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Yelp Inc. (YELP - Snapshot Report) reported earnings 4 cents per share in the second quarter of 2014, which compared favorably with the Zacks Consensus Estimate of a loss of 3 cents per share. It also reversed the year-ago loss of a penny. This improvement was primarily attributable to robust revenue growth.

Shares of Yelp were up 8.81% ($6.12) following the earnings release.

Revenue

Revenues for the quarter surged 61.4% from the year-ago quarter to $88.8 million. Reported revenues were ahead of management’s guided range of $85.0 million to $86.0 million as well as the Zacks Consensus Estimate of $86.0 million.

Local revenue was $75.7 million, up 69% on a year-over-year basis while brand advertising revenues increased 28% year over year to $9.1 million. International revenue contributed about 3% of total revenue in the second quarter.

In the reported quarter, total international traffic grew 80% year-over-year to approximately 31 million unique visitors on a monthly average basis. The company expanded its presence in Japan and Argentina in the reported quarter. During the quarter, the company also opened a new European headquarter in Dublin, Ireland.

In the second quarter, Yelp recorded a 55% increase in active local business accounts from the year-ago quarter to reach a level of 80K. Cumulative reviews increased 44% from the year-ago quarter to $61 million. Nearabout 40% of the new reviews were contributed through mobile devices.

Average monthly unique visitors grew 27% on a year-over-year basis to $138 million in the reported quarter. Average monthly mobile unique visitors on the other hand grew 51% year over year to $68 million.

Yelp has been continuously endeavoring to improve the mobile web experience for its users and in the reported quarter it rolled out the ability to post video clips to business listings.

During the quarter, the company launched Message the Business feature, which in turn enables consumers to directly contact businesses on Yelp with questions. The company also introduced Yelp Reservations for restaurants to easily and quickly set up free online reservations.

Yelp also teamed up with EatStreet to bring online ordering to thousands of restaurants listed on its site and their customers.

Margins

Yelp reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $17.2 million compared with $7.8 million in the year-ago quarter.

Sales and marketing expenses escalated 55.2% year over year to $47.8 million while product development costs surged 84.1% year over year to $14.7 million. General & administrative expenses increased 30.6% from the year-ago quarter to $13.3 million.

Sales headcount grew 62% in the quarter on a year-over-year basis. The company intends to continue investing in sales and marketing going forward with an eye to explore the large market opportunity.

In the second quarter, the company reported an operating profit of $3.13 million versus a loss of $0.64 million in the year-ago quarter. Net income was $2.7 million or earnings of 4 cents per share compared to $0.88 million or loss of a penny reported in the prior-year quarter.

 


Balance Sheet & Cash Flow

Yelp exited the quarter with $290.4 million in cash & cash equivalents versus $400.0 million in the previous quarter. The company generated $19.9 million in cash from operations in the reported quarter compared with $5.1 million in the prior-year quarter.

Guidance

Yelp expects revenues in the range of $98 million to $99 million for the third quarter of 2014, representing 61% year-over-year growth. The Zacks Consensus Estimate of $95 million is lower than management’s guidance range. Adjusted EBITDA is expected in the range of $18 million to $19 million for the same period.

For full year 2014, net revenue is expected to be in the range of $372 million to $375 million, representing year-over-year growth of approximately 60%. The Zacks Consensus Estimate for the same is pegged at $365 million. The company also projected adjusted full year 2014 EBITDA to be between $67 million and $69 million.

Our Take

For the first time in its history, Yelp reported a profit in the second quarter. Management provided optimistic guidance for the third quarter and full year. The positive guidance reflects strong growth in user base (particularly mobile), its entry into new markets (both domestic & international) and also new partnerships.

Moreover, we remain encouraged by the company’s international expansion (Japan Mexico, Portugal and Argentina in 2014), which will beef up ad revenues. Additionally, partnerships with Yahoo! (YHOO - Analyst Report) and YP.com are positives for the company.

Also, the company’s collaboration with cloud-based platform, Booker is expected to boost its top line going forward. The acquisition and integration of its European competitor, Qype, has led to a contribution of 1.8 million reviews and 1.4 million photographs.

Although fierce competition from the likes of Facebook (FB - Analyst Report) and Twitter (TWTR - Analyst Report) in the brand related revenue market and rising product development cost remain headwinds going forward, we believe that Yelp will benefit from robust growth in active local business accounts and improving mobile customer engagement.

Currently, Yelp has a Zacks Rank #1 (Strong Buy).

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