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YELP > SEC Filings for YELP > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for YELP INC


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

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 of 1933, as amended, 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," "strategy," "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 39.1 million cumulative 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 102.1 million unique visitors used our website, and our mobile application was used on approximately 9.9 million unique mobile devices on a monthly average basis during the quarter ended March 31, 2013, according to Google Analytics, a product from Google, Inc. that provides digital marketing intelligence. Businesses of all sizes 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, 2013, we are active in 54 Yelp markets in the United States and 46 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. In October 2012, we acquired Qype GmbH, a Germany-based reviews website (collectively with its subsidiaries, "Qype"), through our wholly-owned subsidiary, Yelp Ireland Ltd. We believe the acquisition of Qype will accelerate the expansion of our international footprint as its largest markets - Germany and the United Kingdom
- are key markets for us, and together we will have a substantially increased presence in these markets. For the three months ended March 31, 2013 revenue generated internationally accounted for six percent of total revenue.


Our overall philosophy is to invest for long-term growth. 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 2013, we had 1,479 employees, which represents an increase of 48% compared to March 31, 2012.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("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 our Annual Report on Form 10-K for the year ended December 31, 2012.

Key Metrics

We regularly review a number of metrics, including the key metrics set forth below, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.

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, 2013, approximately 36.2 million reviews were available on business profile pages, including approximately 9.0 million reviews that were being filtered, after accounting for the approximately 2.9 million reviews that 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 dates presented:

As of March 31, 2013 2012

(in thousands)

Reviews 39,103 27,569

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. Unique visitors do not include visitors who access our platform through our mobile app. For the quarter ended March 31, 2013, our mobile app was used on approximately 9.9 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, 2013 2012

(in thousands)

Unique Visitors 102,065 71,448

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 dates presented:

                                                     As of March 31,
                                                    2013          2012
                                                     (in thousands)
            Claimed Local Business Locations          1,103          700

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, 2013 2012

(in thousands)

Active Local Business Accounts 45 27


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, restructuring and integration costs. 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,
                                                      2013               2012
                                                          (in thousands)
     Reconciliation of Adjusted EBITDA:

         Net loss                                $     (4,799 )     $     (9,802 )
         Provision for income taxes                        44                 31
         Other income (expense), net                      201                 30
         Depreciation and amortization                  2,478              1,361
         Stock-based compensation                       4,605              7,429
         Restructuring and integration costs              675                  -
             Adjusted EBITDA                     $      3,204       $       (951 )

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. The stock-based compensation amount of $4.6 million for the three months ended March 31, 2013 excludes approximately $0.6 million of stock-based compensation related to the Qype acquisition already included in restructuring and integration costs.

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:

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;

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;

adjusted EBITDA does not take into account restructuring and integration costs associated with our acquisition of Qype; and

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 the results of operations to be anticipated for
the full year 2013 or any future period.

                                                                                         Three Months Ended March 31,
                                                                                           2013                 2012
                                                                                       (as a percentage of net revenue)
Consolidated Statements of Operations Data:
Net revenue by product
    Local advertising                                                                           85 %                78 %
    Brand advertising                                                                           10                  15
    Other services                                                                               5                   7

Total net revenue                                                                              100 %               100 %

Costs and expenses:
    Cost of revenue (exclusive of depreciation and amortization shown separately
    below)                                                                                       7 %                 8 %
    Sales and marketing                                                                         61                  69
    Product development                                                                         16                  15
    General and administrative                                                                  19                  39
    Depreciation and amortization                                                                5                   5
    Restructuring and integration costs                                                          1                   -

Total costs and expenses                                                                       109                 136

Loss from operations                                                                           (10 )               (36 )
Other income (expense), net                                                                     (1 )                 -

Loss before income taxes                                                                       (11 )               (36 )
Provision for income taxes                                                                       -                   -

Net loss                                                                                       (10 )%              (36 )%


Three Months Ended March 31, 2013 and 2012

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 and our mobile app.

   Brand Advertising. We generate revenue from brand advertising through the
sale of display advertisements (both graphic and text) on our website and our
mobile app, 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 and
Gift Certificates, 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. 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. Gift Certificates allow merchants to sell
full-priced gift certificates directly to customers through their business
profile page. We earn a fee based on the amount of the Gift Certificate sold,
which we record on a net basis and include in revenue upon a consumer's purchase
of the Gift Certificate. 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.

                                       19

--------------------------------------------------------------------------------

                                                                                     2012 to
                                                                                     2013 %
                                              Three Months Ended March 31,           Change
                                                2013                 2012
                                                    (dollars in thousands)
Net revenue by product:

    Local advertising                     $       38,967       $       21,473          81 %
    Brand advertising                              4,758                3,994          19
    Other services                                 2,408                1,918          26

        Total                             $       46,133       $       27,385          68 %

Percentage of net revenue by product:
    Local advertising                                 85 %                 78 %
    Brand advertising                                 10                   15
    Other services                                     5                    7

        Total                                        100 %                100 %

Total net revenue increased $18.8 million, or 68%, in the three months ended March 31, 2013, compared to the three months ended March 31, 2012. Our local advertising revenue increased $17.5 million, or 81%, 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 $0.8 million, or 19%, 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 $0.5 million, or 26%, primarily due to an increase in revenue from the sale of Yelp Deals and sales of remnant advertising inventory.

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, video production expenses and allocated facilities costs. 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.

                                                                              2012 to
                                                                               2013%
                                       Three Months Ended March 31,           Change
                                         2013                 2012
                                          (dollars in thousands)
     Cost of revenue               $        3,340       $        2,126          57 %
     Percentage of net revenue                  7 %                  8 %

In the three months ended March 31, 2013, cost of revenue increased $1.2 million, or 57%, compared to the three months ended March 31, 2012. This increase was primarily attributable to an increase of $0.3 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, set up costs, including video production, for local customer business pages increased by $0.3 million due to increased demand by local businesses for videos on their business pages. Merchant fees related to credit card transactions for local advertising also increased $0.3 million due to a higher volume of credit card paying customers. Lastly, increased personnel costs to support our website infrastructure resulted in an increase of $0.2 million in the three months ended March 31, 2013 compared to the same period last year.


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 incur almost no sales and marketing expense 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 community management costs to increase as we continue to expand to new markets and within existing markets. We expect our sales and marketing expenses to continue to increase both domestically and internationally as we expand our domestic and international footprint, increase the number of active local business accounts and continue to build our brand. The substantial majority of these expenses will be related to hiring Community Managers and an international sales force. We expect our sales and marketing costs, including community management costs, to increase and to be our largest expense for the foreseeable future. For the three months ended March 31, 2013, we spent $5.3 million related to our international sales and marketing operations compared to $2.4 million for the three months ended March 31, 2012.

                                                                              2012 to
                                                                              2013 %
                                       Three Months Ended March 31,           Change
                                         2013                 2012
                                          (dollars in thousands)
     Sales and marketing           $       28,194       $       18,770          50 %
     Percentage of net revenue                 61 %                 69 %

In the three months ended March 31, 2013, sales and marketing expenses increased $9.4 million, or 50%, compared to the three months ended March 31, 2012. The increase was primarily attributable to an increase in headcount and related expenses of $7.2 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 by $1.0 million. In addition, we experienced an increase in facilities and related allocations of $1.6 million, partially offset by a decrease in 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, 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, . . .

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