Yelp Inc. (YELP) Earnings Call Transcript & Summary

Thank you. Hello, everyone. Thank you for your patience and for joining us. Welcome to Yelp Incorporated's second quarter 2026 earnings conference call, a reminder that participants are in a listen-only mode. After today's prepared remarks, we will host a Q&A session Thank you.

Good afternoon, everyone, and thanks for joining us on Yelp's second quarter 2026 earnings conference call. Joining me today are Yelp's Chief Executive Officer Jeremy Stoppelman, Chief Financial Officer David Schwarzbach, and Chief Operating Officer Jed Nachman. We published a shareholder letter Investor Relations website and with the SEC and hope everyone had a chance to read it. We'll provide some brief opening comments and then turn to your questions. Now I'll read our safe harbor statement. We'll make certain statements today that are forward looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements. in light of new information or future events. In addition, we are subject to a number of risks that may significantly impact our business and financial results. Please refer to our SEC filings, as well as our shareholder letter, for a more detailed description of the risk factors that may affect our results. During our call today, we may discuss adjusted EBITDA, adjusted EBITDA margin, and free cash flow, which are non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles. In our shareholder letter released this afternoon, noon in our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding these non-GAAP financial measures, as well as a historical reconciliation of GAAP net income or loss to adjusted EBITDA, a calculation of net income margin and adjusted EBITDA margin, and a historical reconciliation of GAAP cash flows from operating activities to free cash flow. And with that I will turn the call over to Jeremy.

Thanks, Kate, and welcome, everyone. Yelp continued to advance its AI transformation in the second quarter. Our team made local discovery more conversational, delivered new tools to help businesses succeed, and expanded the reach of our trusted content through new partnerships. We are pleased by the progress of our initiatives and the meaningful signs of improvement that emerge across several key metrics. At the same time, consumers and local businesses have continued to face a challenging economic environment. Second quarter net revenue increased by 1% year over year to $376 million with a net income margin of 8% and an adjusted EBITDA margin of 24%. Underlying our top line results, Services ad revenue was flat year over year, and RRNO ad revenue decreased by 10% year over year. We've increased our focus on growing a number of AI driven revenue streams this year, which contributed to other revenue growth accelerating from the first quarter to 98% year over year. On the consumer side of our business, we saw encouraging traffic trends in the quarter with improvements in app installs and page views. Moving to our product initiatives, we have reconceived how consumers and businesses connect on Yelp through a conversational experience that provides answers and enables actions. Central to this updated experience, the new Yelp Assistant which works across all categories, demonstrated early positive signs in user engagement. In services category specifically, Yelp Assistant has been an important driver of project submissions and monetization, contributing to overall project growth of approximately 10% year over year. We are delivering AI tools that help service pros and other local businesses grow, operate, and succeed. For advertisers, we improved our advertising technology and ad formats. We also directed leads acquired via paid search to multi-location services advertisers, which contributed to substantial budget growth from these customers over the first half of the year. Our team continued to scale Yelp host, our AI powered call answering service for restaurants, which reached an annual run rate of 2.4 million calls handled in July, more than tripling from January. We recently rolled out a number of updates to the product, including 16 new languages and an integration with OpenTable that enables consumers to book and manage reservations automatically via Yelp Host. We also significantly expanded Yelp Host's market opportunity by adding food ordering functionality with full point-of-sale integration, which enables restaurants to take phone orders for pickup without added fees. We accelerated our strategy in this area for services businesses through the acquisition of Hatch in February. Hatch annual run rate revenue grew 59% year over year to $35 million in June as we lapped a period of significant growth to To accelerate Hatch's roadmap, we significantly increased the size of the team in Q2. While this resulted in an adjustment period in the quarter, we saw improved trends in July. Looking ahead, we see a considerable opportunity in AI lead management. With increased product velocity and added sales headcount that continues to ramp, we're excited by Hatch's growth potential in the year ahead. Lastly, we are extending our reach to power local discovery across the AI ecosystem through data licensing. In the second quarter, we saw robust demand for our licensing products, including from our partnership with OpenAI. Yelp ratings and reviews recently began powering ChatGPT's local experience in relevant categories. Recording and reporting on the data, we are also expanding our reach to power local discovery across the AI ecosystem through data licensing. Quest to Quote integration with ChatGPT is coming soon, building on our success with Apple Maps and Yahoo. In summary, we continue to make significant progress transforming Yelp with AI in the second quarter. We are confident in our plans for the year and believe that our initiatives will position us to drive profitable growth over the long term. With that, I'll turn it over to David.

