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TMCNet:  YELP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

[February 27, 2013]

YELP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled "Risk Factors" included under Part I, Item 1A and elsewhere in this Annual Report. See "Special Note Regarding Forward-Looking Statements" in this Annual Report.



Overview Yelp connects people with great local businesses. Our users have contributed a total of approximately 36.0 million reviews of almost every type of local business, from restaurants, boutiques and salons to dentists, mechanics, plumbers and more. These reviews are written by people using Yelp to share their everyday local business experiences, giving voice to consumers and bringing "word of mouth" online. The information these reviews provide is valuable for consumers and businesses alike. Approximately 86.3 million unique visitors used our website, and our mobile application was used on approximately 9.2 million unique mobile devices, on a monthly average basis during the quarter ended December 31, 2012. Businesses of all sizes use our platform to engage with consumers at the critical moment when they are deciding where to spend their money. Our business revolves around three key constituencies: the contributors who write reviews, the consumers who read them and the local businesses that they describe.

As of December 31, 2012, we are active in 53 Yelp markets in the United States and 44 Yelp markets internationally. This footprint represents a small fraction of the potential domestic and international markets that we are currently targeting for expansion. Our domestic expansion plans include growth in our existing markets as well as expansion into new markets, many of which are smaller than our current markets, as we look to expand our breadth of coverage.

Internationally, as we are in the early stages of establishing our footprint, we are targeting a mix of both large and small markets. On October 23, 2012, we and Yelp Ireland Ltd., our wholly-owned subsidiary, entered into a share purchase agreement with Qype and its shareholders pursuant to which Yelp Ireland Ltd. acquired all the outstanding equity interests in Qype for €18.6 million (approximately $24.3 million at the time of closing) in cash and 968,919 shares of our Class A common stock with an estimated fair value of approximately $23.3 million. The transaction closed upon the execution of the share purchase agreement and Qype became our indirect wholly-owned subsidiary. We expect the addition of Qype to contribute approximately $6 million to our revenue and increase our operating expense by approximately $6 million in the year ending December 31, 2013. We believe the acquisition of Qype will accelerate the expansion of our international footprint as its largest markets - Germany and the United Kingdom - are key markets for us, and together we will have a substantially increased presence in these markets. We have not yet made any substantive effort to monetize the international markets we have developed organically and have not generated significant revenue from international markets to date.

We plan to continue investing in additional domestic and international markets as we seek to emulate our growth to date. We develop each market in the following stages: Identification. We select new markets based on a number of different city- or country-specific criteria, including but not limited to population size, local gross domestic product, pre-existing base of reviews on our platform, Internet and wireless penetration, proximity to existing markets, number of local businesses and local ad market growth rate.

Preparation and Launch. Before launching a market in any country, we license business listing information from third-party data providers and create individual pages for each business location in the entire country. We sometimes hire temporary local employees, called "scouts," to provide additional rich content, such as reviews, photos and hours of operation. At launch, consumers can read and write reviews about any business on our platform and contribute information about businesses that are not already listed. We have active Yelp markets in Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Poland, Singapore, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

36 -------------------------------------------------------------------------------- Growth. After launch, we focus on attracting contributors, consumers and local businesses to our platform. In each Yelp market, we hire a Community Manager, a local resident who helps increase awareness of our platform and who fosters a local community of contributors. The primary responsibilities of a Community Manager include: º planning and executing fun and engaging events for the community, such as parties, outings and activities at restaurants, museums, hotels and other local places of interest; º getting to know our users and helping them get to know one another as a way to foster an offline community experience that can be transferred online; º promoting Yelp, including guest appearances on local television and radio and at local events like concerts and street fairs; and º writing weekly e-mail newsletters to share information with the community about local businesses, events and activities.

Through these activities, we believe Community Managers help increase the frequency of use of our platform that drives a network effect, whereby contributed reviews expand the breadth and depth of our review base and this expansion draws an increasing number of consumers to access the content on our platform, thus inspiring new and existing contributors to create additional reviews that can be shared with this growing audience.

Scale. At scale, our platform reaches a critical mass of reviews, consumers and active local business accounts, and we begin an active sales effort to local businesses. Thereafter, our largest expense is related to sales efforts to attract local business advertising customers. In Yelp markets that have attained this level of development, we expect to achieve economies of scale and operating cost leverage.

Our success is primarily the result of significant investment in our communities, employees, content, brand and technology. As we continue to launch new markets, we believe that we will follow a similar pattern of investment preceding revenue growth. The table below summarizes the expansion of our business since inception: 2007 2008 2009 2010 2011 2012 Cumulative Yelp Markets(1) 14 20 27 49 71 97 New Yelp Markets(1) 8 6 7 22 22 26 Yelp Markets(1) San Diego Philadelphia Sacramento Raleigh-Durham Milwaukee Richmond (United States) DC Denver Honolulu Kansas City Pittsburgh Oklahoma City Austin Minneapolis St. Louis Las Vegas Tampa Bay Hampton Roads Atlanta Dallas Orlando San Antonio Louisville Birmingham Portland Miami Columbus Baltimore Madison Houston Detroit Indianapolis Memphis Albuquerque Phoenix Charlotte Hartford Jacksonville San Jose Cincinnati Buffalo Tucson Nashville New Orleans Cleveland Salt Lake City Providence Yelp Markets(1) London Dublin Amsterdam Antwerp (International) Toronto Leeds Halifax Brussels Vancouver Paris Edinburgh Brisbane Berlin Vienna Florence Glasgow Hamburg Lille Manchester Lyon Perth Calgary Madrid Seville Edmonton Munich Sydney Marseille Adelaide Montreal Copenhagen Rome Oslo Barcelona Ottawa Milan Stockholm Melbourne Valencia Helsinki Birmingham Singapore Zurich Metrics (in thousands): Reviews(2) 1,993 4,689 8,834 15,115 24,817 35,959 Unique Visitors(3) 5,717 15,736 26,077 39,356 65,796 86,308 Claimed Business Locations(4) NA 25 120 307 606 994 Active Local Business Accounts(5) - 4 7 11 24 40 37 -------------------------------------------------------------------------------- (1) A Yelp Market is defined as a city or region where we have hired a Community Manager. Cumulative Yelp Markets represents the cumulative number of Yelp Markets as of the end of each of the years in the period from 2007 through 2012.

(2) Represents the cumulative number of reviews submitted to Yelp since inception, as of the end of each of the years in the period from 2007 through 2012, including reviews that were then being filtered or that had been removed from our platform. We define a review as each individually written assessment submitted by a user who has registered by creating a public profile on our platform. For moreinformation, including information regarding filtered and removed reviews, see "-Key Metrics-Reviews." (3) Represents the average number of monthly unique visitors for the last quarter of each of the years in the period from 2007 through 2012. We define monthly unique visitors as the total number of unique visitors who have visited our website at least once in a given month, and we average the number of monthly unique visitors in each month of the three-month period to calculate average monthly uniquevisitors. For more information, see "-Key Metrics-Unique Visitors." (4) Represents the cumulative number of business locations that have been claimed on Yelp worldwide since 2008, as of the end of each of the years in the period from 2008 through 2012. For more information, see "-Key Metrics-Claimed Local Business Locations." (5) Represents the number of active local business accounts from which we recognized revenue during the last quarter of each of the years in the period from 2007 through 2012. For more information, see "-Key Metrics-Active Local Business Accounts." We provide local businesses both free and paid services to connect with our large audience of consumers. Our free services include a business owner's account that allows local merchants to update business listing information and respond to reviews in real time. We generate revenue from our paid services to local businesses, which include enhanced business listings, search advertising solutions, Yelp Deals and Gift Certificates, as well as the sale of brand advertising. Many of our active local business accounts pay us on a monthly basis, primarily by credit card. To date, almost all of our revenue and a majority of our expenses have been denominated in U.S. dollars. As we expand internationally, however, we expect to generate an increasing percentage of revenue, and incur an increasing percentage of our expenses, in foreign currencies.

