Yext, Inc. Q2 FY2021 Earnings Call

Good afternoon, and welcome to the Yext Second Quarter Fiscal 2021 Financial Results Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Yuka Broderick, Head of Investor Relations. Please go ahead.

Thank you, Andria, and good afternoon, everyone. Welcome to Yext fiscal second quarter 2021 conference call. With me today are CEO, Howard Lerman; CFO, Steve Cakebread; and revenue team leaders, Jim Steele, David Rudnitsky, and Patrick Blair. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements, including statements about revenue and non-GAAP net income guidance, sales momentum and efficiency, expenses, hiring, market opportunities, business performance, capital expenditures, 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, the evolution of our industry, our product development and success, including with Answers, general economic and business conditions such as the impact of the COVID-19 pandemic. 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 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 quarterly and annual reports, and our press release that was issued this afternoon. During the call, we will also refer to non-GAAP financial measures. Reconciliations with the most comparable GAAP measures are also available in the press release, which is available at investors.yext.com. With that, I will turn the call over to Howard.

Thank you, Yuka. In 2016, we held our first user event and hosted Mark Kelly, who you may know is a current Arizona Senate candidate, following a long and distinguished career as a navy aviator and astronaut. At LocationWorld in 2016, he shared a story about flying a two-person attack plane where his focus was flying the plane and dodging missiles. It was his partner's job to successfully hit the target with a bomb. Each person had a job to do and focused solely on that job. As he told us, we call that 'compartmentalization', focusing on the stuff you can control, and not worrying about the stuff outside of your control. Who knew that advice would still be relevant four years later? We are living in a highly chaotic and unpredictable time. But in Q2, we learned that as a company, we can accomplish great things when we focus on what we can control. First, we are focused on top-line growth. We reported $88.1 million in revenue, $2 million above the high end of our guidance range. Next, we are focused on efficiency, especially sales efficiency. We reported a $0.07 non-GAAP loss per share in the quarter, which is a $0.04 beat to the high end of our guidance range. Finally, we are focused on our mission to help every business and organization around the world deliver official answers every time people search. We saw 30% of our enterprise North America new and upsell bookings as Answers led in the quarter. We now have over 150 Answers customers live. If you follow us on Twitter, you will see our daily showcase of brands, including Verizon Business, Cox Communications, Krispy Kreme, and AutoZone, all of whom have upgraded their site search using the Yext Official Answers Engine. Let me explain what I mean by the Official Answers Engine. We are witnessing a massive shift in search from keyword-based document search to an era where computers understand what people are asking. At the root of this is a brain-like database called a Knowledge Graph that we have been building for over ten years. A couple of years ago, we started to develop our own search technology based on natural language processing. Last fall, we launched Yext Answers, our site search engine that sits atop a company's knowledge graph. When an end user wants official information about a business, they visit that business's website. However, if the site search is inadequate and cannot deliver an official answer for even the most basic query, that user bounces back to Google to seek answers. This causes the company to lose control of the customer journey and leads to spending on AdWords to win the customer back, the same customer who was trying to find them organically. We launched our own site search engine with Answers, which we call the world's first official answers engine. In the second quarter, we expanded Answers to be available in French, Italian, German, and Spanish, helping more websites around the world deliver official answers to every customer question using NLP. It's our founding principle that the ultimate authority on official information is the business itself. With our Official Answers Engine, our customers can achieve higher conversion rates, lower customer support costs, and gather valuable customer intelligence on what people are asking. In fact, during the quarter, we answered over 11 million searches, all of which were commercial and valuable questions from customers on a company's live website looking to transact. When you provide a great customer experience the first time, they remember it and tend to return, creating a habitual pattern. You can train a user to come back repeatedly by simply delivering official answers to their questions. Early adopters of Answers see, on average, a 60% increase in site search volume within just 60 days of implementing the Yext Official Answers Engine. Every customer journey begins with a search, and we envision making a business's website the first and last place people look for answers about that business. That is the goal of the Official Answers Engine, to give every company a Google-like search experience on their domain. The most exciting part is that we are only at the very top of the first half of realizing this vision. That sums up our first area of focus. Next, we are laser-focused on sales efficiency. The best SaaS companies today use a premium or free trial acquisition model, which we launched in the second quarter in the form of our Answers free trial. We received thousands of Answers free trial requests and accepted as many as we could support. The next phase is to make Yext completely self-serve for Answers, allowing anyone to integrate our Answers Engine into their own website and experience the power and positive ROI opportunity firsthand. We are witnessing positive results from this new sales motion in terms of sales efficiency. GAAP sales and marketing as a percentage of revenue decreased from 72% in the year-ago quarter to 64% in this second quarter. We are focused on both growth and sales efficiency and are excited about the results we're already seeing with this new model. None of this would have been possible without the incredible leadership of Jim Steele. I want to thank him for his amazing contributions to Yext. Four years ago, I recruited Jim to the Board and shortly thereafter, I persuaded him to adopt an operating role as our President. Jim built a world-class sales team and laid the foundation for future success with outstanding sales executives, including Dave Rudnitsky and Patrick Blair. For those of you who know Jim, he is not just a great salesman, but also a tremendous human being, and I have learned so much from him. I'm grateful to continue learning from him as he transitions to an advisory role for the next year. I'm also thrilled to promote the next generation of sales leadership at Yext with Dave Rudnitsky and Patrick Blair serving as Co-Chief Revenue Officers. David, who joined us nearly four years ago, will continue leading enterprise North America, while Patrick, who joined us a year and a half ago, will lead our CBU international businesses. Jim has trained them well, and I am confident in their ability to work with me to build and lead our world-class sales department. Now, I am pleased to turn the call over to Jim for his final remarks.

