Yext, Inc. Q1 FY2025 Earnings Call

Good afternoon, and welcome to the Yext, Inc. First Quarter Fiscal 2025 Financial Results Conference Call. All participants will be in listen-only mode. 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.

Thank you, Operator, and good afternoon, everyone. Welcome to Yext First Quarter Fiscal 2025 Earnings Conference Call. With me today are CEO and Chair of the Board, Mike Walrath, and CFO, Darryl Bond. During this call we will make forward-looking statements including statements related to our future financial performance, statements regarding the timing and expected effects of our pending acquisition of Hearsay Systems, expectations regarding the growth of our business, our outlook for the second quarter and full year fiscal 2025, our strategy and estimates of financial and operating metrics, capital expenditures, and other indications of future opportunities, as further described in our first quarter shareholder letter. 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 ability to compete, our acquisition of Hearsay Systems, and integrate its business with ours, our management performance, and general economic and business conditions. These forward-looking statements represent our beliefs and assumptions only as of the date made, and we undertake no obligation to revise or update any statements to reflect changes that occur after this call. Further information on factors and other risks that could cause actual results to materially differ from these forward-looking statements is included in our reports filed with the SEC, including in the sections titled Special Note Regarding Forward-Looking Statements and Risk Factors in our most recent quarterly report on Form 10-Q for the three months ended April 30th, 2024, and our shareholder letter that was issued this afternoon. During the call, we also refer to certain metrics including non-GAAP financial measures. Reconciliations with the most comparable historical GAAP measures are available in the shareholder letter, which is available at investors.yext.com. We also provide definitions of these metrics in the shareholder letter. I will now turn the call over to Mike.

Thanks, Nils. Good afternoon and thank you for joining us today. Hopefully by now you've read both the press release announcing our definitive agreement to acquire Hearsay Systems, as well as our first quarter letter to shareholders which was posted to our website after the close of market. I'm very excited to discuss the news with you today, and our first quarter earnings call is the perfect forum to discuss recent events. I hope it was clear from reading our shareholder letter that we feel the opportunity to combine Hearsay's client engagement solutions with Yext's industry-leading digital presence platform is a game changer. As a trusted global leader in digital client engagement for financial services, Hearsay Systems empowers over 260,000 advisors and agents to proactively guide and capture the last mile of digital communication in a compliant manner. The world's leading financial firms rely on Hearsay's compliance-driven platform to scale their reach, optimize sales engagements, grow their business, and deliver exceptional client service. Yext and Hearsay are both trusted by leading financial firms and insurance providers who rely on our platforms to manage their digital presence and compliant customer engagement. Combined, we helped empower over 3,000 global brands. Yext is proud to work with nine of the 10 largest US Banks and the four major wealth management firms. Hearsay's customer base includes the top 5 US Life insurance firms and four of the top five global wealth management firms. Our joint customers will benefit from seamless access to new tools and capabilities to strengthen their management of the complete customer journey. A few important points regarding the financial terms of the deal. First, the purchase price is for $125 million, subject to customary adjustments that set forth in the merger agreement. Yext may be required to pay additional contingent consideration of up to $95 million in cash or Yext common stock based on the achievement of certain milestones over a two-year period. Second, while the final audit of Hearsay's financial statements is still pending, we believe Hearsay generated approximately $60 million in revenue during its prior fiscal year ended December 31, 2023. Third, we believe Hearsay's operations are highly compatible with Yext, and though unaudited, they currently operate around free cash flow breakeven. Fourth, and finally, we estimate Hearsay's business is growing on the basis of ARR. Hearsay has approximately 300 employees globally, and we will be working in the coming months to finalize the plan for the integration of the two companies. Execution of the integration plan will begin after the transaction closes. We are not in a position to comment further on integration plans at this time, except to say that with Hearsay Systems, we believe Yext will be able to provide even more ways for brands to connect with their customers one-to-one. This acquisition will advance our efforts to deliver the products and solutions our customers value most. We look forward to welcoming the Hearsay team to Yext once the transaction closes. And with that, we'd like to open it up for questions.

