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Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2025 Yelp Inc. Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Kate Krieger, Director of Investor Relations. Please go ahead.
Good afternoon, everyone, and thanks for joining us on Yelp's Second Quarter 2025 Earnings Conference Call. Joining me today are Yelp's Chief Executive Officer, Jeremy Stoppelman; Chief Financial Officer, David Schwarzbach; and Chief Operating Officer, Jed Nachman. We published a shareholder letter on our Investor Relations website and with the SEC and hope everyone had a chance to read it. We'll provide some brief opening comments and then turn to your questions.
Now I'll read our safe harbor statement. We'll make certain statements today that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. In addition, we are subject to a number of risks that may significantly impact our business and financial results.
Please refer to our SEC filings as well as our shareholder letter for a more detailed description of the risk factors that may affect our results. During our call today, we may discuss adjusted EBITDA, adjusted EBITDA margin and free cash flow, which are non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles. In our shareholder letter released this afternoon and our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding these non-GAAP financial measures as well as historical reconciliations of GAAP net income or loss to adjusted EBITDA, GAAP net income margin to adjusted EBITDA margin and GAAP cash flows from operating activities to free cash flow.
And with that, I will turn the call over to Jeremy.
Thanks, Kate, and welcome, everyone. Yelp delivered record net revenue and strong profitability in the quarter. We generated $370 million of net revenue while expanding net income margin by 1 percentage point and adjusted EBITDA margin by 2 percentage points from the prior year period. We remain focused on our product-led strategy and rolled out a number of AI-powered updates in the quarter.
Underlying our top line results, services revenue increased by 8% year-over-year and drove our business performance. At the same time, the operating environment for businesses in our restaurant, retail and other categories remain challenging, and our R&O revenue declined by 5% year-over-year. We are continuing to deepen our focus on services. Excluding projects acquired through our paid search initiative, Request-a-Quote projects increased by approximately 10% year-over-year, driven by improvements to the request flow and our AI chatbot, Yelp Assistant, which maintained strong momentum.
Project submission through Yelp Assistant increased by more than 400% year-over-year. As we roll out additional entry points, including by making it available to logged out users, we expect to drive continued growth. To reduce friction and make the service pro experience even smoother, we are providing advertisers with new tools to better manage their leads on Yelp. In the second quarter, we added a number of new labels and filters to the business owners inbox to help service pros sort and respond to consumer requests more quickly.
In addition, our integration with workflow automation platform, Zapier, has been particularly well received with strong early adoption across both SMB and multi-location customers. More broadly, our product and engineering teams continued to leverage AI to transform the way consumers connect with great local businesses. In the second quarter, we continued to make progress towards our launch of Yelp Assistant across all categories. We also recently initiated live testing of Yelp Host, our AI-powered call answering service for restaurants.
We're encouraged by the early results and look forward to beginning similar testing with Yelp Receptionist, our services tailored version later this year. Beyond the Yelp platform, we believe trusted content will be a differentiator in an AI-powered world, and we have seen strong demand for our data licensing products as a result. AI search API calls have accelerated, increasing by 20x over the past year and 10x in just the last 2 months. We also continue to onboard new licensing partners.
Together, these developments contributed to an increase in annual run rate revenue related to AI search to more than $10 million over the last 2 months. This momentum reflects Yelp's value as an essential partner in emerging AI-powered search products. In summary, our focus on services and AI products continue to strengthen our business, and we remain excited by the opportunities ahead to drive profitable growth and shareholder value over the long term. With that, I'll turn it over to David.
Thanks, Jeremy. In the second quarter, net revenue increased by 4% year-over-year to $370 million, $3 million above the high end of our outlook range. Driven by our disciplined approach, net income increased by 16% year-over-year to $44 million or $0.67 per share on a diluted basis, representing a 12% margin. Adjusted EBITDA increased by 10% year-over-year to $100 million, representing a 27% margin, putting it $11 million above the high end of our outlook range.