While our core local online advertising business in the United States has a significant and growing base of revenue, we have invested in several initiatives to enhance our future growth opportunities. We first launched internationally in Canada in 2008 and have continued to expand across Canada, Europe, Australia and other regions to reach 44 Yelp markets internationally as of December 31, 2012.

In the third quarter of 2012, we began selling our advertising products internationally. Although our revenue from international markets only represented approximately 2.2% of our consolidated revenue in the year ended December 31, 2012, we opened a sales office in London in the third quarter of 2012 and plan to continue to grow our sales force, including our international sales force, so we can reach more businesses internationally. In the fourth quarter of 2012, we expanded our European sales operations through our acquisition of Qype and its established European sales force. In addition, we introduced our first mobile app in 2008, and, during the quarter ended December 31, 2012, our mobile app was used on approximately 9.2 million unique mobile devices on a monthly average basis. We currently deliver advertising on both our mobile website and mobile app, and plan to continue to innovate and introduce enhanced mobile solutions as mobile usage increases.

38 -------------------------------------------------------------------------------- Each day, millions of consumers come to our platform to connect with great local businesses. In the year ended December 31, 2012, our net revenue was $137.6 million, which represented an increase of 65% from the year ended December 31, 2011, and we generated a net loss of $19.1 million and adjusted EBITDA of $4.6 million. In the year ended December 31, 2011, our net revenue was $83.3 million, which represented an increase of 74% from the year ended December 31, 2010, and we generated a net loss of $16.7 million and an adjusted EBITDA loss of $1.1 million.

Our overall philosophy is to invest for long-term growth. Accordingly, we do not expect to be profitable in the near term as we anticipate that our operating expenses will increase significantly in the foreseeable future. Specifically, we have made significant investments in our business and expect to continue investing in marketing and product development to improve both the consumer and local business experience on our online and mobile platforms. In addition, we expect to continue to grow our sales organization both domestically and abroad.

We believe that our entry into new markets and expansion in existing markets provides our largest opportunity for future growth. Accordingly, we have determined to forgo the achievement of near-term profitability in return for long-term growth.

We also expect to invest between $6 million and $8 million annually for the next two years in capital expenditures as we continue to grow our business, the majority of which we expect to use to upgrade our technology and infrastructure to improve the ability of our platform to handle the projected increase in usage and enable the release of new features and solutions. In addition to the expenditures noted above, we also expect to invest approximately $7 million in capital expenditures in 2013 for the build out of our San Francisco headquarters as we move to a new facility in October 2013.

Factors Affecting Our Performance Ability to Attract and Retain Local Businesses. Our revenue growth is driven by our ability to acquire and retain local business advertisers that purchase our advertising solutions. Our largest sales and marketing expenses consist of the costs associated with acquiring local business advertisers. We spent a majority of our $85.9 million sales and marketing expense for 2012 on initiatives relating to local business advertiser acquisition and expect to continue to expend significant amounts to attract additional local business advertisers. Failure to effectively attract and retain paying local business advertisers would adversely affect our revenue and operating results.

New Market Development. Our long-term growth depends on our ability to successfully develop new and existing domestic and international markets. We expanded into 26 new markets during 2012, increasing our total market reach to 97 domestic and international markets. It can take years for our platform to achieve a critical mass of consumers and reviews to drive meaningful traction of our advertising solutions and begin to generate revenue in a particular market.

As a result, we may continue to generate losses in new markets for an extended period, and different markets can be expected to grow at different rates and generate varying levels of revenue. As with most businesses, we expect our revenue growth to slow as our business matures over time. Local advertising revenue for our oldest cohort of U.S. markets, which launched in 2005-2006, grew at a 59% year-over-year rate for the year ended December 31, 2012, compared to the year ended December 31, 2011. This rate is lower than the growth rate of local advertising revenue for the 2007-2008 cohort, which grew at 86% in the same period, and the 2009-2010 cohort, which grew at 177% in the same period. We believe this is indicative of continued revenue growth, but slowing revenue growth for more mature markets.

We opened a sales office in London in the third quarter of 2012 and plan to continue to grow our sales force, including our international sales force, so we can reach more businesses internationally. In the fourth quarter of 2012, we expanded our European sales operations through our acquisition of Qype and its established European sales force.

Increasing Mobile Usage. 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. The increasing use of our platform on mobile devices may also affect our performance, particularly if mobile use substitutes for use of our website on personal computers. For example, we believe use of our mobile app and mobile website are complementary to the use of our website; however, if mobile device usage is substituting for, rather than incremental to, usage of our website on personal computers and our mobile advertising solutions prove ineffective, this trend could adversely impact our business.

39 -------------------------------------------------------------------------------- Investment in Growth. We have aggressively invested in the growth of our platform and intend to continue to invest to support this growth as we expand our platform, grow our contributor and local business base, hire additional employees and further develop our technology. We also plan to invest in product development as we continue to innovate and introduce new products for our website and mobile app, explore new platforms and distribution channels and grow and develop advertising and e-commerce products and partner arrangements that provide incremental value to our advertisers and business partners to encourage them to increase their advertising budgets allocated towards our platform. We expect that these investments will increase our operating expenses, and that any increase in revenue resulting from product innovations will likely trail the increase in expenses.

User Engagement. Changes in user engagement, as reflected in consumer traffic and the quality and quantity of contributed content, will also affect our revenue and financial performance. As more people use our platform, more of them write reviews, add photos and tips. Each review, photo or tip that a user contributes helps expand the breadth and depth of the content on our platform, drawing in more consumers and more prospective contributors. This virtuous cycle, which increases consumer traffic and content, improves our value proposition to local businesses as they seek low-cost, easy-to-use and effective advertising solutions to target a large number of intent-driven consumers.

Accordingly, increased user engagement will enhance the usefulness of our platform for users and local businesses alike, benefiting our business in the long term. If user engagement decreases and traffic to our website and on our mobile app decline as a result, our advertisers may stop or reduce the amount of advertising on our platform and our business could be harmed.

Acquisitions. As part of our business strategy, we may determine to expand our product offerings and grow our business through the acquisition of complementary businesses or technologies. For example, in October 2012, we acquired Qype to accelerate our international expansion. Our acquisitions will affect our future financial results due to factors such as the amortization of acquired intangible assets and may also result in potential charges such as restructuring costs or impairment expense.

Impact of Economic Conditions on Local Businesses. We generate a significant portion of revenue from local businesses advertising on Yelp. Many local businesses have limited financial resources, making them more vulnerable to weak economic conditions. A worsening economic outlook would likely cause businesses to decrease investments in advertising, which would adversely affect our revenue.

How We Generate Revenue We generate revenue from local advertising, brand advertising and other services, including Yelp Deals, Gift Certificates and partner arrangements. The following table provides a breakdown of our net revenue.

