Yelp reported its second quarter earnings on Tuesday with better than expected revenue, but worse than expected profit, sending shares tumbling. But that wasn’t the only news to come out of the company. Yelp also announced the resignation of Max Levchin from its Board of Directors, and said it will discontinue display advertising by the end of the year.

Levchin Leaves

Let’s start with Levchin leaving. He was Chairman and Director, and he is officially leaving “to pursue other interests”. His departure is effective immediately. The Board has yet to appoint a replacement Chairman, but says it “plans to consider the issue at the next Board meeting in September.”

“We thank Max for all his contributions to Yelp since its founding in 2004 when he provided the seed capital to start the company,” said CEO Jeremy Stoppelman. “Max saw Yelp grow from just an idea in my head to a company worth billions of dollars with Yelpers around the world. We have mutually agreed this is the right time for him to step down given the demands on his time. I am grateful for his contributions to Yelp’s success and wish him all the best going forward.”

“I am extremely proud of what Yelp has accomplished over the last 11 years and believe I leave it well-positioned to take advantage of the large local advertising market,” said Levchin. “I spoke with Jeremy and felt now is the right time to transition off the board. I’m confident that Yelp is prepared to continue its success as I increase my focus on my CEO responsibilities at Affirm, along with other demands on my time.”

Display No More

During the company’s earnings conference call, Stoppelman revealed that Yelp will phase out display advertising by the end of 2015 as it turns its ad focus to native and local products. Here’s what he had to say about it (via SeekingAlpha’s transcript of the call):

Our mission is to connect people with great local businesses. Consumers are increasingly relying on our 83 million reviews when choosing where to spend their money, making Yelp the ideal place for local businesses to advertise. To better leverage Yelp’s strengths with consumers and local businesses, we decided to phase out brand advertising by the end of the year. We believe that eliminating brand advertising, which we also refer to as our display advertising product, will benefit the company over the long-term. The industry trend towards increasingly disruptive display advertising is at odds with our focus on the consumer experience, particularly within the app.

Direct brand advertising sales is in decline, while programmatic advertising has its own challenges with privacy implications, ever declining CPMs, and lower ad quality. For example, ads that play video or audio intrude upon the consumer experience increasing load times and data usage on smartphones. We believe that prioritizing the consumer experience while delivering highly relevant native local advertising will provide us with the strategic long-term advantage. Given that our brand advertising as a percent of total revenues declined from 25% in 2010 to 6% in the second quarter of 2015 now is the right time for us to reallocate those resources to our highly differentiated core business

The Results

Yelp reported net revenue of $133.9 million for the quarter, which is up 51% year-over-year. It also reported a $0.02 per share loss, which put off Wall Street, which expected a positive $0.01 per share net income.

Cumulative reviews grew 35% year-over-year, reaching 83 million, while mobile unique visitors surpassed the desktop number for the first time, growing 22% to 83 million on a monthly average basis. Local advertising accounts grew 40% year over year to 97,1004.

Brand ad revenue was $8.3 million, which is a decrease of 8%.

Here’s the full earnings release:

SAN FRANCISCO, July 28, 2015 /PRNewswire/ — Yelp Inc. (NYSE: YELP), the company that connects consumers with great local businesses, today announced financial results for the second quarter ended June 30, 2015.

• Net revenue was $133.9 million in the second quarter of 2015 reflecting 51% growth over the second quarter of 2014.
• Adjusted EBITDA for the second quarter of 2015 was $22.7 million, reflecting a 32% increase over the second quarter of 2014.
• Cumulative reviews grew 35% year over year to approximately 83 million.
• Mobile Unique Visitors¹surpassed the number of Desktop Unique Visitors²for the first time, growing 22% year over year to approximately 83 million on a monthly average basis. App Unique Devices grew 51% year over year to approximately 18 million on a monthly average basis³.
• Local advertising accounts grew 40% year over year to approximately 97,100⁴.

Net loss in the second quarter of 2015 was $(1.3) million, or $(0.02) per share, compared to a net income of $2.7 million, or $0.04 per share, in the second quarter of 2014.

Non-GAAP net income, which consists of net income excluding stock-based compensation and amortization was$9.4 million, or $0.12 per share, for the second quarter of 2015.

Net revenue for the six months ended June 30, 2015 was $252.4 million, an increase of 53% compared to $165.2 million in the same period last year. Adjusted EBITDA for the six months ended June 30, 2015 was $39.1 millioncompared to $25.8 million in the first six months of 2014. Net loss for the six months ended June 30, 2015 was$(2.6) million, or $(0.03) per share, compared to net income of $0.1 million, or $0.00 per share, in the comparable period in 2014. Non-GAAP net income for the six months ended June 30, 2015 was $17.3 million, or $0.22 per share, compared to non-GAAP net income of $15.0 million, or $0.19 per share, in the comparable period in 2014.

