Can Yelp Shake This Problem?

One very large problem is staring Yelp (NYSE:YELP) in the face: advertising revenue.

While the review site reported third-quarter earnings Thursday that beat analysts’ estimates, the fourth-quarter guidance issued by the company did not. Amid lagging advertisement sales, Yelp forecast that the next quarter’s revenue would come in between $40 million and $40.5 million; the average analyst estimate compiled by Bloomberg was $40.8 million.

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After the company issued its guidance for the fourth quarter, shares fell close to 11 percent, the greatest drop in five months. Thursday’s plunge reversed the stock’s previous upward trend; since the company’s initial public offering in March, the stock had advanced 60 percent.

The company’s third-quarter earnings report, which revealed that sales rose 63 percent to $36.4 million last quarter, did little to halt the stock’s drop.

During Yelp’s earnings conference call, the company’s Chief Financial Officer, Robert Krolik , said that the revenue from display ads would be “flat-to-down” in the fourth quarter because of “execution challenges in that part of the business.”

Jefferies analyst Brian Fitzgerald lowered his price estimate on Yelp from $33 to $32 based on the company’s problems with advertising revenue . In his research note, Fitzgerald said, “The timing of the fix is still a hanging issue.”

Yelp has even greater problems with its mobile advertising. In the last quarter, the company’s mobile app generated no revenue. However, Chief Operating Officer Geoff Donaker said that the company will begin displaying advertisements on its mobile application in the current quarter.

While mobile advertising could potential be a long-term problem, another of the company’s problems, its slow expansion into smaller foreign markets, could be solved. Yelp announced last week that it had acquired Europe’s biggest local review site, Qype GmbH for $50 million. The Website is active in 13 countries, has more than 2 million reviews, and 15 million unique visitors per month, Yelp said on October 24.

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