yelp – investment thesis · § $8.5 - $9.5b total market opportunity based on 13-14% commission...
TRANSCRIPT
Yelp – Investment Thesis
Agenda
2
i. Company Overview ii. Investment Thesis iii. Industry Tailwinds iv. Revenue and Product Mix-shift v. Variant Perception vi. Valuation
Company Overview
§ Yelp is the #1 business review site and the best way to find a local business
§ Last quarter, Yelp attracted 168 million users onto its platform with more than half coming from mobile visits
§ Frequent Yelp users demonstrate a high level of purchase intent: 89% of users make a purchase within 1 week of finding a business
3
Value Proposition Mobile Reach
Cumulative Reviews Local Ad Revenue Business Model
0%
10%
20%
30%
Yelp Groupon TripAdvisor YP Sites FourSquare Angie's List
0
20
40
60
80
100
Local Revenue
Retained Revenue Ad Delivery New Revenue Number of Salespeople Quota Attainment
Inventory Levels Ad Performance
Number of Existing Customers Revenue Retained
Source:Companyfilings
Revenue Breakdown
4
Local Advertising
81%
Transactions 8%
Brand Advertising
6%
Other 5%
Home & Local 28%
Restaurants 15%
Beauty & Fitness 12%
Shopping 10%
Health 11%
Other 24%
Revenue by Segment
§ The majority of revenue comes from Yelp’s core local advertising product
§ Transaction revenue is a relatively new and fast growing segment that poses substantial opportunity in a young /growing market
Local Ad Revenue by Vertical
§ Yelp’s local ad revenue is spread across multiple verticals and not solely dependent on one single sector
§ This provides protection for Yelp as some verticals experiences different peaks and troughs with their respective industry cycles
Source:Companyfilings
Yelp Stock Price History
5
Yelp is currently trading near its IPO price in 2012
0
20
40
60
80
100
IPO Price: $22.03
Feb. 10, 2015: Yelp acquires Eat24 for $134M in order to enter the food delivery business
Jul. 18, 2013: Yelp acquires online reservation service SeatMe for $12.7M
Jul. 28, 2015: Yelp announces discontinuation of display advertising by end of the year; will shift focus to native and local advertising
Jul. 2, 2015: Yelp decides to stall sale of company
Investment Thesis
§ Competitors in the transaction industry lack one key advantage: Yelp
§ Integrating delivery (transactions) elevates Yelp from a review site to a more comprehensive service
§ Both top-line and bottom-line targets become easier to achieve due to the profitability of the transaction business
6
Monetization will improve with mix-shift
Yelp is an organic driver for Eat24 growth
Stickiness Mitigates Competition Risk
§ Transition from CPM to CPC is fueled by industry demand for CPC
§ Sales-force productivity is increasing (through both focus and better products)
§ U.S. Marketers spent roughly $31 Billion dollars on local advertising, but Yelp’s local advertising revenue was $314 million in 2014
§ Mobile platform allows for accelerated networking effects through increased traffic and engagement
§ Mobile/App users are more sticky than desktop users
§ Less competition for views/clicks on mobile than desktop
§ Yelp becomes the 1st place to search
While the street’s perception towards Yelp’s business initiatives is negative, we see tremendous upside to its growth strategy and an opportunity to purchase shares at a discount relative to their true value.
