Yext, Inc. (NYSE:YEXT) Q3 2023 Earnings Call Transcript

Yext, Inc. (NYSE:YEXT) Q3 2023 Earnings Call Transcript November 30, 2022

Yext, Inc. beats earnings expectations. Reported EPS is $0.02, expectations were $-0.01.

Operator: Good day, and welcome to the Yext Third Quarter Fiscal 2023 Financial Results Conference Call . Please note this event is being recorded. I would now like to turn the conference over to Nils Erdmann, Senior Vice President of Investor Relations. Please go ahead.

Nils Erdmann: Thank you, operator, and good afternoon, everyone. Welcome to the Yext Fiscal Third Quarter 2023 Conference Call. With me today are CEO and Chair of the Board, Mike Walrath; COO and President, Marc Ferrentino; and CFO, Darryl Bond. During this call, we will make forward-looking statements, including statements related to our future financial performance, expectations regarding the growth of our business, our outlook for the fourth quarter and fiscal year 2023, our strategy and estimates of financial and operating metrics, capital expenditures and other indications of future opportunities, as further described in our third quarter earnings press release. These forward-looking statements are subject to certain risks, uncertainties and assumptions, including those related to Yext’s growth, the evolution of our industry, our product development and success, our management performance and general economic and business conditions such as the impact of the COVID-19 pandemic.

We undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports filed with the SEC, including our most recent Form 10-Q for the quarter ended July 31, 2022, our annual report on Form 10-K for the fiscal year ended January 31, 2022, and our press release that was issued this afternoon. During the call, we also refer to non-GAAP financial measures. Reconciliations with the most comparable GAAP measures are available in the earnings press release, which is available at investors.yext.com. I will now turn the call over to Mike.

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Mike Walrath: Thanks, Nils, and thanks, everyone, for joining us today. We are pleased to report Q3 results that demonstrate the continued execution of our strategy to drive efficient and profitable growth by delivering best-in-class products and services that create tremendous value for our customers. I’ll start with a brief rundown of our financial performance. In Q3, our revenue was $99.3 million. On a constant currency basis, our quarterly revenue increased roughly 4% over the prior year period, primarily driven by new customers and upsells. Our non-GAAP net income per share was $0.02 compared to a non-GAAP net loss per share of $0.04 in the same period last year. This improvement was largely driven by our success in streamlining our business and improving our operating efficiencies.

What this illustrates is that the groundwork we laid in the first half of this year is paying off and we’re delivering on the financial commitments we made while continuing to find ways to improve our margins and successfully manage costs to increase our profitability. This quarter, we were able to further reduce our non-GAAP operating expenses as a percentage of revenue to 73%, down from 81% in the same period a year ago. In addition, sales and marketing as a percentage of revenue was 44%, down from 52% in the year ago period, while our direct ARR growth was up 3% year-over-year or 6% on a constant currency basis. In other words, we generated ARR growth with a significantly reduced sales and marketing budget. Our sales team has grown increasingly productive as we align around our highest priorities; customer satisfaction, operational efficiency and product innovation.

To achieve these results, particularly in the face of a challenging macroeconomic environment is a testament to our team’s strength and commitment. The macroeconomic headwinds have placed increased scrutiny on budgets and elongated sales cycles, and this is likely to continue to impact our business in the near term, but our value proposition resonates strongly with our customers as we continue to do more with less, we are helping our customers to do the same. It is important to underscore that we are a net saver of cost for our customers. Our customers are the best source of real time feedback, both direct and indirect, and gathering that information is our first responsibility. Acting on it by developing product features and enhancements is one of the best means of showing them that we’re listening, and we’re committed to making product decisions that will drive greater value.

While we remain focused on operating efficiency, we are committed to developing new and transformative technology to enhance our platform. Our continued investment in technology innovation helps strengthen our relationships with our customers and leads to greater adoption of our Answers platform. This is reflected in our strength in bookings this quarter, both in terms of the breadth and the size of deals we closed. As I mentioned earlier, we’re seeing direct ARR growth from new customers and upsells, and just as importantly, our Q3 gross retention rate was the highest it has been this year. We calculate gross retention by comparing the total dollar value of contracts up for renewal in a given quarter against what was renewed, excluding upsells and in Q3, this percentage moved up into the mid-80s.