“We continue to demonstrate solid topline growth, with total net revenue increasing 51% year over year to approximately $134 million,” said Jeremy Stoppelman, Yelp’s chief executive officer. “Consumers are increasingly turning to apps when using their mobile phones, and we are excited about the growth we’ve seen in app usage which accelerated to 51% year over year. We believe our rich content married with our highly-differentiated local advertising product will position us well to capture a meaningful share of the large local market.”

“Our core local advertising business remains strong, and we are investing in Yelp’s future,” added Rob Krolik, Yelp’s chief financial officer. “We expect local advertising will continue to be our primary driver of growth as we work towards our goal of generating one billion dollars of revenue in 2017.”

Second Quarter Operating Summary

• Local advertising revenue totaled $107.9 million, representing 43% growth over the second quarter of 2014.
• Transactions revenue, which was previously included in Other revenue and will be broken out separately going forward, totaled $11.3 million, compared to $1.2 million in the second quarter of 2014, primarily due to the acquisition of Eat24 in the first quarter of 2015. Transactions revenue is comprised of Eat24, Platform transactions, Yelp Deals and Gift Certificates.
• Brand advertising revenue totaled $8.3 million, representing an 8% decrease compared to the second quarter of 2014. As of today, Yelp is announcing that it plans to phase out its brand advertising product by the end of 2015 to continue its focus on the consumer experience and its native, local advertising products.
• Other revenue totaled $6.4 million, representing 128% growth over the second quarter of 2014. Other revenue is primarily comprised of revenue from partnership arrangements.

Business Highlights

• Mobile Traffic: Mobile Unique Visitors surpassed Desktop Unique Visitors for the first time in company history in the second quarter of 2015, growing to approximately 83 million compared to approximately 79 million Desktop Unique Visitors. Growth in unique devices accessing the Yelp app accelerated to 51% over the second quarter of 2014. The majority of Yelp consumer engagement now occurs on the app with approximately 70% of new reviews and photos and approximately 70% of calls, clicks for directions and map views coming via the Yelp app.
• Local Advertising: With the full rollout of its packaged cost-per-click (CPC) advertising package inSeptember 2014, Yelp increased the percent of local revenue generated by CPC advertisers to 46% in the second quarter of 2015, an increase from 40% in the first quarter of 2015. Based on Yelp’s internal analysis, local advertisers on Yelp receive on average approximately 270% ROI on their advertising spend, demonstrating the compelling nature of its highly relevant, native advertising products.

Business Outlook

Yelp is providing its outlook for the third quarter and lowering its outlook for the full year of 2015 based on slower sales headcount growth and the elimination of its brand advertising product.

• For the third quarter of 2015, net revenue is expected to be in the range of $139 million to $142 million, representing growth of approximately 37% compared to the third quarter of 2014. Adjusted EBITDA is expected to be in the range of $12 million to $15 million. Stock-based compensation is expected to be in the range of $16 million to $17 million, and depreciation and amortization is expected to be 5%-6% of revenue.
• For the full year of 2015, net revenue is expected to be in the range of $544 million to $550 million, representing growth of approximately 45% compared to full year 2014. Adjusted EBITDA is expected to be in the range of $72 million to $78 million. Stock-based compensation is expected to be in the range of $62 million to $64 million, and depreciation and amortization is expected to be 5%-6% of revenue.

Quarterly Conference Call

To access the call, please dial 1 (800) 708-4539, or outside the U.S. 1 (847) 619-6396, with Passcode 40205168, at least five minutes prior to the 1:30 p.m. PT start time.  A live webcast of the call will also be available at http://www.yelp-ir.com under the Events & Presentations menu.  An audio replay will be available between 4:00 p.m. PT July 28, 2015 and 11:59 p.m. PT August 4, 2015 by calling 1 (888) 843-7419 or 1 (630) 652-3042, with Passcode 40205168.  The replay will also be available on Yelp’s website at http://www.yelp-ir.com.

About Yelp

Yelp Inc. (http://www.yelp.com) connects people with great local businesses. Yelp was founded in San Franciscoin July 2004. Since then, Yelp communities have taken hold in major metros across 31 countries. Approximately 83 million unique visitors visited Yelp via their mobile device¹, including approximately 18 million unique devices accessing the Yelp app³, and approximately 79 million unique visitors visited Yelp via a desktop computer²on a monthly average basis during the second quarter of 2015. By the end of the same quarter, Yelpers had written approximately 83 million rich, local reviews, making Yelp the leading local guide for real word-of-mouth on everything from boutiques and mechanics to restaurants and dentists.

¹Calculated as the number of “users,” as measured by Google Analytics, accessing Yelp via mobile web plus unique devices accessing the app, each on a monthly average basis over a given three-month period.

