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Growing Pains Lead Yelp to Loss

Growing Pains Lead Yelp to Loss

Online review site Yelp lost nearly $10 million in its first quarter as a publicly traded company, due in part to aggressive expansion pursuits. "They raised a lot of cash and are using it to rapidly expand and protect against competitive erosion," said analyst Rob Enderle. "This is a case of use it or lose it."

By Rachelle Dragani
05/03/12 10:48 AM PT

Yelp reported a net loss in its first quarter as a publicly traded company after aggressive expansion abroad led to a sharp increase in costs.

The site, which provides online reviews of local businesses, released its earnings on Wednesday for its first ever fiscal quarter after filing its IPO. Yelp reported a net loss of US$9.8 million, or 31 cents per share, more than triple its net loss of $2.7 million from the same time last year.

Revenue was up from the same quarter a year ago, though, driven by growth in visitors to the site and its number of reviews. It averaged 71.4 million monthly unique visitors, a 53 percent increase.

Active local business accounts grew as well. The site now hosts 27.6 million reviews, a 59 percent increase from a year ago. Local businesses are also adding more accounts, growing 117 percent to 27,300. Yelp said it is working to bring even more business accounts to the site by improving mobile metrics that would allow owners to see how many people accessed the site to get more information on their business.

Yelp brought in $27.4 million for the first quarter, up 66 percent from the same quarter last year. The company expects to bring in $128 million to $132 million overall for 2012, topping the Street prediction of $124.4 million.

Yelp didn't respond to our requests for comment on the story.

Baby Steps

Since going public in early March, Yelp's stock has been consistently trading above its $15 IPO price. The company still faces challenges, though, in a market where barriers to entry are small but operating costs are high.

"The Yelp earnings today were fairly good," Sam Hamedeh, CEO of PrivCo, told the E-Commerce Times. "But [they] do show the company's revenue growth already decelerating from earlier, faster rates, despite still being quite small."

Since the company projected an increase in sales for 2012 as a whole, investors are likely to stick it out with Yelp for the time being, Rob Enderle, principal analyst at Enderle Group, told the E-Commerce Times.

"Their revenue growth was strong and beat expectations," said Enderle. "So they have a profit engine and investors will ride with them if they can articulate a plausible positive future, and they did that."

If competitors or other challenges get in the way and keep Yelp from turning a profit, though, Yelp might make a better acquisition than an independent company, Hamedeh said.

"It's hyper-local advertising business is quite a difficult one to make profitable or scale well," said Hamedeh. "Local salespeople must call on small restaurants, bars and so on. It is highly labor-intensive, and Yelp really is not so much a technology company at all but a local advertising company. Very tough to make it work at a large scale."

Rapid Growth

Yelp is attempting to add more local spots for its site. Though revenue and accounts are growing, the company's rapid expansion contributed to its overall net loss. With the extra $114 million cash boost it added after going public, the company said it is pursuing a rapid growth phase.

It brought the service to 11 markets over the past quarter, including Antwerp, Brussels, Oklahoma City, Perth and Hampton Beach. With the added locations, Yelp now has 82 active markets around the globe.

That rapid expansion can act as a safeguard against competitors, said Enderle.

"They raised a lot of cash and are using it to rapidly expand and protect against competitive erosion," said Enderle. "This is a case of use it or lose it -- they need to move into regions and get established before a local, similar, smaller company locks them out."

While the net loss due to growth might not look attractive on an earnings report, said Enderle, the company faces a bigger risk if it doesn't spend on overseas growth.

"In the Web game, if you want to go global you need to move quickly or overseas firms will clone you," said Enderle. "You saw that happen to Google in China."


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