The conserved Hippo signaling pathway acts in growth control and is fundamental to animal development and oncogenesis. Hippo signaling has also been implicated in adult midgut homeostasis in Drosophila. Regulated divisions of intestinal stem cells (ISCs), giving rise to an ISC and an enteroblast (EB) that differentiates into an enterocyte (EC) or an enteroendocrine (EE) cell, enable rapid tissue turnover in response to intestinal stress. The damage-related increase in ISC proliferation requires deactivation of the Hippo pathway and consequential activation of the transcriptional coactivator Yorkie (Yki) in both ECs and ISCs. Here, we identify Pez, an evolutionarily conserved FERM domain protein containing a protein tyrosine phosphatase (PTP) domain, as a novel binding partner of the upstream Hippo signaling component Kibra. Pez function--but not its PTP domain--is essential for Hippo pathway activity specifically in the fly midgut epithelium. Thus, Pez displays a tissue-specific requirement and functions as a negative upstream regulator of Yki in the regulation of ISC proliferation.