Investment Recommendation
Industry Drivers
§ By 2019, online and digital advertisements are expected to represent 35% of total ad spending (23% in 2014)
§ Decline in the market share for traditional advertising channels (direct mail, yellow-pages, newspapers-print)
§ This shift in local ad spending should benefit online and mobile advertising platforms
7
Direct Mail 24%
Newspapers (Print) – 8%
Yellow Pages (Print) – 1%
TV 15% Radio
10%
Newspapers (Online) – 3%
Online 13%
Mobile 10%
Cable 5%
Others 11%
U.S. Local Advertising Spending by Channel (2019E):
$159 Billion
Current Tailwinds
Source:Companyfilings,WallStreetResearchNote:Usernumbersinmillions
Underpenetrated Market § With only ~104,000 paying local advertising
accounts, Yelp has only penetrated about 4% of its claimed local businesses
§ Significant runway to be seen
§ Local advertising business has historically been tough to penetrate
§ Requires significant amounts of investment in sales force to meaningfully penetrate the market (small business take a while to adopt new technologies, therefore lengthening the sales cycle)
§ Newer CPC offerings should attract more advertisers and help with retention
35 41 46 54
64 69 77 84 90 97
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15
Growth in Local Advertising Accounts (mm) 104
Paid Local Advertising Products
8
Yelp Ads SeatMe Call to Action
§ Ability to take customers directly to an order form or website from Yelp page
§ Directly able to measure how many leads you are generating
§ Can customize for specifically mobile or web
§ Allows customers to make reservations directly from the Yelp platform
§ Number of restaurants using SeatMe has grown from 500 to ~18,000 within the past 6 quarters (in comparison, OpenTable has ~25,000 restaurants)
§ Far cheaper than alternatives
§ Search-based advertising: Yelp places local business ads in front of users who are looking to make a purchase similar to what that business provides
§ Demonstrated significant ROI for advertisers using this product based off generated leads
Source:Companyfilings
Local Advertising – Subscription vs. CPC
9
Yelp’s local advertising revenue can be broken up into its self-service and full-service products
Full-Service § Yelp’s core subscription-based advertising
product § Based on the number of advertising
impressions that Yelp displays for the business § Requires businesses to commit to a year long
contract that is billed monthly (~$50 – $1,000 monthly budget)
Self-Service § Cost-per-click based advertising § Growing much faster than the legacy product as
local advertisers are becoming more comfortable with digital advertising and prefer performance based pricing
§ We see the trend towards the CPC based product continuing as advertisers tend to be satisfied with the performance based product
§ Improve customer relations § Gives businesses more flexibility with their
budgets and a better value relative to the subscription model
§ CPC model should increase advertisers’ ROI
19.6 29.8
39.4 49.6
60.3 23%
32% 40%
46% 52%
0%
10%
20%
30%
40%
50%
60%
0 10 20 30 40 50 60 70
Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
CPC Revenue
CPC Revenue % of Local Revenue
Source:Companyfilings
10
Online ordering adds values to users by: § Expanded Choices § Convenience § Control and Transparency § Superior Service § Free to Use Online orders have high value add for restaurants: § More Orders at Full Menu Prices § Low Risk/High Return § Insight from Order Data § Reach New Customers § Higher Margin Takeout
High Growth in Online Ordering
§ $67B Spent by US consumers of take-out annually § $8.5 - $9.5B total market opportunity based on 13-14%
commission rate
Yelp has potential to generate value by connecting its user base to a number of restaurants through Eat24
Restaurants 446,000 25,000 30,000
Locations Nationwide 1,500 Cities 800 Cities
Market Data Users: 168mm Market Cap: $1.92B
Users: 750,000 2015E Revenue: $44mm Acquisition Cost: $127mm Revenue Growth y/y: 73%
Users: 6mm 2015E Revenue: $361mm Market Cap: $2.13B Revenue Growth y/y: 46%
Online Orders, 5%
Paper Menus & Phones,
95%
Online vs. Call-In Takeout Orders
Source:CompanyFilings
Mobile Stickiness
11
14M
20M
Q3'14 Q3'15
App Unique Devices
39% y/y
§ When it comes to mobile, Yelp is a clear leader with ~30% penetration of U.S. smartphones
§ Much higher than key competitors and still plenty of room for growth
§ 70% of page views come from the native app1
§ ~56% of new reviews are coming from the mobile app § Mobile users are more engaged
We see mobile as an opportunity for 3 reasons: § Clear leader amongst peers § Higher degree of interaction § Mobile stickiness reduces the
competition risks
Source:Companyfilings,ComScoreNote:(1)PageviewsincludebusinesslisGngpages,businessphotopages,andsearchlisGngs
Most reviews relative to competitors
Variant Perception
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Street Perception Our Views
§ Phasing out brand advertising will hurt earnings and near-term revenue and profitability
§ Brand advertising revenue is a relatively small part of total revenues
§ Move will improve user experience, especially in mobile application
§ Little monetization of large user and business base (currently only 4% use advertising services)
§ Sales Staff Productivity and Churn § Low barriers to entry and competition
§ Fundamental change in monetarization structures § Shift from CPM to CPC marketing § Wider adoption of marketing services from
businesses § More competition on advertising from
businesses § Slower growth in CPM revenues mask growth § Higher demand for CPC
§ Maturation of cohorts § Older cohorts have consistently higher
expenditures
§ Transaction revenues § Transaction revenues are small § Company at disadvantage due to not being
first movers in the space § Diversification businesses are expensive and
inefficient
§ High synergy between core business and new businesses § Integrating reviews, deals and orders will drive user
experience § Bundling these services together will offer better
opportunities to businesses § Taking of market share of GRUB, GRPN, PCLN etc.
