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YELP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q and our Prospectus filed pursuant to Rule 424(b) under the
Securities Act of 1933, as amended (the "Securities Act") with the Securities
and Exchange Commission (the "SEC") on March 2, 2012 (the "Prospectus").
Forward Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties, as well as assumptions that, if they never
materialize or prove incorrect, could cause our results to differ materially
from those expressed or implied by such forward-looking statements. The
statements contained in this Quarterly Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Forward-looking statements are often identified by
the use of words such as, but not limited to, "anticipate," "believe," "can,"
"continue," "could," "estimate," "expect," "intend," "may," "plan," "project,"
"seek," "should," "target," "will," "would" and similar expressions or
variations intended to identify forward-looking statements. These statements are
based on the beliefs and assumptions of our management based on information
currently available to management. Such forward-looking statements are subject
to risks, uncertainties and other important factors that could cause actual
results and the timing of certain events to differ materially from future
results expressed or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those identified below, and those discussed in the section titled "Risk Factors"
included under Part II, Item 1A below. Furthermore, such forward-looking
statements speak only as of the date of this report. Except as required by law,
we undertake no obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
Company Overview
Yelp connects people with great local businesses. Our users have contributed
a total of approximately 27.6 million reviews of almost every type of local
business, from restaurants, boutiques and salons to dentists, mechanics,
plumbers and more. These reviews are written by people using Yelp to share their
everyday local business experiences, giving voice to consumers and bringing
"word of mouth" online. The information these reviews provide is valuable for
consumers and businesses alike. Approximately 71.4 million unique visitors used
our website, on a monthly average basis, and our mobile application was used on
approximately 6.3 million unique mobile devices, on a monthly average basis,
during the quarter ended March 31, 2012. Businesses, both small and large, use
our platform to engage with consumers at the critical moment when they are
deciding where to spend their money. Our business revolves around three key
constituencies: the contributors who write reviews, the consumers who read them
and the local businesses that they describe.
As of March 31, 2012, we are active in 49 Yelp markets in the United States
and 33 Yelp markets internationally. This footprint represents a fraction of the
potential domestic and international markets that we are currently targeting for
expansion. Our domestic expansion plans include growth in our existing markets
as well as expansion into new markets, many of which are smaller than our
current markets, as we look to expand our breadth of coverage. Internationally,
as we are in the early stages of establishing our footprint, we are targeting a
mix of both large and small markets. We have not yet made any substantive effort
to monetize our international markets and have not generated significant revenue
from these markets to date.
Our overall philosophy is to invest for long-term growth as we continue to
see growth in our key metrics. We expect to continue to invest heavily in our
sales and marketing efforts to grow domestically and internationally and in
product development to expand our platform by innovating and introducing new
products to our website and mobile applications. As of March 31 2012, we had 997
employees, which represented an increase of 49% compared to the same period last
year. As a result of our investment philosophy, we do not expect to be
profitable on a U.S. generally accepted accounting principles ("GAAP") basis in
2012.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP.
The preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, expenses and related disclosures. We evaluate our
estimates and assumptions on an ongoing basis. Our estimates are based on
historical experience and various other assumptions that we believe to be
reasonable under the circumstances. Our actual results could differ from these
estimates.
We believe that the assumptions and estimates associated with revenue
recognition, website and internal-use software development costs, income taxes
and stock-based compensation have the greatest potential impact on our
consolidated financial statements. Therefore, we consider these to be our
critical accounting policies and estimates.
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in the Prospectus.
Key Metrics
We regularly review a number of metrics, including the following key metrics,
to evaluate our business, measure our performance, identify trends in our
business, prepare financial projections and make strategic decisions.
13--------------------------------------------------------------------------------
º Reviews. Number of reviews represents the cumulative number of reviews
submitted to Yelp since inception, as of the period end, including reviews
that were then being filtered or that had been removed from our platform.