Year Ended December 31, 2012 2011 2010 (dollars in thousands) Net revenue by product: Local advertising $ 109,159 $ 58,473 $ 33,759 Brand advertising 20,579 17,686 12,046 Other services 7,829 7,126 1,926 Total $ 137,567 $ 83,285 $ 47,731 Percentage of total net revenue by product: Local advertising 79 % 70 % 71 % Brand advertising 15 21 25 Other services 6 9 4 Total 100 % 100 % 100 % 40 -------------------------------------------------------------------------------- Local Advertising. We generate revenue from local advertising programs, including enhanced profile pages and performance and impression-based advertising in search results and elsewhere on our website and our mobile app.

Brand Advertising. We generate revenue from brand advertising through the sale of display advertisements (both graphic and text) on our website, including advertisements from leading national brands in the automobile, financial services, logistics, consumer goods and health and fitness industries.

Other Services. We generate other revenue through the sale of Yelp Deals and Gift Certificates, monetization of remnant advertising inventory through third-party ad networks and various partner arrangements related to reservations. Yelp Deals allow merchants to promote themselves and offer discounted goods and services on a real-time basis to consumers directly on our website and mobile app. We earn a fee on Yelp Deals for acting as an agent in these transactions, which we record on a net basis and include in revenue upon a consumer's purchase of the deal. Gift Certificates allow merchants to sell full-priced gift certificates directly to customers through their business profile page. We earn a fee based on the amount of the Gift Certificate sold, which we record on a net basis and include in revenue upon a consumer's purchase of the Gift Certificate. We also generate a small portion of our revenue through revenue-sharing arrangements with partner companies. Currently, our revenue-sharing partner arrangements provide for the ability for consumers to make reservations on OpenTable and Orbitz through Yelp.

Key Metrics We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.

Reviews. Number of reviews represents the cumulative number of reviews submitted to Yelp since inception, as of the period end, including reviews that were then being filtered or that had been removed from our platform. In addition to the text of the review, each review includes a rating of one to five stars.

We include filtered and removed reviews because all of them are either currently accessible on our platform or were accessible at some point in time, providing information that may be useful for users to evaluate businesses and individual reviewers. Because our filtering technology continually reassesses which reviews to filter based on new information, the "filtered" or "unfiltered" status of reviews may change over time. Reviews that are being filtered or have been removed do not factor into a business's overall star rating. By clicking a link on a reviewed business's page on our website, users can access the filtered reviews for the business, as well as the star rating and other information about reviews that we removed for violation of our terms of service. As of December 31, 2012, approximately 33.3 million reviews were available on business profile pages, including approximately 8.1 million reviews that were being filtered, after accounting for the approximately 2.7 million reviews that had been removed from our platform, either by us for violation of our terms of service or by the users who contributed them.

From December 31, 2011 to December 31, 2012, the cumulative number of reviews (including filtered and removed reviews) contributed to Yelp increased by 45% from approximately 24.8 million to 36.0 million, and from December 31, 2010 to December 31, 2011, the cumulative number of reviews (including filtered and removed reviews) contributed to Yelp increased by 64% from approximately 15.1 million to 24.8 million. This increase in reviews is a key driver of our platform's value proposition to consumers seeking information on local business and to local businesses seeking to engage consumers. Growth in reviews also provides us with the benefit of a network effect that attracts more consumers, contributors and local businesses. As we expand internationally, growth in reviews will depend, in part, on our ability to include additional languages on our website and mobile app.

Unique Visitors. Unique visitors represent the average number of monthly unique visitors over a given three-month period. We define monthly unique visitors as the total number of unique visitors who have visited our website at least once in a given month, and we average the number of monthly unique visitors in each month of a given three-month period to calculate average monthly unique visitors. We track unique visitors based on the number of visitors with unique cookies who have visited our website using either a computer or mobile browser, as measured by Google Analytics, a product that provides digital marketing intelligence. Unique visitors do not include visitors who access our platform through our mobile app. For the quarter ended December 31, 2012, our mobile app was used on approximately 9.2 million unique mobile devices on a monthly average basis. Because the number of unique visitors is based on visitors with unique cookies, an individual who accesses our website from multiple devices with different cookies will be counted as multiple unique visitors, and multiple individuals who access our website from a shared device with a single cookie will be counted as a single unique visitor.

41 -------------------------------------------------------------------------------- From the quarter ended December 31, 2011 to the same period of 2012, average monthly unique visitors increased by 31% from approximately 65.8 million to 86.3 million, and from the quarter ended December 31, 2010 to the same period of 2011, average monthly unique visitors to our website increased by 67% from approximately 39.4 million to 65.8 million, reflecting an increase in brand awareness and our domestic and international expansion. We view unique visitors as a key indicator of our brand awareness among consumers and whether we are providing consumers with useful products and features, thereby increasing their usage of our platform. We believe that a higher level of usage may contribute to an increase in sales of our advertising solutions, as businesses will have access to a larger potential customer base.

Claimed Local Business Locations. The number of claimed local business locations represents the cumulative number of business locations that have been claimed on Yelp worldwide since 2008, as of a given date. We define a claimed local business location as each business address for which a business representative visits our website and claims the free business listing page for the business located at that address.

From December 31, 2011 to December 31, 2012, the number of claimed local business locations increased by 64% from approximately 606,000 to 994,000, and from December 31, 2010 to December 31, 2011, the number of claimed local business locations increased by 97% from approximately 307,000 to 606,000. We view the number of claimed local business locations as an indicator of an increased brand awareness among local businesses and an opportunity to introduce those local businesses to our advertising solutions.

Active Local Business Accounts. The number of active local business accounts represents the number of active local business accounts from which we recognized revenue in a given three-month period. We treat business accounts that have the same payment and/or user information as a single business account.

From the quarter ended December 31, 2011 to the quarter ended December 31, 2012, the number of active local business accounts increased by 68% from approximately 23,700 to 39,800, and from the quarter ended December 31, 2010 to the quarter ended December 31, 2011, the number of active local business accounts increased by 109% from approximately 11,300 to 23,700. Of the approximately 39,800 total active local business accounts for the quarter ended December 31, 2012, approximately 28,600, or approximately 72%, were existing advertisers from which we recognized local advertising revenue in the immediately preceding 12-month period, and approximately 11,200, or approximately 28%, were advertisers from which we did not recognize any local advertising revenue in that immediately preceding 12-month period. We view the number of active local business accounts as an indicator of the health of our business, our brand awareness and the benefit that a business ascribes to the consumers coming to our website or using our mobile app, as well as our ability to grow our market share. It also provides us with a measure of how productive our sales force is in engaging new active local business accounts.

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted to exclude: provision (benefit) for income taxes, other income (expense), net, interest income, depreciation and amortization, stock-based compensation, restructuring and integration costs and our contribution to The Yelp Foundation. We believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our operating results in the same manner as our management and board of directors.

This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial information should consider the types of events and transactions for which adjustments have been made. For more information about adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss), see "Selected Financial Data-Non-GAAP Financial Measures-Adjusted EBITDA." 42 --------------------------------------------------------------------------------Cost of Revenue and Expenses Cost of Revenue. Our cost of revenue consists primarily of credit card processing fees, web hosting, Internet services costs and salaries, benefits and stock-based compensation for our infrastructure teams related to operating our website, as well as creative design for brand advertising, video production expenses and allocated facilities costs.