Comparable Companies
13 Source:ThomsonReuters,Companyfilings,StaGsta,FactsetNote:(1)UsersdefinedasUniqueMonthlyVisitors(thenumberofusersthatusetheserviceinagivenmonthasopposedtoasingleuservisiGngthewebsitemorethanonce);UMVisequivalenttoMonthlyAcGveUsers(MAU)
(metrics in millions)
(1)
Valuation – Cases
14
Bear Base Bull
Local Ad Revenue § 8% growth in claimed § 4.1% monetization § -5% growth in Rev/Acct
§ 25% growth in claimed § 4.4% monetization § -2% growth in Rev/Acct
§ 30% growth in claimed § 4.6% monetization § +1% growth in Rev/Acct
Transaction Revenue § 40% growth in 2016 § 80% growth in 2016 § 120% growth in 2016
Sales and Marketing § Expense jumps by 200 bps § Expense fall by 200 bps § Expenses fall by 600 bps
EBITDA/Rev Multiple 12.4x / 3x 15.4x / 3.4x 15.4x / 3.4x
Current Price $25.50
Bear Case $21.66(-15%)
Base Case $33.03(+30%)
Bull Case $44.64 (+75%)
Probability: 15% 60% 25%
Upside: $34.25 (+34%)
Valuation
15
Growth Assumptions
§ Local Revenue continues to grow at a steady pace fueled by continued sales force expansion and productivity , as well as slightly higher monetization rate of claimed businesses as the CPC product becomes more popular.
§ Transaction revenue has consistent growth rate for the second half of 2015 and continues to grow quickly as Eat24 becomes integrated with the Yelp platform
0x
2x
4x
6x
8x
10x
12x
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
2016
EV
/ Rev
enue
3-year Forward Revenue CAGR
Yelp trades at a discount to peers in spite of having stronger top line growth
TWTR FB
LNKD
YELP
P
RUBI
TRUE
GOOGL
SALE IACI AOL
Source:WallStreetResearch,ThomsonReuters,Bloomberg,BerkeleyInvestmentGroupassumpGons
Valuation (Cont.)
