Yelp’s Q1 2025 Earnings Show Services Surge, But Macro Headwinds Linger

Yelp Inc. delivered a mixed performance in Q1 2025, with its services segment driving robust growth while traditional categories like restaurants and retail struggled under macroeconomic pressures. The results highlight a growing bifurcation in Yelp’s business: a services-centric future fueled by AI innovation, but one that still faces uncertainty in its core advertising markets. Let’s dig into the numbers and what they mean for investors.

The Financial Breakdown: Services Lead, But RR&O Lags

Yelp’s net revenue rose 8% YoY to $359 million, with services revenue soaring 14% to $232 million. This marked the 16th consecutive quarter of double-digit growth for services—a segment now accounting for nearly 65% of total revenue. The performance was driven by repair and home services, where AI integration and features like image-based project requests are boosting demand for high-value leads.

However, the Restaurant, Retail, & Other (RR&O) category declined 3% YoY to $110 million, reflecting ongoing softness in discretionary spending. Yelp’s paying advertising locations fell 3% to 517,000, with RR&O advertisers shrinking while services advertisers grew.

Profitability improved significantly: Adjusted EBITDA jumped 32% to $85 million (24% margin), and net income surged 72% to $24 million. This was aided by cost discipline, a lower SBC (stock-based compensation) burden (now 10% of revenue, down from 12% a year ago), and higher-margin services revenue.

User Growth: Clicks Drop, But Quality Rises

Ad clicks fell 3% YoY, a result of both macroeconomic pressures and Yelp’s intentional shift away from low-value paid search clicks. This trade-off paid off: Average cost per click (CPC) rose 9%, driven by higher-value services leads and category mix changes.

Request-to-Quote (RTQ) projects—a key metric for services—grew ~10% YoY, with organic growth exceeding 15% when excluding paid search. This suggests Yelp’s organic engagement is improving, a positive sign as it reduces reliance on paid clicks.

The AI Pivot: Yelp’s New Growth Engine

Yelp’s AI initiatives are central to its strategy. The Yelp Assistant now includes photo recognition, letting users upload appliance models to refine repair requests. Response Quality Badges for service pros are boosting lead quality, while upcoming AI answering services aim to capture missed call-based leads.

RepairPal integration—a move to allow auto repair scheduling on Yelp—is also critical. Combined with Zapier’s Leads API for multi-location advertisers, these tools could deepen relationships with enterprise clients and improve monetization.

Guidance: Caution Amid Uncertainty

Yelp guided Q2 revenue between $362 million and $367 million, implying flat to modest growth from Q1. Full-year revenue is projected at $1.465–1.485 billion, with adjusted EBITDA between $345 million and $365 million. The widened ranges reflect macro risks, particularly in RR&O.

Investors should note Yelp’s $268 million remaining in share repurchases under its current $330 million authorization—a sign of confidence in its balance sheet.

The Risks: RR&O and SBC Headwinds

Yelp’s challenges are clear. RR&O advertisers remain cautious, and the category’s decline could persist if discretionary spending weakens further. Meanwhile, stock-based compensation (now 10% of revenue) is still a drag, though management aims to cut it to below 6% by 2027.

CPC management is also critical: Yelp must ensure higher CPCs correlate with advertiser ROI to sustain pricing power.

Conclusion: A Services Story, But Not Yet Fully Told

Yelp’s Q1 results underscore its transition to a services-driven model. With 14% revenue growth in this category, AI-fueled innovation, and a 32% EBITDA expansion, the path forward is promising—if not yet smooth. The stock’s performance over the past year (see visualization) reflects this tension: shares have trended upward but remain volatile amid macro concerns.

Investors should weigh two key facts: Yelp’s services segment has delivered 16 straight quarters of growth, and its adjusted EBITDA margin is now 24%—up from 19% a year ago. The company’s focus on AI and enterprise tools positions it to capitalize on non-discretionary spending, even as RR&O faces headwinds.

However, the risks are real. If the economy sours further, RR&O could drag margins down. Still, Yelp’s services momentum and $268 million in remaining buybacks suggest it’s a stock to watch closely. For now, it’s a bet on AI-driven local commerce—a sector where Yelp holds a unique position, but one that demands patience for macro clarity.

In short: Yelp is a services powerhouse, but its future hinges on balancing growth in high-margin segments while weathering the storm in its traditional categories. The Q1 results suggest it’s on the right path, but the road ahead remains bumpy.