quarter.

Quarter Details

Revenues for the quarter surged 68.5% from the year-ago quarter to $55.0 million. Reported revenues surpassed management’s guided range of $52.5 million-$53.5 million as well as the Zacks Consensus Estimate of $53.0 million.

In the second quarter, Yelp recorded a 62% increase in active local business accounts from the year-ago quarter. This resulted in a 77.0% increase in local revenues from the year-ago quarter to $44.8 million.

Other revenues increased 87.0% from the year-ago quarter to $3.2 million primarily driven by new partnerships and increase in revenues from deals. Brand revenues also increased 24.0% on a year-over-year basis to $7.0 million.

During the quarter, Yelp’s mobile business gained further traction as 40% of local ad impressions were on the mobile platform. Yelp Market added two domestic and four international markets.

Yelp reported adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of $7.8 million compared to $1.6 million in the year-ago quarter.

Sales and marketing expenses escalated 51.5% year over year to $30.8 million while product development costs surged 84.4% year over year to $7.9 million. General & administrative expenses increased 70.2% from the year-ago quarter to $10.1 million.

Higher level of investments hurt profitability as Yelp reported an operating loss of $0.6 million in the quarter. However, the loss narrowed from the year-ago quarter loss of $1.9 million, primarily due to lower costs and expenses as a percentage of revenues. Net loss for the quarter also narrowed from $1.9 million to a loss of $0.9 million.

Yelp exited the quarter with $96.8 million in cash & cash equivalents versus $94.5 million in the previous quarter. Operating cash flow for Yelp was $5.1 million versus $0.3 million the previous quarter.

Guidance

Yelp expects revenues in the range of $58.0 million to $59.0 million for the third quarter of 2013. Adjusted EBITDA is expected in the range of $7.5 million to $8.0 million for the same period.

For fiscal 2013, Yelp raised its revenue guidance range from $216 million-$218 million to $222 million-$224 million (62.0% increase from the year-ago period). The company also raised its adjusted EBITDA estimated range from $21 million-$23 million to $27 million-$28 million.

Recommendation

Yelp’s positive guidance reflects strong growth in user base (particularly mobile), exploring new markets (both domestic & international) and the new partnerships. We believe that mobile presents a significant monetization opportunity for Yelp.

Moreover, the strategic acquisition of SeatMe is expected to increase customer engagement. SeatMe offers solutions though which customers can book their seat online for restaurants and bars. Additionally, partnership with Apple (AAPL - Analyst Report) and Microsoft (MSFT - Analyst Report) is also a positive for the company.

However, increasing investments and competition from Yahoo (YHOO - Analyst Report) are expected to affect profitability in the near term. As Yelp continues to explore and expand into new markets, sales & marketing expenditure is expected to increase significantly, thereby hurting margins.

Currently, Yelp has a Zacks Rank #4 (Sell).

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