Yext, Inc. Q1 FY2020 Earnings Call

Thank you, Sean, and good afternoon, everyone. Welcome to our first quarter fiscal 2020 conference call. With me today are Howard Lerman, CEO of Yext, Steve Cakebread, CFO, and Jim Steele, President and Chief Revenue Officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements, including statements about revenue and non-GAAP net income guidance, margin, cash flow, market opportunities, capital expenditures, geographic expansion, business performances, financial outlook, and other non-historical statements as further described in our press release. These forward-looking statements are subject to certain risks, uncertainties, and assumptions, including those related to Yext's growth, evolution of our industry, price development and success, market opportunities, adoption of accounting principles, and general economic and business conditions. These statements reflect the company's current expectations based on its beliefs, assumptions, and information currently available to it. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement 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 report on Form 10-K and our press release that was issued this afternoon. During the call, we will also refer to non-GAAP financial measures. Reconciliation with the most comparable GAAP measures are also available in the press release, which is available at investors.yext.com. With that, we will begin by turning the call over to Howard.

Well, hello everyone and welcome to our earnings call. And I would like to especially thank Conrad. We are excited to have you onboard for the next major revolution of Yext and we thank you all for being here. We are pleased to report yet another record quarter for Yext. We are on track to achieving another record year. With these great results, there are a ton of highlights this quarter. Revenue grew 35% over the first quarter of last year. It exceeded the high end of our guidance. GAAP loss margins improved by nearly 600 basis points from the year-ago quarter and non-GAAP loss margins improved by more than 900 basis points. And for the third time in the last five quarters, we generated positive operating cash flow. Recently, we unveiled The Yext Building, our global headquarters, which is new and located in the tech-centric heart of New York City alongside Google and the Apple store. This state-of-the-art facility provides us with space for about 1,000 employees and we expect to move in during 2020. The Yext Building also includes a world-class customer briefing center. We are going to help customers from around the globe understand how to build a single source of truth online for their consumers. And during the quarter, we signed contracts with leading brands like Daimler, Famous Brands, Rogers Communications, Sephora, WH Smith. We signed expansions and renewals with Choice Hotels, Jaguar, Land Rover, Allstate Insurance, and Adidas. These brands recognize that there is a massive paradigm shift happening in the world of search from keywords to questions. This shift has retrained consumers to simply ask for what they want. No longer do they have to browse through websites to get answers to their most important questions. The consumer has moved from browsing to asking. And when they ask questions, they expect specific relevant answers about companies and products, professionals, locations, and services. The fact is, today's customer journey starts with a question and consumers expect answers. But what happens to the customer journey when they get the wrong answer or chaotic results or missing info? Reputation is at stake and brands risk losing their business to succeed in this new world and answer customer demand. Brands must become what we call answers-ready. Let's take a step back. The Holy Grail in consumer marketing has always been to reach the right customer at the right time with the right information to incite an action that converts to a sale. For decades, companies have been learning more about their customers starting with demographics. We knew where they lived, their age and their gender, but not a lot. Then as technology progressed, we began to track specific purchases against specific customers and gained insight into their buying patterns and product usage. We started to understand consumer behavior if they used keywords to search the web. We knew what they were doing in real-time, but we didn't know when they were going to do it or why they were going to do it. We have never been able to track true consumer intent, but now we can. As consumers continue to just ask for what they want, now they are displaying more and more intent. As a result, marketers aren't just optimizing for keywords anymore; there are now new ways to optimize marketing around this new intent because consumers are asking questions. This change in consumer behavior is leading to a change in how marketers do their job. Now we can market to our customers based not on who they are, what we can guess about their psychology, but on literally what they just asked for. So we find ourselves at the dawn of a new age, intent marketing, where we can meet the customer at that exact moment of intent. Marketers who meet their customer at the moment of intent with accurate information sell more products. This leads to better brand reputation and increased revenue. A study conducted by Conductor ran a study showing that a multi-word search, which is a strong indicator of intent, converts at 2.5 times that of a single keyword search. So intent marketing means opportunity and opportunity leads to revenue. And that's where Yext comes in. Yext makes it possible to provide verified answers for consumers seeking the truth about brands. Our technology enables companies to take advantage of intent marketing by implementing brand-verified answers everywhere consumers search. They can meet the customer at the moment of intent. Yext puts brands in the line of search with brand-verified answers and leading brands around the world are implementing brand-verified answers to become answers-ready. Being answers-ready consists of three parts. First, they need to build a complete knowledge graph. This is a brain-like database that stores all the data about a business. Second, they need to answer questions themselves on their own website with intent pages, answer pages, and great site search. Third, they need to answer questions everywhere, Google, Alexa, WeChat, anywhere people are asking in any language around the world. Our founding principle that the ultimate authority on a business should be the business itself is more relevant than ever. Our ongoing innovations in new technology are now enabling consumers to get brand-verified answers whenever they search with a question. Yext provides a single source of truth for companies online. Our customers have put more than 200 million authoritative facts into our platform. With our mission of perfect answers everywhere, Yext is leading brands into the future of search. We have been doing this for more than a decade. We always have and we always will. Speaking of that, I would love to now turn the call over to our President and Chief Revenue Officer, Jim Steele.