In addition to the text of the review, each review includes a rating of one
to five stars. We include filtered and removed reviews because all of them
are either currently accessible on our platform or were accessible at some
point in time, providing information that may be useful for users to
evaluate businesses and individual reviewers. Because our filtering
technology continually reassesses which reviews to filter based on new
information, the "filtered" or "unfiltered" status of reviews may change
over time. Reviews that are being filtered or have been removed do not
factor into a business's overall star rating. By clicking a link on a
reviewed business's page on our website, users can access the filtered
reviews for the business, as well as the star rating and other information
about reviews that we removed for violation of our terms of service. As of
March 31, 2012, approximately 19.9 million reviews were available on
business profile pages, approximately 5.6 million reviews were being
filtered and approximately 2 million reviews had been removed from our
platform, either by us for violation of our terms of service or by the
users who contributed them.
The following table presents the number of cumulative reviews as of the
periods presented:
March 31,
2012 2011
(in thousands)
Reviews 27,569 17,339
º Unique Visitors. Unique visitors represent the average number of monthly
unique visitors over a given three-month period. We define monthly unique
visitors as the total number of unique visitors who have visited our
website at least once in a given month, and we average the number of
monthly unique visitors in each month of a given three-month period to
calculate average monthly unique visitors. We track unique visitors based
on the number of visitors with unique cookies who have visited our website
using either a computer or mobile browser, as measured by Google Analytics,
a product that provides digital marketing intelligence. Unique visitors do
not include visitors who access our platform through our mobile app. For
the quarter ended March 31, 2012, our mobile app was used on approximately
6.3 million unique mobile devices on a monthly average basis. Because the
number of unique visitors is based on visitors with unique cookies, an
individual who accesses our website from multiple devices with different
cookies will be counted as multiple unique visitors, and multiple
individuals who access our website from a shared device with a single
cookie will be counted as a single unique visitor.
The following table presents the number of unique visitors (average monthly
number) during the periods presented:
Three Months Ended March 31,
2012 2011
(in thousands)
Unique Visitors 71,448 46,817
º Claimed Local Business Locations. The number of claimed local business
locations represents the cumulative number of business locations that have
been claimed on Yelp worldwide since 2008, as of a given date. We define a
claimed local business location as each business address for which a
business representative visits our website and claims the free business
listing page for the business located at that address.
The following table presents the number of cumulative claimed local
business locations as of the periods presented:
March 31,
2012 2011
(in thousands)
Claimed Local Business Locations 700 380
º Active Local Business Accounts. The number of active local business accounts represents the number of active local business accounts from which
we recognized revenue in a given three-month period. We treat business
accounts that have the same payment and/or user information as a single
business account.
The following table presents the number of active local business accounts
from which we recognized revenue in the given three month periods
presented:
Three Months Ended March 31,
2012 2011
(in thousands)
Active Local Business Accounts 27 13
º Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we
calculate as net income (loss), adjusted to exclude: provision (benefit)
for income taxes, other income (expense), net, interest income,
depreciation and amortization and stock-based compensation. We believe that
adjusted EBITDA provides useful information to investors in understanding
and evaluating our operating results in the same manner as our management
and board of directors. This non-GAAP information is not necessarily
comparable to non-GAAP information of other companies. Non-GAAP information
should not be viewed as a substitute for, or superior to, net income (loss)
prepared in accordance with GAAP as a measure of our profitability or
liquidity. Users of this financial information should consider the types of
events and transactions for which adjustments have been made. The following
is a reconciliation of adjusted EBITDA to net income (loss) below for the
periods indicated.
Three Months Ended March 31,
2012 2011
(in thousands)
Reconciliation of Adjusted EBITDA:
Net loss (9,802 ) (2,706 )
Provision for income taxes 31 12
Other income (expense), net 30 (108 )
Depreciation and amortization 1,361 819
Stock-based compensation 7,429 1,103
Adjusted EBITDA (951 ) (880 )
14
--------------------------------------------------------------------------------Adjusted EBITDA
To provide investors with additional information regarding our financial
results, we have disclosed in the table above and elsewhere in this Quarterly
Report on Form 10-Q adjusted EBITDA, a non-GAAP financial measure. We have
provided a reconciliation above of adjusted EBITDA to net loss, the most
directly comparable GAAP financial measure.