16
EV/EBITDA (50%) EV/Revenue (50%)
Appendix
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i. Historical Financials i. Income Statement ii. Balance Sheet iii. Cash Flow Statement
ii. Comparable Company Analysis iii. Catalysts for Growth iv. Distribution of Reviewed Businesses v. CPM vs. CPC vi. Sales Force & HR Concerns vii. Yelp Products – Local Advertising viii. International Content ix. User Growth x. Customer Satisfaction
xi. SeatMe xii. Cohort Analysis xiii. Valuation Model
i. Income Statement – Base Case ii. Income Statement – Bull Case iii. Income Statement – Bear Case iv. Revenue Assumptions v. Revenue Build – Base Case
xiv. Sum of the Parts Valuation
Historical Income Statement
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Comparable
0
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0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
2016
EV
/ Rev
enue
3-year Forward Revenue CAGR
21
Yelp trades at a discount to peers in spite of having stronger top line growth
TWTR
GOOGL
FB
LNKD
YELP
SALE P
RUBI
TRUE
IACI
AOL
Source:WallStreetResearch
Catalysts for Growth
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Sales Performance § Yelp has been able to
consistently grow its sales force and increase the productivity of the each sales rep on average
§ Sales team has grown nearly 70% since Q1 2014
§ Sales force productivity continues to increase
Eat24 Integration Beyond Restaurants
57.67
64.73
58.27
64.23
61.08
65.81 66.10
70.90 74.07
76.52
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Revenue / Sale Rep
§ Since Yelp acquired Eat24, the company has seen considerable growth in transaction revenue
§ Eat24 is just beginning its integration with the Yelp platform
§ Provides a one-stop-shop for customers looking to read reviews and place an order
§ Most people don’t know that Yelp offers services beyond simply restaurant reviews
§ Yelp is undermarketed – 26% unaided brand awareness
§ “We know just the place” § Home & Local is the fastest
growing vertical
Source:CompanyFilings
Increasing Brand Awareness
14
25
44
2013 2014 2015E
Eat24 Annual Revenue
23
Distribution of Reviewed Businesses
Shopping 23%
Restaurants 19%
Home & Local Services 12%
Beauty & Fitness 9%
Arts, Entertainment
& Events 7%
Health 6%
Auto 4%
Nightlife 4%
Travel & Hotel 4%
Other 12%
Source:Companyfilings
Cost Per Impression vs. Cost Per Click
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While an ad optimizer could also use CPC to test their campaigns, an expert optimizer will at some point use CPM for extremely high performance ads. The reason is that when bidding on a CPC basis, you will never pay less than your bid rate.
“If you’re new to advertising your best bet is to bid on a CPC basis. This way, you are hedging against your exposure to low performing advertisements.”
Sales Force and HR Concerns
25
Street Concerns
Yelp is dependent on a highly productive and growing sales force to be able to grow its revenue and reach more local businesses
Yelp did not meet initial hiring goals (35% instead of 40%) for the first half of 2015 and subsequently lowered its yearly revenue guidance to account for lower than expected sales representatives
Our View
Yelp’s sales force is extremely productive and has consistently been increasing its productivity quarter over quarter
Many reps are leading with the CPC – because it works with local advertisers. They have more offerings such as SeatMe, Eat24 & Yelp Deals. They have more products that are easier to sell
0
500
1,000
1,500
2,000
Sales Headcount
CAGR: 65%
57.67
64.73
58.27
64.23
61.08
65.81 66.10
70.90 74.07
76.52
Revenue / Sale Rep
Source:CompanyFilings
Yelp Products – Local Advertising
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Free Self Service Full-Service
Pricing Plan NA CPC Subscription
Respond to reviews ✓ ✓ ✓
Update business information ✓ ✓ ✓
Business analytics ✓ ✓ ✓
Upload photos ✓ ✓ ✓
Mobile app ✓ ✓ ✓
Yelp reservations ✓ ✓ ✓
Deals and gift certificates ✓ ✓ ✓
Check-In offers ✓ ✓ ✓
Yelp ads ✓ ✓
SeatMe ✓ ✓
Competitor ad removal + $50/month ✓
Slideshow +$25/month ✓
Call to action button +$50/month ✓
