Item 1. Business.
Company Overview
Yelp connects people with great local businesses. Our users have
contributed a total of approximately 36.0 million cumulative reviews of almost
every type of local business, from restaurants, boutiques and salons to
dentists, mechanics, plumbers and more. These reviews are written by people
using Yelp to share their everyday local business experiences, giving voice to
consumers and bringing word of mouth online. The information these reviews
provide is valuable for consumers and businesses alike. Approximately 86.3
million unique visitors used our website, and our mobile application was used on
approximately 9.2 million unique mobile devices, on a monthly average basis
during the quarter ended December 31, 2012. Businesses of all sizes
use our platform to engage with consumers at the critical moment when they are
deciding where to spend their money. Our business revolves around three key
constituencies: the contributors who write reviews, the consumers who read them
and the local businesses that they describe.
Contributors.
We foster and support vibrant
communities of contributors in local markets across the United States, Canada,
Europe, Singapore and Australia. These contributors provide rich, firsthand
information about local businesses, such as reviews, ratings and photos. Yelp
users have contributed a total of approximately 36.0 million cumulative reviews,
which include, as of December 31, 2012, approximately 25.1 million unfiltered
reviews that appear directly on business profile pages, approximately 8.1 million
reviews that were being filtered and can be accessed by clicking on a link on
business profile pages and approximately 2.7 million reviews that had been
removed from our platform.
Consumers.
Our platform is transforming the
way people discover local businesses and is attracting a large audience of
geographically and demographically diverse consumers. Every day, millions of
consumers visit our website or use our mobile app to find great local
businesses. Our strong brand and the quality of the review content on our
platform have enabled us to attract this large audience with almost no traffic
acquisition costs.
Local
Businesses.
Our platform
provides local businesses with a variety of free and paid services that help
them engage with consumers at the critical moment when they are deciding where
to spend their money. Local businesses can register a business account for free
and claim their Yelp business page for each of their locations, allowing them
to enhance the page with additional information about their businesses and
respond to consumer reviews, among other features. Local businesses can also pay
for premium services to promote themselves through targeted search advertising,
discounted offers and further enhancements to their business page.
Powerful
Network Effect.
Our platform
helps people find great local businesses to meet their everyday needs. As more
people use our platform, more of them write reviews, add photos and tips. Each
review, photo or tip that a user contributes helps expand the breadth and depth
of the content on our platform, drawing in more consumers and more prospective
contributors. This increase in consumer traffic and content improves our value
proposition to local businesses as they seek low-cost, easy-to-use and effective
advertising solutions to target a large number of intent-driven consumers.
Yelp Mobile.
We help consumers make decisions
on the go through both our mobile app and versions of our website dedicated to
mobile-based browsers, which we refer to as our mobile website. Our mobile app was ranked as the #1 free travel app in
the Apple App Store as of January 20, 2013, was recognized by Time magazine as
one of the 50 Best iPhone apps in 2012 and was recognized by PC Magazine
as one of the 50 Best Free iPhone Apps in 2012. Our mobile app accounted for
approximately 46% of all searches on our platform in the quarter ended December
31, 2012, and approximately 28% of our unique visitors in the quarter ended
December 31, 2012 were to our mobile website. We expect mobile device usage to
continue to grow and believe that use of our mobile app and mobile website are
complementary to the use of our website on personal computers. However, if
mobile device usage is substituting for, rather than incremental to, usage of
our website on personal computers and our mobile advertising solutions prove
ineffective, this trend could adversely impact our business.
1
As our community
has grown and our product offerings have expanded, we have seen significant
growth in reviews, traffic, claimed local business locations and active local
business accounts
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Our users have contributed a total of
approximately 36.0 million cumulative reviews to our platform as of December
31, 2012, up 45% from the prior year. Of these reviews, approximately 25.1
million were available on business profile pages, approximately 8.1 million
were being filtered and approximately 2.7 million had been removed from our
platform, as of December 31, 2012. Although they do not factor into a
businesss overall star rating, we provide access to filtered reviews because
they provide additional perspectives and information on reviewed businesses,
as well as transparency of the efficacy of the filtering process.
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We had approximately 86.3 million
unique visitors on a monthly average basis for the quarter ended December 31,
2012, up 31% from the same period in the prior year.
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We had approximately 994,000 claimed
business locations as of December 31, 2012, up 64% from the prior year.
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We recognized revenue from
approximately 40,000 active local business accounts for the quarter ended
December 31, 2012, up 68% from the same quarter in the prior year.
The approximately 36.0 million cumulative reviews our users contributed through December 31, 2012 cover a wide set of local business categories, including restaurants, shopping, beauty and fitness, arts, entertainment and events, home and local services, health, nightlife, travel and hotel, auto and other categories. We believe this breadth of content across business categories provides consumers with a wide-ranging selection of reviewed businesses as they search across many categories. We highlight below the breakdown by industry of local businesses that have received reviews on our platform and the breakdown by industry of reviews contributed to our platform through December 31, 2012. The charts below include information based upon all contributed reviews and include some businesses that have only received reviews that are being filtered or have been removed.
We
generate revenue primarily from the sale of advertising on our website and
mobile app to local businesses and on our website to national brands that seek
to reach our growing audience of consumers. During the year ended December 31,
2012, we generated net revenue of $137.6 million, representing 65% growth over
2011, a net loss of $19.1 million and an adjusted EBITDA of $4.6 million. For
information on how we define and calculate number of contributed reviews, unique
visitors, claimed local business locations, active local business accounts and
adjusted EBITDA, and a reconciliation of adjusted EBITDA to net loss, see
Selected Financial
Data
in this Annual Report. The top five industry categories accounted for an aggregate of approximately 76% of our local advertising revenue for the quarter ended December 31, 2012, broken down as follows: Home & Local Services, 22%; Restaurants, 17%; Beauty & Fitness, 15%; Health, 11%; Shopping, 11%.
Our Growth Strategy
We intend to grow
our platform and our business by focusing on the following key growth
strategies:
Growth in Existing
Markets
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Increase the Number of
Reviews
. We will continue to
explore ways to enable contributors to share their local experiences through
detailed reviews, photos, tips and other forms of content contribution across
our platform. As we continue to grow our contributor and consumer footprint
within our existing markets, we expect to benefit from accelerating network
effect dynamics, further driving the growth of reviews, consumers and local
business activity.
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Attract More Users.
We believe that we can increase
the number of consumers that use our platform. In December 2012, less than 16% of the total U.S. online audience visited our website or mobile app, as reported by comScore,
Inc., a company providing digital marketing intelligence. We believe that as
our brand recognition increases and the number of reviews on our platform
grows, our platform will become more widely known and relevant to broader
audiences, thus attracting new consumers to use our service.
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Increase Usage of Current Users.
By continuing to expand the
number of reviews across diverse categories, driving more claimed business
pages and providing a more feature-rich experience, we can increase the
number of visits and searches per user. Many consumers begin using Yelp to
search for restaurants and boutiques, but more than half of reviewed
businesses are in categories outside of restaurants and shopping. We believe
that there is a substantial opportunity for a larger percentage of our user
base to use Yelp to search in more categories.
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Attract More Businesses.
As of December 31, 2012, only
approximately 994,000 local business locations out of the approximately 47 million local
businesses on our platform had claimed their Yelp pages. We believe the
continued increase in the size of our audience of consumers, as well as our
efforts to provide additional tools to measure the effectiveness of our
products, will encourage local businesses to advertise on our
platform.
2
Expand to New
Geographic Markets
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United States.
While we have reviews and local business
listings that span the entire United States, we see a large opportunity to
continue expanding our footprint in the United States by hiring Community
Managers local residents whose responsibilities include writing a weekly Yelp
email newsletter and organizing events for Yelp contributors in new markets.
Our aim is to leverage our capabilities, brand and know-how to create a
trusted online platform to connect people to great local businesses across the
United States.
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International.
We are active in 44
international markets, all of which are in Canada, Europe, Singapore and Australia. In the third quarter of 2012, we
began selling our advertising products internationally, specifically in London. In addition, in the fourth quarter of
2012, we acquired Qype, a
Germany-based company centered around connecting
consumers with local businesses through user-generated reviews, which we acquired to accelerate the expansion of
our international footprint. We plan to continue to expand internationally by making our platform available in additional
international markets and in more languages, as we seek to replicate internationally the powerful network effect that has
driven our historic growth in the United States.
Platform Expansion
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Website and Mobile.
We plan to continue to innovate
and introduce new products for our website and mobile app, making it even
easier for consumers to find the most relevant information on Yelp as they
look for a local business. For example, during 2012, we launched our
redesigned homepage, which places greater emphasis on mobile activity and the
user’s social graph, and enhanced the mobile experience by adding features such as
check-in comments and likes. We are highly focused on the quality of the user
experience and will not incorporate advertising or other products or solutions
that we believe may excessively degrade the mobile device user experience and
potentially alienate users, even if they might result in increased short-term
monetization. We plan to continue to explore opportunities to monetize our
mobile products while adhering to high standards of user
experience.
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Alternative Platforms.
We also plan to continue to
innovate and introduce our content and solutions on new platforms and
distribution channels such as automobile navigation systems, web-enabled
televisions and voice-enabled mobile devices. For example, Yelp-branded
content has been incorporated into Mercedes and Lexus in-vehicle infotainment
systems. We also have relationships with several companies like Microsoft
Corporation and Apple Inc. to make our content and solutions available on its
website and consumer devices, respectively.
Enhance Monetization
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Grow Our Sales Force.
We plan to continue to grow our
sales force so we can reach more businesses. In the fourth
quarter of 2012, we expanded our European sales operations through our
acquisition of Qype and its established European sales force. We believe this
ongoing investment in our sales force will drive an increase in active local
business accounts. In the quarter ended December 31, 2012, we recognized
revenue from approximately 40,000 local business accounts on our platform, a
fraction of the approximately 994,000 claimed local business locations and
approximately 47 million local businesses on our platform.
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Expand Our Portfolio of
Revenue-Generating Products.
We
plan to continue to grow and develop advertising and e-commerce products and
partner arrangements that provide incremental value to our advertisers and
business partners to encourage them to increase their advertising budgets
allocated towards our platform.
3
Market Development
Strategy
As
of December 31, 2012, we were active in 53 Yelp markets in the United States and
44 Yelp markets internationally. This footprint represents a small fraction of the
potential markets that we are currently targeting for expansion. Our market development strategy consists of the following:
Identification.
We
select new markets based on a number of different city- or country-specific
criteria, including but not limited to population size, local gross domestic product, pre-existing
base of reviews on our platform, Internet and wireless penetration, proximity to
existing markets, number of local businesses and local ad market growth rate.
Preparation
and Launch.
Before launching a
market in any country, we license business listing information from third-party
data providers and create individual pages for each business location in the
entire country. We sometimes hire temporary local employees, called scouts, to
provide additional rich content, such as reviews, photos and hours of operation.
To bolster the integrity of the content they provide, we closely monitor their
contributions to the platform, prohibit them from reviewing businesses with
which they have a conflict of interest and identify them in their public
profiles as paid contributors. At launch, consumers can read and write reviews
about any business on our platform and contribute information about businesses
that are not already listed. We have active Yelp markets in Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, the
Netherlands, Norway, Poland, Singapore, Spain, Sweden, Switzerland, Turkey, the
United Kingdom and the United States.
Growth.
After launch, we focus on
attracting contributors, consumers and local businesses to our platform. In each
Yelp market, we hire a Community Manager, whose primary responsibilities include:
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planning and executing fun and engaging events for the community, such as parties, outings and activities at restaurants, museums, hotels and other local places of interest;
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getting to know our users and helping them get to know one another as a way to foster an offline community experience that can be transferred online;
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promoting Yelp, including guest appearances on local television and radio and at local events like concerts and street fairs; and
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writing weekly e-mail newsletters to share information with the community about local businesses, events and activities.