Sales and Marketing. Our sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel expense and incentive compensation for our sales and marketing employees. In addition, sales and marketing expenses include business acquisition marketing, community management, branding and advertising costs, as well as allocated facilities and other supporting overhead costs. We spend almost no sales and marketing expenses to acquire traffic to our website or mobile app. Our Community Managers are responsible for growing and fostering local communities, and coordinating events to raise awareness of our brand. We expect our community management costs to increase as we continue to expand to new markets and within existing markets. We expect our sales and marketing expenses to increase both domestically and internationally as we expand our domestic and international footprint, increase the number of active local business accounts and continue to build our brand.

The substantial majority of these expenses will be related to hiring community managers and an international sales force. We expect sales and marketing expenses to increase and to be our largest expense for the foreseeable future.

Product Development. Our product development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product management and information technology personnel. In addition, product development expenses include outside services and consulting, allocated facilities and other supporting overhead costs. We believe that continued investment in features, software development tools and code modification is important to attaining our strategic objectives, and, as a result, we expect product development expense to increase for the foreseeable future.

General and Administrative. Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, user operations, legal, human resources and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, and facilities and other supporting overhead costs not allocated to other departments. We expect our general and administrative expenses to increase for the foreseeable future as we continue to expand our business and incur additional expenses associated with being a publicly traded company.

Contribution to The Yelp Foundation. In November 2011, our board of directors approved the establishment of The Yelp Foundation, a non-profit organization designed to support consumers and businesses in the communities in which we operate. Contributions made to The Yelp Foundation consist of the issuance and contribution of 520,000 shares of our common stock in the form of a charitable contribution to The Yelp Foundation during 2011. The Yelp Foundation sold 50,000 shares in our initial public offering, and currently holds 470,000 shares of Class B common stock, representing less than 1% of our outstanding capital stock. We did not make any contributions in 2012 and we do not expect to make future contributions to The Yelp Foundation.

Depreciation and Amortization. Depreciation and amortization expenses primarily consist of depreciation on computer equipment, software, leasehold improvements, capitalized website and internal software development costs and amortization of purchased intangibles. We expect depreciation and amortization expenses to increase for the foreseeable future as we continue to expand our technology infrastructure.

Other Income (Expense), Net. Other income, net consists primarily of the interest income earned on our cash and cash equivalents and foreign exchange gains and losses.

Provision for Income Taxes. Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carryforwards.

43 --------------------------------------------------------------------------------Results of Operations The following tables set forth our results of operations for the periods presented as a percentage of net revenue for those periods (certain items may not foot due to rounding). The period-to-period comparison of financial results is not necessarily indicative of future results.

Year Ended December 31, 2012 2011 2010 (as a percentage of net revenue) Consolidated Statements of Operations Data: Net revenue by product Local advertising 79 % 70 % 71 % Brand advertising 15 21 25 Other services 6 9 4 Total net revenue 100 % 100 % 100 % Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below) 7 % 7 % 7 % Sales and marketing 62 66 71 Product development 15 14 14 General and administrative 23 21 23 Depreciation and amortization 5 5 5 Restructuring and Integration costs 1 - - Contribution to The Yelp Foundation - 7 - Total costs and expenses 113 120 120 Loss from operations (14 ) (20 ) (20 ) Other income (expense), net - - - Loss before income taxes (14 ) (20 ) (20 ) Provision for income taxes - - - Net loss (14 )% (20 )% (20 )% Years Ended December 31, 2012, 2011 and 2010 Net Revenue 2011 to 2010 to 2012 % 2011 % Year Ended December 31, Change Change 2012 2011 2010 (dollars in thousands) Net revenue by product: Local advertising $ 109,159 $ 58,473 $ 33,759 87 % 73 % Brand advertising 20,579 17,686 12,046 16 47 Other services 7,829 7,126 1,926 10 270 Total $ 137,567 $ 83,285 $ 47,731 65 % 74 % During 2010, 2011 and 2012, we focused on revenue growth related to our local advertiser customer base as well as the development of relationships with brand advertising agencies. Additionally, during the second half of 2010, we began selling Yelp Deals through our platform, and in the second half of 2012, we began selling Gift Certificates through our platform.

2012 Compared to 2011. Total net revenue increased $54.3 million, or 65%, from 2011 to 2012. Our local advertising revenue increased by $50.7 million, or 87%, primarily due to a significant increase in the number of customers purchasing local advertising plans as we expanded our sales force to reach more prospective local businesses, as well as an increase in average sales per customer. In 2012, the number of customers purchasing local advertising plans increased 64% from 2011. Our brand advertising revenue also increased by $2.9 million, or 16%, due primarily to an increase in brand advertisers of 19% year over year. In addition, our other services revenue increased $0.7 million or 10%, from 2011 to 2012, primarily due to additional remnant advertising inventory and from increases in revenue from existing partnership arrangements related to online reservations, partially offset by not selling Yelp Deals via email in 2012.

44 -------------------------------------------------------------------------------- 2011 Compared to 2010. Total net revenue increased $35.6 million, or 74%, in the year ended December 31, 2011, compared to the year ended December 31, 2010.

Our local advertising revenue increased $24.7 million, or 73%, primarily due to a significant increase in the number of customers purchasing local advertising plans as we expanded our sales force to reach more prospective local businesses.

Our brand advertising revenue increased $5.7 million, or 47%, primarily due to an increase in the average spend per brand advertiser driven primarily by increased advertising impressions. In addition, our other services revenue increased $5.2 million, or 270%, primarily due to an increase in revenue from the sale of Yelp Deals and remnant advertising inventory and from added partnership arrangements.

Cost of Revenue 2011 to 2010 to 2012 % 2011 % Year Ended December 31, Change Change 2012 2011 2010 (dollars in thousands) Cost of revenue $ 9,928 $ 5,931 $ 3,137 67 % 89 % Percentage of net revenue 7 % 7 % 7 % 2012 Compared to 2011. In the year ended December 31, 2012, cost of revenue increased $4.0 million, or 67%, compared to the year ended December 31, 2011.

This increase was primarily attributable to an increase of $1.9 million in outside hosting and Internet service fees, which are necessary to support the increase in visitors and transactions completed on our website, and an increase of $0.7 million in merchant fees related to credit card transactions for local advertising. We incurred an increase in video hosting fees related to slide shows on our website for $0.6 million. We incurred an increase of $0.4 million in expenses related to creative design for brand advertising customers. Lastly, we added personnel to support our website infrastructure resulting in an increase of $0.3 million.

2011 Compared to 2010. In the year ended December 31, 2011, cost of revenue increased $2.8 million, or 89%, compared to the year ended December 31, 2010.

This increase was primarily attributable to an increase of $1.1 million in expenses related to creative design for brand advertising customers. In addition, outside hosting and Internet service fees, which are necessary to support the increase in visitors and transactions completed on our website, increased $0.7 million. Merchant fees related to credit card transactions for local advertising also increased $0.7 million, and we added personnel to support our website infrastructure resulting in an increase of $0.3 million.