Thanks, Howard. As Howard mentioned, it was almost four years ago when I joined the Board at Yext. Just a few months later, Howard and the Board invited me to step in as President and Chief Revenue Officer. I was excited about the opportunity to help Yext go public and to build a world-class revenue organization. I recruited my go-to team, Dave Rudnitsky, whom I worked with for 20 years, and also Patrick Blair two years ago to assist me in this journey. I have tremendous respect and confidence in this team, and I believe the company is in great shape with a bright future ahead. I am honored to continue this journey to help Yext as an advisor. Now, I'd like to turn it over to David and Patrick, whom I hold in high regard and who have been instrumental in developing the sales team to what it is today. They'll walk you through our strong quarter. Dave?

Jim, thank you very much for your mentorship, partnership, and most importantly, friendship over the last 20 years. Through your leadership, I am certain you are leaving the sales organization in great shape. I wish you and your family the best of luck wherever the future takes you. I’m thrilled to take over this role as Co-CRO and partner with Patrick and Howard to continue moving the business forward. Now, let's review Q2. The sales organization had a solid quarter given the unprecedented circumstances. Momentum in new and upsell ACV picked up throughout the quarter. We are seeing more customers engaging again, either working on new projects or resuming temporarily paused projects. In Q2, Yext overall closed 114 new and renewal deals with at least $100,000 in total contract value, including nine deals with more than $1 million in total contract value. The total number of Yext bid market and enterprise customers increased 27% year-over-year to nearly 2,200, excluding our SMB and third-party reseller customers. Our quota-carrying sales rep count remained relatively stable compared to last quarter. We aim to end this fiscal year with 265 quota-carrying sales reps, consistent with our original plan. Specifically, enterprise expansion deals this quarter included T-Mobile MetroPCS, CNO Bankers Life, The UPS Store, the Medical University of South Carolina, and others. Enterprise new logo signings included Guaranteed Rate and Cinemark. Our 'Land with Answers' strategy is generating significantly more opportunities for the enterprise sales team. As Howard mentioned, 30% of Q2 enterprise new and upsell bookings ACV were driven by Answers. There are many Answers-led deals we are currently working on that were not in the pipeline at the beginning of the year. We believe there is a significant attach rate that comes with Answers, making it a product that naturally brings in many other revenue opportunities for listings, pages, and services. We are assisting enterprise customers in solving complex problems with our solution-based offerings, leveraging all of Yext's innovative products. I want to highlight a major expansion deal in Q2 with a prominent U.S. financial institution. This company has four subsidiaries; we started working with one of them, an insurance subsidiary, a couple of years ago. They were a customer for listings, pages, and services for its branch locations and some of its agents. As their COO noted in a shareholder letter, they are undergoing a customer-centric transformation. Customers today expect to be served across all channels and access points. We play right into the heart of this digital transformation, demonstrating how Yext can drive value and ROI. This culminated in an upsell deal in Q2 that expanded within the insurance subsidiary and into the company's other three subsidiaries, more than doubling ACV and including listings, reviews, pages, answers, and services. This is a great example of how Yext can provide a comprehensive solution to an enterprise's need for accelerating digital transformation efforts and addressing business challenges. Now, I'll turn it over to Patrick to share what he is seeing with his team.