Thanks, Howard. We are really excited about the great start we have had to the year, especially after our strong performance in Q4. We continue to see signs of momentum across the geographies and vertical markets. This is true in both enterprise and mid-markets. In enterprise, we signed more than 50 new logos this quarter, including leading brands in travel and hospitality, food, healthcare, financial services, and retail. We are seeing the level of our executive sponsor increasingly being at the CMO and CEO level. I am also excited that Patrick Blair has joined us as Executive Vice President of our Global Commercial Business. Patrick is an accomplished cloud software veteran with more than 20 years of experience developing and leading go-to-market teams. We worked together at Salesforce for 10 years; Patrick was instrumental in building the commercial business unit there to over $2 billion. At Yext, he will be responsible for mid-enterprise and mid-market sales and services around the world. It's an honor to work alongside Patrick again. I am really excited about that. Now I will turn the call over to Steve Cakebread to walk you through the quarter in more detail. Steve?

Okay. Thank you, Jim. It was a strong Q1. We are pleased with our start to the year even though the first quarter is when we typically see lower volume in new business. A quick note before I get into the numbers. I just want to remind you that we adopted ASC 606 last quarter and this quarter 842 for our lease accounting. Our first-quarter revenue grew 35% to $68.7 million, above the high end of our guidance, and we continue to see growth from both new and existing accounts. Our net revenue retention, both overall as well as in enterprise and mid-market, remain consistent with last quarter's levels. Unearned revenue, which we formerly reported as deferred revenue prior to the adoption of 606, increased 53% from the year-ago period to $125.4 million. As of April 30, we had $256 million in remaining performance obligations or RPOs. That's down from the fourth quarter balance because of the seasonality of first-quarter business flow. Our total backlog, which includes another $36 million of revenue under contract but subject to accounting exclusions, gives us $292 million in estimated future revenue under contract. Looking at profitability, gross margins were 76% this quarter, an increase of 110 basis points over the first quarter last year. Gross margins this quarter benefited from the timing of certain publisher fees. That said, we remain comfortable with gross margins remaining in the mid-70% range. Operating expenses this quarter increased at a rate less than our rate of revenue growth, highlighting how we continue to realize efficiencies and economies of scale. Total OpEx increased from $55.1 million last year to $71.5 million this quarter. As a percentage of revenue, we saw improvements in all three lines of OpEx: sales and marketing, R&D, and G&A compared to the first quarter last year. Looking at our net loss, first-quarter net losses increased from $17 million a year ago to $19 million this quarter. But on the basis of 106.5 million weighted average basic shares outstanding, net loss per share of $0.18 this quarter compares to $0.18 loss a year ago. Non-GAAP net loss, excluding stock-based compensation, improved 37% from $9.1 million a year ago to $5.7 million this quarter. Non-GAAP loss margin of 8% in the current quarter was a substantial improvement from the 18% of revenue in the year-ago quarter. Our GAAP loss margin was 28% in the current quarter and improved nearly 600 basis points from the 33% of revenue last year. Our non-GAAP net loss of $0.05 per share this quarter compares to $0.10 in the year-ago quarter and was $0.04 favorable to the high end of our guidance. Keep in mind, approximately $0.01 of this relates to the higher share count from our recent equity offering in March where we issued seven million shares. The offering had not been reflected in the guidance we gave you in last quarter's call, so our share count is a bit higher than the guidance. Please refer to the press release we issued this afternoon for a reconciliation of GAAP to our non-GAAP results. Looking at the balance sheet and cash flow, cash, cash equivalents, and marketable securities totaled $284 million. This was an improvement of approximately $160 million from the year-ago balance and is due to a combination of the proceeds from the offering, but also positive operating cash flow. Net cash from operations was breakeven this quarter as we were last year at this time. We achieved this while continuing to expand our workforce and invest in new facilities across the globe, demonstrating how our business model is capable of generating healthy cash flow. Over the remainder of the year, we expect to continue to invest in people and facilities. Earlier this May, the lease on our new global headquarters in New York commenced. We need to do some work to get this space ready for our move-in next year and expect to see some of those cash impacts over the next few quarters. We continue to expect to increase our CapEx spend over the next two years for new and existing facilities around the world. Let's take a look at our expectations for next quarter and the rest of the year. In the second quarter, we expect revenue of between $70.8 million and $71.8 million. In the same period, we anticipate a non-GAAP loss per share between $0.12 to $0.14, which reflects the investment we need to make in facilities and people. This assumes a weighted average basic share count of approximately 111.8 million shares. For the full year, we are raising the revenue midpoint by $1 million to an expected range now of $297 million to $300 million in revenue. We are maintaining our existing non-GAAP net loss per share range of between $0.40 and $0.44, based on an assumed basic weighted average share count of approximately 111.9 million shares. I would like to take a moment to thank James Hart for the great Investor Relations foundation he laid over the last two years from the Yext IPO to today. We owe a great deal of gratitude to him for all he has done for Yext and fully support him in his next adventure. At the same time, I want to welcome Conrad Grodd. Both he and James have worked to make a seamless transition.