This is very encouraging, particularly when taking into account that a handful of sizable renewals closed in the early days of Q4. Had these closed in Q3, our gross retention would have been several points higher. Even without these deals, we demonstrated sequential improvement in gross retention this quarter, our focus in this area is having a positive impact. To build on this momentum, last month, we welcomed Tom Nielsen to Yext as our Chief Revenue Officer to lead the execution of our sales and customer success strategies. Tom was most recently EVP and Head of Worldwide Sales at New Relic. And his expertise in building and managing scalable, dynamic go-to-market engines is what makes him the ideal leader to drive improved sales execution and accelerate our global revenue growth.

His oversight of our overall revenue strategy will drive better integration across our direct and partner businesses and alignment across our sales and customer service organizations. While Tom’s focus will be on our revenue engine, we will continue to look for ways to drive efficiency of our business and enhance our profitability, which is critical to our success. As our Q3 results indicate and our Q4 and full year guidance suggests, we continue to operate with an unwavering focus on long term sustainable growth through an efficient operating model. I’d like to take a moment and thank our entire global team for their hard work and commitment to Yext and to getting the right answers for our customers. And with that, I’d now like to turn the call over to Marc.

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Marc Ferrentino: Thanks, Mike. We’re making good progress in driving efficiency across our sales organization. And as Mike mentioned, we’re successfully doing more with less. This shows in our ARR growth, which we achieved with a leaner, stronger and hungrier sales team, not surprisingly doing more with less is also what our customers strive for, particularly in this economic environment. So our objectives are closely aligned with our customers. What resonates with our customers is being able to show how quickly we can solve their answers problems across one area of their organization, and then demonstrate how our platform can be adapted to manage additional pain points. I’m encouraged by the momentum we’re beginning to see here and most importantly, the results are resonating with our customers.

It’s becoming even more clear that we are well positioned to drive long term growth as our new and existing customers are taking greater advantage of multiple products across our Answers platform. What resonates with them is the value add and cost savings that our products enable to help our customers with digital adoption and becoming mission critical, particularly with the growing number of disconnected digital tools that are implemented across organizations. Gaining real time customer insights and data driven decisioning are essential for operating within the digital environment, and our Answers platform presents an opportunity to help our customers optimize their growth. To remain the best-in-class solution for our customers, we are continually making enhancements to the Answers platform and developing even more functionality that improve the overall user experience.

In our fall release, which was announced a couple of weeks ago, we added features like listings verifier and point-in-time backups for pages that will transform how our customers use two of our most popular products. This is our third consecutive seasonal release where we’ve introduced major enhancements to our listings products while also introducing new and innovative ways for organizations to drive user engagement through pages, search, reviews and connector. We added Twitter and Instagram to the Yext publisher network for social postings. This broadens our platform which has the industry’s largest network of 250-plus direct integration partners and gives Yext Listings customers the ability to promote new content, deliver valuable updates and drive user engagement across key social media platforms.

With these and our ongoing enhancements, we continue to strengthen our Answers platform and our value proposition to clients. The breadth of clients leveraging the platform across several verticals and use cases demonstrates the positive trends underpinning our business and gives us confidence in the long term opportunities. In Q3, we expanded our leadership position across financial services, healthcare and technology while also adding significant wins and multiproduct cross sells to verticals in e-commerce, sports, government and religious organizations. Here are a few examples. We substantially expanded our relationship with the Church of Jesus Christ of of Latter-day Saints with a new multiyear contract. Originally, they use listings and pages for a portion of their locations.

And because of our successful implementation and the lift in traffic and rankings, they asked us to expand their usage and roll out to all of their global locations. In addition to listings and pages, they also broadened their use of our other products on the Answers platform. A Department of Defense agency became a new Yext government client after running a highly competitive RFP that we ultimately won. They chose Yext to help them attract talent from centers across the US through listings and support services. Another exciting competitive win in the commerce space was a global climate solutions manufacturer. The client was up for listings renewal in Q4 but was also running an RFP for a search and pages provider their B2B commerce experience.