Through these activities, we believe Community Managers help us increase awareness of our
platform and build avid communities of users who are willing to contribute
content to our platform. These active contributors may be invited to attend
sponsored social events but do not receive compensation. In time, this community
growth drives a network effect whereby contributed reviews expand the breadth
and depth of our review base. This expansion draws an increasing number of
consumers to access the content on our platform, thus inspiring new and existing
contributors to create additional reviews that can be shared with this growing
audience.
Scale.
At scale, our platform reaches a
critical mass of reviews, consumers and claimed local business accounts, and we
begin an active sales effort with local businesses. Thereafter, our largest
expense is related to sales efforts to attract local business advertising
customers. In Yelp markets that have attained this level of development,
we expect to achieve economies of scale and operating cost leverage.
To further
illustrate the development of our markets as they scale, we highlight below our
review and revenue metrics for three cohorts of Yelp markets in the United
States: the Yelp markets that we launched in 2005-2006; the Yelp markets that we
launched in 2007-2008; and the Yelp markets that we launched in 2009-2010. In
the markets we have entered, review growth and consumer activity are generally
followed by revenue generated from local businesses.
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Year-Over-Year
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Year-Over-Year
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Average
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Growth in
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Average Local
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Growth in
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Number
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Cumulative
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Average
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Advertising
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Average Local
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of Yelp
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Reviews
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Cumulative
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Revenue
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Advertising
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U.S. Market
Cohort
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Markets
(1)
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in
2012
(2)
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Reviews
(3)
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in
2012
(4)
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Revenue
(5)
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2005 2006
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6
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2,683
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37%
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9,316
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59%
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2007
2008
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14
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561
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42%
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2,082
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86%
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2009 2010
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18
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164
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65%
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397
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177%
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(1)
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A Yelp
market is defined as a city or region in which we have hired a Community
Manager.
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(2)
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Average
cumulative reviews is defined as the total cumulative reviews of the
cohort as of December 31, 2012 (in thousands), including reviews that were
then being filtered or had been removed from our platform, divided by the
number of Yelp markets in the cohort.
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(3)
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Year-over-year growth in average cumulative reviews compares
average cumulative reviews as of December 31, 2012 with average cumulative
reviews as of December 31, 2011.
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(4)
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Average
local advertising revenue is defined as the total local advertising
revenue from businesses in the cohort for the year ended December 31, 2012
(in thousands) divided by the number of Yelp markets in the
cohort.
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(5)
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Year-over-year growth in average local advertising revenue compares
local advertising revenue for the year ended December 31, 2012 with local
advertising revenue for the year ended December 31,
2011.
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4
For a table showing the year of launch of each of the Yelp markets in
which we are currently active, see
Managements Discussion and Analysis of Results of Operations and
Financial ConditionOverview
. In
general, the Yelp markets in our earlier U.S. market cohorts are more populous
than those in later cohorts, and we have already entered many of the largest
markets in the United States. For these and other reasons, further expansion
into additional U.S. markets may not yield results similar to those of our
existing U.S. markets.
We have made a
significant investment in support of our market development initiatives. For the
year ended December 31, 2012, our total costs and expenses were $156.3 million,
an increase of approximately 57% over the year ended December 31, 2011. Over the
same period, total net revenue also increased by approximately 65%. Because most
of our costs and expenses relate to personnel and activities that support
multiple markets, we do not record costs and expenses separately by market or
cohort.
Products
We provide both
free and paid products to local businesses. In addition, we enable local
businesses and national advertisers to deliver targeted advertising to large
local audiences through our platform. We have also entered into revenue sharing arrangements with
other companies, such as OpenTable and Orbitz.
Local Business
Free Online Business Account
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We enable businesses
to create a free online business account and claim the page for each of
their business locations. Business representatives can verify their
affiliation with the business through an automated telephone verification
process which requires that they be reachable at the phone number that is
publicly displayed for their business listing on our platform. With their
free business accounts, businesses can view business trends (e.g.,
statistics and charts reflecting the performance of a businesss page on
our platform), message customers (e.g., by replying to reviews either
publicly or privately), update information (e.g., address, hours of
operation) and offer Yelp Deals and Gift Certificates.
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Enhanced Listing
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Our enhanced listing
solution eliminates search advertising from the businesses profile pages
and allows them to incorporate a video clip or photo slide show on the
pages.
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Search and Other Ads
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We allow local
businesses to promote themselves as a sponsored search result on our
platform or on related business pages.
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Yelp Deals
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Our Yelp Deals
product allows local business owners to create promotional discounted
deals for their products and services, which are marketed to consumers
through our platform. Yelp Deals typically have a fee structure based
solely on transaction volume with no upfront costs, and we typically earn
a fee based on the discounted price of each deal sold. We process all
customer payments and remit to the business the revenue share of any Yelp
Deal purchased. We primarily offer deals on our platform that are focused
on demand fulfillment where businesses can target intent-driven consumers
who are specifically searching for a product or service on our
platform.
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Gift Certificates
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Our Gift Certificates
product allows local business owners to sell full-price gift certificates
directly to customers through their business profile page. The business
chooses the price points to offer (from $10 to $500), and the buyer may
purchase a Gift Certificate in one of those amounts. We earn a fee based
on the amount of the Gift Certificate sold. We process all consumer
payments and remit to the business the revenue share of any Gift
Certificate purchased.
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5
National/Brand
Advertisers
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Traditional
Display Advertising
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We offer our advertising solution for
national brands that want to improve their local presence. These solutions
consist of search and display ads (both graphic and text) on our
website, which are typically sold to advertisers on a per-impression
basis. Our national advertisers include leading brands in the automobile,
financial services, logistics, consumer goods and health and fitness
industries.
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Transaction
Partners
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OpenTable
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Our partnership, through a written
agreement, with OpenTable provides consumers the ability to reserve seats
directly on the business listing pages of restaurants that participate in
OpenTables network.
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Orbitz
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Our partnership, through a written
agreement, with Orbitz allows consumers to quickly book rooms directly on
the business listing pages of hotels that affiliate with
Orbitz.
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The following table provides a breakdown of our revenue by product as a percentage of net revenue for the years indicated:
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Year Ended December
31,
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2012
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2011
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2010
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Percentage of total net
revenue by product:
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Local
advertising
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79
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%
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70
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%
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71
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%
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Brand
advertising
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15
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21
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25
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Other
services
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6
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9
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4
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Total
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100
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%
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100
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%
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100
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%
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Technology
Product
development and innovation are core pillars of our strategy. We aim to delight
our users and business partners with our products. We provide our web-based and
mobile services using a combination of in-house and third-party technology
solutions and products.
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Our Search and Ranking Technology.
We leverage the data stored on our platform
and our proprietary indexing and ranking techniques to provide our users with
contextual, relevant and up-to-date results to their search queries. For
example, a consumer desiring environmentally-friendly carpet cleaners does not
have to call individual cleaners and inquire about their use of chemical-based
cleaning solutions. Instead the consumer can search for
environmentally-friendly carpet cleaners on Yelp and discover cleaners with
the best service and green cleaning products that serve a specific
neighborhood.
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Our Filtering Technology.
In order to maintain and enhance the quality, authenticity
and integrity of the reviews on our platform, we employ proprietary filtering
technology to analyze and screen all of our reviews. Our filtering software
looks at a wide range of data associated with each review and reviewer in
order to determine the reviews relevance and reliability. Our filtering
software operates continually, and the results of its determinations with
respect to particular reviews may change over time as it factors in new
information. This can result in reviews that were previously unfiltered
becoming filtered and reviews that were previously filtered being restored to
unfiltered status. Filtered reviews do not factor into a businesss overall
star rating and are segregated from unfiltered reviews on our website. By
clicking on a link on a reviewed businesss page on our website, users can
access the filtered reviews for that business, as well as the star rating and
other information about reviews that we have removed for violation of our
terms of service. We believe our filtering technology is one of the key
contributors to the quality, authenticity and integrity of the reviews on our
platform and the success of our service.
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Our Mobile Solutions.
We identified mobile as a key area for our business as early
as 2006. We have since invested significant resources into the development of
a comprehensive mobile app platform, supporting the major smartphone operating
systems available to consumers today, including iOS, Android, Blackberry and
Windows Mobile. In addition, we maintain versions of our website dedicated to
mobile-based browsers. Over time we have enhanced the functionality of our
mobile app, such that it provides similar and, in some areas, greater
functionality than our website. Some of the innovations we introduced through
our mobile app include check-ins, tips, comments and Monocle, our
augmented reality feature, among others.
6
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Infrastructure.
Our web and mobile properties are currently hosted from two locations.
The primary location is within a shared data center environment in San
Francisco, California. We are in the process of deploying an additional
location within a shared data center environment in Virginia as a fully
redundant
backup for our primary location, and
to increase performance and reliability of our platform. We are currently
using the second data center to serve mobile and international traffic, and
expect this location to be fully redundant by mid-2013. We also currently use a
third-party leased server provider as our second hosting location to optimize
performance as an interim solution until our redundant location is fully
deployed; we expect to cease using this interim solution in late 2013. Our web and
mobile properties are designed to have high availability, from the Internet
connectivity providers we choose, to the servers, databases and networking
hardware that we deploy. We design our systems such that the failure of any
individual component is not expected to affect the overall availability of our
platform. We also leverage other third-party Internet based (cloud) services
including rich-content storage, map related services, ad serving and bulk
processing.
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Network Security.
Our platform includes a host of encryption, antivirus, firewall and
patch-management technology to protect and maintain the systems located at the
data center as well as other systems and computers across our business.
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Internal Management Systems.
We rely on third-party off-the-shelf technology solutions
and products as well as internally developed and proprietary systems to ensure
rapid, high-quality customer service, software development and website
integration, update and maintenance.
Sales
and Marketing
We have a team
of Community Managers based in 97 Yelp markets in the United States and
internationally, whose primary goals are to build a local community of
contributors, raise brand awareness, organize events for the best contributors
in their respective cities and engage with the surrounding community. These
efforts foster and support vibrant communities of contributors in local markets
across the United States, Canada, Europe, Singapore and Australia. We believe
that continuing to serve our contributors is a critical factor in improving the
value of our platform and facilitating the network effect that has helped to attract approximately 86.3 million unique visitors, on a
monthly average basis for the quarter ended December 31, 2012, to our website with almost no traffic acquisition
costs.
Our sales force is concentrated in five primary locationsSan Francisco,
California, Scottsdale, Arizona, New York City, New York, London, United
Kingdom and Hamburg, Germany. Our sales force primarily focuses on gaining new
active local business accounts by identifying and contacting local businesses
through direct engagement, direct marketing campaigns and weekly emails to
claimed local businesses. Our sales force is also responsible for attracting
national brand advertisers to our platform.
Competition
We compete for consumer traffic with traditional, offline local business
guides and directories and with other online providers of local and web search
on the basis of a number of factors, including the reliability of our content,
breadth, depth and timeliness of information and the strength and recognition of
our brand. We also compete for a share of local businesses overall advertising
budgets with traditional, offline media companies and other Internet marketing
providers on the basis of a number of factors, including our large consumer
audience, effectiveness of our advertising solutions, our pricing structure and
recognition of our brand. Our competitors include the following types of
businesses:
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Offline.
We
primarily compete with offline media companies and service providers who
typically have existing advertising relationships with local businesses.
Services provided by competitors range from yellow pages listings to direct
mail campaigns to advertising and listings services on local newspapers,
magazines, television and radio.
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Online.
We
compete with Internet search engines, such as, Google, Yahoo! and Bing. We
also compete with various other online service providers and review websites.
7
Culture and Employees
We take great
pride in our company culture and consider it to be one of our competitive
strengths. Our culture helps drive our business forward and is a part of
everything we do; it allows us to attract and retain a talented group of
employees, create an energetic work environment and continue to innovate in a
highly competitive market.
