Earnings Call Transcript - YEXT Q1 2024

Operator, Operator

Hello and welcome to the Yext Inc. First Quarter Fiscal 2024 Financial Results Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask a question. 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.

Nils Erdmann, Senior Vice President, Investor Relations

Thank you, operator, and good afternoon everyone. Welcome to Yext's Fiscal First Quarter 2024 Earnings Conference Call. With me today are CEO and Chair of the Board, Mike Walrath; President and COO, Marc Ferrentino; and CFO, Darryl Bond. During this call, we will make forward-looking statements, including statements related to our future financial performance, expectations regarding the growth of our business, our outlook for the second quarter and fiscal year 2024, our strategy and estimates of financial and operating metrics, capital expenditures and other indications of future opportunities, as further described in our first quarter earnings 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, 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 Form 10-K for the fiscal year ended January 31st, 2023, and our press release that was issued this afternoon. During the call, we also refer to certain metrics, including non-GAAP financial measures, reconciliations to the most comparable historical GAAP measures are available in the earnings press release which is available at investors.yext.com. We also provide definitions of these metrics in the earnings press release. I will now turn the call over to Mike.

Michael Walrath, CEO

Thanks, Nils, and thanks everyone for joining us today. We are pleased to report solid Q1 results and a strong start to the year. We generated revenue of $99.5 million, non-GAAP earnings per share of $0.09 and over $14 million of adjusted EBITDA. Our non-GAAP EPS and adjusted EBITDA were the highest in Yext history, and we continue to hit new peak levels of efficiency and profitability. Our performance in the first quarter was a direct result of our continued execution on our priorities, creating value for our customers and improving productivity across the organization. Last year was a turning point for Yext, and we spent the better part of fiscal 2023 reorganizing our team, reorienting ourselves around our customers to deliver the highest value and delivering tremendous product innovation. Our first quarter total non-GAAP cost of revenue and operating expenses totaled $89.7 million, down from $106.2 million last year, a 16% decrease. We've hit the ground running in fiscal 2024 and in the first quarter we continued to build awareness for the power of Yext Answers platform and its ability to deliver and generate trusted answers across the full spectrum of digital experiences. Both new and existing customers are realizing how much our platform can enhance their digital transformation by reducing friction, streamlining operations, addressing customer pain points, and driving increased value. Our launches of Content Generation Studio and Yext Chat in beta have been catalysts for more in-depth discussions around Generative AI. As Yext becomes increasingly engaged in strategic discussions about the end-to-end customer journey through the digital experience, our conviction in the long-term opportunity of our platform grows stronger. In the last couple of weeks, we launched two new global campaigns focused on the importance of having a modern, composable best-in-breed architecture that shows the possibilities of what customers can do with our AI-led DXP. Our go-to-market executive team has been in place for six months and we're pleased with the progress we are making. While the full transformation of our go-to-market will take a couple more quarters, we are beginning to see increases in pipeline production and conversions, particularly with smaller enterprise customers. Our mid-market team benefits from shorter sales cycles and less complex integrations and the uptake is a good indicator of how our value proposition is landing with customers. So while it is still early, we believe this momentum will eventually carry over to the larger enterprises as well. Our first quarter performance delivered against the goals we laid out in March and again in April during our Investor Day. We streamlined our operations and demonstrated even greater efficiency and profitability. And in spite of macroeconomic headwinds, we exceeded our revenue, adjusted EBITDA, and non-GAAP EPS targets for the quarter. We generated significant year-over-year profit growth and as Darryl will describe in more detail, we are raising all of our top and bottom-line targets for the year. During our previous earnings call, we mentioned our multi-year plan to transition a portion of our services business to our systems integrator and partner ecosystem. As part of our restructuring plan, we reduced the size of our professional services organization. As expected, the shift in our services strategy had a modest impact on our retention and bookings in Q1. And we expect this to continue as we work through the renewals and build more partnerships throughout the year. The upside to this was felt immediately, and the margin profile of our business has increased significantly. This resulted in non-GAAP gross margin of 79.2% for the quarter, which exceeded our expectations and contributed to our bottom line beat. Overall, we experienced business conditions in Q1 that were similar to the previous several quarters. Our net retention rate for direct on the basis of ARR was consistent with the fourth quarter. We achieved year-over-year growth with a smaller sales organization, which indicates that our emphasis on productivity is having the desired effect. We've made steady progress in Q1, despite a continuing cost-conscious demand environment. And as our go-to-market and demand gen engines begin to ramp, we're looking forward to picking up momentum. At the same time, our team remains committed to growing our business profitably and managing efficiently. I'm grateful for the commitment and efforts of our entire global team, who are performing well in a challenging environment and staying focused on the significant opportunities ahead of us. With that, I'd now like to turn the call over to Marc.

