Yext, Inc. Q4 FY2025 Earnings Call

Good afternoon, and welcome to the Yext Incorporated Fourth 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's fourth quarter fiscal 2025 earnings conference call. With me today are CEO and Chair of the Board, Michael 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 recent acquisitions, expectations regarding the growth of our business, our outlook for the first quarter and full year fiscal 2026, our strategy and estimates of financial and operating metrics, capital expenditures and other indications of future opportunities as further described in our fourth 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 acquired businesses 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 October 31, 2024, our earnings release and our shareholder letter that were issued this afternoon. During the call, we refer to certain metrics, including non-GAAP financial measures. Definitions of these non-GAAP metrics and other operating metrics as well as reconciliations with the most comparable historical GAAP measures are available in the shareholder letter, which is available at investors.yext.com. I will now turn the call over to Mike.

Thanks, Nils, and thanks everyone for joining us today. I'd like to highlight some key points. First, Yext is incredibly well-positioned strategically and competitively. We've made excellent progress with our integration of Hearsay, and our combined businesses are generating go-to-market and cost synergies as expected. Our platform and product roadmap has been enhanced significantly with the Hearsay products, Yext Social, and just this week with the launch of Yext Scout. Product innovation is accelerating at Yext, and this will be a growth driver for us in the future, particularly as we help our customers grapple with the fast rate of change being driven by AI. In our discussions with customers and prospects, we're hearing excitement and enthusiasm for how our platform is evolving, which is opening up new opportunities. Second, we are seeing positive trends from our performance metrics despite a mostly unchanged macroeconomic environment. Our gross retention and net retention rates are both increasing with gross ARR retention increasing to the high 80% and net retention up across both direct and reseller. Our EBITDA margins are north of 20%, and our outlook for over $100 million in EBITDA in fiscal year '26 points to the financial strength of our business. While the macro environment remains unchanged relative to last quarter and spending scrutiny still persists, we have nonetheless seen changes in the demand environment. These outcomes are the result of our recent product developments and our heightened focus on customer success. Third, the launch of Scout represents a major milestone for Yext. In my 16-year tenure here, I have never experienced a more enthusiastic response from our customers to one of our product announcements. We believe Yext Scout will fundamentally change the way our customers and partners gather data insights, expand their knowledge graph, and prioritize actions to win more visibility in an increasingly complex local marketing world. Our customers are just as optimistic. We announced the closed beta for Scout just two days ago, and already we have had hundreds of waitlist signups. This is a very strong demand signal, especially given the very limited marketing of the launch. And I believe this will be an advantage for Yext as brands increasingly focus on the opportunities and challenges that a fragmented search landscape presents. Finally, I'd like to take the opportunity to thank our entire global team for their ongoing efforts and commitment to our customers and our mission. Now, we'd like to open it up for questions.

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

Hey, this is Matt Shea on for Ryan. Thanks for taking the question. Maybe first on the outlook for 2026, I recognize you guys aren't guiding the top line. Maybe just qualitatively, last quarter, you talked about seeing some signs of stabilization, noting that deals that had slowed down were starting to accelerate and that you weren't necessarily seeing tailwinds, but headwinds were starting to abate. Is that still your assessment of the environment? Any changes in that optimism level from last quarter or anything you're seeing that's informing the outlook for 2026?

Hey, Matt. I'll go first, and Darryl may have some financial comments on the outlook. But I'd say no, I wouldn't say that we see anything really changing. I mean, I think, we talked about we feel like they've stabilized and normalized. We were not calling tailwinds, but I think we're seeing that the headwinds are at least not getting worse. And I think what we're seeing across our base of customers and partners is that the awareness around the pace of change with AI experiences and AI search is driving a level of urgency that we haven't seen in quite some time to understand what the opportunities are to address the challenges that are going to come when winning visibility and winning traffic is a far more difficult task than just managing your Google profile and Google organic and paid search results. So, from that perspective, we see that momentum continuing. You're still facing all the typical cost optimizations that we've been seeing in the last couple of years. You're still dealing with things like store closures and challenges around numbers of licenses and things like that. But I'd say overall, we feel momentum continuing to build, and it certainly doesn't feel like things are getting more difficult.

Okay. That's good to hear. And then, maybe, with Hearsay and Yext Social, it sounds like a lot of great demand there, which I think has likely partially been supported by industry-specific factors like financial institutions just facing greater SEC crackdown, forcing them to be more compliant basically. Is it fair to say that there's maybe some tailwinds in the financial services space that play to Yext's favor where we should see this vertical grow faster maybe than other end markets in FY '26? And then, maybe more broadly, with the kind of macro environment continuing, are there any other industry verticals you see as really ripe for Yext in FY '26 despite that tough operating environment? It sounds like healthcare was really strong in Q4. So maybe we see that continue. Any color would be helpful.

