Yelp Inc. (YELP) - Q1 2026 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2026. Yelp operates as a single reporting segment, generating revenue primarily through performance-based advertising and data licensing. The quarter was marked by the strategic acquisition of Hatchify Inc. ("Hatch"), an AI lead management platform, to accelerate the company's AI transformation.
Key Financial Metrics
| Metric | Q1 2026 | Q1 2025 | Change |
|---|---|---|---|
| Net Revenue | $361.5 million | $358.5 million | +1% |
| Net Income | $17.7 million | $24.4 million | -27% |
| Diluted EPS | $0.30 | $0.36 | -17% |
| Adjusted EBITDA | $79.4 million | $84.9 million | -7% |
| Adjusted EBITDA Margin | 22% | 24% | -200 bps |
| Operating Cash Flow | $57.8 million | $98.0 million | -41% |
| Free Cash Flow | $45.2 million | $87.5 million | -48% |
| Cash & Equivalents | $110.4 million | $216.1 million | -49% |
| Debt (Revolving Credit) | $130.0 million | $0 | New Borrowing |
Material Changes vs. Prior Period
- Revenue Mix Shift: While total revenue grew slightly, advertising revenue declined 3% year-over-year. This was driven by an 11% drop in "Restaurants, Retail & Other" (RR&O) revenue, partially offset by a 1% increase in "Services" revenue and a 75% surge in "Other" revenue (driven by data licensing and the Hatch acquisition).
- Profitability Pressure: Net income decreased 27% due to higher operating expenses, including increased marketing spend, acquisition integration costs, and higher depreciation/amortization from new intangible assets.
- Balance Sheet Impact: Cash reserves decreased significantly due to the $271.2 million cash acquisition of Hatch. To fund this and maintain liquidity, the company drew $130 million on its revolving credit facility.
- Key Metrics: Ad clicks decreased 10% year-over-year, while Average Cost-Per-Click (CPC) increased 8%. Paying advertising locations declined 6% to 485,000.
Guidance, Outlook, and Risks
- Outlook: Management expects net revenue to decrease year-over-year in Q2 2026 due to persistent macroeconomic challenges affecting local businesses. However, sequential revenue growth is anticipated due to strength in "Other" revenue streams.
- AI Strategy: The company is targeting an annual run rate of $250 million in "Other" revenue by the end of 2028, driven by AI tools like Yelp Assistant and data licensing partnerships (e.g., OpenAI, Alexa+).
- Expense Trajectory: Expenses are expected to increase sequentially in Q2 2026 due to AI investments and marketing spend, which will likely result in a year-over-year decrease in Adjusted EBITDA for the quarter.
- Risks: Key risks include adverse macroeconomic conditions impacting advertiser spending, the ability to execute AI integration, and the realization of deferred tax assets ($115.5 million net DTAs as of Dec 2025).
Investor Verification Checklist
- Acquisition Integration: Verify the progress of Hatch integration and whether the projected $34 million annual run rate revenue is being realized.
- Debt Covenants: Confirm continued compliance with the revolving credit facility covenants (leverage ratio max 3.75x, interest coverage min 3.00x) given the new $130 million debt load.
- Deferred Tax Assets: Monitor management's assessment of the realizability of the $115.5 million in net deferred tax assets, as a valuation allowance could materially impact future earnings.
- RR&O Trends: Assess if the 11% decline in Restaurants, Retail & Other revenue is a temporary macroeconomic effect or a structural shift in advertiser behavior.
- Stock Repurchases: Note that $125 million was spent on buybacks in Q1 despite the cash outflow for the acquisition; verify the sustainability of this capital allocation strategy.