Yelp (YELP) Q1 2026 earnings review
Other Revenue Masks a Deteriorating Core Advertising Engine
Yelp eked out a 1% YoY revenue growth in 26Q1, but the underlying quality is poor. The entire top-line beat was driven by a 75% surge in 'Other Revenue' (data licensing and the Hatch acquisition). The core advertising business is rapidly decelerating: Services advertising grew a meager 1%, while Restaurants, Retail & Other (RR&O) plummeted 11%. Volume metrics are flashing red, with ad clicks down 10% and paying locations dropping 6%. Furthermore, management's aggressive pivot toward AI is taking a toll on the bottom line, sending Net Income down 27% and Adjusted EBITDA down 7% as infrastructure and marketing costs climb.
🐂 Bull Case
Other Revenue exploded 75% to a record $29 million. The integration of Hatch and successful data licensing deals (like OpenAI) are successfully diversifying Yelp away from its reliance on local SMB advertising.
Yelp repurchased a massive 5.1 million shares ($125 million) in Q1 alone, reducing diluted shares outstanding by 12% YoY and artificially supporting EPS despite the steep drop in net income.
🐻 Bear Case
Total paying advertising locations dropped 6% YoY to 485,000, and ad clicks fell 10%. Yelp is relying entirely on an 8% increase in CPC to offset massive volume flight, which is an unsustainable long-term strategy.
Cost of revenue jumped 10% due to AI infrastructure costs, and sales & marketing rose 5%. This drove a reversing trend in profitability, with Adjusted EBITDA margin shrinking from 24% to 22%.
⚖️ Verdict: 🔴
Bearish. The pivot to AI data licensing and SaaS is promising, but it's not large enough to offset the structural decay in the core local advertising business, which is bleeding advertisers and seeing steep margin contraction.
Key Themes
The Services Engine is Suddenly Stalling
For years, management has touted the Services segment as their resilient growth engine to offset RR&O weakness. However, the data contradicts this positive narrative: Services advertising revenue growth abruptly decelerated to just 1% YoY in 26Q1 ($234M). Just a year ago (25Q1), this segment was growing at 14%. If the Services segment cannot maintain meaningful growth, Yelp's entire advertising model is at risk.
Other Revenue Becomes the Savior
Accelerating aggressively, 'Other Revenue' surged 75% YoY to $29 million. This was driven by the integration of Hatchify (acquired Feb 2026), Yelp Places API licensing, and the DoorDash food ordering partnership. Management is targeting a $250 million annual run rate for this segment by 2028, representing a pivotal shift toward higher-margin, recurring SaaS and data monetization.
Macro Headwinds Crushing RR&O
The Restaurant, Retail & Other (RR&O) segment continues to bleed, with revenue down 11% YoY to $99M. Management blames a challenging operating environment for local businesses and competitive pressures from food delivery apps. This segment has been reversing into deeper contraction for multiple quarters, pulling total paying locations down to a multi-year low of 485,000.
AI Product Innovation and Adoption
Yelp rolled out 35+ new AI updates in Q1, specifically launching a cross-category Yelp Assistant. Yelp Host (an AI call answering service) surpassed an annual run rate of 1.5 million calls handled in April, doubling since January. These products are critical for proving ROI to businesses that are otherwise canceling their ad budgets.
Relying on Price Hikes Over Volume
Yelp is masking a mass exodus of clicks (-10% YoY) and advertisers (-6% YoY) by charging more per interaction. Average CPC increased 8% YoY. While management claims this is due to a mix-shift toward higher-value Services leads, inflating CPCs while volumes crater is a classic late-cycle dynamic that limits future pricing power.
Stock-Based Compensation Control
Management continues to clean up the income statement by suppressing Stock-Based Compensation (SBC). SBC dropped to 8% of revenue in 26Q1, down 200 basis points from 25Q1. They remain committed to reducing this to under 6% by the end of 2027, which will support GAAP EPS even as EBITDA compresses.
Other KPIs
Accelerating up 10% YoY. The margin pressure is real—Yelp is spending significantly more on maintaining and improving website infrastructure to integrate its new suite of AI products, as well as absorbing new infrastructure costs from the Hatch acquisition.
Decelerating sharply from $87.5 million in 25Q1. Operating cash flow fell from $98M to $58M, impacted by lower net income, higher CapEx for infrastructure ($12.7M), and negative working capital changes.
Guidance
Stable sequentially but implies a heavy deceleration YoY. Midpoint of $365.5M represents roughly flat to slightly down growth compared to 25Q2 ($370M), confirming that the advertising slowdown is not a one-quarter blip.
Stable. The company reiterated its full-year outlook. At the midpoint ($1.465B), this implies effectively 0% growth over FY2025 ($1.465B), demonstrating that Other Revenue growth is barely offsetting advertising declines.
Reversing. Reaffirmed prior guidance, which models a steep drop from the $369 million delivered in FY2025. This quantifies management's explicit choice to sacrifice 2026 margins to fund AI transition costs, paid traffic acquisition, and Hatch integration.
Key Questions
Services Segment Stagnation
Services advertising growth slowed from 14% a year ago to just 1% this quarter. How much of this is driven by macro conditions versus reaching peak penetration with service professionals?
RR&O Floor
With RR&O revenue declining by 11% this quarter, what signals are you looking for to indicate a floor in this segment? Have advertiser retention rates stabilized at all in early Q2?
Hatch Margin Profile
Other Revenue is growing rapidly, aided by Hatch, but EBITDA margins are compressing. Can you detail the gross margin profile of Hatch and the data licensing business compared to the legacy advertising business?
CPC Ceiling
You've successfully offset click declines with an 8% increase in average CPC. Given the macro pressures on SMBs, how much further can you push CPC pricing before it fundamentally breaks advertiser ROI?