Yeah. So, I think we've seen momentum in healthcare, and we've seen momentum in financial services. It's not surprising in finance that we're experiencing the benefit of having a broader platform and being able to solve more of the top-of-funnel and customer relationship, social and communications pieces. And certainly, it's an environment where there's heightened SEC scrutiny. I think the other thing, and this really crosses all verticals, is anyone trying to optimize a local presence, whether it's a service area or a store location or an advisor or an agent, is facing urgency around the need to understand how they are performing across a broader range of platforms. And it feels like every week, there is another player that you need to think about - how will I show up on Perplexity, how will I show up on ChatGPT and SearchGPT? This week we saw Grok, and that's an amazing experience. So, I think while the financial environment remains challenged, as I said before, I think the prioritization of getting my data right and using that data to feed a diverse set of answer engines is something that we believe will be an increasing priority for every business with a local footprint. We see the opportunity to outrun some of the macro headwinds this year, which is why we still see the business's ARR growth coming back this year despite an environment that remains challenging at the highest level.

Got it. Thanks for that, Mike.

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

Hey, thanks. I know on the fiscal year '26 guide, maybe talk about your kind of philosophy around spend to the extent you can and what are the key investment priorities in the upcoming year above and beyond what you did last year to get to that $100 million-plus EBITDA? And how should we think about any incremental flow-through in margins for the next 12 months?

Sure. I think I can address this together. Our approach for 2026 is somewhat different, and as you noticed, we are not providing a full-year guidance. We are expanding the information we share about Annual Recurring Revenue (ARR) to include uncommitted ARR, giving a more comprehensive view of our ARR situation. We faced some foreign exchange challenges in Q4 that impacted our ARR presentation. Typically, we've had around 1% to 1.5% of revenue from one-time professional services. As we aim to provide the clearest picture of ARR, we believe it will give a strong indication of what our revenue may look like over the next four quarters. We think this approach is more effective than a full-year revenue forecast. On the operational side, we will be cautious in managing expenses until we see growth trends emerging. Therefore, the EBITDA guidance represents a modest recovery in the ARR. If we observe a quicker recovery or growth in ARR, we may decide to invest more in research and development or allow more of the increased EBITDA to contribute to our bottom line. We see significant opportunities for ARR growth this year, along with the potential to invest in that growth or direct excess EBITDA from that growth to improve profitability.

Yeah. And the only thing I'd add to that, Rohit, is we've made pretty good progress on integrating Hearsay business and operating as one company going forward. So that will obviously have benefits to EBITDA as well.

Okay, great. I wanted to follow up on the discussion about search fragmentation and how Yext's competitive positioning might improve strategically. Could you explain the rationale behind the recent acquisition and how Scout and your search offering could be compared in a fragmented marketplace?

Yeah. Sorry, I got a little garbled there. I think you're asking about the Places Scout acquisition and the launch of Scout.

Yeah, exactly. And given the kind of the overall fragmentation of search and how the acquisition fits into the new competitive environment that you might be seeing?

Yeah. So, as you know, we've been talking for a couple of quarters about the environment where Google is the dominant player, which is really what we've been in for the last close to a decade. What happens is people get comfortable, marketers get comfortable, and C-suites get comfortable with the idea that that's where the traffic comes from, that's where the discovery is happening. We feel like we're doing the right things to manage our data in a way that makes sense. However, in a fragmented environment and with the acceleration of that fragmentation, you need much more data to understand what is happening competitively, how you are showing up, whether that's on an AI experience or a more traditional search experience, understanding your share of voice, and brand sentiment, alongside Google's search ranking and other search engines. Where Places Scout is best-in-class is in gathering search rank information and related attributes around reputation, reviews, photographs, and all the other data we can gather. By acquiring Places Scout and merging that with our multi-quarter effort of R&D to create best-in-class AI share of voice and brand sentiment reporting, we're building a comprehensive platform that utilizes AI to create an agent working 24/7 to identify opportunities for our customers to increase their digital presence and visibility. The reaction from customers has been overwhelmingly positive, indicating a sizable demand.

Great. Thanks for the update, and looking forward to catching up. Thanks.

Thanks, Rohit.

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

Great. Thanks for taking my question. Maybe just a follow-up to the last one. I agree the acceleration of search fragmentation is super interesting, and it seems like my phone all of a sudden I have three or four new apps in the last quarter or two that I'm using for search occasionally. I guess, when I think about Places Scout, when I think about what they bring versus what you guys had been working on internally, it sounds like vis-a-vis this idea of optimization and SEO visibility across all these different platforms, what is the combination of the two things bring that maybe is different from other SEO optimization offerings out in the market? And then, I have a quick follow-up.