Thanks, Dave. I’d also like to take a moment to thank Jim for his mentorship, support, and friendship over the last 10 years. I know he'll stay close to Yext, and I wish him the best of luck in his next endeavor. I'm thrilled to continue building the sales team alongside Dave and Howard. In terms of results, we had a strong quarter in both the CBU and international business in Q2, given the circumstances. Due to the fast sales cycle in CBU, those teams contributed most of the Answers free trial conversions. We signed new logos, including CubeSmart and PetIQ, and had great expansion deals like Fazoli's and ENT and Allergy Associates, as they embrace our full platform. Answers is a fantastic solution for Yext CBU accounts. While enterprise accounts have multiple teams focused on their website, commercial accounts generally have a more nimble decision-making process and a shorter sales cycle. We have hundreds of companies participating in our Answers free trial program, and we are turning on more of those trials daily. One example of the fast sales cycle is Tower Loan, a loan company headquartered in Mississippi. As the coronavirus hit the U.S. in the spring, Tower saw a spike in website visits and customer service calls, creating both an opportunity and a challenge. We worked quickly with them to launch an Answers free trial. Just six weeks after launching Answers on their website, they began to see the value of deeper customer insights, higher lead conversion, and lower support costs, and transitioned to a paying Answers customer. In EMEA, we observed a resurgence in business activity following COVID-19 shutdowns and furloughs. We executed an expansion deal with Philip Morris International and signed a master service agreement with Louis Vuitton. Additionally, we secured new deals with Pret and Superdry. In Japan, we signed new deals with GEO Holdings and R Corporation, finalized an expansion deal with Yamato Transport, and renewed with SMBC. At a time when many companies seek solutions to provide customers with accurate, reliable answers, it's inspiring for our sales team to offer a solution that can show a measurable return on investment. I'm more excited than ever about our ability to capture this expanding market opportunity. I’ll now turn the call over to Steve.

