Yelp is famous for its online reviews, but it also offers free and paid advertising and other services. Local businesses are a primary source of its income. But the complaint says that the company gave a false picture of its prospects for 2017 by failing to reveal expected customer retention problems caused by changes in the way the company was doing business.
The class for this action is all buyers of Yelp common stock between February 10, 2017 and May 9, 2017.
The class period begins with the February 9, 2017 press release for fourth-quarter and full-year 2016 results. The complaint quotes it as reporting that Yelp’s local revenue had grown by 39%. It offered guidance for fiscal year 2017 of $880 million to $900 million, “representing growth of approximately 25%...”
In the conference call, the company’s CFO pointed out the chance for growth in the local market, saying, “We’ve got 138,000 advertisers in a market that is 20 million local businesses…” Its CEO said that the company’s repeat rate was “at an all-time high right now.”
The company’s stock traded at a high of more than $38 during the class period, at a higher than average volume of trading.
But the complaint claims that the company’s statements were misleading because they did not disclose adverse information, including (1) Yelp was transitioning from Cost-per-Thousand Impressions (CPM) to Cost-per-Click (CPC), which would mean that many advertisers’ contracts ended in the first part of 2017, and (2) new customers who had signed on with the CPC model had lower retention rates because they were not effectively competing with more established customers.
As a result of these two factors, the complaint says, Yelp would have lower retention rates and would not be able to achieve the financial guidance it had published.
At the end of the class period, Yelp announced its first-quarter 2017 results and had to revise its guidance downwards, to $850 million to $865 million. On the related conference call, the company’s CEO said that the company “did see a decline in retention that has impacted our outlook.” The company’s CFO also admitted that one of the biggest factors “slowing revenue growth [was] … lower account retention in early 2017.” Further discussion underlined the issue even more.
The day after this news, Yelp’s stock closed at $28.33.
The complaint alleges that the company’s CEO was aware of the problems the company was facing since he sold 750,000 shares of stock during the class period. Withholding these problems from the public, the complaint claims, was a violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.