Featured video ✓
Call tracking ✓
Account Manager ✓
Model
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Internet Mkt Place 2014 2015 2016 2017 2018 2019 2020
Revenue (Base) 377,536 538,589 680,876 797,632 885,688 972,636 1,068,199 EBITDA (Base) 70,922 68,696 121,843 168,432 228,455 266,995 286,688 Revenue (Bull) 377,536 540,285 773,976 1,030,665 1,294,849 1,483,345 1,578,589 EBITDA (Bull) 70,922 94,224 201,234 267,973 362,558 445,004 473,577 Revenue (Bear) 377,536 393,535 586,203 666,906 726,460 758,202 759,298 EBITDA (Bear) 70,922 46,898 46,896 46,683 50,852 68,238 68,337
Case Return WeightBase 38.2% 55%Bull 81.4% 10%Bear -3.2% 35%
Weighted return 28%
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Base Case 1Assumptions COGS as % of Revenue 4.3% 6.5% 7.1% 7.1% 6.9% 6.3% 7.2% 9.6% 9.6% 10.0% 9.2% 8.5% 8.5% 8.5% 8.5% 8.5%Bear Case 12.0% 10.0% 10.0% 10.0% 10.0% 10.0%Base Case 10.0% 8.5% 8.5% 8.5% 8.5% 8.5%Bull Case 8.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Sales and Marketing as % of Revenue 68.8% 69.7% 63.6% 58.9% 52.3% 49.3% 49.2% 46.6% 53.9% 50.0% 50.0% 48.0% 47.0% 45.0% 44.0% 44.0%Bear Case 53.0% 52.0% 52.0% 52.0% 50.0% 50.0%Base Case 50.0% 48.0% 47.0% 45.0% 44.0% 44.0%Bull Case 47.0% 44.0% 44.0% 43.0% 42.0% 42.0%
Product Development as % of Revenue 11.9% 13.2% 13.0% 13.6% 13.7% 13.3% 15.9% 15.1% 15.7% 16.0% 15.7% 15.0% 15.0% 14.0% 14.0% 14.0%Bear Case 18.0% 17.0% 18.0% 18.0% 18.0% 18.0%Base Case 16.0% 15.0% 15.0% 14.0% 14.0% 14.0%Bull Case 14.0% 14.0% 14.0% 13.0% 12.0% 12.0%
General and Administrative as % of Revenue 17.2% 22.6% 17.7% 17.0% 14.4% 12.3% 13.9% 11.7% 12.0% 12.0% 12.3% 11.0% 10.0% 10.0% 10.0% 10.0%Bear Case 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%Base Case 12.0% 11.0% 10.0% 10.0% 10.0% 10.0%Bull Case 10.0% 9.0% 9.0% 9.0% 9.0% 9.0%
Stock Based Comensation as % if Revenue 2.2% 3.0% 5.9% 10.8% 11.4% 11.2% 11.5% 11.6% 10.9% 11.0% 11.2% 10.0% 10.0% 10.0% 10.0% 10.0%Bear Case 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%Base Case 11.0% 10.0% 10.0% 10.0% 10.0% 10.0%Bull Case 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
Depreciation and Amortization as % of Revenue 4.7% 4.9% 5.1% 5.3% 4.9% 4.7% 5.8% 5.4% 5.3% 5.5% 5.5% 4.5% 4.5% 4.5% 4.5% 4.5%Bear Case 6.5% 5.5% 5.5% 5.5% 5.5% 5.5%Base Case 5.5% 4.5% 4.5% 4.5% 4.5% 4.5%Bull Case 4.5% 4.0% 4.0% 4.0% 4.0% 4.0%
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Customers Businesses
Most reviews relative to competitors
Integrated Platform
168 million users that are using Yelp with the intent to make a purchase Targeted native advertisements that generate high ROI for local businesses
No more CPM – businesses pay for performance (aka leads) Ability to interact with customers and improve social media presence
Read Review
Interact with Data
Make Purchases
International Content Continues to Grow Globally
30
Review Growth Relative to Community Manager Start
Source:CompanyfilingsNote:Bubblesize=adultmetropopulaGon
International
U.S.
User Growth § Overall User
growth slowing, but mobile app users reaccelerating
§ Possibly due to law of large numbers and traffic issues due to Google algo change
§ However, engagement on mobile platforms remains healthy as over 50% of reviews and photos are contributed via mobile app
31
9.5 10.4 11.2 10.6 10.9
12
14.5 14.5 16
18.1
11.6 11.4 13.4 13.4 14.8
17
67%
44% 36%
15% 10%
16%
30% 37%
47% 51%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
2
4
6
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1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
Yelp (Worldwide) Yelp Mobile Users (U.S) Yelp Reported Mobile App User Growth
40.2 45.1 50.5 52.9 61.2 67.9 73.4 72.3 79 82.8
71.8 73.4 78.2 77.7 82.2 81.9 80.5 77.6 79.5 79.2 112 118.5 128.7 130.6
143.4 149.8 153.9 149.9 158.5 162
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
Reported Users Breakdown
Mobile Desktop Source:Companyfilings,WallStreetResearch,comScore,SFGResearchNote:Usernumbersinmillions
Customer Satisfaction
32
18%
82%
10%
90%
0% 50% 100%
Dissatisfied
Satisfied
How satisfied are SMBs with Yelp's Paid Ad Product?