Thanks, Patrick. For the second quarter, revenue grew 22% year-over-year to $88.1 million. Unearned revenue increased 20% year-over-year to $147 million. Annual recurring revenue (ARR) at the end of the quarter was $338 million, growing 22% year-over-year from $277 million in the year-ago quarter. Trailing 12 months net dollar-based retention, which excludes our SMB customers, stood at 105%. Our trailing 12-month net dollar-based retention for direct to enterprise customers, excluding our SMB and third-party reseller channels, was 106%. This is slightly lower than last quarter due to muted upsells, but we began to see our retention rates and upsells improve during Q2. Before discussing margins and expenses, I would like to point out that I will encompass both GAAP and non-GAAP results. Reconciliations of GAAP to non-GAAP financials have been included in our earnings release. In Q2, GAAP gross margins rose to 75%, compared to 73.4% in the same quarter last year. The non-GAAP gross margin was 76.5%, up from 74.7% in the year-ago quarter. The change in gross margin reflects higher revenue leverage coupled with some increased data center costs, though publisher costs remained stable. Year-to-date, non-GAAP gross margins were 76.6%, compared to 75.9% last year. Q2 GAAP operating expenses totaled $90.3 million, an 8% increase from $83.4 million in the prior year quarter. Non-GAAP operating expenses for Q2 were $74.4 million, equivalent to 84% of revenue, compared to $67.8 million or 94% of revenue in Q2 last year. The increase was primarily driven by a rise in overall headcount, offset by reduced spending on travel and events. Year-to-date, non-GAAP operating expenses were $151.6 million or 87% of revenue, compared to $126.9 million or 90% of revenue a year ago. Given the uncertain business environment, we are being prudent regarding our operating expenses while investing in expanding our TAM, generating revenue growth, and enhancing sales efficiency. We will maintain a conservative hiring approach while targeting 255 quota-carrying sales reps by the end of the fiscal year. Our Q2 GAAP net loss was $25.1 million, compared to a loss of $29.3 million in the previous year quarter. Based on 118.4 million weighted average basic shares outstanding, net loss per share this quarter was $0.21, down from $0.26 last year, based on 111.8 million weighted average basic shares outstanding. Our Q2 non-GAAP net loss excluding stock-based compensation was $7.9 million, compared to a loss of $12.7 million in the previous year quarter. The Q2 non-GAAP net loss per share of $0.07 contrasts with an $0.11 loss in the same quarter last year. Cash and cash equivalents at the close of the quarter were $223 million, and we believe our balance sheet is robust, positioning us well to weather the current economic conditions. Our net cash flow from operations for Q2 was a negative $15.6 million versus negative $11.4 million last year. CapEx totaled $18.8 million compared to $3.6 million in the year-ago quarter, as we make progress with building projects in New York, Washington D.C., Tokyo, and Paris, expecting remaining CapEx for these projects to be about $32 million, most of which will occur during the fiscal year 21. We have successfully exited our 1 Madison Avenue headquarters, saving four months of lease expenses relative to the original lease, and our operating expenses going forward will no longer include lease expenses from 1 Madison Avenue. Turning to our outlook, we expect Q3 revenue between $86 million and $88 million, with anticipated non-GAAP net loss per share ranging from $0.07 to $0.09. We expect a weighted average share count of approximately 120.4 million shares in Q3. We remain excited about our progress in Q2; however, the business environment remains uncertain. Therefore, we will continue providing only quarterly guidance, not full-year guidance. We are still in the early days with Answers free trials, and we have a growing pool of customers moving through their 90-day trials. We expect these trials to begin converting towards the end of the year, but we will exercise appropriate conservatism in evaluating these opportunities. In summary, we are pleased with our performance for the quarter. There are early signs that Answers is generating additional opportunities, faster sales cycles, and enhanced sales efficiencies. We are also glad to have successfully executed our plan while managing costs effectively. Once again, Jim, I wish you all the best. It's been great working alongside you. I agree with Howard that our current team possesses the knowledge and experience to take us to the next level. Now, I will turn the call back to Howard.

Thank you, Steve. We had a strong second quarter, and our Land with Answers sales motion, along with our focus on sales efficiency, is already yielding promising results. Each day, new logos are utilizing Yext to power their site search with our Official Answers Engine, bringing us closer to realizing our vision of making every business the official source of information about themselves. Thank you all for your continued support, and we look forward to updating you on our progress next quarter. Don't forget to follow us on Twitter to see it live and in real time.

Thank you, Howard. Andria, can we please open the floor to questions?

We will now begin the question-and-answer session. And our first question will come from Ryan McDonald of Needham. Please go ahead.

Yes, thanks for taking my questions. Good afternoon, Howard, Steve, and team. Congrats on a great quarter! We've definitely been following along with the Twitter feed and seeing some interesting logos pop up for Answers. Great to see! Howard, can you sort of frame for us the success that you are seeing with Answers versus other areas of your business, and provide a little more context on the top-line guidance for the third quarter, which represents a bit of deceleration in the growth rate despite positive commentary in various segments of the business? Thank you.

Thanks, Ryan. Answers is a remarkable new product for us because it significantly expands our total addressable market (TAM). The number of verticals we can pursue in relation to Answers is vast; every business requires answers to questions. This need wasn't necessarily applicable for our previous product, Listings. Everything remains anchored in the Knowledge Graph. Most encouragingly, 30% of North American enterprise new ACV deals in the quarter were led by Answers. This already demonstrates a significant impact. Additionally, we received thousands of free trial requests this quarter, and we worked to set up as many as we could. We are striving to evolve toward a fully self-serve model, and we feel optimistic about inbound demand. With 150 customers now live, those brands you see on our website like Verizon are exciting initial customers. The results from a user perspective are astonishing; when an answers box is deployed, site search volume on the customer's site generally increases by 60%. The intelligence gained by our customers through understanding what people ask is extraordinary. Meanwhile, regarding guidance, while we remain cautiously optimistic about Answers and our business, we continue to take a conservative approach with the ongoing uncertainty stemming from the pandemic and the economy.

