[March 07, 2019] |
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SQN Sends Letter to Yelp Board of Directors
SQN Investors LP ("SQN", or "we"), a technology-focused investment firm
with over $1.1 billion under management and the beneficial owner of more
than 4% of the outstanding common stock of Yelp (News - Alert), Inc. ("Yelp" or the
"Company") (NYSE: YELP), today issued a public letter to the Yelp Board
of Directors ("the Board").
March 7, 2019
The Board of Directors Yelp Inc. 140 New Montgomery Street San
Francisco, California 94105 Attn: Chairperson Diane M. Irvine
Dear Members of the Board,
We are pleased that the announcements Yelp Inc. ("Yelp" or the
"Company") made on its earnings call on February 13, 2019, along with
the other materials released on that date, appear to indicate that the
Company is in the process of implementing many of the recommendations
that we made to you in our presentation published publicly on January
16, 2019 (www.SQNLetters.com).
Specifically, we note the following Company actions taken in response to
each of the recommendations we previously made:
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Refresh the Board: Following our repeated calls to refresh the
Board, the Board has added three new independent directors: Ms. Sharon
Rothstein, Mr. George Hu, and Mr. Brian Sharples. Each of these
individuals appear to have the strong operating experience that Yelp
needs on its Board at this stage in its growth. However, it is
important that they not get trapped in the same cycle of dysfunction
that has historically encumbered the Board. To that end, we encourage
the Board to name as Chairperson one of the newly appointed directors
so that the fresh perspectives of these new Board members are not
blunted by the same inertia that has historically resulted in abysmal
performance.
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Manage Transition to Transactions Marketplace: As suggested in
our January 2019 presentation, we note the Company's Q4 2018
Shareholder Letter highlights a renewed focus on generating
transaction revenue from the Restaurants and Home & Local segments.
While food order growth of 27% compared to Q4 2017 and Request a Quote
volume growth of 41% compared to Q4 2017 are encouraging metrics, they
are off a low revenue base. We hope that the renewed focus on
generating transactions from these markets also results in the
acceleration of transaction revenue growth that will be required to
make them material contributors to Yelp's revenue. Otherwise, we fear
Yelp will continue to lose market share and relevance.
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Monetize Through Partners: We continue to believe that
"Effective Partnerships," such as the ones noted in your February 2019
Yelp Investor Presentation, apparently in response to our
recommendation, are critical for the Company's future success. While
Yelp has announced several partnerships over the years, few are
meaningful. We believe that without deep partnerships that generate
material incremental revenue from transactions, Yelp will not be able
to monetize its traffic to its full potential. We hope that the
refreshed Board will take a new look at the potential partnership with
ANGI Homeservices that we outlined in our presentation. It is
partnerships of such nature that we believe are needed for Yelp to
realize the value of its traffic.
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Improve Sales Efficiency: Yelp is embracing our recommendation
to improve sales productivity and shift emphasis to its most efficient
sales channels. In our presentation, we illustrated how Yelp's sales
productivity is significantly behind peer benchmarks and how Yelp
should invest in its fastest growing verticals: Home & Local and
National Accounts. It was therefore great to see that "capturing the
opportunity in National" was listed as one of your five initiatives to
accelerate growth in addition to Yelp's focus on key verticals such as
Home & Local.
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Align Spend with Growth Potential: The reduction in marketing
spend by $15M is a small first step that acknowledges our
recommendation to enhance profitability. To achieve Yelp's commitment
of achieving at least 30% EBITDA margins by 2023, more of such
initiatives will be required.
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Move Headcount to Lower Cost Cities: The move to relocate sales
out of San Francisco and the associated annual savings of $10 million
is a positive step toward lowering the Company's overall costs. If
Yelp implements this approach across all functions, as we recommended,
we estimate the Company can save $58 million annually exiting 2020. We
look forward to hearing about more savings from such moves.
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Buyback $500 Million of Stock: Yelp has now announced a total
of $500 million of buybacks since we first initiated our dialogue with
the Board and $250 million of buybacks since we made our
recommendations public. We hope that by 2020, as outlined in our
presentation, Yelp will achieve our recommended target of $500M of
incremental buybacks, or $750 million including the $250 million
buyback announced in November 2018.
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Eliminate Key Product Gaps: As we recommended, several key
product-related announcements were mentioned in Yelp's Q4 2018 Letter
to Shareholders. We hope to see these announcements translate into
product releases over the course of 2019, particularly as its new
Chief Product Officer, Vivek Patel, announced on February 19, 2019,
settles into his new role.