Yes. It wouldn't be an earnings call without me pitching some events here. So let's go ahead and do that before we open up for questions. I want to remind you, we have two big events coming up. The first is actually next week. If you are in the United Kingdom, we would love to see you at our iconic event at the London Science Museum on Wednesday, June 5. From voice search and autonomous vehicles to future cities and virtual reality, we are going to take a look at the current state of intelligent services and their effect on businesses today and beyond. You can still join us for a few slots remaining alongside thought leaders from Google, Jaguar Land Rover, Air France, and more than 500 customers, partners, and prospects. Second, I would love to remind you all of ONWARD19. It's taking place this fall on October 29 and 30. Registration is also open, and our theme this year is the Future of Search. This will be our largest conference ever, and we are taking over the Marriott Marquis in New York City to host it. We had it last year at Jazz at Lincoln Center, where we put on an incredible show, but unfortunately, they can't hold our size anymore. So we are going to the Marriott. More than 1,600 of our customers, partners, and investors will hear from world-class speakers, sharing insights into the way consumers are searching for brand-verified answers, and this year we had to add more capacity since last year it was standing room only. ONWARD has sold out every year, and this year ticket sales are running ahead of last year. So act now while supplies last. If you are interested in attending, please visit events.yext.com or onward19.com to register. We hope to see many of you there. And with that, operator, we will now open up the call for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Koji Ikeda with Oppenheimer. Please go ahead.

Nice quarter, guys. Thanks for taking my questions. A question for Howard or Steve. So brand-verified answers. We have been hearing more about this concept recently. So I wanted to ask you a couple of questions on the topic. I guess, first part is, have organizations realized the importance of accurate information and answers yet? Or is there a lot of evangelism that still needs to be done out there? And then part two is, could unverified or inaccurate answers through search become a problem that really gets worse before it gets better in the near term? Finally, why is solving the problem of having accurate brand-verified answers so difficult to do?

I will start with the last two points. By the way, this is Howard. Koji, brand-verified answers come from search. Search is the number one channel for most businesses on the planet. Google has become every business's homepage. When you search for any brand, product, or service, Google gives you the answer. And as a result of the paradigm shift from keywords to questions where people don't just type single query keywords anymore but they ask more specific questions, Google is giving answers back, making it paramount for every brand to do this. There’s no question around the world, we still need to do more evangelization, but at the same time, we are benefiting from a paradigm shift; a paradigm shift from keywords to questions and from search links to answers. Across the world, we see higher-level conversations with CMOs and CEOs who are aware that their brand is everywhere and that they need to be able to answer questions to meet consumer expectations. There’s nothing more powerful for a marketer than intent marketing. The ability to reach a customer when they ask a question with a very specific answer is going to lead answers-ready brands to sell more and drive more revenue. The ROI is clear and proven from being able to do that. Last, why is it difficult? We live in a world of lots of information that's always changing. Anyone with an Internet connection can publish anything, which can cloud information even if they are not an authority on it. Our founding principle at Yext is that the ultimate authority on a business is the business itself. The vehicle for delivering that information has always been a company's website. But websites are structured upside down. They were designed for early adopters years ago, where you would start on a homepage and navigate down to get the answer. That takes a bunch of clicks. But now, when people search for questions using Google or other services, websites need to be constructed to answer those questions which is flipped upside down from today's current paradigm.