Sales and Marketing 2011 to 2010 to 2012 % 2011% Year Ended December 31, Change Change 2012 2011 2010 (dollars in thousands) Sales and marketing $ 85,915 $ 54,539 $ 33,919 58 % 61 % Percentage of net revenue 62 % 66 % 71 % 2012 Compared to 2011. In the year ended December 31, 2012, sales and marketing expenses increased $31.4 million, or 58%, compared to the year ended December 31, 2011. The increase was primarily attributable to an increase in headcount and related expenses of $23.3 million, including an increase in stock-based compensation of $3.3 million, as we expanded our sales organization, including our international sales organization, to take advantage of the market opportunity created by increased recognition of the value of our platform and increased use of our free online business accounts. As a result of our increase in net revenue, our commission expenses also increased $3.5 million. In addition, we experienced an increase in facilities and related allocations of $5.0 million and domestic and international marketing and advertising costs of $0.4 million. For the year ended December 31, 2012, we spent $13.2 million related to our international sales and marketing operations compared to $7.0 million for the year ended December 31, 2011.

45 -------------------------------------------------------------------------------- 2011 Compared to 2010 In the year ended December 31, 2011, sales and marketing expenses increased $20.6 million, or 61%, compared to the year ended December 31, 2010. The increase was primarily attributable to an increase in headcount and related expenses of $15.1 million, including an increase in stock-based compensation of $0.9 million, as we expanded our sales organization to take advantage of the market opportunity created by increased recognition of the value of our platform and increased use of our free online business accounts. As a result of our increase in net revenue, our commission expenses also increased $2.4 million. In addition, we experienced an increase in facilities and related allocations of $1.3 million and domestic and international marketing and advertising costs of $1.4 million.

Product Development 2011 to 2010 to 2012 % 2011 % Year Ended December 31, Change Change 2012 2011 2010 (dollars in thousands) Product development $ 20,473 $ 11,586 $ 6,560 77 % 77 % Percentage of net revenue 15 % 14 % 14 % 2012 Compared to 2011. In the year ended December 31, 2012, product development expenses increased $8.9 million, or 77%, compared to the year ended December 31, 2011. The increase was primarily attributable to an increase in headcount and related expenses of $7.7 million, including an increase in stock-based compensation of $1.0 million, as we continued to invest in adding features and functionality to our website and mobile app. In addition, we experienced an increase in facilities and related allocations of $0.6 million as a result of the increase in headcount. Lastly, we incurred an increase in consulting and outside services of $0.5 million for investing in systems and support for the growth of the business.

2011 Compared to 2010. In the year ended December 31, 2011, product development expenses increased $5.0 million, or 77%, compared to the year ended December 31, 2010. The increase was primarily attributable to an increase in headcount and related expenses of $4.8 million, including an increase in stock-based compensation of $0.5 million, as we continued to invest in adding features and functionality to our website and mobile app. In addition, we experienced an increase in facilities and related allocations of $0.2 million.

General and Administrative 2011 to 2010 to 2012 % 2011 % Year Ended December 31, Change Change 2012 2011 2010 (dollars in thousands)General and administrative $ 31,531 $ 17,234 $ 11,287 83 % 53 % Percentage of net revenue 23 % 21 % 23 % 2012 Compared to 2011. In the year ended December 31, 2012, general and administrative expenses increased $14.3 million, or 83%, compared to the year ended December 31, 2011. The increase was primarily attributable to an increase in headcount and related expenses of $9.2 million as we continued to invest in key accounting, finance and management positions within the organization to support the growth of the Company and greater compliance requirements associated with being a publicly traded company, including an increase in stock-based compensation expense of $5.6 million related primarily to the acceleration of vesting of stock options held by two executives in connection with the completion of our initial public offering, or IPO. Additionally, we invested in the growth of the business through the use of outside consultants, which contributed to the increase by $1.7 million, had an increase in bad debt expense of $1.3 million, an increase in legal expense of $0.7 million and an increase in facilities and related allocations of $0.6 million.

46 -------------------------------------------------------------------------------- 2011 Compared to 2010. In the year ended December 31, 2011, general and administrative expenses increased $5.9 million, or 53%, compared to the year ended December 31, 2010. The increase was primarily attributable to an increase in headcount and related expenses of $5.5 million, including an increase in stock-based compensation expense of $2.0 million related primarily to refresh grants, as we continued to invest in key accounting, finance and management positions within the organization. Additionally, we invested in our systems and support for the growth of the business through the use of outside consultants, which contributed to the increase by $1.6 million. The amount of the increase was partially offset by the accrual of a $1.3 million legal settlement recorded in the quarter ended March 31, 2010.

Depreciation and Amortization 2011 to 2010 to 2012 % 2011 % Year Ended December 31, Change Change 2012 2011 2010 (dollars in thousands)Depreciation and amortization $ 7,223 $ 4,238 $ 2,334 70 % 82 % Percentage of net revenue 5 % 5 % 5 % 2012 Compared to 2011. In the year ended December 31, 2012, depreciation and amortization expense increased $3.0 million, or 70%, compared to the year ended December 31, 2011. The increase was primarily the result of our investments in expanding our technology infrastructure and capital assets. Our technology infrastructure costs have increased in order to support the growth in new products and features for the desktop and mobile applications as well to support the increased demand on our website due to continued growth in user traffic.

Depreciation and amortization related to our fixed assets and capitalized website and internal use software development costs increased $1.5 million and $0.8 million, respectively. Additionally, amortization related to our intangibles increased by $0.3 million primarily due to the acquired intangibles from the Qype acquisition.

2011 Compared to 2010. In the year ended December 31, 2011, depreciation and amortization expense increased $1.9 million, or 82%, compared to the year ended December 31, 2010. The increase was primarily the result of our investments in expanding our technology infrastructure and capital assets to support our increase in headcount across the organization. Depreciation and amortization related to our fixed assets and capitalized website and internal use software development costs increased $1.0 million and $0.4 million, respectively.

Restructuring and Integration Costs Year Ended December 31, 2012 2011 2010 (in thousands) Restructuring and integration costs $ 1,262 $ - $ - In the year ended December 31, 2012, following the acquisition of Qype, we announced our plan to reduce the size of the Qype workforce and to terminate several of Qype's leases. These actions were made in order to reduce our cost structure, enhance operating efficiencies and strengthen our business to achieve long-term profitable growth. As a result of this plan, we incurred restructuring charges during the fourth quarter of 2012 of $1.3 million. We expect that activities under this restructuring plan will be substantially complete by the end of the second quarter of 2013. Additional expense related to this restructuring plan to be received in the future is expected to be immaterial.

47 --------------------------------------------------------------------------------Contribution to The Yelp Foundation Year Ended December 31, 2012 2011 2010 (in thousands) Contribution to The Yelp Foundation $ - $ 5,928 $ - In the year ended December 31, 2011, we issued 520,000 shares of common stock to The Yelp Foundation as a charitable contribution. We recorded an expense in the amount of $5.9 million for the contribution based on the fair value of the common stock on the date the shares were issued to The Yelp Foundation. There were no contributions to The Yelp Foundation in 2010 or 2012.

Other Income (Expense), Net Year Ended December 31, 2012 2011 2010 (in thousands) Interest income $ 51 $ 13 $ 30 Transaction gains (losses) on foreign exchange (259 ) (393 ) 9 Other non-operating loss, net (18 ) (15 ) (24 ) Total other income (expense), net $ (226 ) $ (395 ) $ 15 2012 Compared to 2011. In the year ended December 31, 2012, other income (expense), net increased $0.2 million compared to the year ended December 31, 2011. In 2012, the transaction losses on foreign exchange were largely driven by unfavorable changes in the exchange rate between the Euro and the British pound sterling. In 2011, transaction losses on foreign exchange were driven by unfavorable changes in the exchange rates between the Euro and the U.S. dollar.