Our culture extends beyond our offices and into the local communities in
which people use Yelp. Our full-time Community Managers responsibilities
include supporting the sharing of experiences by consumers in the local market
that they serve and increasing brand awareness. In addition, we organize events
several times a year to recognize our most important contributors, fostering
face-to-face interaction, build the Yelp brand and foster the sense of true
community in which we believe so strongly. Our culture is at the foundation of
our success, and our core values remain a pivotal part of our everyday
operations.
As of December 31, 2012, we had 1,387 full-time employees globally. None
of our employees are covered by collective bargaining agreements, and we
consider our relations with our employees to be good.
The Yelp Foundation
In November 2011, our board of directors approved the establishment of
The Yelp Foundation, a non-profit organization designed to support consumers and
businesses in the communities in which we operate. In the quarter ended December
31, 2011, our board of directors approved the contribution and issuance to The
Yelp Foundation of 520,000 shares of our common stock, of which The Yelp
Foundation sold 50,000 shares in our initial public offering. The Yelp
Foundation currently holds 470,000 shares of Class B common stock, representing
less than 1% of our outstanding capital stock. We did not make any contributions
in 2012 and we do not expect to make future contributions to The Yelp
Foundation.
Intellectual Property
We rely on federal, state, common law and international rights, as well
as contractual restrictions, to protect our intellectual property. We control
access to our proprietary technology and algorithms by entering into
confidentiality and invention assignment agreements with our employees and
contractors, and confidentiality agreements with third parties.
In addition to these contractual arrangements, we also rely on a
combination of trade secrets, copyrights, trademarks, service marks and domain
names to protect our intellectual property. We pursue the registration of our
copyrights, trademarks, service marks and domain names in the United States and
in certain locations outside the United States. As of December 31, 2012, we had
approximately 84 trademarks and service marks registered or pending in
approximately 26 countries or regions. Our registration efforts have focused on
gaining protection of the following trademarks (among others): Yelp and the Yelp
burst logo. These marks are material to our business as they enable others to
easily identify us as the source of the services offered under these marks and
are essential to our brand identity.
Circumstances outside our control could pose a threat to our intellectual
property rights. For example, effective intellectual property protection may not
be available in the United States or other countries in which we operate. Also,
the efforts we have taken to protect our proprietary rights may not be
sufficient or effective. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete. Also, protecting our
intellectual property rights is costly and time-consuming. Any unauthorized
disclosure or use of our intellectual property could make it more expensive to
do business and harm our operating results.
Companies in the Internet, media and other industries may own large
numbers of patents, copyrights and trademarks and may frequently request license
agreements, threaten litigation or file suit against us based on allegations of
infringement or other violations of intellectual property rights. We are
currently subject to, and expect to face in the future, allegations that we have
infringed the trademarks, copyrights, patents and other intellectual property
rights of third parties, including our competitors and non-practicing entities.
As we face increasing competition and as our business grows, we will likely face
more claims of infringement.
8
Government Regulation
As a company
conducting business on the Internet, we are subject to a number of foreign and
domestic laws and regulations relating to consumer protection, information
security, data protection and privacy, among other things. Many of these laws
and regulations are still evolving and could be interpreted in ways that could
harm our business. In the area of information security and data protection, the
laws in several states require companies to implement specific information
security controls to protect certain types of information. Likewise, all but a
few states have laws in place requiring companies to notify users if there is a
security breach that compromises certain categories of their information. Any
failure on our part to comply with these laws may subject us to significant
liabilities.
Information About Segment and
Geographic Revenue
Information about segment and geographic revenue is set forth in Note 15
of the Notes to Consolidated Financial Statements included elsewhere in this
Annual Report.
Seasonality
Our business is affected by both cyclicality in business activity and
seasonal fluctuations in Internet usage and advertising spending. We believe our
rapid growth has masked the cyclicality and seasonality of our business. As our
revenue growth rate slows, we expect that the cyclicality and seasonality in our
business may become more pronounced and may in the future cause our operating
results to fluctuate.
Corporate and Available Information
We were incorporated in Delaware on September 3, 2004 under the name
Yelp, Inc., and we changed our name in late September 2004 to Yelp! Inc. and in
February 2012 to Yelp Inc. Our principal executive offices are located at 706
Mission Street, San Francisco, California 94103, and our telephone number is
(415) 908-3801. Our website address is www.yelp.com. Information contained on or
accessible through our website is not incorporated into, and does not form a
part of, this Annual Report.
We file or furnish electronically with the Securities and Exchange
Commission, or SEC, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make
available free of charge on or through our website copies of these reports as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the SEC.
The SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding our filings at
www.sec.gov. You may also read and copy any of our materials filed with the SEC
at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549.
Information regarding the operation of the Public Reference Room can be obtained
by calling the SEC at 1-800-SEC-0330.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and
uncertainties, including those described below, which could adversely affect our
business, financial condition, results of operations, cash flows and the
trading price of our Class A common stock. You should carefully consider the
risks and uncertainties described below before making an investment decision.
Additional risks not presently known to us or that we currently believe are
immaterial may also significantly impair our business
operations.
9
Risks Related to Our Business and
Industry
We have a short operating history
in an evolving industry, which makes it difficult to evaluate our future
prospects and may increase the risk that we will not be
successful.
We have a
short operating history in an evolving industry that may not develop as
expected, if at all. This short operating history makes it difficult to assess
our future prospects. You should consider our business and prospects in light of
the risks and difficulties we may encounter in this rapidly evolving industry.
These risks and difficulties include our ability to, among other things:
-
increase the number of users of our website and
mobile app and the number of reviews and other content on our platform;
-
increase the revenue from advertisers on our website and mobile app;
-
continue to earn and preserve a reputation for
providing meaningful and reliable reviews of local
businesses;
-
effectively monetize our mobile products as usage
continues to migrate toward mobile devices;
-
manage, measure and demonstrate the effectiveness
of our advertising solutions and attract and retain new advertising clients,
many of which may only have limited or no online advertising
experience;
-
successfully compete with existing and future
providers of other forms of offline and online advertising;
-
successfully compete with other companies that are
currently in, or may in the future enter, the business of providing
information regarding local businesses;
-
successfully expand our business in new and
existing markets, both domestic and international;
-
successfully develop and deploy new features and
products;
-
effectively integrate businesses we may acquire,
including Qype;
-
avoid interruptions or disruptions in our service
or slower than expected load times;
-
develop a scalable, high-performance technology
infrastructure that can efficiently and reliably handle increased usage
globally, as well as the deployment of new features and
products;
-
hire, integrate and retain talented sales and
other personnel;
-
effectively manage rapid growth in our sales
force, personnel and operations; and
-
effectively partner with other
companies.
If the demand for information regarding local businesses does not develop
as we expect, or if we fail to address the needs of this demand, our business
will be harmed. We may not be able to successfully address these risks and
difficulties or others, including those described elsewhere in these risk
factors. Failure to address these risks and difficulties adequately could harm
our business and cause our operating results to suffer.
We have incurred significant
operating losses in the past, and we may not be able to generate sufficient
revenue to achieve or maintain profitability, particularly given our significant
ongoing sales and marketing expenses. Our recent growth rate will likely not be
sustainable, and a failure to maintain an adequate growth rate will adversely
affect our results of operations and business.
Since our inception, we have incurred significant operating losses, and,
as of December 31, 2012, we had an accumulated deficit of approximately $60.4
million. Although our revenues have grown rapidly, increasing from $12.1 million
in 2008 to $137.6 million in 2012, we expect that our revenue growth rate will
decline in the future as a result of a variety of factors, including the
maturation of our business and the gradual decline in the number of major
geographic markets, especially within the United States, to which we have not
already expanded, and you should not rely on the revenue growth of any prior
quarterly or annual period as an indication of our future performance. We also
expect our costs to increase in future periods as we continue to expend
substantial financial resources on:
-
sales and marketing;
-
product and feature development;
-
our technology infrastructure;
10
-
domestic and international expansion
efforts;
-
strategic opportunities, including commercial
relationships and acquisitions; and
-
general administration,
including legal and accounting expenses related to being a public
company.
These
investments may not result in increased revenue or growth in our business. If we
are unable to maintain adequate revenue growth and to manage our expenses, we
may continue to incur significant losses in the future and may not be able to
achieve or maintain profitability.
We rely on traffic to our website
from search engines like Google, Bing and Yahoo!, some of which offer products
and services that compete directly with our solutions. If our website fails to
rank prominently in unpaid search results, traffic to our website could decline
and our business would be adversely affected.
Our
success depends in part on our ability to attract users through unpaid Internet search results on search engines
like Google, Bing and Yahoo!. The number of users we attract from search engines to our website (including our mobile
website) is due in large part to how and where our website ranks in unpaid search results. These rankings can be affected by
a number of factors, many of which are not in our direct control, and they may change frequently. For example, a search
engine may change its ranking algorithms, methodologies or design layouts. As a result, links to our website may not be
prominent enough to drive traffic to our website, and we may not know how or otherwise be in a position to influence the
results. In some instances, search engine companies may change these rankings in order to promote their own competing
products or services or the products or services of one or more of our competitors. Although traffic to our mobile app is
less reliant on search results than traffic to our website, growth in mobile device usage may not decrease our overall
reliance on search results if mobile users use our mobile website at the expense of our mobile app. In fact, growth in
mobile device usage may exacerbate the risks associated with how and where we rank in search results because mobile device
screens are smaller than desktop computer screens and therefore display fewer search results. Our website has experienced fluctuations in search result rankings in
the past, and we anticipate fluctuations in the future. Any reduction in the number of users directed to our website could
adversely impact our business and results of operations.
Google in particular is the most significant source of traffic to our
website, accounting for more than half of the visits to our website from Internet
searches during the three months and year ended December 31, 2012. Our success
depends on our ability to maintain a prominent presence in search results for
queries regarding local businesses on Google. Google has removed links to our
website from portions of its web search product and has promoted its own
competing products, including Googles local products, in its search results.
Given the large volume of traffic to our website and the importance of the
placement and display of results of a users search, similar actions in the
future could have a substantial negative effect on our business and results of
operations.
If we fail to generate and
maintain sufficient high quality content from our users, we will be unable to
provide consumers with the information they are looking for, which could
negatively impact our traffic and revenue.
Our success depends on our ability to provide consumers with the
information they seek, which in turn depends on the quantity and quality of the
content provided by our users. For example, we may be unable to provide
consumers with the information they seek if our users do not contribute content
that is helpful and reliable, or if they remove content they previously
submitted. For example, our ability to provide high quality content may be
harmed as consumers increasingly contribute content through our mobile website
and mobile app because desktop contributions tend to be longer than content
contributed through mobile devices. Similarly, we may be unable to provide
consumers with the information they seek if our users are unwilling to
contribute content because of concerns that they may be harassed or sued by the
businesses they review, instances of which have occurred in the past and may
occur again in the future. In addition, we may not be able to provide users the
information they seek if the information on our platform is not up-to-date. We
do not phase out or remove dated reviews, and consumers may view older reviews
as less relevant, helpful or reliable. If our platform does not provide current
information about local businesses or users perceive reviews on our platform as
less relevant, our brand and our business could be harmed.
11
If we are
unable to provide consumers with the information they seek, or if they can find
equivalent content on other services, they may stop or reduce their use of our
platform, and traffic to our website and on our mobile app will decline. If our
user traffic declines, our advertisers may stop or reduce the amount of
advertising on our platform and our business could be harmed.
Our business may be harmed if
users view our platform as primarily limited to reviews of restaurants and
shopping experiences.
Our user traffic could be adversely affected if consumers perceive the
utility of our platform to be limited to finding businesses in the restaurant
and shopping categories, which together accounted for approximately 44% of the
businesses that have been reviewed on our platform and 61% of our cumulative
reviews through December 31, 2012. We believe that this concentration of reviews
is primarily due to the frequency with which individuals visit specific
businesses or engage in certain activities versus others. For example, an
individual may eat at a restaurant three times in one week or go shopping once a
week, but the same individual is unlikely to visit a mechanic, get a haircut or
use a home or local service with the same frequency. However, if the high
concentration of reviews in the restaurant and shopping categories generates a
perception that our platform is primarily limited to these categories, traffic
may decline and advertising customers may be less likely to perceive value from
using our services, which could harm our business.
