Yelp Reports Impressive 2Q

Yelp Inc. ( YELP - Snapshot Report ) reported a better-than-expected second quarter of 2012. The online information service provider posted a loss of 3 cents per share, narrower than the Zacks Consensus Estimate of a loss of 6 cents.

Quarter Details

Revenue growth was impressive in the reported quarter, which jumped 66.8% year over year to $32.7 million, well ahead of the Zacks Consensus Estimate of $31.0 million. Major growth came from the domestic market, with only 3 out of 17 countries generating revenues in the quarter.

In the second quarter, local revenue surged 89% year over year to $25.3 million, while Brand revenue increased 27% from the year-ago quarter to $5.7 million. Customer repeat rate remained flat year over year at 70% in the quarter.

Operating metrics such as cumulative reviews, average monthly unique visitors and active local business jumped 54%, 52% and 113% year over year, respectively, reflecting strong business growth across all markets in the reported quarter.

Yelp launched its services in 8 new markets, including Madison, Wisconsin, Denmark, Finland and Norway during the quarter. Yelp’s service now touches 90 markets in total. The company also opened an office in the United Kingdom during the quarter.

Yelp’s popularity on mobile devices continued to rise in the quarter. More than 7.2 million unique mobile devices on a monthly average basis used Yelp mobile apps during the quarter. Recently, Apple ( AAPL - Analyst Report ) announced its plans to integrate Yelp content in its voice recognition application Siri and the upcoming “Maps” application on iOS 6 mobile operating system.

Yelp reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.6 million compared with $0.6 million in the year-ago quarter. Sales and marketing expenses rose 65% year over year to $20.3 million.

The majority was spent on enhancing sales and marketing headcount in order to drive business in the new markets. Investments in overseas market were approximately $3.0 million compared with $1.2 million in the year-ago quarter.

Product development costs soared 63% year over year to $4.3 million, while general & administrative expense jumped 66.4% from the year-ago quarter to $5.9 million. Higher level of investment hurt profitability as Yelp reported an operating loss of $1.9 million in the quarter.

Net loss was $1.9 million or 3 cents per share compared with net loss of $1.2 million or 8 cents per share in the year-ago quarter. Yelp exited the second quarter with $122.6 million in cash & cash equivalents. Cash outflow was $2.4 million in the quarter.

Guidance

Yelp expects revenue in the range of $34.5 million to $35.5 million for the third quarter of 2012. The company raised its full year revenue and adjusted EBITDA guidance.

Yelp now expects revenue to be in the range of $135.0 million to $136.0 million (up 62% to 63% year over year) for the full year of 2012. Adjusted EBITDA is expected to be in the range of $3.0 million to $4.0 million.

Our Take

Yelp’s positive guidance reflects strong growth in user base (particularly mobile), expansions into new markets (both domestic & international) and partnerships with Apple and Microsoft’s ( MSFT - Analyst Report ) Bing. We believe that mobile presents a significant monetization opportunity for Yelp and the partnerships with Apple and Microsoft will boost its top-line growth from this segment over the long term.

Currently, Yelp does not display ads on its mobile apps. We believe that lack of adequate ad coverage for the mobile platform may hurt its revenue earning capacity in the near term. Moreover, increasing investments are expected to drag 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 going forward.

We are Neutral on Yelp over the long term (6-12 months). Currently, Yelp has a Zacks #3 Rank, which implies a Hold rating over the short term.