Got it. Thank you very much for that. Super helpful. One follow-up for me. A question for Steve. Okay, so you beat the top end of your fiscal 1Q revenue guide by about $1.7 million, but only raised the bottom end of the full year guide by a few million. I wanted to dig into that a little bit more. Is that just conservatism there? Or is there something else we should be aware of?

Yes. Koji, thank you. Yes, we are at the beginning of our year. We are thoughtful about having big quarters in the second half of the year. The business is doing great; we had a great Q1 despite the seasonality. We have a really strong and growing pipeline. So there are no hidden agendas here. It's just how we approach giving guidance.

Our next question comes from Brent Bracelin with KeyBanc Capital Markets. Please go ahead.

Thank you and good afternoon. Two questions, if I could. Howard, I will start with you. My question is on the Adobe integration. What type of customer feedback are you hearing so far on Adobe integrations? And perhaps talk a little about the opportunity with Adobe longer term?

Look, we want to partner with all different kinds of companies in our application directory. Clearly, many companies use Adobe to manage their content. The ability for a company to pump content that's unstructured into a structured way and then serve pages from Adobe or Yext is a use case many of our customers want. Many of our customers have also asked to have the analytics, which are very rich coming back from Yext appearing alongside Adobe Analytics. So these are two core use cases that big brands utilize. We see a future where every company has a kind of CMS to manage their unstructured content and then uses a company like Yext to build their knowledge graph.

Hi Brent, this is Jim Steele. About a month-and-a-half ago, we attended the Adobe Summit out in Las Vegas, and we were a platinum sponsor. It was the first year we have done that. We realized that all of Adobe's customers are also our customers, and we have a complementary solution. Adobe is one of the best companies in the world at helping companies build their websites, and we are the best company in the world at making sure that rich content on their website gets pushed out to all the different digital endpoints. So we are complementary and had such an exciting event there. They are a great partner, and we expect to do a lot more with them.

Great. Very helpful. My follow-up, for maybe you Jim or Steve, is really around net new customer adds. You talked about 50 enterprise logo adds this quarter. That's below the quarterly cadence we saw last year, but you still put up a pretty big number. How should we think about that? Is this business being driven more towards upsells? Are we just seeing a little slow start to the year relative to new logo adds? Walk us through that trend line there and what it means to the business.

Yes. Thanks for that question. You are correct, the 50 compared to last year. First of all, in enterprise, we are dealing with large Global 2000 companies, and we have a great install base now of these companies. A lot of our business is coming from upsells to existing accounts and, of course, we want to do both. I think you will see that kind of vary quarter-by-quarter. But we are happy with the results, and a lot of that business came from upsells in the first quarter. You saw the big number of new logos we posted in the fourth quarter; it's just a function of the lumpiness of enterprise sales.

Brent, I would take a look at our unearned revenue growth at 53%. It's a great quarter for us. So while Q1 in the software industry is a little lumpy, we put up great numbers, particularly after a strong Q4. We feel confident about the business ahead of us.

Our next question comes from Naved Khan with SunTrust. Please go ahead.

Yes. Thanks a lot. A few questions from me. Maybe you can break out the growth in the business ex-SMB? How did the growth look like in this last quarter? Can you also talk a little about the growth in international? How it performed versus the domestic?

Yes. On the SMB, it's still roughly in the 40% range as a percentage of our revenue, so no substantial changes there; it’s just that as revenue grows, its percentage decreases. Regarding international, we had good business. I think Japan performed well, and the U.K. also experienced strong business.

Yes. Howard mentioned some of the brands, like a lot of these brands are international. Famous Brands, Africa's largest fast-service dining restaurant, has 2,900 locations in Africa and the U.K. WH Smith has 100 or 1,000 locations in airports internationally. Daimler is from Germany, Rogers Communication is in Canada, and Adidas is expanding globally.

Well, after I spoke Chinese on an earnings call a few quarters ago, I was told to never speak foreign languages again, so that’s why I didn’t try to attempt the German, which I also speak.

Adidas is in 19 countries that we are powering their information, their public information, and they just expanded to China. Jaguar Land Rover operates in 55 countries. These are all international brands which is really exciting, and we started that international business only two years ago.

Very helpful. That color definitely helps. A quick follow-up, if I may. Regarding the mid-size market, congrats on hiring Patrick there. Can you talk a little about where you are with respect to your internal timeline in terms of ramping that up and how the pipeline looks?

Sure. We are only just starting to invest in mid-market. We want to hire a number of sellers. This isn't an instant process. It takes time to get this going. Mid-market sellers ramp up quicker, but they are generating deals in the $10,000 to $50,000 range. We have described mid-market as an exciting and high growth part of our business with tremendous growth potential.