Excellent. As a follow-up, can you describe the role of the Adobe partnership in your free trial funnel? How is that progressing? I know you've been training the Adobe sales force during the quarter. Can you provide insight into the progress there and any contributions it might be making?

We have an active pipeline with Adobe, which is an incredible partnership for us. They sunset their search and promote product last year, which was their site search solution. A lot of excitement surrounds this as they are a leading company in digital experience with their customer experience offerings, and they surpass $3 billion in ARR. Currently, they don't offer a site search solution, providing our opportunity to partner with Adobe to effectively deliver a unique solution. The previous product was outdated, akin to keyword-based document searches from the late 90s. Yext's Official Answers Engine offers knowledge-based searches using NLP and provides answers. This ability to combine it with the Adobe experience is highly advantageous. Our pipeline with Adobe is active, with successful integration of deals already underway.

Our next question will come from an analyst at RBC Capital Markets. Please go ahead.

Hey, everyone. Thanks for having me on, and congrats on this quarter. I wanted to see what your thoughts are on what needs to be done to reach your target of 255 quota-carrying sales reps by the end of the fiscal year? Additionally, last quarter you mentioned exposure to 25% to 30% of heavily impacted industries; has that allocation changed this quarter, and how are you thinking about adding new accounts for the second half?

Thanks for that, Spencer. We're actively recruiting to build our daily quota-carrying headcount, and I believe we can still reach our target of 255 by the end of the year. I’d also like to highlight that our current reps possess the greatest tenure we've ever had. This tenure matters significantly in terms of productivity and efficiency. We have seen a remarkable improvement in efficiency year-over-year, dropping from 72% to 64% of revenue allocated to sales and marketing, which we feel very positive about, largely attributable to our new sales approach, the tenure of our reps, and improvements in our product offerings. Part of the focus for Answers is expanding into new industries and verticals. The current conditions regarding ARR from different industries remain similar; however, with Answers, we can now pursue types of customers and verticals that we never could before.

Our next question will come from Stan Zlotsky of Morgan Stanley. Please go ahead.

Hey, guys, this is Hamza Fodderwala for Stan Zlotsky. Congratulations, Jim, on your next chapter. I wanted to gain more insight into the Co-CRO structure between Patrick and David. How will the roles be divided, given the uniqueness of this structure within software?

Thanks for the question. I am confident that we can manage this structure successfully, which we have seen in other companies. Patrick will oversee international and CBU, while Dave will handle North America and EBU. This format allows us to continue viable growth and leverage the improvements we have already seen. Would you like to add your thoughts, Dave and Patrick?

This is Dave Rudnitsky. We have previously managed this structure effectively, having significant experience at Salesforce. Both Patrick and I know our business segments clearly, and our responsibilities are well defined. Our collaboration occurs daily, enabling us to make real-time decisions in our execution.

I just want to add that as Dave mentioned, our lengthy history of working together drives our efficiency. I am genuinely excited about this next chapter in our transformation, and our division of responsibilities enables us to focus, as well as collaborate, which will undoubtedly enhance the company's strength.

That's helpful. As a quick follow-up, it seems demand really picked up during the quarter. Any color you can provide regarding what you're seeing in the pipeline for the latter half of the year as pandemic restrictions begin to lift, and impacted verticals potentially show improvement in demand?

Yes, I believe you've heard us mention that our business momentum accelerated throughout the quarter. July ended strongly, and although August remained consistent, we experienced typical seasonality. Overall, companies are adapting to the changes caused by remote work. Conversations are taking place, and we foresee enhancements in our performance for the second half of this year.

Howard, if I may add, we’ve noticed strong demand. While there may be a mathematical deceleration in growth rates in Q3 and Q4, one must recognize last year was not impacted by macroeconomic factors, and we still achieved significant growth during that period.

Our next question comes from Koji Ikeda of Oppenheimer. Please go ahead.