If our technology filters helpful
content or fails to filter unhelpful content, consumers and businesses alike may
stop or reduce their use of our platform and products, and our business could
suffer.
While we have designed our technology to filter content that we believe
may be offensive, biased, unreliable or otherwise unhelpful, we cannot guarantee
that our efforts will be effective or adequate. In addition, some consumers and
businesses have expressed concern that our technology inappropriately filters
legitimate reviews, which may cause them to stop or reduce their use of our
platform or our advertising solutions. If the performance of our filter proves
inadequate or ineffective, our reputation and brand may be harmed, users may
stop using our products and our business and results of operations could be
adversely affected.
Our business depends on a strong
brand, and any failure to maintain, protect and enhance our brand would hurt our
ability to retain or expand our base of users and advertisers, or our ability to
increase the frequency with which they use our solutions.
We have developed a strong brand that we believe has contributed
significantly to the success of our business. Maintaining, protecting and
enhancing the Yelp brand is critical to expanding our base of users and
advertisers and increasing the frequency with which they use our solutions, and
will depend largely on our ability to maintain consumer trust in our solutions
and in the quality and integrity of the user content and other information found
on our website and mobile app, which we may not do successfully. If we do not
successfully maintain a strong brand, our business could be harmed.
For example, consumers may believe that the reviews, photos and other
content contributed by our Community Managers or other employees are influenced
by our advertising relationships or are otherwise biased. Although we take steps
to prevent this from occurring by, for example, displaying an ambassador badge
on the account profile pages for each of our Community Managers identifying them
as Yelp employees and explaining their role on our platform, the designation
does not appear on the page for each review contributed by the Community Manager
and we may not be successful in our efforts to maintain consumer trust. As a
result, our brand and our business could be harmed.
Our trademarks are an important element of our brand. We have faced in
the past, and may face in the future, oppositions from third parties to our
applications to register key trademarks in foreign jurisdictions in which we
expect to expand our presence. If we are unsuccessful in defending against these
oppositions, our trademark applications may be denied. Whether or not our
trademark registration applications are denied, third parties may claim that our
trademarks infringe their rights. As a result, we could be forced to pay
significant settlement costs or cease the use of these trademarks and associated
elements of our brand in those or other jurisdictions. Doing so could harm our
brand or brand recognition and adversely affect our business, financial
condition and results of operation.
12
Negative publicity could
adversely affect our reputation and brand.
Negative
publicity about our company, including our technology, sales practices,
personnel or customer service, could diminish confidence in and the use of our
products. The media has previously reported allegations that we manipulate our
reviews, rankings and ratings in favor of our advertisers and against
non-advertisers. These allegations, though untrue, could adversely affect our
reputation and brand, require significant management time and attention, and
subject us to inquiries or investigations. In order to demonstrate that our
filtering process applies in a nondiscriminatory manner to both advertisers and
non-advertisers, we have made all filtered reviews accessible on our platform.
We have also allowed businesses to publicly comment on negative reviews so that
they can provide their response. Nevertheless, our reputation and brand, the
traffic to our website and mobile app and our business may suffer if negative
publicity about our company persists or if users otherwise perceive that content
on our website and mobile app is manipulated or biased. In addition, our website
and mobile app serve as a platform for expression by our users, and third
parties or the public at large may attribute the political or other sentiments
expressed by users on our platform to us, which could harm our
reputation.
If we fail to maintain and expand
our base of advertisers, our revenue and our business will be
harmed.
For the three months and year ended December 31, 2012, substantially all
of our revenue was generated by the sale of advertising products. Our ability to
grow our business depends on our ability to maintain and expand our advertiser
base. To do so, we must convince prospective advertisers of the benefits of our
products, including those who may not be familiar with our products (such as
those in new markets). In addition, we have incurred significant costs to
attract current and future advertisers and expect to incur significant
additional costs for the foreseeable future. We may face greater challenges as
we continue to expand our advertiser base in businesses outside the restaurant
and shopping categories, which together accounted for approximately 44% of the
businesses that have been reviewed on our platform and 61% of our cumulative
reviews through December 31, 2012, especially if these businesses believe that
consumers perceive the utility of our platform to be limited to finding
businesses in the restaurant and shopping categories. We must also convince
existing and prospective advertisers alike that our advertising products work to
their benefit. Many of these businesses are more accustomed to using more
traditional methods of advertising, such as newspapers or print yellow pages
directories. Failure to maintain and expand the advertiser base could harm our
business.
Our advertisers do not typically have long-term obligations to purchase
our products. In addition, we rely heavily on advertising spend by small and
medium-sized local businesses, which have historically experienced high failure
rates and often have limited advertising budgets. As a result, we may experience
attrition in our advertisers in the ordinary course of business resulting from
several factors, including losses to competitors, lower priced competitors,
perceptions that our advertising solutions are unnecessary or ineffective,
declining advertising budgets, closures and bankruptcies. We must continually
add new advertisers both to replace advertisers who choose not to renew their
advertising or who go out of business, or otherwise fail to fulfill their
advertising contracts with us, to grow our business. Our advertisers decisions
to renew depend on a number of factors, including the degree of satisfaction
with our products and their ability to continue their operations and spending
levels. The ratings and reviews that businesses receive from our users may also
affect advertising decisions by current and prospective advertisers. For
instance, favorable ratings and reviews, on the one hand, could be perceived as
obviating the need to advertise, and unfavorable ratings and reviews, on the
other, could discourage businesses from advertising to an audience they perceive
as hostile or cause them to form a negative opinion of our products and user
base, which could discourage them from doing business with us. If our
advertisers increase their rates of non-renewal or if we experience significant
advertiser attrition or contract breach, or if we are unable to attract new
advertisers in numbers greater than the number of advertisers that we lose, our
client base will decrease and our business, financial condition and results of
operations would be harmed.
If we fail to expand effectively
into new markets, both domestically and abroad, our revenue and our business
will be harmed.
We intend to expand our operations into new markets, both domestically
and abroad. We may incur losses or otherwise fail to enter new markets
successfully. Our expansion into new markets places us in competitive
environments with which we are unfamiliar and involves various risks, including
the need to invest significant resources and the possibility that returns on
such investments will not be achieved for several years, or at all. In
attempting to establish a presence in
new markets, we expect, as we have in the past, to incur significant expenses
and face various other challenges, such as expanding our sales force and
community management personnel to reach those new markets. Our current and any
future expansion plans will require significant resources and management
attention. Furthermore, we have already entered many of the largest markets in
the United States and further expansion in smaller markets may not yield similar
results or sustain our growth.
13
Our international operations
involve additional risks, and our exposure to these risks will increase as we
expand internationally.
We have
started to expand our operations internationally. We expect to expand our
international operations significantly by accessing new markets abroad and
expanding our offerings in new languages. Our platform is now available in
English and several other languages. However, we may have difficulty modifying
our technology and content for use in non-English-speaking markets or fostering
new communities in non-English-speaking markets. We recently acquired Qype to
accelerate the expansion of our international footprint, primarily in Europe and
Brazil, but can make no assurance that we will be successful in integrating Qype
with our businesses or in taking advantage of Qypes presence in these
international markets. Our ability to manage our business and conduct our
operations internationally requires considerable management attention and
resources, and is subject to the particular challenges of supporting a rapidly
growing business in an environment of multiple languages, cultures, customs,
legal systems, alternative dispute systems, regulatory systems and commercial
infrastructures. Furthermore, in most international markets, we would not be the
first entrant, and our competitors may be better positioned than we are to
succeed. Expanding internationally may subject us to risks that we have either
not faced before or increase our exposure to risks that we currently face,
including risks associated with:
-
recruiting and retaining qualified, multi-lingual
employees, including sales personnel;
-
integrating businesses we may acquire
internationally, including Qype;
-
increased competition from local websites and
guides and potential preferences by local populations for local
providers;
-
compliance with applicable foreign laws and
regulations, including different privacy, censorship and liability standards
and regulations and different intellectual property laws;
-
providing solutions in different languages for
different cultures, which may require that we modify our solutions and
features to ensure that they are culturally relevant in different
countries;
-
our ability to achieve prominent rankings for our
content in unpaid search results, which may be more difficult in newer markets
where we may have less content and more competitors than in established
markets;
-
the enforceability of our intellectual property
rights;
-
credit risk and higher levels of payment
fraud;
-
compliance with anti-bribery laws, including but
not limited to compliance with the Foreign Corrupt Practices Act and the U.K.
Bribery Act;
-
currency exchange rate
fluctuations;
-
foreign exchange controls that might prevent us
from repatriating cash earned outside the United States;
-
political and economic instability in some
countries;
-
double taxation of our international earnings and
potentially adverse tax consequences due to changes in the tax laws of the
United States or the foreign jurisdictions in which we operate;
and
-
higher costs of doing business
internationally.
14
Many people use smartphones and
other mobile devices to access information about local businesses. We have
limited experience with mobile advertising and have prioritized the quality of
user experience with our mobile products over short-term monetization. As a
result, growth in use of our mobile app and mobile website, particularly if it substitutes
for use of our website on personal computers, may adversely affect our results
of operations and business.
The number of
people who access information about local businesses through mobile devices,
including smartphones and handheld tablets or computers, has increased
dramatically in the past few years and is expected to continue to increase.
Although we currently deliver advertising on our mobile app and mobile website,
we have limited experience with mobile advertising and have prioritized the
quality of user experience with our mobile products over short-term
monetization. With our ability to effectively monetize our mobile products
unproven, we may not be able to generate meaningful revenue from our mobile
products despite the expected growth in mobile usage. In addition, if consumers
use our mobile app and mobile website as substitutes for, rather than in
addition to, use of our website on personal computers and our mobile solutions
prove ineffective, our advertisers may stop or reduce their advertising with us.
Similarly, we may be unable to attract new advertisers if our mobile advertising
solutions are not compelling. If our advertising solutions are not effective or
we fail to continue to innovate and introduce enhanced mobile solutions, if our
solutions alienate our user base, or if our solutions are not widely adopted or
are insufficiently profitable, our business may suffer.
Additionally, as new mobile devices and platforms are released, it is
difficult to predict the problems we may encounter in developing products for
these alternative devices and platforms, and we may need to devote significant
resources to the creation, support and maintenance of such products. We are
dependent on the interoperability of our mobile products with popular mobile
operating systems that we do not control, such as Android and iOS, and any
changes in such systems that degrade their functionality could adversely affect
mobile usage. If we experience difficulties in the future in integrating our
mobile app into mobile devices or if problems arise with our relationships with
providers of mobile operating systems or mobile application download stores,
such as those of Google, with whose local products we compete, or Apple, Inc.,
our user growth and user engagement could be harmed. In addition, if our
applications receive unfavorable treatment compared to the promotion and
placement of competing applications, such as the order of our products in the
Apple AppStore, or if we face increased costs to distribute our mobile app, our
future growth and our results of operations could suffer. Further, in the event
that it becomes more difficult for our users to access and use our mobile app,
or if users choose to use mobile products that do not offer access to our mobile
app, we may be unable to decrease our reliance on traffic from Google and other
search engines.
We expect to face increased
competition in the market.
The market for information regarding local businesses and advertising is
intensely competitive and rapidly changing. With the emergence of new
technologies and market entrants, competition is likely to intensify in the
future. Our competitors include, among others, offline media companies and
service providers; newspaper, television and other media companies; Internet
search engines, such as Google, Bing and Yahoo!; and various other online
service providers and review websites. Our competitors may enjoy competitive advantages, such as
greater name recognition, longer operating histories, substantially greater
market share, large existing user bases and substantially greater financial,
technical and other resources. These companies may use these advantages to offer
products similar to ours at a lower price, develop different products to compete
with our current solutions and respond more quickly and effectively than we do
to new or changing opportunities, technologies, standards or client
requirements. In particular, major Internet companies, such as Google, Facebook,
Yahoo! and Microsoft may be more successful than us in developing and marketing
online advertising offerings directly to local businesses and many of our
advertisers and potential advertisers may choose to purchase online advertising
services from these competitors and may reduce their purchases of our products.