We will now begin the question-and-answer session. Our first question today is from Tom White with DA Davidson. Please go ahead.

Great, thanks for taking my question. Congrats on the Hearsay deal. I guess maybe it was a little more sizable than maybe we would have thought you guys were considering as it relates to kind of your social capabilities specifically. I guess, Mike, maybe you can comment like was this something that this size sort of always, maybe your intention or just any color on how the process evolved? And then I have a quick follow-up on the guidance.

We believe that the scale of the business aligns well with ours. As I've mentioned repeatedly in recent quarters, consolidation will be an important trend moving forward. We have explored various opportunities, discussing how well the solutions complement each other and their significance to our customers. This focus on complementarity is more critical to us than the specific size of the business. We are confident that the solutions and products offered by Hearsay are extremely complementary, as we already share a significant number of customers and possess valuable insights regarding the benefits these products provide. Therefore, whenever we evaluate an acquisition opportunity, our primary consideration will be the degree of complementarity and the potential synergies from merging the platforms. We will keep an open mind regarding size as we seek consolidation opportunities.

Okay, great. Thank you for that. And then just on the full year revenue guide, I think it came in a little bit. I mean, can you just provide a little bit more color on kind of what's changed? Is that purely related to maybe kind of slower conversion of the pipeline related to the longer sales cycles and kind of budget scrutiny, stuff that you guys have been and a lot of people have been encountering? Or is there anything kind of else to maybe call out, just kind of in the existing book of business?

Yeah. I don't think we're seeing anything that you're not seeing elsewhere. When we gave the guide for the full year, we talked about assuming a level of stability or even some level of recovery. I think what we're seeing and what we hear from our peers is, it's certainly not getting any easier to convert demand, budget constraints, deal cycles. It's all still there. You know, and the other thing that's happening there is, as we go through renewal cycles, we're being very intentional about making sure that we're solidifying the relationship with the customer, that we're setting ourselves up for future upsells, and that we're building a stronger relationship with the customer. So all of those things are going to challenge bookings, and they're going to challenge retention. One of the things we talked about in March is that we had planned a pretty significant sales capacity ramp early in the year. As we saw how the quarter was playing out and how challenging some of these headwinds were, we did grow our sales capacity, but we certainly slowed down the pace of hiring a bit. And I think part of what's flowing through on the full year is just a different set of assumptions about how fast we build that sales capacity and how fast we can convert the demand. You know, it's a big, I talk about this all the time, but you don't want to build the sales capacity ahead of the ability to convert the demand because then you take a step backward on productivity. And we haven't taken a step backward on productivity. We're still seeing the productivity improvement. So that's good. It's just, I think it's really a question of how quickly do we hire that sales capacity and how quickly do we start to see the demand converting.

Okay, thank you very much.

The next question is from Rohit Kulkarni with ROTH Capital Partners. Please go ahead.

Hi, thank you. I have a couple of questions. First, regarding the acquisition, could you provide more details, Mike, on the overlap with Yext? How significant is the financial services segment at Yext? Additionally, how well does your sales value proposition align with Yext's core verticals, such as retail, restaurants, and hospitality? Where do you anticipate these synergies will emerge over time?

Hey Rohit, it's Darryl. I'll take a couple parts of that and then hand it off to Mike. In terms of financial services, a little over a year ago we did an Investor Day and we included in that deck, some of our largest verticals. And I think health care and financial services were around the 21%, 22% mark. Those continue to be our two largest and strongest verticals. We feel really good about the complementary nature of Hearsay, given their strength in financial services and the ability for us to have some common customers, but also customers they have that we don't and vice versa. So we think there are certainly some opportunities for revenue synergies just within financial services. And I think we look broader into the rest of our verticals, I think there are opportunities there, particularly as we continue to build out our own social product and flush out that road map.

