Yelp's ad business takes a hit after switching to non-term contracts
- Yelp added zero net advertisers for Q3 2018 and declined 32%, according to CNBC. Shares dropped to $29.33, a new 52-week low and one of the worst showings since the company went public in 2012.
- The company recently switched from long-term advertising contracts in local markets to flexible, non-term contracts, which led some advertisers to cancel. The cancellations were expected, but Yelp was unable to offset the loss with new advertisers, with fewer signing up than expected.
- Yelp reported revenue of $241 million for Q3, short of analysts’ projections of $245 million. The company cut its full-year revenue guidance to $938 million to $942 million, down from the previously expected $952 million to $967 million.
Yelp's Q3 results paint a very different picture from just a few months ago, underscoring the challenges facing digital platforms in competing against Facebook and Google when it comes to attracting advertisers. Yelp had just a few months ago reported a strong advertising business and a better-than-expected outlook. In Q2, ad revenue increased 21% to $226 million, and paying advertising accounts jumped by 17,000 to 194,000, surpassing analysts’ forecasts. Yelp had been able to grow its sales by increasing the size of its sales force.
The company tested non-term contracts for years, and analysts had predicted the model would attract new advertisers who may be more interested in smaller ad buys or shorter campaigns. The fact that this did not happen in Q3 could mean Yelp's sales staff had a hard time explaining the benefits of the new contracts to potential advertisers and the downturn will be temporary. On the other hand, the expected benefits from the new contracts may continue to be a challenge to realize.
Yelp’s CFO Charles Baker blamed the company’s rough Q3 on the combination of several issues. Along with advertisers canceling contracts, the company saw a change in ad promotions, slower sales head count growth, technical issues in how leads were funneled to sales reps and a lower success rate in reaching decision-makers during sales calls. Changes in Google’s search algorithm and sales rep turnover were also cited as factors.
Platforms like Yelp continue to struggle to compete with the digital duopoly of Facebook and Google, which dominate the digital marketing space and snaps up large portions of local ad budgets. Going forward Yelp may need to tweak its self-service ad platform to offer more flexibility to advertisers if it hopes to compete in the space, according to analysts cited in the CNBC report. Google and Facebook control a combined 57.7% of U.S. digital ad revenue in 2018, down from 59.1% last year, as Amazon is grabbing a larger share of digital ad revenue, according to eMarketer.