A “negative rating” for Yelp from investors

by Lei Xuan

Yelp warned the company's fourth quarter revenue won't be as good as third quarter. Photo by Lei Xuan
Yelp warned the company’s revenues won’t grow as rapidly in the fourth quarter as they did in the third. Photo by Lei Xuan

Yelp Inc. shares took a big tumble Thursday after the online review company turned in better-than-anticipated third quarter results, but warned investors that sales in the current quarter won’t quite match the breakneck pace of recent periods.

In the latest quarter, the San Francisco-based company earned $3.6 million, or 5 cents per diluted share, compared to a net loss of $2.3 million, or 4 cents per diluted share in the year-ago quarter. The latest per-share earnings topped Wall Street forecasts by 2 cents.

Revenue jumped a hefty 67 percent to $102.5 million from $61.2 million in last year’s quarter. That marks only the second profitable quarter of Yelp, which was founded 10 years ago and went public in 2012.

“We had a great quarter,” said Yelp CEO Jeremy Stoppelman in the earnings conference call on Wednesday.

Despite Stoppelman’s enthusiasm, the company’s guidance for fourth quarter revenues disappointed investors. For the year’s final period, Yelp said, officials expect revenue of between $107 million and $108 million. That’s an eye-catching 52 percent increase over the year-ago quarter, but it fell short of the $111 million Wall Street had been expecting.

Investors’ judgment was harsh: on a day when the broad market was enjoying a powerful upturn, Yelp shares fell $10.43, or 15 percent, $59.80 in late morning trading.

Asked why a shortfall of a few million dollars in revenue could cause such a selloff in Yelp shares, B. Riley& Co analyst Sameet Sinha said: “The guidance of fourth quarter is below expectation, which implies a sharp slowdown in growth.”

“If a company is saying we grew more than 60 percent in the third quarter, then says ‘we will only grow 52 percent in the fourth,’ then people start questioning what’s happening that is causing this slowdown in growth,” he added.

Yelp has both website and mobile app that allow customs rate and review local businesses, ranging from restaurants to spas. In the third fiscal quarter this year, 83.1 percent of its revenue was generated from local advertising.

With its expansion to Chile and Hong Kong last quarter, Yelp is now available in 29 countries and 16 languages. But the company’s international business only contributed 3 percent, or $3 million, of its total revenue last quarter.

“We see a large opportunity internationally,” CEO Stoppelman told analysts during the conference call. “And we continue to roll out the Yelp playbook in new markets as we plant the seeds for future growth.”

“Once the content and traffic grow, we’re able to start monetizing,” he added, “but this process takes time.”

Despite Wednesday’s turbulence, Wall Street remains interested in fast-growing Yelp.

“We continue to believe Yelp remains extremely well positioned to benefit from growth in mobile usage and local ad dollars shifting online,” said Goldman Sachs analyst Heath P. Terry, who retained a Neutral rating on the company’s stock, “though with a high degree of success already reflected in Yelp’s multiple and recent competitive developments from Facebook, Apple and Groupon.”