Yes. It is important to understand the overlap in clients. In our financial services sector, Yext is particularly strong in wealth management, agent-based businesses, and insurance. This strength comes from the challenges of marketing local agents and wealth management, which resembles marketing for local retail, restaurants, and medical offices. However, financial services have a higher compliance and measurement bar to meet. Yext excels in listings, pages, reputation management, and internal search applications. Additionally, we are addressing areas like social media management, text and voice communications, along with compliance features. Our goal is to integrate these components and create a unified data layer with workflows and analytics that generate content and provide ROI for our customers. This is a focus we have had for a while. The synergies with Hearsay are apparent in how we can serve and add value to these clients. Regarding taking these solutions beyond financial services, we have a roadmap for our social product aimed at non-financial institutions, which will significantly boost our social media management capabilities. Within financial services, there remains a great opportunity for top-tier social media management, especially concerning local social needs. Moreover, Hearsay's strength in text and communication is often underappreciated. While other sectors may lack the same compliance issues as financial services, they still face many communication challenges. Being able to text customers directly in a brand-compliant and trackable manner presents a valuable opportunity that this acquisition will enhance.

Okay. Okay. Awesome. I guess another question is just on your ARR growth outlook. Maybe talk about this mid-single-digit growth rate by end of 2025 and high single digits by first half of next year. Maybe talk through what gives you confidence that we are going to see that kind of level of acceleration in the next six months to nine months perhaps, given the recent six months, ARR growth is kind of going in the wrong direction.

Yes, that's a valid question. The primary challenge we are facing right now is the significant customer churn that occurred at the end of Q4. This has certainly impacted our year-over-year performance. Additionally, we are experiencing some sequential challenges, as mentioned earlier, because we are actively working on renewals to strengthen our partnerships. This situation is not unique to us; it is something that is happening industry-wide. It can lead to various obstacles, including licensing counts, pricing issues, and budget constraints within our partner organizations. We take all of these factors into consideration when restructuring partnerships at the time of renewal, all of which create headwinds. However, we remain optimistic about the latter half of the year due to our visibility into demand. We are ahead of the curve when it comes to managing renewals, significantly more so than in past years, and we believe that our estimates, while still conservative, indicate that we will experience ARR growth in the second half of the year, even if the market continues to be challenging.

Okay, thank you. I will go back in the queue. Thanks Mike, thanks Darryl.

Thanks.

The next question is from Ryan MacDonald with Needham. Please go ahead.

Hi, thanks for taking my questions. Maybe just adding on with Hearsay questions. Can you just talk about general growth rate of the business or the end market that they're operating, maybe in the context of last year, if you're not giving updated guidance to include it yet. And then as we think about the efforts that you took recently with the workforce reduction in the core business and sort of pairing that with expected integration of Hearsay, how should we think about sort of what the integration of this business does for the margin profile of the business? And is it accretive, dilutive to sort of the core Yext business at this point?

Thank you for the questions, Ryan. Regarding Hearsay, we will be providing updates in the future. The guidance we are sharing today does not reflect the Hearsay acquisition, so it is entirely based on our organic growth. Once the acquisition is finalized, we will update our financial outlook and share more details about our anticipated growth rate and revenue. However, we are not prepared to discuss it further at this time, as it would be premature to speculate. You mentioned the end markets they operate in; Hearsay currently focuses on the financial services sector. We are very optimistic about this opportunity, but our go-to-market strategy encompasses a wider range of verticals, while theirs is specifically centered on financial services. Therefore, we see significant potential to integrate their products with ours, especially in the social area, as we expand into a larger market in the latter half of the year.

Super helpful. As a follow-up, could you provide insights on the newer AI modules that are starting to reach customers, as well as the positive feedback we've been receiving? Looking ahead to the acceleration of growth in the second half of the year, what are the expectations for the AI sector? Are there short-term monetization opportunities, or should we still wait and see how the market evolves?

