Q3 2026 Yelp Inc. Earnings Conference Call - YELP INC

Financial Performance:

• Net revenue decreased 1% YoY to $371 million, slightly beating the high end of guidance; full-year revenue guidance raised to $1.455B–$1.46B.
• Net income fell 12% YoY to $35 million (9% margin); Adjusted EBITDA declined 6% YoY to $92 million (25% margin), significantly beating guidance by $17M.
• Services ad revenue dropped 2% to $238M; R&O ad revenue fell 13% to $99M despite a 3% increase in paying locations to 509k, driven by lower spend per advertiser and an 8% drop in ad clicks.
• "Other revenue" surged 82% YoY to a record $34M, fueled by Hatch, data licensing, and food ordering; this segment currently sits at a ~$136M annual run rate, with a long-term target of $250M by 2028.
• Free cash flow utilization included $25M in share repurchases (average price $26.14), reducing diluted shares outstanding by 15% YoY; the company paused repurchases temporarily to pay down the revolving credit facility.
• Stock-based compensation (SBC) dropped to 6% of revenue (3 percentage points lower YoY), with management expecting SBC to remain below 6% in Q4, a year ahead of the 2027 target.

Guidance and Future Outlook:

• Q4 2026 net revenue guidance set at $347M–$352M, reflecting continued macro headwinds and advertising pressure.
• Q4 2026 Adjusted EBITDA guidance lowered to $57M–$62M, up from Q3's margin, to account for increased investments in Hatch and Yelp Post.
• Full-year Adjusted EBITDA guidance narrowed and raised to $320M–$325M.
• Management anticipates a challenging economic environment persisting into Q4, with inflation and borrowing costs impacting consumer and business spending.
• Strategic goal: Drive "Other Revenue" to a $250M annual run rate by end of 2028, leveraging AI tools and data licensing.

Business Segments and Product Lines:

• Yelp Host: Internal AI voice solution for restaurants reached a 2.5M call annual run rate (15x growth since Oct 2025); food order conversion increased 13% for a major client; food ordering revenue grew 6x from June to October.
• Hatch: AI-powered lead management platform for home services; ARR reached ~$37M (up 55% YoY, 6% QoQ); growth driven by voice AI integration with GPT-Live and deepened ServiceTitan integration.
• Yelp Assistant: Conversational AI for consumers; generated ~10% of request-to-quote projects; new features include "Check For Me" (wait times), "Keep Me Posted" (reminders), and deeper ChatGPT integration.
• Data Licensing: Robust demand from AI ecosystem partners (OpenAI, Meta) for trusted local content; revenue growth contributing significantly to the "Other Revenue" segment.

Market and Competitive Landscape:

• Advertising market remains soft due to macroeconomic pressure, inflation, and high input costs (labor, energy) for local businesses.
• "Repair vs. Replace" consumer behavior is reducing demand for large home services projects.
• R&O locations increased 3% driven by multi-location advertisers, offsetting declines in average revenue per location.
• Competition in AI voice and local discovery is intense; Yelp positions itself as an essential partner for personal AI agents due to its unique repository of reviews, photos, and real-time business status.

Risks and Challenges:

• Persistent macroeconomic headwinds expected to continue impacting advertising revenue in Q4 and beyond.
• Risk of "muted" impact from Google's AI Overviews on organic traffic, though management notes this has been less severe than reported elsewhere.
• Execution risk in scaling high-growth AI products (Host, Hatch) to reach the $250M revenue target by 2028.
• High input costs for small businesses and consumers may constrain the local advertising market for an extended period.

Management Commentary and Tone:

• Management tone is cautiously optimistic; they acknowledge the difficult advertising environment but express high confidence in the AI transformation and long-term value creation.
• Emphasis on "disciplined capital allocation" with a focus on ROI, shifting resources from traditional ad spend to high-growth AI products.
• CEO Jeremy Stoppelman and CFO David Schwarzbach highlighted that the 30+ new product features in Q3 and rapid velocity in product development demonstrate the efficacy of their AI strategy.
• Management reiterated a commitment to returning >50% of free cash flow to shareholders via buybacks once credit facility repayment is stable.

Analyst Questions and Answers:

• Data Licensing & AI Agents: Management confirmed strong engagement with OpenAI and Meta; Yelp's verified local data is critical for personal AI agents to avoid "hallucinations" regarding business status/hours.
• Expense Outlook: Q3 expense favorability came from marketing optimizations and capitalized software development; Q4 expenses expected to rise slightly due to strategic investments in Hatch and Yelp Host.
• Yelp Assistant Stickiness: Focus on converting one-time project searches into recurring habits by integrating high-frequency categories (dining, nightlife) and agentic features (booking, reminders).
• Hatch Growth: 55% YoY growth maintained; expansion into new service categories (pest control, lawn care) and enterprise/commercial sales teams expected to drive future acceleration.
• Yelp Post: A new internal AI call-answering tool showing strong traction with high call volumes and improved conversion metrics.
• AI Infrastructure: Internal AI tools are driving significant productivity gains in product/engineering velocity and sales pipeline management, reducing the need for proportional headcount growth.

Other Key Points:

• A one-time tax benefit of ~$30M is expected in Q4 related to previously unrecognized tax benefits, which will boost net income but not Adjusted EBITDA.
• The company is expanding its go-to-market teams for both Yelp Host and Hatch to capture market share in the enterprise and commercial segments.
• Yelp has paused share repurchases temporarily to prioritize debt reduction on the revolving credit facility, with plans to resume in 2027.
• Product velocity is highlighted as a key competitive advantage, with over 30 new features released in Q3 alone.