The more than 100 five-star reviews on David Gunderman’s Yelp page used to be a source of pride and joy. Then something fishy happened.

Gunderman, 52, and his business partner Andrew Gunderman-Raskopf, are realtors in the most populous neighborhood of the San Francisco Bay Area. The married duo had collected about 140 reviews that recommend their services by last October, but near the end of 2018, Yelp Inc.’s software banished some 80 percent of them to the bottom of their page, in a section labeled “not currently recommended.”

They weren’t the only ones. Social media lit up with complaints. With limited explanation from Yelp, businesses were left to draw their own conclusions: a change in the software. Some market watchers dubbed the situation the ‘Yelp Purge of 2018’ and Yelp’s ‘Ghost’ update.

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“I could not imagine that we’d ever be here. Where’s the bottom? They just keep falling,” Gunderman said in a phone interview after posting an open letter on LinkedIn. “We’ve had a stellar reputation for going on 20 years in our marketplace, and now I have as many reviews as someone who has been doing it for two or three years.”

Like a digital phonebook, Yelp is a listing of businesses. People who have used the listed services or businesses post their reviews and give ratings. Companies don’t pay to be included in the listing, but can buy ads so that their business is more prominently displayed in results of a search on the platform, and they can pay to have some control over pictures and to keep competitors from advertising on their page.

Only “recommended reviews,” as determined by Yelp’s software, count toward a business’s average number of stars. Yelp’s algorithm is built to weed out any reviews that may be fake or biased, as well as any that are written by users that aren’t very active on the platform.

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Yelp is certainly no stranger to complaints on how it manages reviews, but it may now be more vulnerable after switching to flexible, non-term contracts with advertisers last year. The change allows businesses to more easily start and stop advertising. The San Francisco-based company has since experienced a slowdown in sales -- something that it warned will flow into fourth-quarter results, which are due after the market closes Wednesday.

Yelp has been struggling after reporting in the third quarter that it added fewer new accounts and cancellations increased. The company gave a forecast for the fourth quarter that missed analysts’ estimates. Its shares dropped as much as 30 percent after the report and they have only partially recovered. Adding to concerns, one of Yelp’s largest investors is threatening a proxy fight if it doesn’t follow recommendations to improve its performance.

Raymond James analyst Justin Patterson said he’d heard about the recommendation purge and that it would be helpful to have some clarity on it from the company. He rates the stock the equivalent of a hold.

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A Yelp spokeswoman wouldn’t confirm that the company’s recommendation software underwent a major update.

“The algorithm is constantly learning as it ingests more data,” according to a statement provided by Yelp. “Given the continuous improvement of the recommendation software, it’s possible for reviews to move from ‘not recommended’ to ‘recommended’ and vice versa at any given point.”

Len Raleigh, founder and chief content creator at marketing firm Telapost, looked into the complaints and found that Yelp did change the way which reviews are displayed as “recommended reviews.” After posting an initial article about it in December, he got dozens of emails from people, some of whom said they wanted to pull their advertising on Yelp.

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“Any business owner would tell you reviews are extremely important when people are looking up a business,” Raleigh said in an interview. “A lot of consumers will just look at the overall review number when they select a business.”

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While many small businesses may still rely on their Yelp presence to build their brand, competition from Google, Facebook Inc. and ANGI Homeservices Inc. may give them an opportunity to shop around.

Aegis Capital Corp. analyst Victor Anthony changed his rating on the stock to sell from buy based on Yelp’s decision to pivot away from locking advertisers into long-term contracts. If the algorithm change is enough to keep some businesses from buying ads, that could eat into overall revenue.

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“Local advertisement is their bread and butter,” Anthony said. “That’s how they make their money so they can’t afford to lose it at all, particularly as they go through this business model transition.” About 96 percent of Yelp’s revenue in the first three quarters of 2018 came from local advertising.

Gunderman pays $70 per month to Yelp for a low level of advertising, which includes the ability to add photos and keep other advertisers off his page. “I don’t see any point in advertising because my page has been slaughtered,” Gunderman said. And although he has yet to cancel, he says “my fingers are itching to do so.”

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When Yelp reports quarterly results, analysts estimate profit, excluding some items, of 36 cents a share. The company has forecast net revenue of $239 million to $243 million in the period. Analysts are expecting $241.2 on average.

To contact the reporter on this story: Krista Gmelich in New York at kgmelich1@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Molly Schuetz, Andrew Pollack

©2019 Bloomberg L.P.

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