In addition, many of our current and potential competitors have established
marketing relationships with and access to larger client bases. As the market
for local online advertising increases, new competitors, business models and
solutions are likely to emerge. We also compete with these companies for the
attention of contributors and consumers, and may experience decreases in both if
our competitors offer more compelling environments. For all of these reasons, we
may be unable to maintain or grow the number of people who use our website and
mobile app and the number of businesses that use our advertising solutions and
we may face pressure to reduce the price of our advertising solutions, in which
case our business, results of operations and financial condition will be
harmed.
15
The traffic to our website and
mobile application may decline and our business may suffer if other companies
copy information from our platform and publish or aggregate it with other
information for their own benefit.
From time to
time, other companies copy information from our platform, through website
scraping, robots or other means, and publish or aggregate it with other
information for their own benefit. For example, in parts of 2010 and 2011,
Google incorporated content from our website into its own local product without
our permission. Googles users, as a result, may not have visited our website
because they found the information they sought on Google. While we do not
believe that Google is still incorporating our content within its local
products, we have no assurance that Google or other companies will not copy,
publish or aggregate content from our platform in the future.
When third parties copy, publish or aggregate content from our platform,
it makes them more competitive and decreases the likelihood that consumers will
visit our website or use our mobile app to find the information they seek, which
could negatively affect our business, results of operations and financial
condition. We may not be able to detect such third-party conduct in a timely
manner and, even if we could, we may not be able to prevent it. In some cases,
particularly in the case of websites operating outside of the United States, our
available remedies may be inadequate to protect us against such practices. In
addition, we may be required to expend significant financial or other resources
to successfully enforce our rights.
The impact of worldwide economic
conditions, including the resulting effect on advertising spending by local
businesses, may adversely affect our business, operating results and financial
condition.
Our performance is subject to worldwide economic conditions and their
impact on levels of advertising spend by small and medium-sized businesses,
which may be disproportionately affected by economic downturns. In the event of
an economic slowdown or deterioration of worldwide economic conditions, our
existing and potential advertising clients may no longer consider investment in
our advertising solutions a necessity, or may elect to reduce advertising
budgets. Historically, economic downturns have resulted in overall reductions in
advertising spending. In particular, web-based advertising solutions may be
viewed by some of our existing and potential advertising clients as a lower
priority and could cause advertisers to reduce the amounts they spend on
advertising, terminate their use of our solutions or default on their payment
obligations to us. In addition, economic conditions may adversely impact levels
of consumer spending, which could adversely impact the numbers of consumers
visiting our website and mobile app. Consumer purchases of discretionary items
generally decline during recessionary periods and other periods in which
disposable income is adversely affected. If spending at many of the local
businesses reviewed on our platform declines, businesses may be
less likely to use our advertising products, which could have a material adverse
effect on our financial condition and results of operations.
We face potential liability and
expense for legal claims based on the content on our
platform.
We face potential liability and expense for legal claims relating to the
information that we publish on our website and mobile app, including claims for
defamation, libel, negligence and copyright or trademark infringement, among
others. For example, businesses in the past have claimed, and may in the future
claim, that we are responsible for defamatory reviews posted by our users. We
expect claims like these to continue, and potentially increase in proportion to
the amount of content on our platform. These claims could divert management time
and attention away from our business and result in significant costs to
investigate and defend, regardless of the merits of the claims. In some
instances, we may elect or be compelled to remove content or may be forced to
pay substantial damages if we are unsuccessful in our efforts to defend against
these claims. If we elect or are compelled to remove valuable content from our
website or mobile app, our platform may become less useful to consumers and our
traffic may decline, which could have a negative impact on our business and
financial performance.
16
We process, store and use
personal information and other data, which subjects us to governmental
regulation and other legal obligations related to privacy. Our actual or
perceived failure to comply with such obligations could harm our
business.
We receive, store and process personal information and other user data,
including credit card information for certain users. There are numerous federal,
state and local laws around the world regarding privacy and the storing,
sharing, use, processing, disclosure and protection of personal information and
other user data, the scope of which are changing, subject to differing
interpretations, and may be inconsistent between countries or conflict with
other rules. For example, the Federal Trade Commission, or FTC, currently
expects companies like Yelp to comply with guidelines issued under the Federal
Trade Commission Act that govern the collection, use and storage of consumer
information, establishing principles relating to
notice, consent, access and data integrity and security. Our practices are
designed to comply with these guidelines as described in our published privacy
policy. For example, we disclose that we collect a range of information about
our users, such as their names, email addresses, search histories and activity
on our platform. We also use and store such information primarily to personalize
the experience on our platform, provide customer support and display relevant
advertising. While we do not sell or share personally identifiable information
with third parties for direct marketing purposes, we do have relationships with
third parties that may allow them access to user information for other purposes.
For example, when we outsource functions such as technical and customer support,
tracking and reporting, quality assurance and payment processing to other
companies, we make user information available to those companies to the extent
necessary for them to provide the outsourced services. We believe our policies
and practices comply with the FTC privacy guidelines and other applicable laws
and regulations. However, if our belief proves incorrect, or if these
guidelines, laws or regulations or their interpretation change or new
legislation or regulations are enacted, we may be compelled to provide
additional disclosures to our users, obtain additional consents from our users
before collecting or using their information or implement new safeguards to help
our users manage our use of their information, among other changes.
We also
generally comply with industry standards and are subject to the terms of our
privacy policies and privacy-related obligations to third parties (including, in
certain instances, voluntary third-party certification bodies such as TRUSTe).
It is possible that these obligations may be interpreted and applied in a manner
that is inconsistent from one jurisdiction to another and may conflict with
other rules or our practices.
Any failure or perceived failure by us to comply with our privacy
policies, our privacy-related obligations to users or other third parties, or
our privacy-related legal obligations, or any compromise of security that
results in the unauthorized release or transfer of personally identifiable
information or other user data, may result in governmental enforcement actions,
litigation or negative publicity and could cause our users and advertisers to
lose trust in us, which could have an adverse effect on our business.
Additionally, if third parties with whom we work, such as advertisers, vendors
or developers, violate applicable laws or our policies, such violations may also
put our users information at risk and could have an adverse effect on our
business.
Our business could suffer if the
jurisdictions in which we operate change the way in which they regulate the
Internet, including regulations relating to user-generated content and
privacy.
Our business, including our ability to operate and expand
internationally, could be adversely affected if legislation or regulations are
adopted, interpreted or implemented in a manner that is inconsistent with our
current business practices and that requires changes to these practices or the
design of our platform, products or features. For example, if legislation is
passed that limits the immunities afforded to websites that publish
user-generated content, we may be compelled to remove content from our platform
that we would otherwise publish, restrict the types of businesses that our users
can review or further verify the identity of our users, among other changes.
Similarly, legislation could be passed that limits our ability to use or store
information about our users.
Practices regarding the collection, use, storage, display, processing,
transmission and security of personal information by companies offering online
services have recently come under increased public scrutiny. As a result, the
regulatory framework for privacy issues worldwide is currently in flux and is
likely to remain so for the foreseeable future. The U.S. government, including
the White House, the FTC and the Department of Commerce,
are reviewing the need for greater regulation of the collection of information
concerning consumer behavior with respect to online services, including
regulation aimed at restricting certain targeted advertising practices. The
White House recently published a report calling for a consumer privacy Bill of
Rights that could impact the collection of data. Legislative changes have been
proposed abroad as well, including recent proposals by the European Commission
to reform its existing data protection legal framework. Various government and
consumer agencies have also called for new regulation and changes in industry
practices. Recently, the State of California and several other states have
adopted privacy guidelines with respect to mobile applications. Changes like
these could increase our administrative costs and make it more difficult for
consumers to use our platform, resulting in less traffic and revenue. Similarly,
changes like these could make it more difficult for us to provide effective
advertising tools to businesses on our platform, resulting in fewer advertisers
and less revenue. In any of the cases above, our business could
suffer.
17
Our acquisition of Qype creates
numerous risks and uncertainties that could adversely affect our operating
results or prevent us from realizing the expected benefits of the
acquisition.
In October
2012, we acquired Qype to accelerate our international expansion. This
acquisition requires the integration of Qype, its operations, services and
personnel with our organization. These transition activities are complex, and we
may encounter unexpected difficulties or incur unexpected costs.
In order to realize the expected benefits and synergies of our
acquisition of Qype, we must meet a number of significant challenges, including:
-
integrating the management teams, strategies and operations of the
combined business;
-
retaining and assimilating the key
personnel of each company;
-
retaining existing customers and
obtaining new customers;
-
difficulties in the assimilation of
employees and corporate cultures;
-
migrating Qype users and content to
our platform;
-
implementing and retaining uniform
standards, controls, procedures, policies and information systems;
and
-
managing the combined business
effectively.
It is possible
that the integration process could result in the loss of technical skills and
management expertise of key employees, the disruption of each companys ongoing
business or inconsistencies in standards, controls, procedures and policies due
to possible cultural conflicts or differences of opinions on technical decisions
and services. In addition, following the acquisition of Qype, we began implementation of a
restructuring plan affecting approximately 35 Qype employees in order to
eliminate redundancies within the combined business and improve operational
efficiencies. Such restructuring efforts could result in reduced efficiency of
retained employees and may result in employees, whether or not directly affected
by the restructuring, seeking future employment with our business partners or
competitors. Although employees are subject to confidentiality requirements, the
confidential nature of certain proprietary information may not be maintained in
the course of any such future employment. Further, we believe that our ability
to realize the full benefits of the acquisition will depend upon our ability to
retain highly skilled personnel. We may have difficulty retaining such personnel
as a result of the restructuring.
A failure to integrate Qype successfully could adversely affect our
ability to maintain relationships with customers and employees or to achieve the
anticipated benefits of the acquisition. In addition, we may be required to
spend additional time or funds on integration that otherwise would be spent on
the development and expansion of the combined business. Even if we are able to
integrate Qype operations successfully, these integrations may not result in the
realization of the full benefits of synergies, cost savings, innovation and
operational efficiencies that may be possible from the integration, and these
benefits may not be achieved within a reasonable period of time.
We may also acquire other
companies or technologies, which could divert our managements attention, result
in additional dilution to our stockholders and otherwise disrupt our operations
and harm our operating results.
Our success will depend, in part, on our ability to expand our product
offerings and grow our business in response to changing technologies, user and
advertiser demands and competitive pressures. In some circumstances, we may
determine to do so through the acquisition of complementary businesses or
technologies rather than through internal development. We have limited
experience as a company in the complex process of acquiring other businesses and
technologies. The pursuit of potential future acquisitions may divert the
attention of management and cause us to incur expenses in identifying,
investigating and pursuing suitable acquisitions, whether or not they are
consummated. Acquisitions could also result in dilutive issuances of equity
securities or the incurrence of debt, which could adversely affect our results
of operations or our ability to achieve profitability.
18
Acquisitions also involve a number of risks to our business, including
the difficulty of integrating operations, services, sites and technologies, and
personnel of the acquired companies, the potential disruption of our ongoing
business, the potential distraction of management, the possibility that our
business culture and the business culture
of the
acquired companies will not be compatible, expenses related to the acquisition
and to the integration of the acquired companies, the impairment of
relationships with employees and customers as a result of any integration of new
personnel, risks related to the businesses of acquired companies that may
continue to impact the businesses following the acquisition and potential
unknown liabilities associated with acquired companies. Any inability to
integrate services, sites and technologies, operations or personnel in an
efficient and timely manner could harm our results of operations.
If we fail to manage our growth
effectively, our brand, results of operations and business could be
harmed.