Additionally, consistent with our recommendations, Yelp committed to
achieving a mid-teens revenue CAGR (compound annual growth rate) from
2019 to 2023 and achieving 30% to 35% EBITDA margins by 2023. While this
is consistent with our growth and profitability targets, in contrast to
what we did in our presentation, Yelp revealed few details on how it
plans to achieve these targets. Particularly in light of Yelp's weak
2019 guidance, the new Board will need to hold Management accountable to
a level of execution that has previously eluded the Company.
Specifically:
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Achieving a mid-teens revenue CAGR from 2019 to 2023: This
implies adding roughly $1 billion in revenue or essentially doubling
the size of Yelp by 2023. For Q1 2019, Yelp only guided to 4% to 6%
growth, down from the 12% growth delivered in Q4 2018 and 18% for
2018. Yelp guided to accelerating revenue growth as 2019 progresses
with the hopes of achieving 8% to 10% revenue growth for the year,
down from the previous guidance of "double-digit growth" for 2019
mentioned on the Q3 2018 earnings call. Yelp's updated guidance
implies further reacceleration in 2020-2023 to achieve the stated
mid-teens revenue CAGR for this period. We hope the refreshed Board
will engage in depth with Management to evaluate the specific
initiatives that will ensure the delivery of these committed targets.
We look forward to Yelp making more of the details public under the
stewardship of the new Board.
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Increasing EBITDA margin from 19% in 2018 to at least 30% in 2023:
Should Yelp's stated growth targets materialize, and Yelp maintain its
commitment to the various cost reduction initiatives announced, this
target should be achievable. However, should growth fail to quickly
and meaningfully reaccelerate as Management has guided, much greater
cost reductions will be required to meet the stated EBITDA targets.
We believe that a Board that holds Management accountable should be able
to deliver on these targets given the potential of the business. To that
end, we hope that the new Board will pay particular attention to our
remaining recommendations that first necessitated refreshing the Board:
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Evaluate Talent: The Board should evaluate the Executive
Leadership and their direct reports on their demonstrated successes in
their time at Yelp and whether they have the skills required to
deliver on Yelp's stated five-year goals. We anticipate they will find
several skill gaps and areas in need of leadership change. We do not
believe that internal promotions of the kind Yelp has relied on in the
past will be sufficient to address the talent deficiencies at Yelp.
External hires with new skills and a mindset to challenge the status
quo will be essential to delivering on Yelp's stated goals.
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Align Compensation to Performance: Management compensation must
break from handouts of stock - that executives often turn around and
sell - and be based to a higher degree on metrics that are aligned
with delivering successful outcomes by functional area. We look
forward to future announcements that suggest Yelp is changing its
approach to compensation in a meaningful way.
As longstanding shareholders of Yelp, we sincerely hope that Yelp's
recent announcements represent a true commitment to change as opposed to
merely defensive maneuvers and hollow promises designed to deflect
shareholder pressure. We are not typically activist investors, but in
this situation, we believe our public actions have yielded positive
results. Considering the numerous changes made or announced by the
Company, and the stated financial targets for 2019 and 2023, we are
prepared to support the newly refreshed Board and refrain from
nominating director candidates for election at the 2019 Annual Meeting.
Critically, we believe that the new Board of Yelp will need to be
objective in asking the crucial question of whether the Company can
actually deliver on its publicly announced targets and remain a viable
standalone public company. Much work remains to achieve what Yelp has
announced and the new Board may conclude that Yelp shareholders would be
better served if the Company were sold. Given the strong operating
backgrounds of the three new Board members, we are hopeful they can be
impactful in arriving at the right conclusion.
In our view, Yelp's CEO, Jeremy Stoppelman, now has one more opportunity
to reinvigorate performance under the stewardship of the new Board. We
hope that this opportunity will not be squandered, and that he will be
open-minded about future management changes.
Time is of the essence. Further failed execution or missed opportunities
could result in Yelp becoming a permanently impaired asset in the
fast-moving internet ecosystem.
We remain committed to maximizing long-term shareholder value at Yelp
and wish the refreshed Board the best of luck. Please feel free to reach
out at any time if we can answer any questions.
Sincerely,
Amish Mehta Founder SQN Investors LP
About SQN Investors LP
SQN Investors is a value-oriented investment adviser focused on the
technology sector. SQN employs a long-term, concentrated, private
equity-like approach to investing in the public equity markets. SQN was
launched in 2014 and currently manages over $1.1 billion of capital on
behalf of institutions and individual investors.
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