Hi guys. This is Chad Schoening on behalf of Koji. Thank you for taking our questions. We've observed the official branding of the Yext search bar online, alongside some pre-marketing efforts. Could you elaborate on your branding strategy and customer awareness concerning the Answers free trials, and whether you have shifted or adjusted your marketing budget during the pandemic?

Jim, Dave, and Patrick are outstanding salespeople, but your product can be your best promoter. Therefore, we take pride in prominently showcasing our logo. Visit krispykreme.com; by the way, don’t indulge too much in donuts—I just had a dozen yesterday when they were brought into the office! The strawberry-iced donut is my favorite. This approach not only boosts awareness but also enhances customer experience. When consumers encounter quality experiences, they learn to trust the official answer seal and receive improved responses instead of redirected links. We strive to create an engaging, Google-like experience on our website, providing clear solutions.

Our next question comes from Mark Murphy of JPMorgan. Please go ahead.

Yes, thank you. Jim, we will miss you and wish you the best. Howard, following up on your previous discussion, can you detail the search technology customers replace with Yext Answers? What incumbent technology do they typically remove?

There are numerous options. Typically, customers might remove Oracle's Endeca technology or a custom-built solution developed in-house. Site search is a legacy market with several players. We've taken a novel approach with our Answers-based technology, leveraging a structured Knowledge Graph rather than traditional keyword-based document search methods. Often, when we engage with customers, we find they already have substantial data within our Knowledge Graph. Given we have 385 million facts in the knowledge graph, which is a 71% year-over-year increase, that structured knowledge enables effective search functionality and eliminates difficulty during start-up.

When they make the switch, I assume they benefit from the extensive inquiries they may have previously covered as well as their ability to handle broad prompts. Could you highlight how this will be maintained once they implement Yext Answers?

When executing a search on a website utilizing our Yext Answers Engine, users will see results prominently displayed. Key results akin to Google appear on top, while tabs categorize information, similar to a Google search. When users engage with Yext Answers, they experience a fusion of knowledge-based answers and keyword-based document search. To address niche queries, our system reliably directs to secondary links, crafting a comprehensive treatment of available inquiries. Notably, the intelligence derived from this operation grants clients unparalleled insight by measuring what users are currently asking and allows them to expedite adding relevant information to the Knowledge Graph. Commonly asked questions are quickly addressed, facilitating swift updates.

That's great. Lastly, Jim, David, or Patrick, could you update us on when you expect net new ARR year-over-year to show growth? Is that coming up as soon as the April quarter or sometime next summer?

Steve, perhaps you could address that question.

Mark, that’s a pertinent question. It heavily relies on macroeconomic conditions. Different cities and countries are at various stages of recovery. More established enterprises are adapting more effectively than smaller businesses, making it challenging to predict. Looking at our pipelines and free trial activity, we do feel optimistic, but in normal circumstances, we would have much better opportunities. However, forecasting for next year requires caution due to looming challenges.

Our next question comes from Naved Khan of Truist. Please go ahead.

Thanks a lot for the insights today. On the self-serve launch timing, can you give us a sense of when this might become available?

Well, you can begin signing up now. It launched late last night.

Understood. To follow up on Answers: is it reasonable to expect that the majority of customers trying the service ultimately become paying customers? For those that do not, what are the common reasons behind that—budget constraints or something else?

We are indeed observing strong conversions amongst clients who trial it, largely because the value proposition of reduced support costs, increased revenue, and actionable customer insights remains demonstrable and compelling. Users can access an admin dashboard that illustrates how many queries are revenue-generating and where cost savings occur. By linking conversion tracking to Yext, they can quantify the financial outcomes from transactions directly. They're either saving or making money, and typically, the ROI is exceptionally appealing. In Patrick's experience, do you have anything to say about that?

I agree with everything Howard mentioned. Thus far, the feedback has been remarkably positive, and we have even witnessed customers transitioning to paying status even before the end of their trial period. Things look incredibly good overall, and we cannot be more enthused about how it has been proceeding.

I'm looking forward to seeing your sign-ups through the self-serve portal.