After a competitive process, Yext was selected with our ability to handle B2B commerce scale of both SKUs and query rules plus the data modeling capabilities of the Knowledge Graph their team can now deliver a superior experience for their customers. Another solid commerce win for us was an NBA franchise, which added Yext Search to help increase sales at their online store. We were able to demonstrate that by enhancing the search functionality on their franchise homepage, we could reduce the number of redirect to third party commerce sites, enabling them to maintain a direct connection with the fans and an increased potential sales on their team store. Our financial services team added several new clients and expanded existing clients. And while not booked in Q3, find a financial advisor was launched by a major financial services company following a highly competitive process across multiple software providers.

The complexity of the search functionality that the client needed to address span both their Internet and external site sources, and there were intricate development and regulatory compliance requirements. As opposed to a search bar, we developed a guided search experience and generated recommendations based on the user’s response to a series of questions. Our team’s ability to support all of the client’s customization requirements led us to winning the account and the client began heavily marketing the service in Q3. Consequently, this guided search functionality also has been successfully implemented at two other financial service providers. Another competitive win that demonstrates the strength of our sales pipeline across the technology vertical was Block Inc.

They chose to partner with us to power the search experience for their Square support and Square seller community. And lastly, on the partnership front, we renewed our multi-year agreement with Thrive, one of our largest partners. With the close of this deal, Thrive now uses the full expense of our Answers platform; listings, pages, reviews and search. We’ll be providing them with premium support services and to add additional integrations and customer service to support them on a global scale. Our teams are executing strongly on our revised go-to-market and Q3 was a good indication that we have the right playbook in place to drive long term growth by delivering unparalleled value to our customers. Now I’ll turn the call over to Darryl.

Darryl Bond: Thanks, Marc. As our financial results demonstrate, we continue to execute well in the third quarter. Our revenue was relatively flat year-over-year at $99.3 million, which was within our guidance range. FX continue to represent a headwind. And as a result of the stronger dollar, our revenue in Q3 was impacted by roughly $0.5 million more than anticipated last September when we provided our Q3 guidance. Third quarter revenue included a negative year-over-year impact of approximately $3.7 million due to FX. Adjusting for this impact, on a constant currency basis, our third quarter year-over-year revenue growth was approximately 4%. Unearned revenue was $153.3 million at the end of the quarter, up slightly from the same period a year ago.

Annual recurring revenue, or ARR, is a good measure of adoption and customer satisfaction. At the end of Q3, our ARR was $389.5 million, up 1% year-over-year. We experienced a negative impact from FX of approximately $12.4 million year-over-year on a constant currency basis. Excluding the FX impact, our Q3 year-over-year ARR growth was approximately 4%. Direct customers, which include enterprise and mid-market accounts, represented 81% of total ARR. Direct ARR at the end of Q3 totaled $317.3 million, representing 3% year-over-year growth. Excluding the impact of FX, the direct ARR growth relative to last year was 6% on a constant currency basis. Third party resellers, which represented 19% of total ARR at the end of Q3 generated ARR of $72.3 million, representing a decline of 8% over prior year.

Excluding the impact of FX, third party reseller ARR declined 5% relative to last year on a constant currency basis. Our trailing 12-month net dollar based retention, which excludes our small business customers, was 96%. Our trailing 12-month net dollar based retention for direct, which also excludes small business customers as well as our third party reseller customers, was 97%. Our customer count for direct increased 6% year-over-year to approximately 2,900. Turning to non-GAAP results, which are reconciled to GAAP in our press release. Q3 gross profit was $74.8 million, representing gross margin of 75.3% compared to 76.5% in the year ago quarter. Gross margins were up sequentially from last quarter and we continue to expect to be in the range of our long term non-GAAP gross margin target of 75% to 80% for the fourth quarter and full year.

Q3 operating expenses were $72.1 million or 73% of revenue compared to $81 million or 81% of revenue in the year ago quarter. We continue to improve operating efficiencies, particularly in sales and marketing. Sales and marketing as a percentage of revenue declined to 44% in Q3 from 52% in the third quarter last year, and we expect this metric to continue to improve. Our Q3 net income was $2.5 million compared to a net loss of $5.5 million in the year ago quarter. Our Q3 net income per share was $0.02 compared to a net loss of $0.04 per share in the third quarter last year. Cash and cash equivalents were $162 million at the end of Q3 compared to $188 million at the end of the second quarter. The decline in our cash balances included continued share repurchases executed during Q3, which totaled $10.1 million.