I am excited about the mid-market too, because to Koji's first question about why this is a hard problem to solve—if you are a mid-market customer without resources to put into an IT department, you wouldn’t be answers-ready unless you use Yext or a competitor. So there’s a significant opportunity if you have a website; you need to be answers-ready.

Yes, I totally agree. It's a great opportunity for our customers.

Our next question comes from Alex Zukin with Piper Jaffray. Please go ahead.

Hi guys. Thanks for taking my questions. So maybe just two for Steve. I wanted to dig into the OpEx guide implied for 2Q. I think if I look at my numbers, that implies a meaningful increase in sales and marketing as a percentage of revenue. Walk us through how we should think about that? And any opportunity for us to get a better sense of the shape of deferred revenue through this year? Should it trend closer to last year with low single-digit sequential growth in 2Q and then decline in 3Q?

Yes. A couple of good questions. As you heard, we are still investing in sales and marketing. We want to ensure that we don't get carried away. But as we bring on more sellers, they will begin to deliver revenue. We are hiring R&D people as well, so we feel confident about what the model shows. Keep in mind we are also hiring in G&A to support all our new offices. In terms of unearned revenue, although it’s not impacted dramatically, 606 does move some numbers around. We are focused on driving towards breakeven on non-GAAP and cash flow, being thoughtful about our marketing opportunities for the second half of the year.

Our next question comes from Stan Zlotsky with Morgan Stanley. Please go ahead.

Hi. This is Mark Randall, on for Stan Zlotsky. Thank you for taking my questions. I wanted to dig into one of the earlier questions about the bump in the low end of the guidance range for revenue for the year. I believe Q1 last year also saw a raise in full-year guidance instead of just lowering the range. Are there any changes in how guidance was formed this year? Anything we should be aware of?

No. As I said to the previous caller, we feel good about the year. We are very thoughtful, as this is the start, not the end of the year. There are numerous global market factors we need to pay attention to. However, we see a strong pipeline; Jim is hiring aggressively, and we are starting to pick up speed. So there are no real issues with our business.

Our next question comes from Brett Knoblauch with Berenberg Capital Markets. Please go ahead.

Hi guys. Thanks for taking my question. I wanted to touch on the mid-market, so for Jim or Steve, just talk a little about how that's going versus your expectations. Do you plan to disclose similar metrics about your mid-market wins as you do for enterprise customers?

Yes, we will talk about some of the wins. The accounts and dollar size in mid-market are smaller—that's why they are mid-market. Understanding, we are just beginning to invest significantly here, and it takes a while to get that momentum going. Remember that mid-market sales teams ramp up quickly and generate deals faster, but the deal sizes will range from $10,000 to $50,000.

I am particularly excited about mid-market because to Koji's first question about why this is a hard problem to solve—if you are a mid-size customer and you do not have resources to manage an IT department, you will not be answers-ready unless you use Yext or a competitor. So that’s a tremendous opportunity if you have a website; you need to be answers-ready.

Yes, I totally agree. It's a great opportunity for our customers.

Our final question comes from Zachary Schwartzman with RBC Capital Markets. Please go ahead.

Hi. Thanks for taking my question. Revenue growth accelerated nicely this quarter on a tougher comp. But longer term over the next several years, what product catalyst would it take to perhaps further accelerate or maintain this growth? Is it Yext Brain? Or if not products, is it just further traction internationally? I would love to hear some updates on Yext Brain and some of the other products you are working on.

Zach, thanks for asking about products. I love answering these questions. We believe that if you have a website, you need to be answers-ready. Until pretty recently, Yext has only supported the location entity natively built into our platform and synced globally. With the rollout of Brain and the ability for a company to build their knowledge graph, we will enable companies to be answers-ready by allowing them to build a more complete knowledge graph, not just for the location entity but for anything they want. Whether in the financial industry, they could input credit card info and mortgage rates. As people ask questions like 'What's the mortgage rate for this exact type of mortgage?' or 'What's the APR on this credit card?', they will have answers right at their fingertips. The second opportunity is to answer those questions directly on their website, which we previewed at ONWARD last year, offering knowledge search to be able to respond to inquiries with a site search or finder product. Third, we aim to provide those answers everywhere, allowing companies to enter the search paradigm. This is present in that companies are adding more and more entities into their knowledge graphs; we now have over 200 million facts in Yext. Collectively, we will grow by integrating new logos and helping them implement that with professional services on top of that.

And that concludes today's earnings call. Thank you everyone for joining us, and we look forward to seeing you throughout the quarter.