2011 Compared to 2010. In the year ended December 31, 2011, other income (expense), net decreased $0.4 million compared to the year ended December 31, 2010. The decrease was largely driven by an unfavorable change in foreign currency exchange rates, primarily the Euro, which contributed to transaction losses on foreign exchange in the year ended December 31, 2011 compared to a gain in 2010.

Provision for Income Taxes Year Ended December 31, 2012 2011 2010 (in thousands) Provision for income taxes $ 122 $ 102 $ 75 2012 Compared to 2011. In the year ended December 31, 2012, income tax expense increased $20,000 because of taxes due in foreign jurisdictions 2011 Compared to 2010. In the year ended December 31, 2011, income tax expense increased $27,000 because of taxes due in foreign jurisdictions.

Quarterly Results of Operations and Other Data The following tables set forth our unaudited quarterly consolidated statements of operations data and our consolidated statements of operations data as a percentage of net revenue for each of the eight quarters in the period ended December 31, 2012. We also present other financial and operational data and a reconciliation of net loss to adjusted EBITDA. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements included in this Annual Report. In the opinion of management, the quarterly financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report. The results of historical periods are not necessarily indicative of the results of operations for any future period.

48 -------------------------------------------------------------------------------- Quarter Ended Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2012 2012 2012 2012 2011 2011 2011 2011 (dollars in thousands, except per share data)Consolidated Statements of Operations Data: Net revenue by product Local advertising $ 33,945 $ 28,485 $ 25,255 $ 21,473 $ 18,148 $ 15,746 $ 13,357 $ 11,222 Brand advertising 4,997 5,886 5,703 3,994 5,033 4,599 4,471 3,583 Other services 2,215 2,000 1,695 1,918 1,724 1,957 1,750 1,695 Total net revenue $ 41,157 $ 36,371 $ 32,653 $ 27,385 $ 24,905 $ 22,302 $ 19,578 $ 16,500 Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below)(1) 3,003 2,501 2,298 2,126 1,833 1,537 1,285 1,276 Sales and marketing(1) 25,511 21,302 20,333 18,770 16,024 14,897 12,347 11,271 Product development(1) 6,244 5,753 4,336 4,140 3,162 3,444 2,661 2,319 General and administrative(1)(2) 7,852 6,987 5,963 10,729 5,267 4,766 3,584 3,617 Depreciation and amortization 2,421 1,780 1,661 1,361 1,448 1,047 924 819 Restructuring and Integration costs 1,262 - - - - - - - Contribution to The Yelp Foundation - - - - 5,928 - - - Total costs and expenses 46,293 38,323 34,591 37,126 33,662 25,691 20,801 19,302 Loss from operations (5,136 ) (1,952 ) (1,938 ) (9,741 ) (8,757 ) (3,389 ) (1,223 ) (2,802 ) Other income (expense), net (203 ) (14 ) 22 (30 ) (252 ) (326 ) 75 108 Loss before income taxes (5,339 ) (1,966 ) (1,916 ) (9,771 ) (9,009 ) (3,715 ) (1,148 ) (2,694 ) Provision for income taxes 20 (45 ) (66 ) (31 ) (37 ) (36 ) (17 ) (12 ) Net loss (5,319 ) (2,011) (1,982 ) (9,802 ) (9,046 ) (3,751 ) (1,165 ) (2,706 ) Accretion of preferred stock - - - (31 ) (48 ) (47 ) (47 ) (47 ) Net loss attributable to common stockholders $ (5,319 ) $ (2,011 ) $ (1,982 ) $ (9,833 ) $ (9,094 ) $ (3,798 ) $ (1,212 ) $ (2,753 ) Net loss per share attributable to common stockholders: Basic $ (0.08 ) $ (0.03 ) $ (0.03 ) $ (0.31 ) $ (0.56 ) $ (0.24 ) $ (0.08 ) $ (0.19 ) Diluted $ (0.08 ) $ (0.03 ) $ (0.03 ) $ (0.31 ) $ (0.56 ) $ (0.24 ) $ (0.08 ) $ (0.19 ) Weighted-average shares used to compute net loss per share attributable to common stockholders: Basic 63,003 61,267 60,887 31,263 16,097 15,511 14,985 14,553 Diluted 63,003 61,267 60,887 31,263 16,097 15,511 14,985 14,553 Stock-based compensation Cost of revenue $ 38 $ 27 $ 35 $ 23 $ 17 $ 13 $ 11 $ 9 Sales and marketing 1,746 1,152 895 1,124 496 559 281 271 Product development 696 466 300 243 164 237 173 147 General and administrative 778 689 628 6,039 689 651 483 676 Total stock-based compensation $ 3,258 $ 2,334 $ 1,858 $ 7,429 $ 1,366 $ 1,460 $ 948 $ 1,103 (1) Includes non-cash stock-based compensation expense.

(2) Includes a legal settlement accrual of $1.3 million recorded in the quarter ended March 31, 2010.

49 -------------------------------------------------------------------------------- Quarter Ended Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2012 2012 2012 2012 2011 2011 2011 2011 (as a percentage of net revenue) Consolidated Statements of Operations Data: Net revenue by product Local advertising 82 % 78 % 77 % 78 % 73 % 71 % 68 % 68 % Brand advertising 12 16 18 15 21 21 23 22 Other services 6 6 5 7 6 8 9 10 Total net revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % Costs and expenses: Cost of revenue 7 7 7 8 7 7 6 8 Sales and marketing 62 59 62 69 64 67 63 68 Product development 15 16 13 15 13 16 14 14 General and administrative 19 19 18 39 21 21 18 22 Contribution to The Yelp Foundation - - - - 24 - - - Depreciation and amortization 6 5 5 5 6 5 5 5 Restructuring and integration costs 3 Total costs and expenses 112 106 106 136 135 116 106 117 Loss from operations ( 12 ) (6 ) (6 ) (36 ) (35 ) (16 ) (6 ) (17 ) Other income (expense), net - - - - (1 ) (1 ) - 1 Loss before income taxes ( 13 ) (6 ) (6 ) (36 ) (36 ) (17 ) (6 ) (16 ) Provision for income taxes - - - - - - - - Net loss (13 )% (6 )% (6 )% (36 )% (36 )% (17 )% (6 )% (16 )% Quarter Ended Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2012 2012 2012 2012 2011 2011 2011 2011 (in thousands) Other Financial and Operational Data(1): Reviews 35,959 33,258 30,259 27,569 24,817 22,390 19,705 17,339 Unique Visitors 86,308 83,538 78,329 71,448 65,796 61,102 51,560 46,817 Claimed Local Business Locations 994 889 791 700 606 529 453 380 Active Local Business Accounts 40 36 32 27 24 19 15 13 Adjusted EBITDA $ 1,805 $ 2,162 $ 1,581 $ (951 ) $ (15 ) $ (882 ) $ 649 $ (880 ) (1) For information on how we define these operational and other metrics, see "-Key Metrics." The following table presents a reconciliation of adjusted EBITDA to net loss.

