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Yelp Inc. (YELP - Snapshot Report) reported a loss of 3 cents in the third quarter of 2012, which was in line with the Zacks Consensus Estimate. However, this was much better than a loss of 24 cents reported in the year-ago quarter.

Quarter Details

Revenue growth was impressive in the reported quarter, increasing 63.1% year over year to $36.4 million and in line with the consensus mark. In the third quarter, local revenue surged 81% year over year to $28.5 million, while Brand revenue increased 28% from the year-ago quarter to $5.9 million. Customer repeat rate increased slightly to 72% in the quarter.

Operating metrics such as cumulative reviews, average monthly unique visitors and active local business jumped 49%, 37% and 82% year over year, respectively reflecting strong business growth across all markets in the reported quarter. Claim local businesses hit 889,000, which surged 68% year over year in the reported quarter.

Yelp launched its services in 4 international markets including Helsinki and Singapore. In the United States, the company launched services in Albuquerque and Jacksonville during the quarter. Yelp’s service now touches 96 markets in total in 19 countries.

Most recently, Yelp announced the acquisition of Qype, an European local review website for $50.0 million. The acquisition is expected to expand Yelp’s presence in European markets of Germany and United Kingdom.

Yelp’s popularity on mobile devices continued to rise in the quarter, as approximately 25% of average monthly unique visitors were mobile device users. More than 8.0 million unique mobile devices on a monthly average basis used Yelp mobile apps during the quarter.

The strong growth was further driven by the availability of Apple’s (AAPL - Analyst Report) new mobile operating system iOS 6 and the integration of Apple Maps and Siri.

Yelp reported adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of $2.2 million compared to a loss of $0.9 million in the year-ago quarter.

Sales and marketing expenses rose 43.0% year over year to $21.3 million. The majority was spent on enhancing sales and marketing headcount in order to drive business in the new markets. Investments in overseas markets were approximately $3.0 million compared with $1.7 million in the year-ago quarter.

Product development costs soared 67.8% year over year to $5.8 million, while general & administrative expense jumped 46.6% from the year-ago quarter to $7.0 million.

Higher level of investment hurt profitability as Yelp reported an operating loss of $2.0 million in the quarter. However, this was much better than the year-ago quarter loss of $3.4 million.

Net loss was $2.0 million compared with net loss of $3.8 million in the year-ago quarter.

Yelp exited the third quarter with $123.0 million in cash & cash equivalents. Cash from operations was $0.7 million in the quarter.

Guidance

Yelp expects revenue in the range of $40.0 million to $40.5 million for the fourth quarter of 2012. Local revenue is projected to grow approximately 75% over the year-ago quarter, while Brand revenue is expected to be flat to down. Adjusted EBITDA is expected to be in the range of $1.25 million to $1.5 million.

The company raised its full year revenue and adjusted EBITDA guidance. Yelp now expects revenue to be in the range of $136.4 million to $136.9 million, (prior guidance $135.0 million to $136.0 million), up approximately 64% year over year for full year 2012. Adjusted EBITDA is expected to be in the range of $3.5 million to $4.0 million (prior guidance $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.

However, 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.

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