We have
experienced rapid growth in our headcount and operations, including through our
recent acquisition of Qype, which places substantial demands on management and
our operational infrastructure. Most of our employees have been with us for
fewer than two years. We intend to make substantial investments in our
technology, sales and marketing and community management organizations. As we
continue to grow, we must effectively integrate, develop and motivate a large
number of new employees, including employees in international markets and from
any acquired businesses, while maintaining the beneficial aspects of our company
culture. If we do not manage the growth of our business and operations
effectively, the quality of our platform and efficiency of our operations could
suffer, which could harm our brand, results of operations and
business.
We may not timely and effectively
scale and adapt our existing technology and network infrastructure to ensure
that our platform is accessible.
It is important to our success that users in all geographies be able to
access our platform at all times. We have previously experienced, and may
experience in the future, service disruptions, outages and other performance
problems due to a variety of factors, including infrastructure changes, human or
software errors, capacity constraints due to an overwhelming number of users
accessing our platform simultaneously, and denial of service or fraud or
security attacks. In some instances, we may not be able to identify the cause or
causes of these performance problems within an acceptable period of time. It may
become increasingly difficult to maintain and improve the availability of our
platform, especially during peak usage times and as our solutions become more
complex and our user traffic increases. If our platform is unavailable when
users attempt to access it or it does not load as quickly as they expect, users
may seek other services to obtain the information for which they are looking,
and may not return to our platform as often in the future, or at all. This would
negatively impact our ability to attract users and advertisers and increase the
frequency with which they use our website and mobile app. We expect to continue
to make significant investments to maintain and improve the availability of our
platform and to enable rapid releases of new features and products. To the
extent that we do not effectively address capacity constraints, upgrade our
systems as needed and continually develop our technology and network
architecture to accommodate actual and anticipated changes in technology, our
business and operating results may be harmed.
Our disaster recovery program contemplates transitioning our platform and
data to a backup center in the event of a catastrophe, but we have not yet
tested the procedure in full, and the transition procedure may take several days
or more to complete. During this time, our platform may be unavailable in whole
or in part to our users.
We are, and may in the future be,
subject to disputes and assertions by third parties that we violate their
rights. These disputes may be costly to defend and could harm our business and
operating results.
We currently face, and we expect to face from time to time in the future,
allegations that we have violated the rights of third parties, including patent,
trademark, copyright and other intellectual property rights and the rights of
current and former employees and business owners. For example, third parties
have sued us for allegedly violating their patent rights (we are currently a
defendant in numerous such suits, all of which involve plaintiffs targeting
multiple defendants in the same or similar suits), an action was filed against
us on behalf of current and former employees claiming that we violated labor and
other laws (we have received final court approval to settle the suit for
approximately $0.8 million) and various businesses have sued us alleging that we
manipulate Yelp reviews in order to coerce them and other businesses to pay for
Yelp advertising (one such suit was voluntarily dismissed, and two others were
consolidated and dismissed with prejudice, although the plaintiffs are seeking
an appeal). In addition, Deutsche Telekom AG, or Deutsche Telekom, has filed two
suits against Qype in Germany regarding fees payable for directory data that Qype and its predecessor purchased from Deutsche Telekom; both claims have been
rejected in full by the German court, although Deutsche Telekom has appealed the
decisions to the Higher Regional Court of Cologne, which referred the appeals to the Higher Regional Court of Düsseldorf. The appeals are expected to be heard in the first half of 2013.
19
Other claims
against us can be expected to be made in the future. Even if the claims are
without merit, the costs associated with defending these types of claims may be
substantial, both in terms of time, money and management distraction. In
particular, patent and other intellectual property litigation may be protracted
and expensive, and the results are difficult to predict and may require us to
stop offering certain features, purchase licenses or modify our products and
features while we develop non-infringing substitutes or may result in
significant settlement costs. We do not own any patents, and, therefore, may be
unable to deter competitors or others from pursuing patent or other intellectual
property infringement claims against us.
The results of litigation and claims to which we may be subject cannot be
predicted with certainty. Even if these matters do not result in litigation or
are resolved in our favor or without significant cash settlements, these
matters, and the time and resources necessary to litigate or resolve them, could
harm our business, results of operations and reputation.
Some of our solutions contain
open source software, which may pose particular risks to our proprietary
software and solutions.
We use open source software in our solutions and will use open source
software in the future. From time to time, we may face claims from third parties
claiming ownership of, or demanding release of, the open source software and/or
derivative works that we developed using such software (which could include our
proprietary source code), or otherwise seeking to enforce the terms of the
applicable open source license. These claims could result in litigation and
could require us to purchase a costly license or cease offering the implicated
solutions unless and until we can re-engineer them to avoid infringement. This
re-engineering process could require significant additional research and
development resources. In addition to risks related to license requirements, use
of certain open source software can lead to greater risks than use of
third-party commercial software, as open source licensors generally do not
provide warranties or controls on the origin of software. Any of these risks
could be difficult to eliminate or manage, and, if not addressed, could have a
negative effect on our business and operating results.
We make the consumer experience
our highest priority. Our dedication to making decisions based primarily on the
best interests of consumers may cause us to forgo short-term gains and
advertising revenue.
We base many of our decisions upon the best interests of the consumers
who use our platform. We believe that this approach has been essential to our
success in increasing our user growth rate and the frequency with which
consumers use our platform and has served the long-term interests of our company
and our stockholders. In the past, we have forgone, and we may in the future
forgo, certain expansion or revenue opportunities that we do not believe are in
the best interests of consumers, even if such decisions negatively impact our
results of operations in the short term, and we believe that continued adherence
to this principle will, in the long term, benefit our stockholders. In
particular, our approach of putting our consumers first may negatively impact
our relationships with our existing or prospective advertisers. For example,
unless we believe that a review violates our terms of service, such as reviews
that contain hate speech or bigotry, we allow the review to remain on the
platform, even if the business disputes its accuracy. Certain advertisers may
therefore perceive us as an impediment to their success as a result of negative
reviews and ratings. This practice could result in a loss of advertisers, which
in turn could harm our results of operations.
We rely on third-party service
providers for many aspects of our business, and any failure to maintain these
relationships could harm our business.
We rely on data about local businesses from third parties, including
various yellow pages and other third parties that license such information to
us. We also rely on third parties for other aspects of our business, such as
mapping functionality and administrative software solutions. If these third
parties experience difficulty meeting our requirements or standards, or our
licenses are revoked or not renewed, it could make it difficult for us to
operate some aspects of our business, which could damage our reputation. In
addition, if such third-party service providers were to cease operations,
temporarily or permanently, face financial distress or other business
disruption, increase their fees or if our relationships with these providers
deteriorate, we could suffer increased costs and delays in our ability to
provide consumers and advertisers with content or provide similar services until
an equivalent provider could be found or we could develop replacement technology
or operations. In addition, if we are unsuccessful in
choosing or finding high-quality partners, if we fail to negotiate
cost-effective relationships with them, or if we ineffectively manage these
relationships, it could have an adverse impact on our business and financial
performance.
20
We expect a number of factors to
cause our operating results to fluctuate on a quarterly and annual basis, which
may make it difficult to predict our future performance.
Our operating
results could vary significantly from quarter to quarter and year to year
because of a variety of factors, many of which are outside of our control. As a
result, comparing our operating results on a period-to-period basis may not be
meaningful. In addition to other risk factors discussed in this section, factors
that may contribute to the variability of our quarterly and annual results
include:
-
our
ability to attract new local business advertisers and retain existing
advertisers;
-
our ability to accurately forecast
revenue and appropriately plan our expenses;
-
the effects of changes in search
engine placement and prominence;
-
the effects of increased competition
in our business;
-
our ability to successfully expand in
existing markets, enter new markets and manage our international
expansion;
-
the impact of worldwide economic
conditions, including the resulting effect on consumer spending at local
businesses and the level of advertising spending by local
businesses;
-
our ability to protect and grow our
intellectual property;
-
our ability to maintain an adequate
rate of growth and effectively manage that growth;
-
our ability to maintain and increase
traffic to our website and mobile app;
-
our ability to
keep pace with changes in technology;
-
the success of our sales and
marketing efforts;
-
costs associated with defending
intellectual property infringement and other claims and related judgments or
settlements;
-
our ability to manage
successfully any acquisitions of businesses, solutions or technologies, including
Qype;
-
changes in government regulation
affecting our business;
-
interruptions in service and any
related impact on our reputation;
-
the attraction and retention of
qualified employees and key personnel;
-
our ability to choose and effectively
manage third-party service providers;
-
the impact of fluctuations in
currency exchange rates;
-
changes in consumer behavior with
respect to local businesses;
-
fluctuations in spending by our advertisers due to seasonality, such as historically stronger spending in the
fourth quarter of each year, or other factors;
-
the effects of natural or man-made
catastrophic events;
-
the effectiveness of our internal
controls; and
-
changes in our tax rates or exposure
to additional tax liabilities.
21
Because we recognize most of the
revenue from our advertising products over the term of an agreement, a
significant downturn in our business may not be immediately reflected in our
results of operations.
We recognize
revenue from sales of our advertising products over the terms of the applicable
agreements, which are generally three, six or 12 months. As a result, a
significant portion of the revenue we report in each
quarter is generated from agreements entered into during previous
quarters. Consequently, a decline in new or renewed agreements in any one
quarter may not significantly impact our revenue in that quarter but will
negatively affect our revenue in future quarters. In addition, we may be unable
to adjust our fixed costs in response to reduced revenue. Accordingly, the
effect of significant declines in advertising sales may not be reflected in our
short-term results of operations.
We rely on the performance of
highly skilled personnel, and if we are unable to attract, retain and motivate
well-qualified employees, our business could be harmed.
We believe our
success has depended, and continues to depend, on the efforts and talents of our
employees, including our senior management team, software engineers, marketing
professionals and advertising sales staff. Our future success depends on our
continuing ability to attract, develop, motivate and retain highly qualified and
skilled employees. Qualified individuals are in high demand, and we may incur
significant costs to attract them. In addition, the loss of any of our senior
management or key employees could materially adversely affect our ability to
execute our business plan, and we may not be able to find adequate replacements.
All of our officers and other U.S. employees are at-will employees, which mean
they may terminate their employment relationship with us at any time, and their
knowledge of our business and industry would be extremely difficult to replace.
We cannot ensure that we will be able to retain the services of any members of
our senior management or other key employees. If we do not succeed in attracting
well-qualified employees or retaining and motivating existing employees, our
business could be harmed.
Failure to protect or enforce our
intellectual property rights could harm our business and results of
operations.
We regard the protection of our trade secrets, copyrights, trademarks and
domain names as critical to our success. In particular, we must maintain,
protect and enhance the Yelp brand. We pursue the registration of our domain
names, trademarks and service marks in the United States and in certain
jurisdictions abroad. We strive to protect our intellectual property rights by
relying on federal, state and common law rights, as well as contractual
restrictions. We typically enter into confidentiality and invention assignment
agreements with our employees and contractors, and confidentiality agreements
with parties with whom we conduct business in order to limit access to, and
disclosure and use of, our proprietary information. However, these contractual
arrangements and the other steps we have taken to protect our intellectual
property may not prevent the misappropriation or disclosure of our proprietary
information nor deter independent development of similar technologies by
others.
Effective trade secret, copyright, trademark and domain name protection
is expensive to develop and maintain, both in terms of initial and ongoing
registration requirements and expenses and the costs of defending our rights. We
are seeking to protect our trademarks and domain names in an increasing number
of jurisdictions, a process that is expensive and may not be successful or which
we may not pursue in every location. Litigation may be necessary to enforce our
intellectual property rights, protect our respective trade secrets or determine
the validity and scope of proprietary rights claimed by others. Any litigation
of this nature, regardless of outcome or merit, could result in substantial
costs and diversion of management and technical resources, any of which could
adversely affect our business and operating results. We may incur significant
costs in enforcing our trademarks against those who attempt to imitate our
Yelp brand. If we fail to maintain, protect and enhance our intellectual
property rights, our business and operating results may be harmed.
