This Analyst Thinks Yelp's Outlook Is 'Reasonable'

On Monday, Yelp Inc YELP had its most recent earnings release and conference call, in which Q4 results were mixed.

With local ad revenues coming in below consensus and decreased user metrics, the company updated its Q1 and 2016 guidance.

Following the mixed results, research firms began to weigh in on the company's report and forecast.

Baird: Neutral Rating, Decreased Price Target To $19

On Tuesday, Baird Equity Research joined the conversation, adding its thesis of "reasonable" guidance to the chatter.

Related Link: Yelp Takes One Out Of Twitter's Playbook

"In Q4, we note user metrics remained mixed, with sequential declines in mobile and web visitors reflecting seasonality and possibly increasing competition," the research firm began, "Nonetheless, we believe lowered 2016 margin expectations provide a reasonable starting point to the year."

The firm concluded that while revenues "marginally disappoint" and "near-term growth opportunities could prove expensive," Yelp is no lost cause. Therefore, the firm decreased the price target on the company from a previous $30 to $19, but maintains a Neutral rating.

Justification

Baird listed four key reasons behind the lowered price target and the Neutral rating:

• Mixed Revenue Report, Estimate Misses: Baird reiterated that local ad revenues did not meet consensus estimates, "Revenues of $153.7 million […] were above consensus of $152.3 million, with upside from legacy brand advertising ($7.1 million vs. $5.5 million expected). Local advertising revenue of $125.9 million was in line with our below-consensus estimate of $126 million, reflecting continued monetization headwinds, while EBITDA of $17.5 million (11.3 percent margin) was well-below expectations of $22 million, driven by higher sales headcount (+45 percent y/y) and branded marketing spend>"
• Management Upset: "CFO Krolik to step down, will operate on an interim basis until replacement found," reported Baird. Additionally, during the conference call, Yelp's CEO mentioned that the "incoming CFO must be experience in operating growth companies at scale," in the context of Yelp's size.
• Company Guidance Makes Sense: Baird analysts stated, "Guidance sets reasonable bar; reflects elevated marketing spend." Based on the revenue guidance of $685-700 million being above expectations, but the EBITDA guidance coming in below expectations, the firm indicated that the balance made sense and expects the company can achieve the fiscal year 16-17 revenue targets.
• Mobile Momentum Flat-ish: "According to management, Yelp now generates 61 percent of local ad revenues from CPC (performance-based formats) vs. 52 percent in 3Q15 and 32 percent in 4Q14," Baird elaborated, stating that the recent traffic trends have declined, but with the local ad in line and reflecting steady net add trends and the revenues up from previous years, the momentum may be leveling off.