Yelp Tumbles After Cutting Sales Forecast as Advertisers Flee

  • Company cites churn after shifting the way it charges for ads
  • Analysts skeptical that the problem will be fixed quickly

Yelp Inc. shares plunged the most in almost two years after the company said a wave of advertisers stopped spending with the online review guide in the first quarter, leading it to a lower forecast for full-year revenue.

Retention of its advertisers is a key metric for analysts to determine Yelp’s growth and long-term sustainability. Executives attributed higher churn from the first quarter to a specific group of advertisers that had come to the site about a year ago just as the San Francisco-based company started shifting the way it charged for ads. Some of the new businesses found the transition to a model of charging for actual clicks on ads instead of just views difficult, Chief Operating Officer Jed Nachman said late Tuesday on a call with analysts.

The company began addressing the issue and was able to “course-correct” and saw better results in March and particularly in April, Nachman said.

Still, Yelp cut its full-year revenue forecast and its projection for second-quarter sales were lower than analysts’ estimates. The shares fell as much as 22 percent, the most since July 2015, to $26.93.

Analysts Downgrade

Two brokerage firms --RBC Capital Markets and MKM Partners -- downgraded the stock, while one, Pacific Crest, recommended using the stock weakness to buy more. Goldman Sachs upgraded its rating to buy.

“There are now substantial questions about Yelp’s salesforce execution and its current value proposition for advertisers. And fundamentals are deteriorating,” Mark Mahaney, an analyst at RBC Capital Markets, wrote in a note. “This won’t be a quick fix.” He downgraded the stock to neutral.

Yelp, which started as a website for consumers to post and find reviews of businesses from restaurants to florists, depends on those same businesses for advertising revenue. The company had pulled back in recent years from national brands to focus on getting more local businesses to advertise on the platform.

The company has had problems with its sales organization in the past, said MKM Partners analyst Rob Sanderson, who cut his outlook on the stock to neutral. He was also skeptical that the churn issue was fully fixed in just six weeks, pointing out that cutting guidance suggests more retention problems ahead.

“In a high-churn business, investors should rightfully ask that if retention issues were so easy to remedy in 1-2 months, then why was this not done at any time in the 5-years since IPO,” he wrote in a note to investors.

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