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.
We have marked with an asterisk (*) those risks described below that
reflect substantive changes from the risks described in our Annual Report on
Form 10-K for the year ended December 31, 2012.
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:
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increase the number of users of our website and mobile app and the
number of reviews and other content on our platform;
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increase the revenue from advertisers
on our website and mobile app;
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continue to earn and preserve a
reputation for providing meaningful and reliable reviews of local
businesses;
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effectively monetize our mobile products
as usage continues to migrate toward mobile devices;
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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;
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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;
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-
successfully expand our business in new and existing markets, both
domestic and international;
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successfully develop and deploy new
features and products;
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effectively integrate businesses we
may acquire, including Qype and SeatMe;
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avoid interruptions or disruptions in
our service or slower than expected load times;
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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;
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hire, integrate and retain talented
sales and other personnel;
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effectively manage rapid growth in
our sales force, personnel and operations; and
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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 June 30, 2013, we had an accumulated deficit of approximately $66.1
million. Although our revenues have grown rapidly in the last several years,
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:
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sales
and marketing;
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product and feature
development;
-
our technology
infrastructure;
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domestic and international expansion
efforts;
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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 information from and links to our website are not displayed as prominently on search
engine result pages as those from competing products and services, 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 information from and links to our website are displayed on search engine result pages. The display, including
rankings, of unpaid search results 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 their displays or 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 our website is displayed 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.
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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 and six months ended June 30, 2013. 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.
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 43% of the
businesses that have been reviewed on our platform and approximately 60% of our
cumulative reviews through June 30, 2013. 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.
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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 operations.
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 comment publicly
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 and six months ended June 30, 2013, 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 43% of the
businesses that have been reviewed on our platform and approximately 60% of our
cumulative reviews through June 30, 2013, 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.
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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.
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
acquired Qype in October 2012 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:
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recruiting and retaining qualified, multi-lingual
employees, including sales personnel;
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integrating businesses we may acquire
internationally, including Qype;
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increased competition from local websites and
guides and potential preferences by local populations for local
providers;
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compliance with applicable foreign laws and
regulations, including different privacy, censorship and liability standards
and regulations and different intellectual property laws;
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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;
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our ability to achieve prominent display of 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;
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the enforceability of our intellectual property
rights;
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credit risk and higher levels of payment
fraud;
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compliance with anti-bribery laws, including but
not limited to compliance with the Foreign Corrupt Practices Act and the U.K.
Bribery Act;
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currency exchange rate
fluctuations;
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foreign exchange controls that might prevent us
from repatriating cash earned outside the United States;
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political and economic instability in some
countries;
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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.
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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.
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.
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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.
*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 (“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, if these guidelines, laws or regulations or their interpretation change or new legislation or
regulations are enacted, or if the third parties with whom we share user information fail to comply with such guidelines, laws,
regulations or their contractual obligations to us, 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. For example, the FTC recently revised its Children’s Online Privacy Protection Act rule,
which regulates the way children use and access the Internet, and updated its guidance on distinguishing paid search results and other
types of advertising from unpaid search results. As a result, we may be required to make changes or implement additional safeguards.
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.
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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.
*Our acquisitions of Qype and SeatMe create numerous risks and uncertainties that could adversely affect our operating results or
prevent us from realizing the expected benefits of the acquisitions.
In October 2012, we acquired Qype to accelerate our international expansion and in July 2013, we acquired SeatMe to enhance
the experience for our consumers and complement our existing partnerships. In order to realize any gains from these acquisitions, we
must successfully complete the integration of each acquired business, 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
acquisitions, 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;
-
managing the combined business effectively; and
-
integrating SeatMe in the manner and in the timeframe our management believes to be in our best interests while maintaining
relationships with our strategic partners.
It is possible that the integration processes 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.
The failure to integrate Qype and SeatMe successfully could adversely affect our ability to maintain relationships with customers
and employees, as well as strategic commercial partners, or to achieve the anticipated benefits of each 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 businesses. Even if we are able to integrate Qype and SeatMe 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 of each business, and these benefits may not be achieved within a reasonable period of time.
36
*Our growth depends in part on the success of our strategic relationships with third parties, and any failure to maintain these
relationships could harm our business.
We rely in part on relationships with various third parties to grow our business, including strategic partners and technology and
content providers. Identifying, negotiating and maintaining
relationships with third parties require significant time and resources, as does integrating their services and technologies onto our
platform. We may also have competing interests and obligations with respect to our partners, which may make it difficult to maintain,
grow or maximize the benefit of each partnership. In addition, we have had, and may in the future have, disagreements or disputes
with our partners about our respective contractual obligations, which could result in legal proceedings or negatively affect our brand
and reputation. It is also possible that these third parties may not be able to devote the resources we expect to the relationships or they
may terminate their relationships with us. If we are unsuccessful in establishing or maintaining our relationships with third parties, our
ability to grow our business could be impaired, and our operating results could suffer.
We may also acquire other companies or technologies, which could divert our management’s 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.
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 acquisitions of Qype in October 2012 and SeatMe in July
2013, 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) 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. In addition, Deutsche Telekom
filed suit against Qype in Germany regarding fees payable for directory data
that Qype and its predecessor purchased from Deutsche Telekom. The claim was
rejected in full by the German court, although Deutsche Telekom has appealed the
decision to the Higher Regional Court of Cologne, which referred the appeal to
the Higher Regional Court of Düsseldorf. The court heard the appeal in April
2013 and a decision is now expected in September 2013.
37
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 products contain
open source software, which may pose particular risks to our proprietary
software and solutions.
We use open source software in our products 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.
*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;
38
-
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 and
SeatMe;
-
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.
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 means 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.
39
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.
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.
40
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.
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 (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.
41
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.
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 effect 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.
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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 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 87% of the voting power of
our outstanding capital stock as of June 30, 2013. 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.
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*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
July 31, 2013, our Class A common stocks daily closing price has ranged from $15.22 to $42.13.
In addition to the factors discussed in this
Risk Factors
section and elsewhere in
this quarterly 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.
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;
44
-
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 June 30, 2013, we had 39,186,395 shares of Class A common stock
and 25,868,912 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).
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.
45
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.