Year-over-year advertising revenue growth decelerated from the first quarter as advertisers exercised increased caution in the face of heightened macroeconomic and policy uncertainties. Advertisers' budgets increased modestly in aggregate as the second quarter progressed, though not to the same extent as we have seen historically. Services revenue increased by 8% year-over-year to a quarterly record $241 million. As Jeremy mentioned, restaurants and retailers remained pressured in the quarter, resulting in a 5% year-over-year decline in RR&O revenue to $113 million.
A decrease in RR&O locations offset growth in services locations in the quarter. This resulted in an overall decline of 3% year-over-year in paying advertising locations to 515,000. Ad clicks declined by 7% year-over-year in the quarter, primarily due to macro pressures and increased competition in RR&O categories. To a lesser extent, reduced spend on paid project acquisition in the current year period had an impact on clicks. Average CPC increased by 11% year-over-year, reflecting growth in services demand and fewer clicks overall.
Turning to expenses. Our second quarter results demonstrate the margin potential of our business with a net income margin of 12% and an adjusted EBITDA margin of 27%. We achieved these strong results through disciplined expense management. As we continue to focus on allocating resources towards our best opportunities, we again expect headcount will be approximately flat year-over-year by the end of 2025. In the second quarter, we reduced stock-based compensation expense as a percentage of revenue by 2 percentage points year-over-year to 9%.
We remain focused on reaching our targets of less than 8% by the end of this year and less than 6% by the end of 2027. We expect these efforts to stack over time, improving the quality of our adjusted EBITDA and benefiting GAAP profitability in the years to come. Our capital allocation strategy consists of 3 main elements: first, maintaining a healthy cash balance to fund our operations; second, retaining balance sheet capacity for potential acquisitions; and third, returning excess capital to shareholders through share repurchases. In the second quarter, we repurchased $65.9 million worth of shares at an average purchase price of $35.58 per share.
As of June 30, 2025, we had $202 million remaining under our existing repurchase authorization. We plan to continue repurchasing shares through the remainder of 2025, subject to market and economic conditions. Turning to our outlook. With heightened macroeconomic uncertainties, we did not see the seasonal increase in revenue that we would typically expect in the second quarter.
We anticipate that this dynamic will persist in the third quarter with net revenue remaining approximately flat with the second quarter in the range of $365 million to $370 million. For the full year, we are narrowing our range with net revenue now expected to be between $1.465 billion and $1.475 billion. Turning to margin. We expect expenses to increase in the second half of the year, primarily driven by cost of revenue and seasonal sales and marketing expenses.
In addition, we expect our efforts to reduce SBC will act as a headwind to adjusted EBITDA as we move through the second half of the year, but will not impact net income. As a result, we expect third quarter adjusted EBITDA will be in the range of $80 million to $85 million. For the full year, we are narrowing our range and now expect adjusted EBITDA to be between $350 million and $360 million. In closing, Yelp's second quarter results reflect the underlying profitability of our business.
We continue to believe in the opportunities ahead to create shareholder value over the long term as we focus our investments in areas that we believe will drive business performance, particularly around AI. With that, operator, please open up the line for questions.
[Operator Instructions] Your first question comes from the line of Sergio Segura with KeyBanc Capital Markets.
I have 2. So the first, I was hoping you could just walk us through the deceleration you saw in services revenue growth this quarter. I know the category has been largely resilient to macro. So curious if anything has changed on that front. And then the second would be on the AI search API and data licensing detail you had in a letter.
I thought that was pretty interesting. Hoping you could just dive a little bit more into the detail there, the momentum you're seeing and how big of an opportunity you ultimately see that being?
Sergio, I'll take the questions here. So we did see a degree of softness, which we attribute to macro and policy changes in volatility. Obviously, consumer sentiment has been impacted with some of those things starting in April. That said, budgets did increase through the second quarter, but we didn't see them increase at the sort of traditional seasonal levels we would expect to see.