Yeah. So, I think the best way to think about it is that historically Places Scout has been a leader in gathering and organizing SEO rank data. What we've recognized here is that many people are discussing whether SEO needs to become AIO. When it comes to Google, there is a well-understood mechanism to assess how you are performing. There's tremendous value in knowing how your data compares to competitors, and this is something that the Places Scout acquisition has unlocked, allowing us to be best-in-class for core traditional SEO metrics. We also inherited a talented team with expertise in gathering data, which will be extremely useful moving forward. The other aspect is that there are no established metrics for measuring performance on AI experiences. Marketers will need to learn what influences the answers being provided by these various platforms. Customers are telling us they need solutions for these challenges, and we believe we have the products necessary to empower them—listings, reviews, pages, social media, and our core knowledge graph—all critical in taking actionable steps. What Scout does is provide a robust insights layer that will recommend and eventually automate these actions in a scalable manner. This excitement from customers is unprecedented.

That was very helpful. Thank you for that. Just one follow-up on capital deployment. You guys have done a couple of acquisitions recently. I also saw that you increased the buyback too. The letter suggested that you are still on the lookout for other acquisitions and you mentioned the vendor consolidation dynamic that's happening. Did I interpret that correctly? Could you talk about how you're weighing your various uses of capital this year?

Yeah. Overall, our position really hasn't changed. We've been evaluating M&A opportunities against our decision to buy back our stock at what we believe is an exceptionally attractive level. We are experiencing increased EBITDA and significant rises in free cash flow. The conversion rate for free cash flow around 70% includes some acquisition-related payments to the Hearsay team. Our strong cash flow gives us flexibility for repurchases, potential M&A opportunities, and ongoing business investments. We will continue to be opportunistic with capital allocations, whether that's into organic growth, M&A, or share buybacks, or if we decide to accumulate on the balance sheet.

Yeah. We noted in the letter that we've got a conversion rate of free cash flow around 70%, and that includes acquisition-related payments to the Hearsay team. However, we continue to generate significant free cash flow, providing flexibility for repurchases, M&A opportunities, and to continue investing in the business.

High-level, we view our cash situation as very healthy. There are multiple avenues of capital allocation available to us, whether through organic growth investments, M&A, share buybacks, or simply letting it accumulate if none of those options appear to be attractive at the time. We will continue to be non-dogmatic and opportunistic in our approach. The increased authorization reflects how we view our stock as valuable right now.

Great. Thanks, Mike. Thanks, Darryl.

My pleasure.

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

Thank you very much. I had a question about the Scout acquisition. Is there any contribution to either revenue or to ARR from this acquisition?

No. Hey, Naved, it's Darryl. No, there is no meaningful impact. It was a relatively small company, and a lot of the benefits that Mike described are underpinned by their technology and capabilities, but we're not forecasting or modeling any meaningful financial contributions.

Other than what's in our plan for the year, it's effectively included in our EBITDA guide for the year. Due to the timing of the deal, we were able to incorporate it into the plan.

Got it. So, I'm trying to understand the ARR dynamics in Q4. Sequentially, ARR declined. What's causing this number to come down or is it primarily impacting the listings business? However, you still expect ARR to increase in 2026 this current fiscal year. What would lead to that on an organic basis?

Yeah. So, there's a few things there. Darryl, do you want to discuss the FX impacts first?

Yeah. So, sequentially from Q3 to Q4, there was about a $3.5 million impact from FX, which is the biggest driver of the overall decline. There are also some fluctuations from bookings and churn contributing to the delta.

Right. The roughly $2.5 million of non-FX related decline represents a continuation of the trend we've discussed, where we are still seeing Yext core ARR decline as we restructure contracts, but the pace of that decline has really tapered down. Last year, it was approximately $12 million in total decline. This year, we're discussing a $2.5 million range. A lot of factors can contribute, including downgrades, not logo churn. We've also seen contributions from the Hearsay business, which is growing while Yext business is still experiencing this 1% decline. We are witnessing green shoots, such as four consecutive quarters of improving renewal rates, gross ARR retention moving back into the high 80%s, all leading to optimism about the future. Retention picture combined with more products to sell and bundle, including Hearsay and Yext Social, and obviously the Scout launch, is a big driver of that positivity.

Understood. Regarding the EBITDA guidance, it appears you are comfortable providing this number because it suggests less dependence on the top-line. Would you agree with that?

Yeah, I think it's fair to say that we have greater control over that number in almost any environment because we can manage investments based on the signals we are receiving. Our confidence isn't just about current improvements, but we also believe the marked improvements we observed last year will be sustainable and scalable regardless of the operating environment.

Got it. Okay. Perfect. Thank you so much, guys.

Thanks, Naved.

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 like to thank everyone for joining us today, and look forward to speaking with you next quarter.

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