Year-to-date, our share repurchases totaled $69.1 million. We intend to continue to maintain a strong balance sheet and cash position going forward and will remain open to buying back our stock at attractive prices. Net cash used in operating activities for Q3 was $10.8 million compared to $9.7 million cash used in the year ago quarter, and our CapEx was $1.5 million compared to $1.8 million in Q3 last year. Turning to our outlook. The US dollar continued to strengthen even further versus the currencies in which we transact our international business, which resulted in a larger than expected FX headwind in Q3. This looks to have ebb slightly so far in Q4 and our guidance does not assume any impact from foreign currency exchange rates. Today, we expect Q4 revenue will be between $100 million and $101 million.

We expect our Q4 non-GAAP EPS to be between $0.02 and $0.03 assuming a weighted average basic share count of approximately 123.2 million shares. For the full year of fiscal ’23, we expect revenue of $399 million to $400 million. Our full year revenue guidance includes an estimated negative impact of $8.7 million to reflect foreign currency exchange rate fluctuations since our initial full year revenue guidance from March 2022. Our full year non-GAAP net loss per share is expected to range from $0.05 to $0.04. This range factors in our Q3 EPS upside as well as our expectations for continued improvement across operating expenses, particularly sales and marketing. Full year EPS assumes a basic weighted average share count of approximately 125.5 million shares.

Operator, we are ready to open it up for Q&A.

Operator: And our first question will come from Naved Khan with Truist.

Naved Khan: Two questions from me. First, on the net dollar retention for direct, it came down a little bit sequentially, I guess, 97% versus, if I remember correctly, 98% in the previous quarter. What’s driving the sequential decline? And then the second question I have is just on the 3P reseller opportunity. Mike, I think on the last call, you talked about how you could expand the opportunity with the 3P resellers. Are there any updates on this front that you can share with us?

Darryl Bond: I’ll take the net retention question. So you’re right, it’s down, on the direct side, it’s down from 98% to 97% this quarter. Keep in mind, this is a trailing 12-month metric and some of the lower gross retention that we saw in Q1 and Q2 is starting to have an impact on that. So that’s a component of it or a piece of it. And then there’s also a little bit of FX in there as well. Those are the sort of two main things that are driving that down.

Mike Walrath: Naved, I think your second question, I missed it a little bit. It was on the partner reseller channel.

Naved Khan: Yes. So on the previous call, you talked about how you could expand the opportunity in terms of how much you do with the 3P resellers. And if I just look at this channel, it’s down year-on-year, but if you could expand the power, maybe you could grow it. So just talk about that.

Mike Walrath: So I think what I said last time was that we believe that there are growth opportunities in that channel, but we’re not — I wouldn’t call those immediate. And I’m sure we talked about this last time, the timing on those is we — I think there are a couple of things driving there. I think the first is that’s primarily a listings channel and it is the primary way that we access the SMBs. And that’s just — it’s a challenged space. And I think in this environment, that’s going to continue to be a challenged space. And so companies that primarily service SMBs not universally, but many of them are going to have a harder time in this environment, and that’s who our customers are in that channel. So we have opportunities to grow in that channel by expanding product offering and growing some of those partnerships.

But I think part of the reason why we’ve been so focused on the direct ARR is that we think it’s the best measure of the near term health of our business. And over the long haul, we’re going to remain focused on that partner reseller channel, but we don’t see it as strong as a near term growth opportunity as the direct business.

Naved Khan: A quick follow-up, if I may. Maybe just just talk about the the performance of international is that weaker, stronger versus the US, how is that doing? And then maybe — you spoke about how sales cycles are longer. Is that more pronounced internationally, or maybe not, just give us some color?

Mike Walrath: So anecdotally, I think we saw the elongation of the sales cycles probably arrived earlier internationally, particularly in Europe with some of the geopolitical things happening over there. I think we’re seeing, as we talked about last time and it’s unchanged, we’re seeing that across the board, I think every management team and CFO and maybe in the world is scrutinizing expenses a little more closely and procurement cycles are lasting longer, and I think we talk to a lot of peers and hear the same things. So I wouldn’t say that there’s necessarily, from my point of view, a quantifiable difference between what we’re seeing internationally versus in the US just that it arrived, I think a little bit internationally than in the US.