Quarter Ended Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2012 2012 2012 2012 2011 2011 2011 2011 (in thousands) Reconciliation of adjusted EBITDA: Net loss $ (5,319 ) $ (2,011 ) $ (1,982 ) $ (9,802 ) $ (9,046 ) $ (3,751 ) $ (1,165 ) $ (2,706 ) Provision for income taxes (20 ) 45 66 31 37 36 17 12 Other (income) expense, net 203 14 (22 ) 30 252 326 (75 ) (108 ) Depreciation and amortization 2,421 1,780 1,661 1,361 1,448 1,047 924 819 Stock-based compensation 3,258 2,334 1,858 7,429 1,366 1,460 948 1,103 Contribution to The Yelp Foundation - - - - 5,928 - - - Restructuring and integration costs 1,262 - - - - - - - Adjusted EBITDA $ 1,805 $ 2,162 $ 1,581 $ (951 ) $ (15 ) $ (882 ) $ 649 $ (880 ) 50 --------------------------------------------------------------------------------Liquidity and Capital Resources As of December 31, 2012, we had cash and cash equivalents of $95.1 million.

Cash and cash equivalents consist of cash and money market funds. Cash held internationally as of December 31, 2012 was $2.9 million. We did not have any short-term or long-term investments. Additionally, we do not have any outstanding bank loans or credit facilities in place. To date, we have been able to finance our operations and our recent acquisition of Qype through proceeds from stock sales, including our IPO in March 2012, and to a lesser extent from the exercise of employee stock options. Immediately after the acquisition of Qype, we paid off Qype's existing debt facility of approximately $1.3 million.

Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under "Risk Factors" in this Annual Report. We believe that our existing cash and cash equivalents, together with any cash generated from operations, will be sufficient to meet our working capital requirements and anticipated purchases of property and equipment for at least the next 12 months. However, this estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier than presently anticipated. We may require additional funds in the next 12 months 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, and, accordingly, we may need to engage in equity or debt financings to secure additional funds.

Cash Flows The following table summarizes our cash flows for the periods presented.

Year Ended December 31, 2012 2011 2010 (in thousands) Consolidated Statements of Cash Flows Data: Purchases of property and equipment $ 7,524 $ 4,798 $ 3,571 Depreciation and amortization 7,223 4,238 2,334 Cash provided by (used in) operating activities (99 ) 250 (7,811 ) Cash used in investing activities (40,592 ) (7,453 ) (4,800 ) Cash provided by financing activities 114,173 1,582 24,633 Operating Activities We used $0.1 million of cash from operating activities during the year ended December 31, 2012, primarily resulting from our net loss of $19.1 million, non-cash stock-based compensation of $14.9 million, provision for doubtful accounts of $1.9 million and non-cash depreciation and amortization of $7.2 million. In addition, significant changes in our operating assets and liabilities resulted from the following: º increase in accounts receivable of $4.1 million due to an increase in billings for local advertising plans and brand advertising campaigns as well as timing of payments from these customers; º increase in prepaids and other assets of $2.6 million relating to the increase in value added tax due from taxing authorities, prepaid business data and prepaid rent for our facilities; and º increase in accounts payable and accrued expenses of $2.0 million relating to the growth in the business and more specifically, the increase in accrued bonus and commissions, increase in accrued vacation and employee related expenses, and deferred rent for new facilities.

51 -------------------------------------------------------------------------------- We generated $0.3 million of cash from operating activities during the year ended December 31, 2011, primarily resulting from our net loss of $16.7 million, offset by a non-cash expense of $5.9 million related to the contribution of common stock to The Yelp Foundation, non-cash stock-based compensation of $4.9 million and non-cash depreciation and amortization of $4.2 million. In addition, significant changes in our operating assets and liabilities resulted from the following: º increase in accounts receivable of $2.3 million due to an increase in billings for local advertising plans and brand advertising campaigns as well as timing of payments from these customers; and º increase in accounts payable and accrued expenses of $4.0 million relating to the growth in the business and more specifically, the increase in accrued vacation and employee related expenses, deferred rent for new facilities, as well as timing of invoices and payments to vendors.

We used $7.8 million of cash in operating activities during the year ended December 31, 2010, primarily resulting from our net loss of $9.6 million, offset by non-cash depreciation and amortization of $2.3 million and non-cash stock-based compensation of $1.4 million. In addition, significant changes in our operating assets and liabilities resulted from the following: º increase in accounts receivable of $4.8 million due to an increase in billings for local advertising plans and brand advertising campaigns as well as timing of payments from these customers; º increase in prepaids and other expenses of $1.1 million primarily due to the timing of payments for annual licenses and support for enterprise resource planning and customer relationship management systems; º increase in accounts payable and accrued liabilities of $2.9 million relating to the growth in the business and more specifically, the increase in accrued vacation, deferred rent for new facilities as well as timing of invoices and payments to vendors; and º increase in deferred revenue of $0.5 million related to the timing of payments for brand advertising campaigns as well as the growth in the local advertising plans business.

Investing Activities Our primary investing activity in 2012 was the purchase of Qype. We also continued to invest in technology hardware to support our growth in headcount and software to support website and mobile app development and operations and our corporate infrastructure. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and website and internal-use software development. We expect to continue to invest in property and equipment and development of software for 2013 and thereafter.

We used $40.6 million in investing activities during the year ended December 31, 2012, including $24.1 million net of cash received for the acquisition of Qype. In addition, we used $7.5 million for purchases of property, equipment and software and incurred expenditures of $2.9 million for capitalized website and software development costs. We also entered into new lease agreements for office space in San Francisco and London. In connection with entry into such leases, we were obligated to deliver letters of credit in the aggregate amount of $6.0 million, which resulted in an increase of $6.0 million in restricted cash.

We used $7.5 million of cash in investing activities during the year ended December 31, 2011. We purchased $4.8 million in property, equipment and software and incurred expenditures of $2.5 million for capitalized website and software development costs.

We used $4.8 million of cash in investing activities during the year ended December 31, 2010. We purchased $3.6 million in property, equipment and software and incurred expenditures of $1.2 million for capitalized website and software development costs.

Financing Activities We generated $114.2 million of cash from financing activities during the year ended December 31, 2012. We received $111.8 million in proceeds from our IPO, net of $10.8 million in offering expenses, including underwriter commission and discounts associated with the transaction. With the exception of the IPO, our recent financing activities have consisted primarily of net proceeds from the issuance of common stock related to the exercise of stock options.

52 -------------------------------------------------------------------------------- We generated $1.6 million of cash from financing activities during the year ended December 31, 2011, which consisted primarily of $2.0 million in net proceeds from the issuance of common stock related to the exercise of stock options. We used $0.5 million in financing activities in 2011 related to our deferred offering costs.

We generated $24.6 million of cash from financing activities during the year ended December 31, 2010 primarily relating to net proceeds of $24.2 million that we received in the quarter ended March 31, 2010 from the issuance of Series E redeemable convertible preferred stock. In addition, we received proceeds of $0.4 million from the issuance of our common stock related to exercises of stock options.

Off Balance Sheet Arrangements We did not have any off balance sheet arrangements in 2010, 2011 or 2012.

Contractual Obligations We lease various office facilities, including our corporate headquarters in San Francisco, California, under operating lease agreements that expire from 2013 to 2021. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. We do not have any debt or material capital lease obligations, and all of our property, equipment and software have been purchased with cash.