2015
2013
• We see a trend towards rising customer satisfaction with Yelp’s core local advertising product. (800 bp increase from 2013)
• SMBs intend to increase their Yelp spending by 6% in the NTM.
• A year ago, SMBs planned to decrease their spending by 18%.
25%
66%
52%
60%
74%
89%
100%
19%
74%
49%
65%
83%
86%
100%
Newspaper website
OpenTable
Groupon
Yelp
Effectiveness*of*Driving*New*Customers
2015
2013
+900bp Improvement
• From 2013 to 2015 we see a 900bp increase in the percentage of SMBs observing improved customer traffic from Yelp’s paid advertising product
• Yelp remains the third most effective channel to drive new customers (after Google and Facebook)
Source:WallStreetResearch
SeatMe
33
SeatMe is an affordable cloud-based online reservation solution
• Table Management • Online Reservations • Streamlined Waitlists • Create Targeted Guest Lists
• 135 million unique users • 78% of Yelp users search
for restaurants • 89% of Yelp users make a
purchase within a week
• SeatMe is far more affordable than competing products
• SeatMe has the Yelp network behind it
Cohort Analysis
34
22.4 35.1 55.9
85.7 136.9
8.2 15.7
29.1
50.4
86.3
2.6
7.1
14.4
28.6
2010 2011 2012 2013 2014
Growth potential in existing markets
2005-2006 Cohort 2007-2008 Cohort 2009-2010 Cohort
IS – Base Case
35
IS – Bull Case
36
IS – Bear Case
37
Revenue Build – Base Case
38
Revenue Assumptions
39
Sum of the Parts Valuation
40
WedecidedtoincludeasumofthepartsvaluaGontoidenGfyhowmuchvaluewefeeliscomingfromthefastgrowingtransacGonbasedproductssegmentofYelp.
2016 Transaction Based Revenue 2016 Local Ad RevenueCase Revenue Multiple Revenue Multiple
Bear 58,254 5.0 519,040 3.4Base 79,578 5.0 626,107 3.4Bull 102,982 5.0 708,882 3.4
Local Advertising ValueRevenue
1.5 2.0 2.5 3.0 3.5 $519,040 $778,560 $1,038,080 $1,297,600 $1,557,120 $1,816,640$588,882 $883,323 $1,177,765 $1,472,206 $1,766,647 $2,061,088$628,882 $943,323 $1,257,765 $1,572,206 $1,886,647 $2,201,088$668,882 $1,003,323 $1,337,765 $1,672,206 $2,006,647 $2,341,088$708,882 $1,063,323 $1,417,765 $1,772,206 $2,126,647 $2,481,088
2016 EV/Revenue LATransaction Value
Revenue982% 3.0 4.5 6.0 7.5 9.0
$58,254 $174,762 $262,143 $349,524 $436,905 $524,286$66,982 $200,946 $301,419 $401,892 $502,365 $602,838$78,982 $236,946 $355,419 $473,892 $592,365 $710,838$90,982 $272,946 $409,419 $545,892 $682,365 $818,838
$102,982 $308,946 $463,419 $617,892 $772,365 $926,838
2016 EV/Revenue TR
Revenue0%
$577,294 -30.2% -11.8% 6.5% 24.9% 43.2%$655,864 -23.3% -2.4% 18.5% 39.4% 60.3%$707,864 -18.2% 4.7% 27.6% 50.5% 73.4%$759,864 -13.1% 11.8% 36.7% 61.6% 86.6%$811,864 -8.0% 18.9% 45.8% 72.8% 99.7%
Return Sensitivity