We have included adjusted EBITDA in this Quarterly Report on Form 10-Q
because it is a key measure used by our management and board of directors to
understand and evaluate our core operating performance and trends, to prepare
and approve our annual budget and to develop short- and long-term operational
plans. In particular, the exclusion of certain expenses in calculating adjusted
EBITDA can provide a useful measure for period-to-period comparisons of our core
business. Accordingly, we believe that adjusted EBITDA provides useful
information in understanding and evaluating our operating results in the same
manner as our management and board of directors.
Adjusted EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
º although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized may have to be replaced in the future, and
adjusted EBITDA does not reflect cash capital expenditure requirements for
such replacements or for new capital expenditure requirements;
º adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
º adjusted EBITDA does not consider the potentially dilutive impact of
equity-based compensation;
º adjusted EBITDA does not reflect tax payments that may represent a
reduction in cash available to us; and
º other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative
measure.
Because of these limitations, you should consider adjusted EBITDA alongside
other financial performance measures, including various cash flow metrics, net
income (loss) and our other GAAP results.
Results of Operations
The following tables set forth our results of operations for the periods
presented as a percentage of net revenue for those periods (certain items may
not foot due to rounding). The period-to-period comparison of financial results
is not necessarily indicative of future results.
Three Months Ended March 31,
2012 2011
(as a percentage of net revenue)
Consolidated Statements of Operations Data:
Net revenue by product
Local advertising 78 % 68 %
Brand advertising 15 22
Other services 7 10
Total net revenue 100 % 100 %
Costs and expenses:
Cost of revenue (exclusive of depreciation and amortization shown separately below) 8 % 8 %
Sales and marketing 69 68
Product development 15 14
General and administrative 39 22
Depreciation and amortization 5 5
Total costs and expenses 136 117
Loss from operations (36 ) (17 )
Other income (expense), net - 1
Loss before income taxes (36 ) (16 )
Provision for income taxes - -
Net loss (36 )% (16 )%
15
--------------------------------------------------------------------------------Three Months Ended March 31, 2012 and 2011
Net Revenue
We generate revenue from local advertising, brand advertising and other
services, including Yelp Deals and partner arrangements. The following provides
a description of our revenue by product.
Local Advertising. We generate revenue from local advertising programs,
including enhanced profile pages and performance and impression-based
advertising in search results and elsewhere on our website.
Brand Advertising. We generate revenue from brand advertising through the
sale of display advertisements (both graphic and text) on our website, including
advertisements from leading national brands in the automobile, financial
services, logistics, consumer goods and health and fitness industries.
Other Services. We generate other revenue through the sale of Yelp Deals,
monetization of remnant advertising inventory through third-party ad networks
and various partner arrangements related to reservations. Yelp Deals allow
merchants to promote themselves and offer discounted goods and services on a
real-time basis to consumers directly on our website and mobile app and via
email. Recently, we have focused on Yelp Deals displayed on our website and
mobile app to target intent-driven consumers who are searching for a specific
product or service on our platform. We have seen an increase in revenue from
Yelp Deals based on this approach and expect that trend to continue as we
develop Yelp Deals that focus on direct fulfillment and scale our service
offerings. Accordingly, we have deemphasized and expect to continue to
deemphasize Yelp Deals that are emailed to our users in favor of Yelp Deals that
are displayed on our website and mobile app. We do not expect this de-emphasis
to have a material impact on our financial condition or growth. We earn a fee on
Yelp Deals for acting as an agent in these transactions, which we record on a
net basis and include in revenue upon a consumer's purchase of the deal. We also
generate a small portion of our revenue through revenue-sharing arrangements
with partner companies. Currently, our revenue-sharing partner arrangements
provide for the ability for consumers to make reservations on OpenTable and
Orbitz through Yelp.
