Equity research note on Yelp performance and outlook (April 2017)

Yelp (Neutral, $43 PO) Stock view: Likely to be some improvement vs last quarter Yelp is coming off of a quarter with decelerating app unique devices, weak new customer adds, and decelerating sales force growth, and it seems likely that one or two of these metrics will improve. The tone at our recent investor meetings with the CFO seem to suggest that 4Q issues did not signal a break in the model (see On the road with Yelp), and we expect an improvement q/q customer adds. We think the company should be able achieve Street 1Q revenue and EBITDA estimates, though we won’t be surprised to see the 2Q17 outlook come in slightly below current Street estimates. For the full year outlook, while we believe the implied expense growth in the 2017 outlook is somewhat conservative, management appears focused on investing in the business for now and we think upside is more likely to come in 2Q or 3Q. Overall, we remain somewhat cautious on the stock given potential revenue deceleration due to tough comps and a deceleration in sales force growth. On the cost front, management has been clear in its intention to invest in performance marketing, which could take time to bear fruit. In addition, we believe sales force growth to stabilize/increase going forward, which would seem to suggest potential cost headwinds relative to recent quarters. Finally, while we don’t have the specific financials, the addition of Nowait ($40mn acquisition closed 2/28) likely encompasses a moderate bump up in opex with limited revenue to offset. As we look ahead, we are encouraged with the three transitions within company and we will be looking for progress on the following on the call. The first is connections between consumers and businesses on Yelp through clicks, reservation services, ordering, and Request a Quote. The second is a ramp up in performance marketing as users engage in more measurable events. The third is new customer acquisition via alternative channels, including national customers from outside sales alongside self- serve customers via online channels. Key theme/metric(s) for 1Q: new account adds, app unique devices growth Given the miss last quarter and pressure on sales force headcount, local advertising accounts will be important gauge of overall execution. Other key metrics include app unique devices growth, which has been decelerating since mid-2015 from 51% y/y to 20% in 4Q16. Performance marketing could reverse the trend, but it could take some time. Finally, while management continues to highlight a decoupling of sales force growth and topline trends, investors still pay attention to overall sales force growth, particularly given the three consecutive quarters of deceleration from 44% y/y (1Q16) to 11% y/y (4Q17). Management has indicated that sales force growth in 2017 should be in the double digits. Table 30: Key 1Q metrics Metrics 4Q16A 1Q17E 2Q17E Claimed Local Business 3,363 3,552 3,/27 y/y Growth 27% 25% 24% Local Advertising Accounts 138 142 150 y/y Growth 24% 17% 17% Reviews 121,022 127,135 133,635 y/y Growth 27% 25% 23% Source: BofA Merrill Lynch Global Research, company reports Biggest 1Q issues/risks: - Local revenue deceleration: We assume 750bps of y/y growth deceleration in 1Q17 vs 4Q16. Bankof America Merrill Lynch Internet/e-Commerce | 06 April2017 45 HOUSE_OVERSIGHT_014931