As of December 31, 2012, we had no material long-term purchase obligations outstanding with any vendors or third parties. Our future minimum payments under non-cancelable operating leases for equipment and office facilities are as follows as of December 31, 2012: Payments Due by Period Less Than More Than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years (in thousands) Operating lease obligations $77,192 $8,681 $24,247 $18,084 $26,180 The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, website and internal-use software development costs, income taxes and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see Note 2 of the notes to our consolidated financial statements.

Revenue Recognition We generate revenue from local advertising, brand advertising and other services, which include Yelp Deals and various partner arrangements. Since 2007, net revenue from local advertising represented a majority of our revenue.

Local Advertising-Local advertising revenue is generated primarily through fixed monthly fee advertising plans with local businesses for advertising placements on our website. Revenue is recognized ratably over the service period, net of customer discounts. The arrangements are evidenced by written and/or electronic acceptance of our agreement that stipulates the volume of advertising to be delivered and the pricing.

53 -------------------------------------------------------------------------------- Brand Advertising-We generated brand advertising revenue through the sale of display advertisements (both graphic and text) on our website, including advertisements from leading national brands in the automobile, financial services, logistics, consumer goods and health and fitness industries. We recognize revenue from the sale of impression-based advertisements on our online network in the period in which the advertisements ("impressions") are delivered, net of customer discounts. We also had brand revenue from fixed-price brand sponsorships that are recognized ratably over the service period. The arrangements are evidenced by insertion orders or contracts that stipulate the types of advertising to be delivered and the pricing.

Other Services-Other service revenue includes the sale of vouchers through our "Yelp Deals" and "Gift Certificates," partner arrangements related to reservations and the monetization of remnant advertising inventory through third-party ad networks. Yelp Deals allow merchants to promote themselves and offer discounted goods and services on a real-time basis to consumers directly on our website and mobile app and, until the quarter ended December 31, 2011, via email. We earn a fee on Yelp Deals for acting as an agent in these transactions, which are recorded on a net basis and included in revenue upon sale of the deal. We record a sales allowance for potential Yelp Deal refunds based on our estimate of future refunds. Gift Certificates allow merchants to sell full-priced gift certificates directly to customers through their business profile page. We earn a fee based on the amount of the Gift Certificate sold, which we record on a net basis and include in revenue upon a consumer's purchase of the Gift Certificate. We also generate revenue through various partnership agreements on a transaction-by-transaction basis. Reservation revenue and promotional certificates are recognized on a transaction-by-transaction basis.

Multiple-Element Arrangements. We enter into arrangements with customers to sell advertising packages that include different media placements or ad services that are delivered at the same time, or within close proximity of one another.

For the year ended December 31, 2010, because we had not yet established the fair value for each element and our agreements contained mid-campaign cancellation clauses, advertising sales revenue was recognized in the period in which the advertisement was delivered.

Beginning on January 1, 2011, we adopted new authoritative guidance on multiple element arrangements, using the prospective method for all arrangements entered into or materially modified from the date of adoption. Under this new guidance, we allocate arrangement consideration in multiple-deliverable revenue arrangements at the inception of an arrangement to all deliverables or those packages in which all components of the package are delivered at the same time, based on the relative selling price method in accordance with the selling price hierarchy, which includes: (1) vendor-specific objective evidence, or VSOE, if available; (2) third-party evidence, or TPE, if VSOE is not available; and (3) best estimate of selling price, or BESP, if neither VSOE nor TPE is available.

VSOE. We determine VSOE based on our historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the standalone selling prices for these services fall within a reasonably narrow pricing range.

We have not historically sold a large volume of transactions on a standalone basis. As a result, we have not been able to establish VSOE for any of its advertising products.

TPE. When VSOE cannot be established for deliverables in multiple element arrangements, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of services cannot be obtained.

Furthermore, we are unable to reliably determine what similar competitor services' selling prices are on a standalone basis. As a result, we have not been able to establish selling price based on TPE.

BESP. When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a standalone basis. BESP is generally used to allocate the selling price to deliverables in our multiple element arrangements. We determine BESP for deliverables by considering multiple factors including, but not limited to, prices we charge for similar offerings, market conditions, competitive landscape and pricing practices. We limit the amount of allocable arrangement consideration to amounts that are fixed or determinable and that are not contingent on future performance or future deliverables. We will regularly review BESP. Changes in assumptions or judgments or changes to the elements in the arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.

54 -------------------------------------------------------------------------------- We recognize the relative fair value of the media placements or ad services as they are delivered assuming all other revenue recognition criteria are met.

As a result of implementing this recent guidance, our revenue for the years ended December 31, 2012 and 2011 was not materially different from what would have been recognized under the previous guidance for multiple-element arrangements.

Website and Internal-Use Software Development Costs We capitalize certain costs related to the development of our website, mobile app or software developed for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding and it is probable that the project will be completed and the software will be used as intended. Such costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be two to three years. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded in product development expenses on our consolidated statements of operations. Costs incurred for enhancements that are expected to result in additional features or functionality are capitalized and expensed over the estimated useful life of the enhancements, generally two or three years.

Business Combinations and Valuation of Goodwill and Other Acquired Intangible Assets We account for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. We allocate the purchase price of the acquisition to the tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values.

The excess of the purchase price over those fair values is recorded as goodwill.

Acquisition-related expenses and restructuring costs are expensed as incurred.

During the measurement period, which could be up to one year after the transaction date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, subsequent adjustments are recorded to our consolidated statements of operations.

We review goodwill for impairment at least annually in the third quarter or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step will be performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the applied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. As of December 31, 2012, no impairment of goodwill has been identified.

Acquired intangible assets are amortized over their estimated useful lives.

We evaluate the recoverability of amortizable intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any such impairment charge during the years presented.

In addition to the recoverability assessment, we routinely review the remaining estimated useful lives of our amortizable intangible assets. If we reduce the estimated useful life assumption for any asset, the remaining unamortized balance would be amortized over the revised estimated useful life.

55 --------------------------------------------------------------------------------Income Taxes We account for our income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or in our income tax returns. Deferred income taxes are recognized for differences between financial reporting and tax bases of assets and liabilities at the enacted statutory income tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in income tax rates is recognized in income in the period that includes the enactment date. We evaluate the realizability of our deferred tax assets and valuation allowances are provided when necessary to reduce net deferred tax assets to the amounts expected to be realized.

We recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We will recognize interest and penalties related to unrecognized tax benefits in our income tax provision in the accompanying consolidated statement of operations.

Stock-Based Compensation We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. We measure stock-based compensation expenses for employees at the grant date fair value of the award, and recognize expenses, net of forfeitures, on a straight-line basis over the requisite service period, which is generally the vesting period. We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. We believe that the fair value of stock options is more reliably measured than the fair value of the services received. As such, the fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

We estimate the fair value of stock-based option award using the Black-Scholes option-pricing model. The determination of the fair value of a stock-based award on the date of grant using the Black-Scholes option-pricing model is affected by our stock price on the date of grant as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award and expected dividends. The value of the portion of the award that is ultimately expected to vest is recognized as expense in our consolidated statements of operations. We estimate the expense for restricted stock grants based on grant date fair value.

Prior to our IPO, our board of directors considered numerous objective and subjective factors to determine the fair market value of our common stock at each meeting at which stock options were granted and approved.

Stock-based compensation expenses are classified in the consolidated statement of operations based on the department to which the related employee reports. Our stock-based awards are comprised principally of stock options and restricted stock unit awards.

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