Yes. Well, you remember, I made myself pretty unpopular about a year ago by saying that the AI bookings wave that everyone was expecting in the second half of last year wasn't going to materialize. I don't think I made a lot of friends in that statement. I think we still see it the same way, which is it is coming. We see less of a tidal wave and more of a rising tide. But when it comes particularly to the larger enterprises, they are going to be cautious, and there's not going to be as much of a giant cresting wave. It is just going to be a slowly rising tide over time. The way we think that plays out is that, and this is – it is a little different, I think, than the prevailing narrative of there are going to be just sort of binary winners and losers when it comes to software and AI. That may be true when it comes to purely productivity-based pieces of software. But I think we are combining data layer with workflow with analytics and a content generation flywheel. What winds up happening is all of these AI technologies get built into the platform and they get used in lots of different ways that makes the platform more valuable. And so we are not necessarily thinking about it so much as selling AI as we are thinking about it as what are the things that AI makes better inside the platform. So we gave a couple of these examples, manage review response, and ultimately AI generative review response is a great example of something that there is, I think increasing adoption and increasing comfort with the idea that you can save a ton of time having your review response written in a brand voice. And then in most cases, still be reviewed by a human being. On the listings recommendation side of things, what we are starting to see is that bringing the combination of data science and AI to bear in the form of automated recommendations around things that you can do within your listings configuration and ultimately more broadly across the platform are going to be really exciting ways that we bring those technologies into the platform. And so we are still incredibly bullish about this and as we see our customers using it, we are probably even more bullish than ever. And I'll probably will continue to make myself somewhat unpopular by not predicting that there is going to be a massive tidal wave of bookings in the second half of the year for this. And right around the time people give up on AI driving bookings is probably when we'll start to see that the tide is rising across the board.

Appreciate the color, thanks Mike.

The next question is from Naved Khan with B. Riley. Please go ahead.

Yeah, hi. And thanks a lot. So maybe just on the ARR trend. If I look at the direct and third-party ARR sequentially both dipped. Is that related to maybe some give back or, as you said, maybe solidifying relationships, reviewing the number of licenses and so on? What's the driver of that?

Yes, I think there are various factors at play. The primary factor we notice is during renewal cycles, which I believe is a common challenge across the industry. Customers may face budget constraints or changing business circumstances since signing their previous contracts, possibly two years ago, when they had more stores or agents. This type of pressure is not unique to us; it affects other software companies selling licenses as well. In fact, it may be less pronounced for us since a smaller portion of our software is sold based on a seat license model. Ultimately, our focus is on making decisions that foster long-term customer relationships, especially with opportunities arising from acquisitions like Hearsay, which enhance our potential for growth. We aim to avoid short-term revenue increases that might annoy our customers, especially since such strategies often lead to downgrade pressures. We've consistently maintained that we prefer downgrades over losing customers entirely. Being too rigid regarding downgrades can result in higher customer turnover.

Got it. So your outlook for return, just call it, mid-single-digit kind of growth by the end of this year. Is that just based on the pipeline, the conversion rates, as well as the fact that you might be anniversarying some of these changes as they exit the year? How should we think about that?

Yes. We don't experience the significant churn from last year until we reach the end of Q4. However, we are continuously assessing the pipeline and our capacity to convert it, along with the renewals, which are a substantial component. Considering the overall situation with a cautious perspective, we still anticipate growth in the latter half of the year and a return to a more sustainable growth state during that period.

Okay. And then one final question maybe on Hearsay. You mentioned 300 employees. Are most of the people in the sales function or technology? Or any kind of color on that?

Yes, the company is diverse and has all the necessary functions. We don't see anything abnormal in their organization, and they operate in a way that's quite similar to us. In the next call, we hope to discuss more about the acquisition and its impact on our financial areas. Currently, it's a strong business with annual recurring revenue growth. They have faced challenges in recent years, but their execution has been excellent, they've launched new products, and they have growth drivers in place. The business is currently operating around cash flow breakeven, so we feel confident about its financial profile and our ability to find synergies during integration.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Walrath for any closing remarks.

Well, I'd just like to thank everybody for joining us today and for your questions, and we look forward to speaking with you next quarter.

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