² Calculated as the number of “users,” as measured by Google Analytics, accessing Yelp via desktop computer on an average monthly basis over a given three-month period.

³ Calculated as the number of unique devices accessing the app on a monthly average basis over a given three-month period, according to internal Yelp logs.

⁴Local advertising accounts comprise all local business accounts from which we recognize local advertising revenue in a given three-month period.

Non-GAAP Financial Measures

This press release includes information relating to adjusted EBITDA, non-GAAP net income and non-GAAP net income per share, each of which the Securities and Exchange Commission has defined as a “non-GAAP financial measure.” Adjusted EBITDA, non-GAAP net income and non-GAAP net income per share have been included in this press release because they are key measures used by Yelp management and board of directors to understand and evaluate core operating performance and trends, to prepare and approve its annual budget and to develop short- and long-term operational plans. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”).

Adjusted EBITDA and non-GAAP net income have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of Yelp’s financial 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 and non-GAAP net income do 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, Yelp’s working capital needs;
• adjusted EBITDA and non-GAAP net income do 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 Yelp; and
• other companies, including those in Yelp’s industry, may calculate adjusted EBITDA and non-GAAP net income differently, which reduces their usefulness as comparative measures.

Because of these limitations, you should consider adjusted EBITDA, non-GAAP net income and non-GAAP net income per share alongside other financial performance measures, including various cash flow metrics, net income (loss) and Yelp’s other GAAP results. Additionally, Yelp has not reconciled its adjusted EBITDA outlook for the third quarter and full year 2015 to its net income (loss) outlook because it does not provide an outlook for other income (expense) and provision for income taxes, which are reconciling items between net income (loss) and adjusted EBITDA. As items that impact net income (loss) are out of Yelp’s control and cannot be reasonably predicted, Yelp is unable to provide such an outlook. Accordingly, reconciliation to net income (loss) outlook for the third quarter and full year 2015 is not available without unreasonable effort. For a reconciliation of historical non-GAAP financial measures to the nearest comparable GAAP measures, see the non-GAAP reconciliations included below in this press release.

Forward-Looking Statements

This press release contains forward-looking statements relating to, among other things, the future performance of Yelp and its consolidated subsidiaries that are based on Yelp’s current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the third quarter and full year 2015, Yelp’s ability to capture a meaningful share of the large local market, Yelp’s target revenue for 2017 and its expectations regarding local advertising as the primary driver of growth, Yelp’s estimates regarding local advertisers’ ROI on advertising spend, the future growth in Yelp revenue and continued investing by Yelp in its future growth, and Yelp’s ability to drive daily usage and engagement (particularly on mobile), increase awareness of Yelp among consumers, and deliver value to local businesses. Yelp’s actual results could differ materially from those predicted or implied and reported results should not be considered as an indication of future performance. Factors that could cause or contribute to such differences include, but are not limited to: Yelp’s short operating history in an evolving industry; Yelp’s ability to generate sufficient revenue to maintain profitability, particularly in light of its significant ongoing sales and marketing expenses; the impact of Yelp phasing out its brand advertising products by the end of 2015; Yelp’s ability to attract, retain and motivate well-qualified employees, particularly in sales and marketing; successfully manage acquisitions of new businesses, solutions or technologies, such as Eat24, and to integrate those businesses, solutions or technologies; Yelp’s reliance on traffic to its website from search engines like Googleand Bing; Yelp’s ability to generate and maintain sufficient high quality content from its users; maintaining a strong brand and managing negative publicity that may arise; maintaining and expanding Yelp’s base of advertisers; changes in political, business and economic conditions, including any European or general economic downturn or crisis and any conditions that affect ecommerce growth; fluctuations in foreign currency exchange rates; Yelp’s  ability to deal with the increasingly competitive local search environment; Yelp’s need and ability to manage other regulatory, tax and litigation risks as its services are offered in more jurisdictions and applicable laws become more restrictive; the competitive and regulatory environment while Yelp continues to expand geographically and introduce new products and as new laws and regulations related to Internet companies come into effect; Yelp’s ability to timely upgrade and develop its systems, infrastructure and customer service capabilities. The forward-looking statements in this release do not include the potential impact of any acquisitions or divestitures that may be announced and/or completed after the date hereof.

More information about factors that could affect Yelp’s operating results is included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Yelp’s most recent Quarterly Report on Form 10-Q at http://www.yelp-ir.com or the SEC’s website at www.sec.gov. Undue reliance should not be placed on the forward-looking statements in this release, which are based on information available to Yelp on the date hereof. Yelp assumes no obligation to update such statements.

Investor Relations Contact Information
Wendy Lim, Allie Dalglish
(415) 635-2412
[email protected]

Image via Yelp (Flickr)