SQN’s Presentation on Yelp: Yelp is Worth $65/Share

Smart Money

Yelp has dramatically underperformed with no meaningful accountability to stockholders

  • Underperformed Russell 2000 Technology Index by -117% and its own proxy peer group by -74% over the last 5 years; missed investor expectations in 12 out of the last 19 quarters
  • Board is stale, with no new members added since May 2012; failed to hold CEO accountable for shifting strategies, missed opportunities, and dismal execution
  • Stockholder-unfriendly governance structure has severely limited stockholders’ ability to seek recourse

Stockholders must seize the opportunity to refresh the Board with candidates not handpicked by the existing Board

  • Dual-class share structure collapsed in September 2016, creating the possibility for change
  • Stockholders must capitalize on the opportunity to replace 3 out of 8 directors on Yelp’s staggered board in 2019 with candidates not handpicked by the existing board; new board should include stockholder representation
  • 5-year history of Yelp’s underperformance continues; time is of the essence
  • Ahead of the 3/8/19 nomination deadline, SQN would prefer to work constructively with Yelp on the reconstitution of its board; alternatively, SQN will consider all options available, including nominating board members and seeking stockholder support for their election

A refreshed Board should evaluate strategic alternatives

  • Should immediately evaluate strategic alternatives including a possible sale of Yelp
  • Successful implementation of our recommendations could result in a $55 to $65 stock price, or an appreciation of 59% to 89% from 12/7/18 unaffected closing stock price
  • Immediate sale to a PE firm could yield a $47 to $50 stock price, or a 36% to 45% premium; a sale to a strategic acquirer could yield an even higher premium

Significant value can be unlocked by a strategic review process

  • Remain Public: implementation of our recommendation could result in the following by 2020:
    • Re-acceleration of revenue growth to 20%
    • Expansion of EBITDA margins to 30% from 19%
    • Incremental $500 million of buybacks
    • $55-65/share; 59% to 89% upside potential
  • Sell Yelp: large universe of potential buyers:
    • PE buyers interested in optimizing the business
    • Strategic buyers interested in high user traffic
    • Strategic buyers interested in reviews and local business directory
    • $47 – 50/share; 36%-45% immediate premium; with potential for a higher premium from strategic buyers

SQN’s recommendation

  • Recommend replacing the 3 members on Yelp’s 8-person staggered Board that are up for election at Yelp’s 2019 Annual Meeting with candidates that are not handpicked by the existing Board
  • Can significantly increase the monetization of its traffic by partnering with vertically-focused internet platforms
  • There are dozens of potential partnerships across multiple categories that Yelp can pursue to get the highest value for its traffic
  • Sales cold-calling results are far below benchmarks. We only assume a 30% efficiency improvement by 2020 and believe there is significant additional upside
  • By aligning S&M spend to growth for each segment, we believe Yelp can expand EBITDA margins by 8%, or $97M annually exiting 2020
  • By aligning R&D spend to growth for each segment, Yelp can expand EBITDA margins by 3%, or $36M annually exiting 2020
  • Shifting headcount to lower cost cities could result in a 4.71% expansion in EBITDA margins, or $58M annually exiting 2020
  • Yelp can return 20% growth and achieve $1.3B in revenues by 2020 through monetization partnerships and improvements in sales efficiency
  • Yelp can conservatively expand to 30% EBITDA margins by 2020 if these recommendations are implemented. This is still well below Yelp’s own long-term target of 35% to 40%
  • Can easily buy back $500M of stock and still have significant excess cash remaining
  • Yelp lacks Google’s feature that allows advertisers to preview the reach of their ad campaign, enticing advertisers to spend
  • Lacks benchmarking like Google’s feature that lets advertisers preview what competitors spend, allowing new advertisers to compare themselves to peers
  • Unlike on Google, there is no easy way to download and analyze Yelp’s traffic and advertising data. Yelp’s dashboard is too crude to run effective ad analyses
  • Does not have A/B testing, while Google allows advertisers to easily run multiple ads at the same time to optimize their ad campaigns
  • To help SMBs adopt and better manage their ad campaigns, Yelp should significantly expand its network of advertising partners
  • Should put an immediate stop to the handouts of Yelp’s valuable stock and instead tie compensation to specific performance metrics

SQN Investors – Yelp: A Fresh Perspective, January 16, 2019

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

Image Source: SQN Investors, Yelp, Google, Facebook, TripAdvisor

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