Just a follow-up for Steve regarding the guidance. When we compare the Q2 guidance with the actual results, should we expect Q3 similar conservatism given the macro uncertainty portrayed with your renewal activity primarily in the second half?

This is Steve; my line dropped. Can you repeat your question? Did we see an advantage from deal movement in Q2 compared to Q3? No, not significantly. While we had a robust Q2, it’s also important to note that many trials began during this quarter. The effects of those trials will predominantly be felt in Q3 and Q4, but we remain cautious due to the lasting macroeconomic challenges.

Our next question comes from Arjun Bhatia of William Blair. Please go ahead.

Hey, great job on the results, and Jim, best of luck to you in the future! Howard, I want to follow up on Answers and your commitment towards new markets which you mentioned have become accessible due to the product. When evaluating customers currently engaged with Answers, could you clarify how much is derived from cross-selling to the current base versus acquiring new accounts?

Our free trial initiatives primarily target new logo acquisitions; by design, we're focusing on new accounts reaching out to us. When we offer free trials, we typically don't approach existing customers. Our intention is to generate engagement with brands we haven't connected with before, but it's worth noting that this has successfully shifted our market mix to a broader scope, including organizations previously out of reach. For instance, in our free trials, we have seen prestigious organizations like the World Health Organization and the State Department engage with us; engaging with them wouldn’t have been feasible previously via our Listings product. This shift into new verticals has broadened our target audience, especially seen in our ability to provide tailored tools like our Official Answers Engine.

Understood. Could you perhaps walk us through how your long-term go-to-market strategy has adapted considering the new product and any changes in sales efficiencies achieved during the pandemic? How do you foresee sustainability in these efficiencies post-pandemic?

Hi Arjun, it’s Dave Rudnitsky. The efficacy evident from our work-from-home model is grounded; our teams, especially in enterprise, adapted quickly to remote working as some of our clients were initially uncomfortable. Our reps have successfully transitioned to productivity in this atmosphere. Importantly, we appreciate that there's no need for extensive travel to execute effectively; we will remain capable in this sustainability trend thereafter. Moreover, our new approach with Answers has accelerated pipeline growth during various industries that we did not target six to nine months ago. The addition of our newer offerings allows us to explore existing sectors as well.

Howard emphasized our team's tenure previously, which has markedly enhanced our efficiency as well; I believe we'll maintain this momentum.

Our next question will come from Rohit Kulkarni of MKM Partners. Please go ahead.

Thank you, and congratulations on a successful quarter. I have a couple of inquiries regarding Answers and market positioning. Could you explain the feedback on ROI along with your pricing structure for Answers, whether as a stand-alone entity or as an add-on to existing customers? Have you adopted capacity-based or utilization-based pricing? Please provide an overview.

Certainly! We first focus our discussion on ROI, which is vital. Each question a company receives is classified as either cost savings or revenue generating. One significant revenue source from Answers arises from diminished support inquiries; addressing a client's concern via Answers prevents costly customer support calls, which can also posit friction between the customer and the brand, thus reducing expenses in general. In addition, we syntactically categorize inquiries according to industry specifics, providing revenue estimates per query. Customers only pay for queries that are linked to a transaction. Users have a dashboard illustrating keyword classifications as revenue-generating or cost-saving opportunities, as well as the number of searches conducted. They track clicks that lead to conversions. Our analytics enable customers to quantify which transactional amounts generated revenue through interaction and engagement, portraying clear ROI versus the initial investments in Answers. Economically, the impact is impressive; we often see a ratio of 3x to 100x ROI against the overall costs of maintaining Answers. The model is capacity-based, allowing clients to choose the query limit per month based on free trial exposure, refining their future requirements accurately.

Thank you for those details! Do you find that budgets for Answers typically come from CIOs, CMOs, or some changing space owing to increased outreach?

Hi Rohit, it’s Dave Rudnitsky. We've noticed a lot of budgeting originates from the CMO and CDO's offices. Answers is tightly aligned with the discourse surrounding digital transformation, which is at the forefront of all executives’ agendas currently.

This concludes our question-and-answer session. I'd like to turn the conference back over to Yuka Broderick for any closing remarks.

Thank you for your time, everyone. We're looking forward to updating you for the next quarter. Have a great day!

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.