Yelp is off to a rocky start in 2015. Shares of the reviews site plummeted in after-hours trading Wednesday after the company reported weaker-than-expected revenues and sluggish user growth. The decline in revenues was driven in part by a botched reorganization of its sales force, company executives said during an earnings call Wednesday evening.
In January, the company removed geography from the way it assigned territories to sales reps, meaning that a salesperson in Tulsa might work with a business in New Jersey or Dallas. The change, which was intended to increase efficiency, caused a meaningful dip in performance and the company reverted to its previous model by the end of February, the company’s chief financial officer, Rob Krolik, said Wednesday.
“For the first time, we made a change where we took geography out of the equation in an effort to make sure we got leads in the hands of reps faster,” said Krolick.” We learned quickly that [geography] turned out to be very important. The ability to talk about weather or the local sports team turned out to be fairly critical to the sales process.”
A weakening growth story
But the shaky quarter extended well-beyond a sales force mishap. The company continues to struggle to combat a deceleration in its user growth, with total unique visitors, which accounts for activity on both mobile and desktop properties, declining on a year-over-year basis for the past seven consecutive quarters.
The growth metrics are muddled slightly by the shift of consumers from desktop to mobile devices. The company said mobile visitors increased by nearly 30% in the quarter and mobile application usage, an important metric for engagement, grew 47% from the previous year to 16 million users.
While existing users are undoubtedly shifting behavior, the company appears to be struggling to bring on new users in a mobile-first environment. And that’s not a surprise — the cost of acquisition for new mobile users is far higher than desktop users due to a temporary spike in demand and, more important, the absence of a meaningful (and free) discovery engine on mobile that’s comparable to Google search on the web.
The problem abroad
A big contributor to the slowing growth is the company’s relatively stagnant international presence. The company said Wednesday that international traffic was flat in aggregate across the 29 international markets in which it operates.
CEO Jeremy Stoppelman said the company was pleased with secondary metrics, such as community and reviews growth as well as engagement with the mobile app, and reiterated that the growth story in the U.S. remains its central focus. However, he also admitted that a change in Google’s algorithm last year did materially affect the standing of Yelp content in search results — something that could adversely affect the speed and cost at which it can introduce the Yelp brand to international users.
“It happened much faster than we expected”
When Yelp started monetizing in late 2009, the company sold advertising bundles to small businesses. They included premium features and a certain number of impressions on which the business could advertise.
That’s increasingly no longer the case. The company said that in the first quarter over 40% of the $98.6 million local advertisers spent with the company was with cost-per-click, or performance, advertising. Theoretically, a shift to performance advertising will allow the company to maximize ad price in dense markets using an auction model similar to Google AdWords. But it’s also unclear whether its cost structure for impressions was above or below that number.
Geoff Donaker, the company’s chief operating officer, said the shift “happened much faster than we expected” and said he thought performance ads would account for the overwhelming majority of revenue within a few years.
More programmatic meant less profit
Brand advertising, which account for a small, but very profitable, percentage of the company’s revenues, dropped by more than 23% from the last quarter of 2014. Interestingly, the company attributed the sudden rise of programmatic advertising.
According to executives, the shift in spending from direct sales to programmatic has created a “headwind” for the company. The decline in revenues undoubtedly came from lower prices on programmatic exchanges but it was unclear whether Yelp lacked the necessary infrastructure to sell its ads on exchanges.
Steven Jacobs is Street Fight’s deputy editor.