We may be unable to continue to
use the domain names that we use in our business, or prevent third parties from
acquiring and using domain names that infringe on, are similar to, or otherwise
decrease the value of our brand or our trademarks or service
marks.
We have registered domain names for our website that we use in our
business, such as Yelp.com. If we lose the ability to use a domain name, whether
due to trademark claims, failure to renew the applicable registration, or any
other cause, we may be forced to market our products under a new domain name,
which could cause us substantial harm, or to incur significant expense in order
to purchase rights to the domain name in question. In addition, our competitors
and others could attempt to capitalize on our brand recognition by using domain
names similar to ours. Domain names similar to ours have been registered in the
United States and elsewhere. We may be unable to prevent third parties from
acquiring and using domain names that infringe on, are similar to, or otherwise
decrease
the value of our brand or our trademarks
or service marks. Protecting and enforcing our rights in our domain names may
require litigation, which could result in substantial costs and diversion of
managements attention.
22
If our security measures are
compromised, or if our platform is subject to attacks that degrade or deny the
ability of users to access our content, users may curtail or stop use of our
platform.
Our platform
involves the storage and transmission of user and business information, some of
which may be private, and security breaches could expose us to a risk of loss of
this information, which could result in potential liability and litigation. Like
all online services, our platform is vulnerable to computer viruses, break-ins,
phishing attacks, attempts to overload our servers with denial-of-service or
other attacks and similar disruptions from unauthorized use of our computer
systems, any of which could lead to interruptions, delays or website shutdowns,
causing loss of critical data or the unauthorized disclosure or use of
personally identifiable or other confidential information. Because the
techniques used to obtain unauthorized access, disable or degrade service or
sabotage systems change frequently, often are not recognized until launched
against a target and may originate from less regulated and remote areas around
the world, we may be unable to proactively address these techniques or to
implement adequate preventative measures. If we experience compromises to our
security that result in performance or availability problems, the complete
shutdown of our website or the loss or unauthorized disclosure of confidential
information, our users or advertisers may lose trust and confidence in us and
decrease their use of our platform or stop using our platform entirely, and we
would suffer reputational and financial harm. For example, we work with third
party vendors to process credit card payments by certain of our users and local
businesses and are subject to payment card association operating rules. If our
security measures fail to protect this information adequately as a result of
employee error, malfeasance or otherwise, or we fail to comply with the
applicable operating rules, we could be liable to our users and local businesses
for their losses, as well as the vendors under our agreements with them, we
could be subject to fines and higher transaction fees, we could face regulatory
action and our users, local businesses and vendors could end their
relationships with us, any of which could harm our business and financial
results.
In addition, user and business owner accounts and profile pages could be
hacked, hijacked, altered or otherwise claimed or controlled by unauthorized
persons. For example, we enable businesses to create free online business
accounts and claim the business profile pages for each of their business
locations. We verify these claims through an automated telephone verification
process, which is designed to confirm that the person setting up the account is
affiliated with the business by confirming that the person has access to the
businesss telephone. Our verification system could fail to confirm that the
recipient of the call is an authorized representative of the business, or
mistakenly allow an unauthorized representative to claim the businesss profile
page. Any or all of these issues could negatively impact our ability to attract
new users or could deter current users from returning or reduce the frequency
with which consumers and advertisers use our solutions, cause existing or
potential advertisers to cancel their contracts or subject us to third-party
lawsuits, regulatory fines or other action or liability, thereby harming our
results of operations.
Our business is subject to a
variety of U.S. and foreign laws, many of which are unsettled and still
developing and which could subject us to claims or otherwise harm our
business.
We are subject to a variety of laws in the United States and abroad,
including laws regarding data retention, privacy, distribution of user-generated
content and consumer protection, that are frequently evolving and developing.
The scope and interpretation of the laws that are or may be applicable to us are
often uncertain and may be conflicting, particularly outside the United States.
For example, laws relating to the liability of providers of online services for
activities of their users and other third parties are currently being tested by
a number of claims, including actions based on invasion of privacy and other
torts, unfair competition, copyright and trademark infringement and other
theories based on the nature and content of the materials searched, the ads
posted, or the content provided by users. In addition, regulatory authorities
around the world are considering a number of legislative and regulatory
proposals concerning data protection and other matters that may be applicable to
our business. It is also likely that if our business grows and evolves and our
solutions are used in a greater number of countries, we will become subject to
laws and regulations in additional jurisdictions. It is difficult to predict how
existing laws will be applied to our business and the new laws to which we may
become subject.
23
If we are not
able to comply with these laws or regulations or if we become liable under these
laws or regulations, we could be directly harmed, and we may be forced to
implement new measures to reduce our exposure to this liability. This may
require us to expend substantial resources or to discontinue certain products or
features, which would negatively affect our business. In addition, the increased
attention focused upon liability issues as a result of lawsuits and legislative
proposals could harm our reputation or otherwise impact the growth of our
business. Any costs incurred to prevent or mitigate this potential liability
could also harm our business and operating results.
Domestic and foreign laws may be
interpreted and enforced in ways that impose new obligations on us with respect
to Yelp Deals, which may harm our business and results of
operations.
Our Yelp Deals
products may be deemed gift certificates, store gift cards, general-use prepaid
cards or other vouchers, or gift cards, subject to, among other laws, the
federal Credit Card Accountability Responsibility and Disclosure Act of 2009, or
the Credit CARD Act, and similar federal, state and foreign laws. Many
of these laws include specific disclosure requirements and prohibitions or
limitations on the use of expiration dates and the imposition of certain fees.
For example, the Credit CARD Act requires that gift cards expire no
earlier than five years after their issue. Yelp Deals are comprised of two
components: (i) the purchase value, which is the amount paid by the purchaser
and which does not expire, and (ii) the promotional value, which is the
remaining value for which the Yelp Deal can be redeemed during a limited period,
which typically ends one year after the date of purchase. If, contrary to our
belief, the Credit CARD Act and similar state laws were held to apply to
the promotional value component of Yelp Deals, consumers would be entitled to
redeem the promotional value component of their Yelp Deals for up to five years
after their issue, and we could face liability for redemption periods that are
less than five years. Various companies that provide deal products similar to
ours are currently defendants in purported class action lawsuits that have been
filed in federal and state court claiming that their deal products are subject
to the Credit CARD Act and various state laws governing gift cards and
that the defendants have violated these laws as a result of expiration dates and
other restrictions they have placed on their deals. Similar lawsuits have been
filed in other locations in which we plan to sell our Yelp Deals, such as the
Canadian province of Ontario, alleging similar violations of provincial
legislation governing gift cards.
The application of various other laws and regulations to our products,
and particularly our Yelp Deals and Gift Certificates, is uncertain. These include laws and
regulations pertaining to unclaimed and abandoned property, partial redemption,
refunds, revenue-sharing restrictions on certain trade groups and professions,
sales and other local taxes and the sale of alcoholic beverages. For example,
although it is the responsibility of merchants to redeem or refund unexpired
Yelp Deals and Gift Certificates that they offer through our platform, the law might be interpreted to
require that we redeem or refund them. Because merchants alone, and not Yelp,
are in a position to track the redemption of Yelp Deals and Gift Certificates, we may not be able to
comply with such a requirement without substantial and potentially costly
changes to our infrastructure and business practices. In addition, we may
become, or be determined to be, subject to federal, state or foreign laws
regulating money transmitters or aimed at preventing money laundering or
terrorist financing, including the Bank Secrecy Act, the USA PATRIOT Act and
other similar future laws or regulations.
If we become subject to claims or are required to alter our business
practices as a result of current or future laws and regulations, our revenue
could decrease, our costs could increase and our business could otherwise be
harmed. In addition, the costs and expenses associated with defending any
actions related to such additional laws and regulations and any payments of
related penalties, fines, judgments or settlements could harm our
business.
We may require additional capital
to support business growth, and this capital might not be available on
acceptable terms, if at all.
We intend to continue to make investments to support our business growth
and may require additional funds to respond to business challenges, including
the need to develop new features and products or enhance our existing services,
improve our operating infrastructure or acquire complementary businesses and
technologies. Accordingly, we may need to engage in equity or debt financings to
secure additional funds. If we raise additional funds through future issuances
of equity or convertible debt securities, our existing stockholders could suffer
significant dilution, and any new equity securities we issue could have rights,
preferences and privileges superior to those of holders of our Class A common
stock. Any debt financing we secure in the future could involve restrictive
covenants relating to our capital raising activities and other financial and
operational matters, which may make it more difficult for us
to obtain additional capital and to pursue business
opportunities, including potential acquisitions. We may not be able to obtain
additional financing on terms favorable to us, if at all. If we are unable to
obtain adequate financing or financing on terms satisfactory to us when we
require it, our ability to continue to support our business growth and to
respond to business challenges could be significantly impaired, and our business
may be harmed.
24
Our business is subject to the
risks of earthquakes, fires, floods and other natural catastrophic events and to
interruption by man-made problems such as computer viruses or
terrorism.
Our systems
and operations are vulnerable to damage or interruption from earthquakes, fires,
floods, power losses, telecommunications failures, terrorist attacks, acts of
war, human errors, break-ins and similar events. For example, a significant
natural disaster, such as an earthquake, fire or flood, could have a material
adverse impact on our business, operating results and financial condition, and
our insurance coverage may be insufficient to compensate us for losses that may
occur. Our U.S. corporate offices and one of the facilities we lease to house
our computer and telecommunications equipment are located in the San Francisco
Bay Area, a region known for seismic activity. In addition, acts of terrorism,
which may be targeted at metropolitan areas that have higher population density
than rural areas, could cause disruptions in our or our local business
advertisers businesses or the economy as a whole. Our servers may also be
vulnerable to computer viruses, break-ins and similar disruptions from
unauthorized tampering with our computer systems, which could lead to
interruptions, delays, loss of critical data or the unauthorized disclosure of
confidential client data. We may not have sufficient protection or recovery
plans in certain circumstances, such as natural disasters affecting the San
Francisco Bay Area, and our business interruption insurance may be insufficient
to compensate us for losses that may occur. As we rely heavily on our servers,
computer and communications systems and the Internet to conduct our business and
provide high quality customer service, such disruptions could negatively impact
our ability to run our business and either directly or indirectly disrupt our
local business advertisers businesses, which could have an adverse affect on
our business, operating results and financial condition.
The intended tax benefits of our
corporate structure and intercompany arrangements depend on the application of
the tax laws of various jurisdictions and on how we operate our
business.
Our corporate structure and intercompany arrangements, including the
manner in which we develop and use our intellectual property and the transfer
pricing of our intercompany transactions, are intended to reduce our worldwide
effective tax rate. The application of the tax laws of various jurisdictions,
including the United States, to our international business activities is subject
to interpretation and depends on our ability to operate our business in a manner
consistent with our corporate structure and intercompany arrangements. The
taxing authorities of the jurisdictions in which we operate may challenge our
methodologies for valuing developed technology or intercompany arrangements,
including our transfer pricing, or determine that the manner in which we operate
our business does not achieve the intended tax consequences, which could
increase our worldwide effective tax rate and harm our financial position and
results of operations.
Our corporate structure includes legal entities located in jurisdictions
with income tax rates lower than the U.S. statutory tax rate. Our intercompany
arrangements allocate income to such entities in accordance with arms-length
principles and commensurate with functions performed, risks assumed and
ownership of valuable corporate assets. We believe that income taxed in certain
foreign jurisdictions at a lower rate relative to the U.S. statutory rate will
have a beneficial impact on our worldwide effective tax rate.
