Yext, Inc. Q3 FY2025 Earnings Call

Good afternoon and welcome to the Yext, Inc. Third Quarter Fiscal 2025 Financial Results Conference 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 Nils Erdmann, Senior Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Yext's Third 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 expected effects of our acquisition and integration of Hearsay Systems, expectations regarding the growth of our business, our outlook for the fourth 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 third 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 integrate the Hearsay Systems 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 section titled Special Note regarding forward-looking statements and Risk Factors in our most recent quarterly report on Form 10-Q for the three and nine months ended October 31st, 2024, and our earnings release and shareholder letter that were 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.

Good afternoon. Thank you all for joining us today. Our quarterly shareholder letter has been posted to our Investor Relations site. I hope you've all had a chance to read it. Before we jump into Q&A, I'd like to emphasize a few points from the letter. We're pleased with our results for Q3. Our revenue grew 13% year-over-year with the inclusion of Hearsay Systems. The core Yext business is very stable, and we're seeing growth contributions from Hearsay. The selling environment appears to have stabilized in the second half of the year, and we're seeing early signs of the extreme cost optimization moderating. We're seeing the early phases of a fragmenting search environment driven by generative AI search experiences. We believe this environment is positive for Yext, as brands will need to lean into the best ways to structure their content and data and deliver to a much broader set of consumer search and find experiences. I am pleased with our operating results. We're a much more efficient business today. And while there is still opportunity to continue to improve our margin profile, we are increasingly focused on accelerating growth. None of this would be possible without the commitment and efforts of our global team, and I'd like to take a moment to thank them for their ongoing contributions here. Now, we'd like to open it up for questions.

We will now begin the question-and-answer session. Our first question is from Ryan MacDonald with Needham and Company. Please go ahead.

Hi. Thanks for taking my questions. Congrats on a nice quarter. Mike, maybe to start, you talked about quite a bit in the letter and just there in the prepared remarks that we're in the early phases of a fragmented search environment. So it's a lot of new generative AI search kind of starting to disrupt sort of Google's traditional monopoly and sort of SEO and SEM strategies today. Can you just talk about how this is translating into customer conversations and potential pipeline generation and what you think this could potentially do for organic growth as we think out over the next couple of years?

Yes, sure. Thanks for the question, Ryan. So this is probably, I mean, this is certainly the number one conversation that we're having with both customers and with prospects. And it's really interesting because over the last five, six, seven years, the centralization of the search business with a single party, the focus on kind of single party focused SEM and SEO has been a challenge for us. As we start to see that what seems clear to us is going to be a fragmentation. There are going to be different ways that AI search experiences address consumer questions, answer questions, and ultimately deliver those answers to the questions. One of the things that will need to be top of mind for marketers is that the rules will likely be different. How do I create content that is more adjustable by these generative search experiences? How do I deliver that content to these different generative search experiences? It's not going to be as simple as updating my data pipes that I have into Google and making sure that I'm following the rules of Google's SEO and SEM marketplace. There's no customer that we aren't talking about this with. From Yext's point of view, this is very much a problem we faced historically with the fragmentation that came from the mobile device. In many ways, it's the reason why Yext exists. Having a really advanced platform for gathering brands' information, structuring that data, and then making that data deliverable through an increasing number of digital channels is central to a brand strategy. We're not making predictions today about exactly when we will start to see the impacts of this; it's already happening in boardrooms and management rooms, and there isn't any topic for brands, especially those that are thinking locally, that is more top of mind than this topic right now.

Helpful there. And then it seemed like from the shareholder letter, it was a very good quarter, with lots of new logo additions, especially in healthcare, and some nice expansion activity. Can you just kind of maybe compare that with the implied guidance for the fourth quarter and the top line, which is taking a sequential step down? Just how should we think about where things stand in terms of the trajectory? And maybe you can divide that between the organic business versus the core Yext business versus some of the initial things you're seeing with Hearsay? Thanks.

Yes, sure, Ryan. So thanks for the question. I'm going to let Darryl get into the specifics, but I think the punchline to your question is that the confusing sequential nature of the revenue in Q3 and the guide in Q4 is FX-related. Darryl, I don't know if you want to jump in there.

No, that's right. Ryan, in the Q that we filed this afternoon, there are a few more specifics on the Hearsay business and their contribution in Q3. But at the end of the day, we view the sort of legacy Yext business as pretty stable. When you back off the ARR contribution from Hearsay at the end of Q3, which was about $62.8 million, and look at the sort of Yext Direct ARR, it was up a little bit from Q1 to Q2, down a little bit from Q2 to Q3. So we feel pretty good about the stability that we're seeing there. We talked about modest improvements in retention rates. So the business feels pretty stable. On the revenue side, we also quantified the Hearsay revenue in Q3 at $16.4 million. And when you look at that from Q1 to Q2 to Q3, the legacy Yext revenue is pretty stable as well. We feel good about the addition of Hearsay, and we're excited to get through Q4 and into next year to continue to build on the momentum that we've got post-closing.

Yes, Ryan, just to add to that, the delta between the revenue that we had in Q3 and the guide and the revenue guide for Q4 suggests that the revenue can be down a little bit sequentially. The way that FX fluctuated, there was upside in Q3 and downside in Q4. When you wash those things out, there's actually stability in the revenue, which is what we talked about last quarter and what we expect as we get through the end of the year.

And Ryan, just to elaborate a little bit on the FX, we did get a benefit from FX and revenue in Q3, but post-October 31st, we saw the FX rates come down, and that's what we used to set our guide.

Appreciate all the color there. I'll hop back in the queue. Thanks.

Thanks, Ryan.