Thanks, Jeremy. Turning to our second quarter results. Net revenue increased by 1% year over year to $376 million, $8 million above the high end of our outlook range. Net income decreased by 28% year over year to $32 million, representing an 8% margin. Adjusted EBITDA decreased by 9% year-over-year to $91 million, $16 million above the high end of our outlook range, representing a 24% margin. As Jeremy mentioned, local businesses have faced a challenging operating environment, which is reflected in our advertising metrics for the quarter. Services ad revenue was flat year over year at $241 million, while RR&O ad revenue decreased by 10% year over year to $102 million. flat services locations and a decrease in our R&O locations resulted in an overall decline of 1% year over year in paying advertising locations to 510,000. Ad clicks declined by 5% year over year in the quarter, driven by fewer clicks in our R&O categories, partially offset by a slight increase in services categories. Average CPC increased by 1% as services ad clicks comprised a greater portion of total ad clicks compared to the prior year period. Moving to other revenue, other revenue increased by 98% year over year to a record $33 million. This strong growth was driven by the inclusion of revenue generated by Hatch, as well as significant growth in revenue from data licensing and food ordering. Turning to to expenses. In 2026, we're investing behind high return areas that we believe will transform Yelp. In particular, we see a significant opportunity in other revenue through AI-driven offerings such as Yelp Host, Hatch, and DAIL licensing. As these accretive revenue streams continue to gain traction, we are targeting an annual run rate of $250 million in other revenue by the end of 2028. At the same time, we see substantial opportunities to unlock operational efficiencies and increase employee productivity with AI. We've already seen AI tools drive meaningful improvements in product and engineering velocity. iterating quickly and bringing new products like Yelp Host to market faster than ever before. In the short term, we plan to increase our investments in a number of areas. We are providing Hatch with additional resources to accelerate their product roadmap and go to market. We also expect to continue to invest in consumer marketing to drive leads to multi-location services businesses. We reduced stock-based compensation expenses, percentage of revenue by three percentage points year over year to 7% in the second quarter. We also continue to expect that we will reduce stock-based compensation expense to less than 6% of revenue by the end of 2027. To create long-term shareholder value, we are evolving our approach to capital allocation. We plan to invest in future growth, pursue strategic acquisitions through a combination of cash and financing, and return more than 50% of free cash flow to shareholders each year through share repurchases. To that end, in the second quarter, we repurchased $15 million worth of shares at an average price of $24.92 per share, contributing to a $50 15% year over year reduction in diluted shares outstanding. We subsequently repurchased approximately $25 million worth of shares in the third quarter, bringing our total repurchases for the year to approximately $200 million. We have now paused our program as we work to pay down our revolving credit facility. With $339 million remaining under our existing authorization at present, we expect to resume repurchases in 2027. Turning to our outlook, we anticipate that the challenging economic environment for local businesses will persist for the remainder of the year and continue impacting advertising revenue across categories. At the same time, we expect our investments in our strategic initiatives will continue to drive strong growth and other revenue as As a result, we anticipate third quarter net revenue will be in the range of $365 million to $370 million. For the full year, we are narrowing our range and now expect net revenue will be between $1.460 billion and $1.470 billion. Turning to margin, we expect expenses will increase sequentially in the third quarter as we invest in our AI transformation, Hatch, and consumer marketing. As a result, we expect third quarter adjusted EBITDA will be in the range of $70 million to $75 million. For the full year, we are narrowing our range and now expect adjusted EBITDA will be between 350 and $1. $15 million and $325 million. In closing, with early signs of improvement across a number of key metrics, Yelp's second quarter results reflect continued product momentum as we invest in our AI transformation. We continue to believe in the opportunities ahead and our ability to create long-term shareholder value. With that, operator, please open up the line for questions.

Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of Eric Sheridan with Goldman Sachs. Eric, your line is open. Please go ahead.

Hey guys, this is Alex on for Eric. Thanks for taking our question. Maybe just wanted to dig into a little bit of some of the investments you're making behind the other revenue push here and specifically for Hatch. What are some of the investments, whether it's product development, go-to-market that you plan to to make to support that and what are the potential differences in structural margins going forward between that revenue stream and your core advertising? Thanks.

A reminder if you are muted locally to unmute your device.

Alex, thanks for the question. We are investing in Hatch. We're investing across the board, both in good market as well as product. and engineering. Really when we acquired Hatch in February, it was a startup, and now we obviously want to scale operations there. So we're bringing a lot of folks, as well as process and metrics to the go-to-market side. And we were able to deliver quite a few products product improvements throughout the course of the second quarter. We obviously think that there is a significant market opportunity here, and we absolutely want to go after it. In terms of over the longer term, the margin profile for this business we expect can be similar to other subscription businesses. In the near term, though, we definitely want to continue to invest to scale and, again, to capture market opportunity.

Great, thank you. Your next question comes from the line of Sergio Segura with KeyBank. Sergio, your line is open. Please go ahead.

Great, thanks for taking the questions. Maybe one on data licensing and the chat GPT request-to-crow integration that's coming up. I'm just curious how you think about it longer term, how you believe Yelp captures most of the economic value from AI, you know, driving users back to the Yelp ecosystem, generating the leads to these platforms, or licensing the content and data, just how you view all those opportunities.

Hi, Sergio. Thanks for the question. You know, we're really excited about working with OpenAI, obviously. It has a big consumer footprint with chat GPT. You can now see our integration starting to happen there. It's still kind of the first inning, but you know, You can see ratings. It links back to Yelp. You can see review snippets. and those also can link back to Yelp. And in fact, we just started to see rolling request to quote and services represents a huge majority of our revenue. So having that interconnectivity, I think is pretty exciting. Brian R. super early days, you know, in terms of traffic impact, but we, you know, see this as a potentially significant distribution channel over time, we do have a history here in licensing our data and cooperating with other big players. Brian R. For example, our data can be found in places like Amazon duck duck go bing and. Apple has been obviously a huge partner that we've worked with for a long time. And when our content shows up there, I think it's a win-win. We need consumers wherever they're at. There's often ways to get back to Yelp. So it's both an opportunity opportunity to merchandise and remind consumers of Yelp, but also can deliver some meaningful traffic back. And so we see the opportunity with these AI players to be quite similar, and we're thinking about it much in the same way.

Great, that's helpful. Maybe just a follow up on that. Anything notable to call out on differences in quality or conversion of these leads coming through these AI platforms versus other performance channels?.

I think it's quite early to really have a strong opinion on that. You know, the way that it's being merchandised is just kind of at the bare minimum, as you can see. And I don't think that's the eventual steady state. But I really haven't, you know, seen any data on conversions, just because it's just been starting more recently. I mean, I guess separately, you know, on the overall, you know, speaking of overall traffic, you know, we did note some, consumer tailwinds and good things happening. And so just to highlight, that's coming from a variety of places. Some of it is our great work product teams done on SEO, as well as driving more downloads, which is exciting because of course, downloads are more of a direct relationship with consumers. It's a great way to discover and utilize Yelp. And we did see some gains from, from our partner network. Again, we've been licensing data for quite some time. This is folks that are not in the AI LLM search space, but in working with our partners, we were able to drive some more traffic. And then we also saw some positive changes on the algorithmic side for Google, where we've seen they've started to really lean to user-generated content in a big way, I think, because the onslaught of spam and low-quality content. And so that's benefited us as well. Understood. Thank you, Jeremy. Appreciate the perspective. Sure thing.