Yelp Inc. (YELP) Earnings

Management highlights

- Consumer and AI Product Initiatives * Encouraging improving trends in app installs and page views in Q2. * Launched a new conversational platform connecting consumers and businesses, centered on Yelp Assistant, which has delivered early positive user engagement. Yelp Assistant drove project submissions and monetization in services categories, contributing to 10% year-over-year overall project growth. * Scaled Yelp Host, the AI-powered call answering service for restaurants, which reached an annual run rate of 2.4 million calls handled in July 2025, more than tripling the run rate from January 2025. Recent product updates added 16 new languages, OpenTable reservation integration, and commission-free phone pickup order functionality with full point-of-sale integration, expanding the product's addressable market. - Acquisition and Partnership Updates * Acquired Hatch, a services business AI lead management platform, in February 2025. Hatch's annual run rate revenue grew 59% year-over-year to $35 million as of June 2025. The team size was significantly expanded in Q2 to accelerate the product roadmap, leading to a short-term adjustment period in the quarter with improved trends observed in July. * Launched a data licensing partnership with OpenAI, where Yelp ratings and reviews now power ChatGPT's local search experience; requested quote integration is upcoming. Yelp already has long-standing data licensing partnerships with Apple Maps, Yahoo!, Amazon, Bing, and DuckDuckGo. Robust demand for data licensing products was seen in Q2. - Financial and Capital Allocation Strategy * Q2 2025 net income was $32 million (8% margin), a 28% year-over-year decrease; adjusted EBITDA was $91 million (24% margin), a 9% year-over-year decrease that came in $16 million above the high end of prior outlook. * Stock-based compensation expense fell to 7% of revenue in Q2, a 3 percentage point year-over-year reduction, with a target of bringing this below 6% of revenue by the end of 2027. * The company is targeting an annual run rate of $250 million in other revenue by the end of 2028, driven by AI offerings including Yelp Host, Hatch, and data licensing. AI tools have already improved product and engineering velocity, allowing faster go-to-market for new products. * Updated capital allocation strategy: invest in high-return growth initiatives, pursue strategic acquisitions, and return more than 50% of annual free cash flow to shareholders via share repurchases. Yelp repurchased $15 million in shares in Q2 and ~$25 million in Q3 to date, bringing 2025 year-to-date repurchases to ~$200 million. The repurchase program is currently paused to pay down the revolving credit facility, with resumption planned for 2027, when $339 million of authorization remains. Diluted shares outstanding declined 15% year-over-year.

Guidance

- Management expects the challenging operating environment for local businesses to persist through the remainder of 2025, continuing to pressure advertising revenue across categories, while strategic AI investments will drive strong other revenue growth. - Third quarter 2025 net revenue is guided to a range of $365 million to $370 million. Full year 2025 net revenue guidance is narrowed to $1.460 billion to $1.470 billion, representing a $5 million reduction to the upper end of the prior range. - Third quarter 2025 adjusted EBITDA is guided to a range of $70 million to $75 million, as expenses are expected to increase sequentially to fund AI transformation, Hatch scaling, and consumer marketing investments. Full year 2025 adjusted EBITDA guidance is narrowed to $315 million to $325 million.

Segment performance

Yelp's Q2 2025 net revenue totaled $376 million, a 1% year-over-year increase, exceeding the high end of management's prior outlook by $8 million. Of this total: 1) Services ad revenue: $241 million, flat year-over-year, accounting for approximately 64.1% of total net revenue. 2) Restaurants, Retail, and Other (RR&O) ad revenue: $102 million, a 10% year-over-year decrease, accounting for approximately 27.1% of total net revenue. 3) Other revenue: $33 million, a 98% year-over-year increase to a record level, accounting for approximately 8.8% of total net revenue. This strong growth was driven by the inclusion of Hatch acquisition revenue, plus significant expansion in data licensing and food ordering revenue. Overall paying advertising locations declined 1% year-over-year to 510,000, reflecting flat services locations and a decrease in RR&O locations. Total ad clicks declined 5% year-over-year, driven by lower RR&O clicks partially offset by a slight increase in services clicks; average cost per click (CPC) increased 1% year-over-year as higher-margin services clicks made up a larger share of total clicks.

Risks & headwinds

- Persistent challenging macroeconomic conditions for local businesses, including ongoing inflation, higher input and energy costs, are expected to continue pressuring advertising demand and paying advertiser counts through 2025, with no near-term material improvement in broader local economic conditions expected. - Short-term investment scaling for Hatch resulted in an adjustment period in Q2, and ongoing near-term investments will pressure near-term margins even as the company targets long-term growth. - Traffic impacts and lead conversion quality from new AI ecosystem data licensing partnerships are still unproven at this early stage, with no meaningful long-term data available yet.

Analyst Q&A

• Q: What investments are being made in Hatch, and what is the margin outlook for the business? /

  A: Management is investing across product, engineering, and go-to-market operations to scale the startup post-acquisition, adding headcount, processes, and performance tracking. Multiple product improvements were delivered in Q2 already. Management expects Hatch will eventually have a similar margin profile to other subscription software businesses, and will prioritize near-term investment to capture market share over immediate margin gains.

• Q: How does Yelp plan to capture economic value from OpenAI and broader AI data licensing partnerships, and what is the lead quality outlook? /

  A: Yelp views AI platform partnerships as a win-win similar to its existing long-term data licensing deals with major tech partners: Yelp reaches consumers where they already search, links content back to the Yelp platform, drives incremental traffic, and builds brand awareness. It is far too early to assess lead conversion quality from new AI partnerships, as integrations are in very early stages.

• Q: Have there been early cross-selling synergies between Yelp Host and Yelp's restaurant advertising products? /

  A: Yelp has a dedicated sales team for restaurant partners that sells Yelp ads alongside Yelp Host and other restaurant products like Yelp Guest Manager, and early synergies have been observed. While Yelp Host has not yet meaningfully moved the needle on overall restaurant advertising revenue, the high-satisfaction product creates more opportunities to engage restaurant clients and expand account spend over time.

• Q: What is different about Yelp's current paid search lead acquisition strategy for multi-location advertisers compared to past efforts? /

  A: Unlike past broader experiments buying leads across the full Yelp ecosystem, the current strategy is exclusively focused on sourcing quality leads for multi-location services advertisers, a segment that has capacity for large budget increases when delivered quality, scalable leads. Management confirms it is confident in the return on ad spend for this targeted strategy, which has driven substantial multi-location advertiser budget growth in the first half of the year.

• Q: Why has Yelp seen organic Google traffic tailwinds after Google's recent core updates, when many peers reported AI overview-related traffic headwinds? /

  A: Management noted Yelp has bucked the peer trend because Yelp's core local search categories are highly monetizable for Google, and Google generally does not place AI overviews at the top of search results for these queries to preserve its own ad revenue. Yelp's traffic tailwind is almost entirely organic; paid traffic makes up a negligible share of Yelp's overall traffic.