Yelp's AI Pivot: Data Licensing and Hatch Drive a New Revenue Line, but Core Ad Business Still Under Pressure
Yelp bets on AI-powered revenue streams to offset a sluggish advertising market, with Other revenue soaring 98% but core Services and RR&O stagnating.
YELP · Earnings Call · 2026-08-06
A New Revenue Engine Emerges
Yelp's transformation is real. In the second quarter, data licensing and other AI-driven offerings pulled Other revenue up 98% year-over-year to a record $33 million. The company now targets a $250 million annual run rate by 2028, a three-fold increase from the current pace. Management is investing heavily in acquisition of Hatch, the AI lead-management startup purchased in February. "We are investing in Hatch. We're investing across the board, both in go-to-market as well as product and engineering," CFO David Schwarzbach said on the call. He stressed that the margin profile can eventually mirror subscription businesses, though near-term investment will compress margins. The most tangible evidence of traction is Yelp Host. The AI phone-answering service for restaurants now handles 2.4 million calls annually, more than tripling since January. It has added OpenTable integration and food-ordering capability with full POS integration, expanding its market. Jeremy Stoppelman called it a compelling product and said it opens doors for cross-selling ads and other products.The Macro Cloud Over Core Ads
The core advertising business remains under pressure. Services ad revenue was flat year-over-year at $241 million, while restaurants, retail, and other (RR&O) ad revenue fell 10% to $102 million. Paying advertising locations declined 1% to 510,000. The company attributes this to a challenging local economy. "We anticipate that the challenging economic environment for local businesses will persist," David said in his prepared remarks. The company has narrowed its full-year revenue guidance to $1.460-1.470 billion and adjusted EBITDA to $315-325 million. The softening is not new—it has been a recurring theme across calls. As Jeremy remarked in May, "We've seen incremental projects as we've rolled out Yelp Assistant... 15% now are driven by Yelp Assistant." But the difference now is the strategic pivot: instead of just optimizing search, Yelp is actively buying leads for multi-location services advertisers. "The difference now is that we're specifically targeting multi-location Services businesses," Jed Nachman explained. This is a deliberate expansion of the paid-search effort that had been scaled back previously.Fundamental Shape and Capital Allocation
Total revenue grew 1% to $376 million in Q2, with net income margin at 8% and adjusted EBITDA margin at 24%. Operating income fell 15% year-over-year to $30 million, and free cash flow (less SBC) dropped 71% to $15 million as the company reinvested in AI and Hatch. To fund this transformation, Yelp has paused share repurchases to pay down its revolving credit facility, having bought back $200 million in the first half. The company now plans to return more than 50% of free cash flow to shareholders annually, a new sticky commitment. This capital-allocation shift, combined with the AI revenue push, marks a clear strategic reorientation. The stock has been weak, down ~20% from its May peak, reflecting investor skepticism about the ad business. But the AI narrative offers a counterweight: if data licensing and Hatch can deliver the promised $250 million run rate, Yelp could be a much more diversified, resilient business in three years.That encapsulates the thesis. The question is whether the core ad weakness is cyclical or structural. For now, Yelp is betting that AI revenue can outgrow and eventually offset the ad headwinds.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.