So we do believe that it's going to persist through Q3, as we said in our remarks. As far as what's really under our control and what can we do, there's a lot to be excited about. We've got the rollout of Yelp Assistant, which is going well. Projects going through that flow is up 400% year-over-year.
We continue to add new entry points. There is a big pool of traffic or logged out users that don't get the Yelp Assistant experience currently, and we do expect to bring that to life in the second half. We're really excited about that. There's the coming additional category expansion of Yelp Assistant, which we expect to boost overall usage of Yelp Assistant, the stickiness of that, if you can really use it as a new interface for Yelp at large.
We think that's really exciting and consumers are going to love that. We're hard at work on that experience and expect to deliver that in the second half. On the multi-location services side, we continue to have good progress there. We talked about in the letter, the integration of our leads API with Zapier.
And that's gone well. That's made a lot easier for multi-location businesses to tap into our great leads, especially from Request-a-Quote and get out timely responses and win more business. So that's some of the stuff that's going on in services, a lot to be excited about. You also mentioned AI search, especially with respect to our API and how is that going?
And we pointed to some interesting stats. We have seen a lot of recent pickup with respect to our API as well as our search data licensing for that space at large. So on the API, we saw in the last 2 months, our usage of that API go up 10x. And so that's AI search players that are accessing our data through our API.
That's really exciting to see. We do feel like it's super early. We're in kind of the first inning there. It does make sense, obviously, for a lot of the players that are trying to provide a general search experience with AI that they're going to need to tap into local content.
They have great general knowledge, but we all know about hallucinations and problems with the data. And of course, the local landscape is changing constantly, and you really need a trust factor. And we think that Yelp content is the perfect fit there. There's a lot of players that aren't Google that really don't have access to content without turning to someone like Yelp.
And so we do see ourselves as a really essential ingredient in this rapidly developing space. And so we're starting to see some of that traction on our API as well as we're onboarding search licensing partners. Our revenue in the last few months has increased to a $10 million run rate for this space as well on the licensing side. So there's a lot to be excited about.
And again, we're just a kind of step on here. So we'll keep you posted as we make progress.
Your next question comes from the line of Colin Sebastian with Baird.
This is Zach Witaszek on for Colin Sebastian. So I guess on the restaurant side of the business, you've been calling out the pressure from the food delivery providers for a few quarters now. Has there been any change in this level of competitive headwind? And then just as a quick follow-up, how are you thinking about the ability for the Yelp Assistant to open some more activity here?
And are there any early learnings as you expand it?
Zach, this is Jed. I can take the first part of that question in terms of competitive pressure. We think the main story behind the RR&O category is macro and continues to be uncertainty. Certainly, in April, we saw it peak and it has continued, but we've been talking about it now for a couple of years.
When you look at consumer sentiment and inflationary impacts on the consumer, it's really taken a toll on kind of the restaurant segment. And then you look at the operating costs for the operators, input costs are up, there are labor issues. And so I think the main story there is the macro. And certainly, at the margins, we see impacts from some of the competitive pressures, but largely, it's a macro story.
And Zach, I can take your question around Yelp Assistant and does that potentially support higher frequency categories like restaurants. I think as we go cross category, that is certainly one of the things we're going to be looking for and one of the things we're hopeful for. We do think the experience is going to be very unique to be able to have a conversation about what your needs are to get very specific. If you want a vegan restaurant that serves organic wine, that's the type of thing that you can talk to the assistant about and get straight to the result.
So we are really excited to bring that type of experience to consumers. We think it will be industry- leading. There's a lot of folks working on it internally right now as well. I think there's also the off Yelp side of it.
So when you think about wrapping the Yelp Assistant functionality in an API, obviously, there is emerging more general AI search players, and we do think there in need of content and experiences like this. And we already do see pickup on our API from players in the space that are using our content. So we do see an opportunity there as well to get our great content, especially within restaurants and other high-frequency categories in front of consumers with these new emerging players that are gaining a lot of traction on the general search side.
[Operator Instructions] There are no further questions at this time. Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.