2011 to
2012 %
Three Months Ended March 31, Change
2012 2011
(dollars in thousands)
Net revenue by product:
Local advertising $ 21,473 $ 11,222 91 %
Brand advertising 3,994 3,583 11
Other services 1,918 1,695 13
Total $ 27,385 $ 16,500 66 %
Percentage of net revenue by product:
Local advertising 78 % 68 %
Brand advertising 15 22
Other services 7 10
Total 100 % 100 %
Total net revenue increased $10.9 million, or 66%, in the three months ended
March 31, 2012, compared to the three months ended March 31, 2011. Our local
advertising revenue increased $10.3 million, or 91%, primarily due to a
significant increase in the number of customers purchasing local advertising
plans as we expanded our sales force to reach more local businesses. Our brand
advertising revenue increased $0.4 million, or 11%, primarily due to an increase
in the average spend per brand advertiser driven primarily by increased
advertising impressions per brand advertiser. In addition, our other services
revenue increased $0.2 million, or 13%, primarily due to an increase in revenue
from the sale of Yelp Deals and remnant advertising inventory and from added
partnership arrangements, offset by a decrease in the emphasis of email deals.
Cost of Revenue
Our cost of revenue consists primarily of credit card processing fees, web
hosting, internet services costs, and salaries, benefits and stock-based
compensation for our infrastructure teams related to operating our website, as
well as creative design for brand advertising and video production expenses. We
currently expect cost of revenue to increase on an absolute basis and remain
relatively flat as a percentage of revenue in the near term as, consistent with
our investment philosophy we continue to expand data center capacity and
headcount associated with supporting our website and mobile.
2011 to
2012 %
Three Months Ended March 31, Change
2012 2011
(dollars in thousands)
Cost of revenue $ 2,126 $ 1,276 67 %
Percentage of net revenue 8 % 8 %
16
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In the three months ended March 31, 2012, cost of revenue increased $0.9
million, or 67%, compared to the three months ended March 31, 2011. This
increase was primarily attributable to an increase of $0.4 million in outside
hosting and internet service fees, which are necessary to support the increase
in visitors to our website and transactions completed on our website. In
addition, expenses related to creative design for brand advertising customers,
increased $0.1 million and video expenses related to slide shows for local
customers increased by $0.1 million. Merchant fees related to credit card
transactions for local advertising also increased $0.1 million, and we added
personnel to support our website infrastructure resulting in an increase of $0.1
million.
Sales and Marketing
Our sales and marketing expenses primarily consist of salaries, benefits,
stock-based compensation, travel expense and incentive compensation for our
sales and marketing employees. In addition, sales and marketing expenses include
business acquisition marketing, community management, branding and advertising
costs, as well as allocated facilities and other supporting overhead costs. We
spend almost no sales and marketing expenses to acquire traffic to our website
or mobile app. Our Community Managers are responsible for growing and fostering
local communities, and coordinating events to raise awareness of our brand. We
expect our sales and marketing costs, including community management costs, to
increase as we continue to expand into new domestic and international markets
and within existing markets. For the three months ended March 31, 2012, we spent
$2.4 million related to our international sales and marketing operations
compared to $0.9 million for the three months ended March 31, 2011.
2011 to
2012 %
Three Months Ended March 31, Change
2012 2011
(dollars in thousands)
Sales and marketing $ 18,770 $ 11,271 67 %
Percentage of net revenue 69 % 68 %
In the three months ended March 31, 2012, sales and marketing expenses
increased $7.5 million, or 67%, compared to the three months ended March 31,
2011. The increase was primarily attributable to an increase in headcount and
related expenses of $6.4 million, including an increase in stock-based
compensation of $0.9 million, as we expanded our sales organization to take
advantage of the market opportunity created by increased recognition of the
value of our platform and increased use of our free online business accounts. As
a result of our increase in net revenue, our commission expenses also increased
$1.1 million. In addition, we experienced an increase in facilities and related
allocations of $0.6 million and domestic and international marketing and
advertising costs of $0.4 million.
Product Development
Our product development expenses primarily consist of salaries, benefits and
stock-based compensation for our engineers and product management and
information technology personnel. In addition, product development expenses
include outside services and consulting, allocated facilities and other
supporting overhead costs. We believe that continued investment in features,
software development tools and code modification is important to attaining our
strategic objectives, and, as such, we expect product development expense to
increase on an absolute basis but not necessarily increase as a percentage of
revenue in the near term, consistent with our investment philosophy.
