SQN Sends Letter to Yelp Board of Directors: Board Needs to Be Refreshed

Smart Money
  • SQN is one of Yelp’s top five stockholders, beneficially owning more than 4% of the outstanding common stock of Yelp
  • First invested in Yelp in August 2015 and have been consistent buyers of the stock,despite the Company’s prolonged underperformance
  • Size and duration of our investment demonstrate the level of conviction we have in both Yelp’s leading position in local search and the potential value-creation opportunities that lie ahead for the Company, if managed correctly
  • Board has failed to hold itself and Management accountable for the Company’s strategic and operational missteps, repeated missed earnings, lost opportunities, and poor corporate governance
  • We are not typically activist investors. However, if we fail to align with the Board and Management on a constructive path forward after their repeated history of value destruction, we are open to taking our proposals directly to stockholders to seek their support

The Yelp Opportunity

  • Leading local business review site in the US, attracting 75 million unique visitors every month to its mobile platform
  • As of 9/30/18, Yelp had 4.8 million claimed business listings and 171 million cumulative reviews on its platform
  • Yelp also allows users to directly engage with businesses through online appointment bookings, reservations, food ordering and service quote requests
  • Yelp has a unique and highly strategic asset in its vast, irreplicable network of peer reviews
  • Yelp has significant runway to grow, given the nascent state of local online advertising and the multiple levers that Yelp has at its disposal to accelerate growth, most notably through its Home and Local Services segment and with its National Accounts customers
  • Yelp has an attractive financial profile with a high recurring revenue base, and a financial model that generates greater than 90% gross margins, resulting in high operating leverage
  • At 9.3x consensus 2019 EBITDA, we think Yelp is attractively valued relative to its growth and its value creation potential
  • We commend Yelp’s Founder and CEO, Jeremy Stoppelman, for having translated his vision into a public company that plays an important role in connecting consumers to local businesses
  • Board is not working effectively to oversee management and the strategic direction of the Company as evidenced by Yelp’s long history of underperformance

Yelp’s Underperformance

  • Despite Yelp’s vision and compelling business qualities, its stock price tells a different story – one of repeated strategic errors, operational missteps, and stockholder disappointments
  • Over a five year period, stock has delivered a -45% return to investors. This represents an underperformance to the S&P 500 by -107%, the Nasdaq by-127%, the Russell 2000 Technology Index by -117%, and its own proxy peer group by -74%
  • Yelp’s poor execution is especially evident in the frequency and magnitude of its earnings disappointments. Since Q1 2014, Yelp has failed to meet investor expectations in 12 of the last 19 quarters
  • During this time, any positive actions taken by Management have been overwhelmed by a consistent pattern of operational blunders, poor forecasting and sharp guidance revisions

Yelp’s Missed Opportunities

  • Yelp has failed to capitalize on significant long-term opportunities in its end-markets
  • Slow pace of innovation has allowed Google and Facebook to narrow the gap between themselves and the Company
  • Market caps of publicly-traded, best-of-breed companies in some of Yelp’s key markets total $26.1 billion, more than 9x greater than Yelp’s own market cap of $2.9 billion
  • We think this large difference in valuation highlights the opportunities that Yelp has failed to monetize

Yelp’s Poor Corporate Governance

  • Average tenure of the Board is over 9 years, with only one new member joining since May 2012
  • Has a remarkably stockholder-unfriendly corporate profile: Board is classified,with directors up for reelection every 3 years instead of annually; directors can only be removed for cause; the Board can only fill director vacancies;stockholders have limited ability to act outside of the annual meeting process,as stockholders cannot act by written consent or call special meetings; and any stockholder vote to amend these provisions in Yelp’s charter requires a supermajority vote of 2/3 of the outstanding stock

SQN’s Recommendation: Refresh the Board

  • Board needs to be refreshed with new, independent and objective perspectives, including the addition of a stockholder representative on the Board
  • Management also needs to make itself meaningfully more available to investors
  • We note that following our engagement with certain members of the Board in early November, in which we outlined our concerns and ideas, including how Yelp should increase its capital return to stockholders, the Board was quick to announce a$250 million share repurchase program
  • We think a refreshed Board will:
    • Objectively evaluate all aspects of Yelp’s strategy and hold management accountable for its execution
    • Improve business metric disclosures to help stockholders better understand business fundamentals
    • Better align the use of Yelp’s significant cash balance with stockholders
    • Develop and implement a compensation plan for the Board and Management that pays for performance and is aligned with creating stockholder value
    • Be objective in determining if, and when, Yelp should consider a sale of the Company

SQN Investors is a value-oriented investment adviser focused on the technology sector. SQN was launched in 2014 and currently manages over $1 billion of capital on behalf of institutions and individual investors. Run by Amish Mehta, SQN was seeded by David Einhorn’s Greenlight Capital in 2014.

SQN Sends Letter to Yelp Board of Directors, December 10, 2018 

Image Source: SQN/Business Wire

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