The next question is from Tom White with D. A. Davidson. Please go ahead.

Great. Thanks for taking my questions. Maybe just a couple on Hearsay. Now that you guys have had a little more time to dive deep into the books, I'm just curious if there are any new insights you could share about trends in that business, maybe the quality of the pipeline versus when we heard from you three months ago? And maybe just update on whether there's any difference in the deal cycles for Hearsay versus the legacy business, given that it's exposed to enterprises having to satisfy compliance requirements. I'm just curious if it's a bit more resilient on that front. And then I have a quick follow-up.

Yes. So I would say there's not really any big surprises here. We knew the business was growing and that trend continues. As we get through the integration, which we're making great progress on, we expect to be largely complete with that by the end of the year. What we're seeing is real momentum in that business and the best conversations we're having are with our mutual customers and also the customers who use one platform or the other about the power of unifying these platforms and having a unified data system and insights. The headwinds to budgeting and cost cutting we've seen over the last couple of years have been abating. Part of that is we're starting to see deals that slowed down over the last couple of years accelerate a bit. There's a feeling overall around the business and our customers, that after a period of cost cutting, we now have a margin profile that is more sustainable.

Okay, great. Thanks, Mike. That was very interesting. Maybe just in the letter, I think there was a mention that you will continue to evaluate M&A opportunities. I'm curious if there are any adjacent products that you can imagine wanting to have in the next few years. I'm thinking about Hearsay and social; we didn't hear a ton about you guys talking about social for a few years, and then all of a sudden, we heard about it for a couple of quarters. Are there any other adjacent products you think might make sense for you guys to consider building or buying? Thanks.

Yes, I think a big part of the development of both our non-financial services social, Yext Social product, as well as the Hearsay acquisition were really driven by our customers' continued demand for a unified platform that would unify listings, pages publishing, reputation management, search, social media, and compliant communications. We see opportunities in healthcare, data, and analytics. Our focus is listening to our customers and understanding their different vertical needs. We're going to take a pragmatic approach to organic growth, R&D, and M&A opportunities.

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

Hi. Thanks for the questions. A couple. One on the letter, you said that in the last couple of weeks, you've been seeing some deals accelerate as businesses focus more on digital transformation. Is FX the only reason for the guidance? How does the trend you’re seeing tie into the guidance?

Sure. No problem. So I'll take the second part and let Darryl talk about the FX stuff. I think you have come to expect from us that our financial guidance is conservative. We want to prove that the dynamics are there before we adjust our guidance. There is some FX noise in it, which I think Daryl can discuss in more detail. But we do feel confident the business will start to perform better from a growth standpoint.

Yes. And I think it's also about deal timing. Deals that come in toward the end of Q4 won’t impact revenue immediately. The FX impact is a couple hundred K affecting the business in Q4. We want to be thoughtful and conservative with our guidance, knowing that we're operating in a dynamic environment.

Okay. And I think a couple of tidbits on Yext Social; seems like a nimble launch and integration into Hearsay. What is your go-to-market strategy for Yext Social? Where do you see the greatest near-term opportunities?

Yes. I think most of our larger customers are using something for social today. Yext Social and Hearsay Social are different initiatives but are converging. The needs of non-financial services customers manage social media and analytics for location-based marketing are very different due to compliance features. We’re doing well since the Yext Social product launch in September, and we see Yext Social as a focus area for future quarters.

Okay. And could you provide your latest thinking on the breakdown of the rule of 40? Given where you are with revenue growth and profitability today, how do you expect to approach the rule of 40 in the next few quarters?

Yes. We've made a lot of progress. We haven't set a date when we expect to get to the rule of 40, but we're focused on our margin profile, which improved a lot in Q3, and we expect further improvements in Q4. We still expect that the revenue growth will be the major contributor. We're much closer to achieving the rule of 40 than we were at any point in the last two and a half years. We're satisfied with our progress but know we still have work to do.

Okay. Thanks, guys.

Thanks, Rohit.

Thank you.

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

Thanks a lot. So two questions from me. One on ARR. Darryl, can you clarify if the Direct ARR declined from Q2 into Q3? If so, why did that happen?

Sure. What I was saying before is if you back out the Hearsay contribution to ARR in Q3 of $62.8 million, the sequential decline from Q2 to Q3 is down around $1.5 million in that range. Overall, we were up a little from Q1 to Q2, and down a little from Q2 to Q3. Q4 generally has the biggest volume. So it feels stable to us. Keep in mind, we will be lapping that large customer churn that we mentioned, which will impact the growth in retention metrics.

If I can just add to that, we talked about how the core business has been stable and how we've been focusing on solidifying our partnerships. We've seen three quarters of gross retention, net retention improvement, and our renewal rate has been improving as well. This tells us that the trends show the potential for future ARR growth. We're making long-term decisions.

Got it. Okay. The other question I have is on your commentary regarding the fragmentation of search. Could you provide your thoughts on how quickly you think things might change in consumer behavior? Any insights?

Yes. I think I would heavily discount the notion that there's a scenario where things aren't going to change. We've seen enough to know that there are interesting ways humans interact with AI that will change the traditional search experience. Consumer behavior is shifting as more search occurs across AI and social channels. We haven't seen significant transactional behavior across these experiences yet, but we believe that search generative experiences won't remain just exploratory. We think a structured data system is essential for brands' visibility in this fragmented landscape. We advise everyone to get their data in order to manage the exploitation of these new experiences.

No, it does. And I appreciate the detailed response. Thank you, Mike. Thank you, Darryl.

My pleasure.

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

I'd just like to thank everyone for joining us today and look forward to speaking to you in another quarter if not sooner.

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