17
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2011 to
2012 %
Three Months Ended March 31, Change
2012 2011
(dollars in thousands)
Product development $ 4,140 $ 2,319 79 %
Percentage of net revenue 15 % 14 %
In the three months ended March 31, 2012, product development expenses
increased $1.8 million, or 79%, compared to the three months ended March 31,
2011. The increase was primarily attributable to an increase in headcount and
related expenses of $1.6 million, including an increase in stock-based
compensation of $0.1 million, as we continued to invest in adding features and
functionality to our website and mobile app. In addition, we experienced an
increase in facilities and related allocations of $0.1 million.
General and Administrative
Our general and administrative expenses primarily consist of salaries,
benefits and stock-based compensation for our executive, finance, user
operations, legal, human resources and other administrative employees. In
addition, general and administrative expenses include outside consulting, legal
and accounting services, and facilities and other supporting overhead costs not
allocated to other departments. We expect that our general and administrative
expenses will increase on an absolute basis but not necessarily increase as a
percentage of revenue in the near term, as we continue to expand our business
and incur additional expenses associated with being a publicly traded company.
2011 to
2012 %
Year Ended March 31, Change
2012 2011
(dollars in thousands)
General and administrative $ 10,729 $ 3,617 197 %
Percentage of net revenue 39 % 22 %
In the three months ended March 31, 2012, general and administrative expenses
increased $7.1 million, or 197%, compared to the three months ended March 31,
2011. The increase was primarily attributable to an increase in headcount and
related expenses of $6.5 million, including an increase in stock-based
compensation expense of $5.5 million related to primarily the acceleration in
connection with the closing of the IPO of stock options held by two executives,
as well as grants made during the quarter. Additionally, we invested in our
systems and support for the growth of the business through the use of outside
consultants, which contributed to the increase by $0.5 million. These increases
were offset by a decrease in legal fees of $0.3 million.
Depreciation and Amortization
Depreciation and amortization expenses primarily consist of depreciation on
computer equipment, software, leasehold improvements, capitalized website and
internal software development costs and amortization of purchased intangibles.
We expect that depreciation and amortization expenses will increase on an
absolute basis as we continue to expand our technology infrastructure and will
remain relatively flat as a percentage of revenue in the near term.
2011 to
2012 %
Three Months Ended March 31, Change
2012 2011
(dollars in thousands)
Depreciation and amortization $ 1,361 $ 819 66 %
Percentage of net revenue 5 % 5 %
In the three months ended March 31, 2012, depreciation and amortization
expense increased $0.5 million, or 66%, compared to the three months ended March
31, 2011. The increase was primarily the result of our investments in expanding
our technology infrastructure and capital assets to support our increase in
headcount across the organization. Depreciation and amortization related to our
fixed assets and capitalized website and internal use software development costs
increased $0.3 million and $0.2 million, respectively.
18
--------------------------------------------------------------------------------Other Income (Expense), Net
Other income (expense), net consists primarily of the interest income earned
on our cash and cash equivalents and foreign exchange gains and losses.
Three Months Ended March 31,
2012 2011
(dollars in thousands)
Interest income $ 5 $ 5
Transaction gains (losses) on foreign exchange (21 ) 108
Other non-operating income (loss), net (14 ) (5 )
Total other income (expense), net $ (30 ) $ 108
In the three months ended March 31, 2012, other income (expense), net
decreased $0.1 million compared to the three months ended March 31, 2011. The
decrease was largely driven by an unfavorable change in foreign currency
exchange rates, primarily the British Pound, which contributed to transaction
losses on foreign exchange in the three months ended March 31, 2012 compared to
a gain in 2011.
19
--------------------------------------------------------------------------------Provision for Income Taxes
Provision for income taxes consists of federal and state income taxes in the
United States and income taxes in certain foreign jurisdictions, deferred income
taxes reflecting the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, and the realization of net operating
loss carryforwards.
Three Months Ended March 31,
2012 2011
(in thousands)
Provision for income taxes $ 31 $ 12
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