Significant judgment is required in evaluating our tax positions and
determining our provision for income taxes. During the ordinary course of
business, there are many transactions and calculations for which the ultimate
tax determination is uncertain. For example, our effective tax rates could be
adversely affected by earnings being lower than anticipated in countries where
we have lower statutory rates and higher than anticipated in countries where we
have higher statutory rates, by changes in foreign currency exchange rates or by
changes in the relevant tax, accounting and other laws, regulations, principles
and interpretations. As we operate in numerous taxing jurisdictions, the
application of tax laws can be subject to diverging and sometimes conflicting
interpretations by tax authorities of these jurisdictions. It is not uncommon
for taxing authorities in different countries to have conflicting views, for
instance, with respect to, among other things, the manner in which the arms
length standard is applied for transfer pricing purposes, or with respect to the
valuation of intellectual property. In addition, tax laws are dynamic and
subject to change as new laws are passed and new interpretations of the law are
issued or applied. In particular, there is uncertainty in relation to the
U.S. tax legislation in terms of the future corporate tax rate but also in terms
of the U.S. tax consequences of income derived from income related to
intellectual property earned overseas in low tax jurisdictions.
25
Our
existing corporate structure and intercompany arrangements have been implemented
in a manner we believe is in compliance with current prevailing tax laws.
However, the tax benefits which we intend to eventually derive could be
undermined if we are unable to adapt the manner in which we operate our business
and due to changing tax laws.
The enactment of legislation
implementing changes in the U.S. taxation of international business activities
or the adoption of other tax reform policies could materially impact our
financial condition and results of operations.
The current administration has made
public statements indicating that it has made international tax reform a
priority, and key members of the U.S. Congress have conducted hearings and
proposed new legislation. Recent changes to U.S. tax laws, including limitations
on the ability of taxpayers to claim and utilize foreign tax credits and the
deferral of certain tax deductions until earnings outside of the United States
are repatriated to the United States, as well as changes to U.S. tax laws that
may be enacted in the future, could impact the tax treatment of our foreign
earnings. Due to the expanding scale of our international business activities,
any changes in the U.S. taxation of such activities may increase our worldwide
effective tax rate and harm our financial condition and results of operations.
If our goodwill or intangible
assets become impaired, we may be required to record a significant charge to
earnings.
Under accounting principles
generally accepted in the United States, or GAAP, we review our intangible assets for
impairment when events or changes in circumstances indicate the carrying value
may not be recoverable. Goodwill is required to be tested for impairment at
least annually. Factors that may be considered include a change in circumstances
indicating that the carrying value of our goodwill or other intangible assets
may not be recoverable include declines in our stock price and market
capitalization or future cash flows projections. We recorded a significant
amount of goodwill related to our acquisition of Qype in the fourth quarter of
2012. A decline in our stock price, or any other adverse change in market
conditions, particularly if such change has the effect of changing one of our
critical assumptions or estimates, could result in a change to the estimation of
fair value that could result in an impairment charge to our goodwill and intangible assets. Any such material charges may have a material
negative impact on our financial and operating results.
Risks Related to Ownership of Our
Class A Common Stock
The dual class structure of our
common stock has the effect of concentrating voting control with those
stockholders who held our stock prior to our initial public offering, including
our founders, directors, executive officers and employees and their affiliates,
and limiting your ability to influence corporate matters.
Our Class B common stock has 10
votes per share, and our Class A common stock has one vote per share.
Stockholders who hold shares of Class B common stock, including our founders,
directors, executive officers and employees and their affiliates, together
beneficially own shares representing approximately 94.5% of the voting power of
our outstanding capital stock as of December 31, 2012. Consequently, the holders
of Class B common stock collectively will continue to be able to control all
matters submitted to our stockholders for approval even if their stock holdings
represent less than 50% of the outstanding shares of our common stock. Because
of the 10-to-1 voting ratio between our Class B and Class A common stock, the
holders of our Class B common stock collectively will continue to control a
majority of the combined voting power of our common stock even when the shares
of Class B common stock represent a small minority of all outstanding shares of
our Class A and Class B common stock. This concentrated control will limit your
ability to influence corporate matters for the foreseeable future, and, as a
result, the market price of our Class A common stock could be adversely
affected. Future transfers by holders of Class B common stock will generally
result in those shares converting to Class A common stock, which will have the
effect, over time, of increasing the relative voting power of those holders of
Class B common stock who retain their shares in the long term, which may include
existing founders, officers and directors and their affiliates.
26
Our share price has been and will
likely continue to be volatile.
The
trading price of our Class A common stock has been, and is likely to continue to
be, highly volatile and could be subject to wide fluctuations in response to
various factors, some of which are beyond our control. Since shares of our
common stock were sold in our initial public offering in March 2012 at a price
of $15.00 per share through February 15, 2013, our stocks daily closing price
has ranged from $15.22 to $28.89. In addition to the factors discussed in
this
Risk Factors
section and elsewhere in this Annual Report, factors that may cause
volatility in our share price include:
-
actual or anticipated fluctuations in our
financial condition and operating results;
-
changes in projected operating and financial
results;
-
actual or anticipated changes in our growth rate
relative to our competitors;
-
announcements of technological innovations or new
offerings by us or our competitors;
-
announcements by us or our competitors of
significant acquisitions, strategic partnerships, joint ventures or
capital-raising activities or commitments;
-
additions or departures of key
personnel;
-
issuance of research or reports by securities
analysts;
-
fluctuations in the valuation of companies
perceived by investors to be comparable to us;
-
sales of our Class A or Class B common
stock;
-
changes in laws or regulations applicable to our
solutions;
-
share price and volume fluctuations attributable
to inconsistent trading volume levels of our shares; and
-
general economic and market
conditions.
Furthermore, the stock markets
recently have experienced extreme price and volume fluctuations that have
affected and continue to affect the market prices of equity securities of many
companies. These fluctuations often have been unrelated or disproportionate to
the operating performance of those companies. These broad market and industry
fluctuations, as well as general economic, political and market conditions such
as recessions, interest rate changes or international currency fluctuations, may
negatively impact the market price of our Class A common stock. In the past,
companies that have experienced volatility in the market price of their stock
have been subject to securities class action litigation. We may be the target of
this type of litigation in the future. Securities litigation against us could
result in substantial costs and divert our managements attention from other
business concerns, which could harm our business.
We do not intend to pay dividends
for the foreseeable future, and as a result your ability to achieve a return on
your investment will depend on appreciation in the price of our Class A common
stock.
We have never declared or paid any
cash dividends on our common stock and do not intend to pay any cash dividends
in the foreseeable future. We anticipate that we will retain all of our future
earnings for use in the development of our business and for general corporate
purposes. Any determination to pay dividends in the future will be at the
discretion of our board of directors. Accordingly, investors must rely on sales
of their Class A common stock after price appreciation, which may never occur,
as the only way to realize any future gains on their investments.
27
Anti-takeover provisions in our
charter documents and under Delaware law could make an acquisition of us more
difficult, limit attempts by our stockholders to replace or remove our current
management and limit the market price of our Class A common
stock.
Provisions in our certificate of
incorporation and bylaws may have the effect of delaying or preventing a change
in control or changes in our management. Our amended and restated certificate of
incorporation and amended and restated bylaws include provisions
that:
-
authorize our board of directors to issue, without
further action by the stockholders, up to 10,000,000 shares of undesignated
preferred stock;
-
require that any action to be taken by our
stockholders be effected at a duly called annual or special meeting and not by
written consent;
-
specify that special meetings of our stockholders
can be called only by our board of directors, the Chair of our board of
directors, or our Chief Executive Officer;
-
establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting, including
proposed nominations of persons for election to our board of directors;
-
establish that our board of directors is divided
into three classes, with directors in each class serving three-year staggered
terms;
-
prohibit cumulative voting in the election of
directors;
-
provide that vacancies on our board of directors
may be filled only by a majority of directors then in office, even though less
than a quorum;
-
require the approval of our board of directors or
the holders of a supermajority of our outstanding shares of capital stock to
amend our bylaws and certain provisions of our certificate of incorporation;
and
-
reflect two classes of common stock, as discussed
above.
These
provisions may frustrate or prevent any attempts by our stockholders to replace
or remove our current management by making it more difficult for stockholders to
replace members of our board of directors, which is responsible for appointing
the members of our management. In addition, because we are incorporated in
Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware corporation from
engaging in any of a broad range of business combinations with any interested
stockholder for a period of three years following the date on which the
stockholder became an interested stockholder.
If securities or industry
analysts do not publish research or reports about our business, or publish
negative reports about our business, our share price and trading volume could
decline.
The trading market for our Class A
common stock, to some extent, depends on the research and reports that
securities or industry analysts publish about us or our business. We do not have
any control over these analysts. If one or more of the analysts who cover us
downgrade our shares or change their opinion of our shares, our share price
would likely decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which could cause our share price or trading volume to
decline.
Future sales of our Class A
common stock in the public market could cause our share price to
decline.
Sales of a substantial number of
shares of our Class A common stock in the public market, particularly sales by
our directors, officers and employees and significant stockholders, or the
perception that these sales might occur, could depress the market price of our
Class A common stock and could impair our ability to raise capital through the
sale of additional equity securities. We have a small public float relative to
the total number of shares of our Class A and Class B common stock that are
issued. As of December 31, 2012, we had 23,380,283 shares of Class A common
stock and 40,124,986 shares of Class B common stock outstanding. Although a
public market exists for our Class A common stock only, shares of Class B common
stock are generally convertible into an equivalent number of shares of Class A
common stock at the option of the holder or upon transfer (subject to certain
exceptions).
28
The requirements of being a
public company may strain our resources, divert managements attention and
affect our ability to attract and retain qualified board
members.
We are
subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley
Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange
and other applicable securities rules and regulations. Compliance with these
rules and regulations has increased and will continue to increase our legal and
financial compliance costs, make some activities more difficult, time-consuming
or costly, and increase demand on our systems and resources. The Sarbanes-Oxley
Act requires, among other things, that we maintain effective disclosure controls
and procedures and internal control over financial reporting. In order to
maintain and, if required, improve our disclosure controls and procedures and
internal control over financial reporting to meet this standard, significant
resources and management oversight may be required. As a result, managements
attention may be diverted from other business concerns, which could harm our
business and operating results. Although we have hired additional employees to
comply with these requirements, we may need to hire more employees in the
future, which will increase our costs and expenses.
In addition, changing laws,
regulations and standards relating to corporate governance and public disclosure
are creating uncertainty for public companies, increasing legal and financial
compliance costs and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations, in many cases
due to their lack of specificity, and, as a result, their application in
practice may evolve over time as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to
disclosure and governance practices. We intend to invest resources to comply
with evolving laws, regulations and standards, and this investment may result in
increased general and administrative expenses and a diversion of managements
time and attention from revenue-generating activities to compliance activities.
If our efforts to comply with new laws, regulations and standards differ from
the activities intended by regulatory or governing bodies due to ambiguities
related to practice, regulatory authorities may initiate legal proceedings
against us and our business may be harmed.
We also expect that being a public
company that is subject to these new rules and regulations will make it more
expensive for us to obtain director and officer liability insurance, and we may
be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These factors could also make it more difficult for us to
attract and retain qualified members of our board of directors and qualified
executive officers.
As a result of becoming a public
company, we will be obligated to develop and maintain proper and effective
internal controls over financial reporting. We may not complete our analysis of
our internal controls over financial reporting in a timely manner, or these
internal controls may not be determined to be effective, which may adversely
affect investor confidence in our company and, as a result, the value of our
Class A common stock.
We will be required, pursuant to
Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on,
among other things, the effectiveness of our internal control over financial
reporting for the fiscal year ending 2013. This assessment will need to include
disclosure of any material weaknesses identified by our management in our
internal control over financial reporting, as well as a statement that our
auditors have issued an attestation report on our managements assessment of our
internal controls. We are in the early stages of the costly and challenging
process of compiling the system and processing documentation necessary to
perform the evaluation needed to comply with Section 404. We may not be able to
complete our evaluation, testing and any required remediation in a timely
fashion. During the evaluation and testing process, if we identify one or more
material weaknesses in our internal control over financial reporting, we will be
unable to assert that our internal controls are effective. If we are unable to
assert that our internal control over financial reporting is effective, or if
our auditors are unable to express an opinion on the effectiveness of our
internal controls, we could lose investor confidence in the accuracy and
completeness of our financial reports, which would cause the price of our Class
A common stock to decline.