Marc Ferrentino, President and COO

Thanks, Mike. Back in March, we announced the strengthening of our Answers Platform with new AI-enabled features as part of our Spring '23 release. Our innovative AI-driven solutions and our digital experience platform are driving considerable interest from new and existing customers. We launched a beta version of Yext Chat in February, based on significant demand for Chat from our customers. And we expect that Chat will soon be included in our general release. Our recently launched Studio and Content Generation features have also been well received. And we believe there is significant opportunity for us and our partners with these products. From our conversations with prospective and existing clients, it's clear that Yext is at the center of a massive transformation taking place that can help businesses leverage the power of AI. Our innovations across natural language processing, analytics, and security as well as our leading technology integrations are driving competitive wins in the marketplace and setting the table for sustainable long-term growth. Our innovative composable product platform makes it easier for businesses to enhance their digital experiences, and we have some great customer examples from Q1. During the quarter we expanded our position and added customer wins within the healthcare, financial services, technology, and consumer product sectors. Here are just a few examples. Our go-to-market team executed an impressive win back with a large healthcare provider. This provider was a pre-week Yext customer that churned in 2020. They replaced Yext with another listings provider. And since then has suffered from inaccuracies on Google, a lack of customer support, and an absence of analytics data. They were already familiar with our best-in-class listing solution and further impressed with the new features of our platform such as Verifier, Direct API integrations, and new Apple Map integrations, which won them back in Q1. Another boomerang customer with TGI Friday's. After leaving Yext, they were in talks and close to signing with another listings provider, but after demonstrating the benefits of our composable platform in a head-to-head against a competitor, we were able to win them back. A few months ago, Yext was evaluated against several search providers and selected by Netgear to power the search experiences across all of their global sites, including e-commerce, support community, and documentation. We're looking forward to a great partnership. One of the largest regional banks in the US became another great example of a customer visualizing Yext as a platform, as opposed to a point solution. By showcasing how Yext could not only replace an existing listing provider but also enhance and improve their entire digital experience. We were able to engage with the customer across several branches, loan officers, products and FAQs of the organization. Our team provided quantitative analysis of their digital experience and provided examples of the incremental value that our platform could add relative to their in-house and third-party providers. As a result, the customer chose our platform and our suite of products to work with their existing systems and to manage their experiences across channels and different modalities. Beltone was a competitive win where we were able to demonstrate the advantages of our platform over various point solutions. Beltone had been using in-house tools at a competing listing solution. And they needed a platform that could streamline their existing process and manage the scope of their extensive network. The Yext direct integrations and extensive publisher network helped earn us their listings business and they regarded our other products as compelling opportunities for us to scale in the future. Mathnasium needed a platform that could help them automate their existing highly manual listing process and scale across more than one thousand franchise locations. We were able to win the business over several competitors because of our platform benefits, strong analytics, and superior technology. And finally, one of the world's largest producers of premium food products was looking for ways to leverage AI-generated content as part of its marketing effort. Consistent with what we have heard from numerous consumer brands, this customer wanted to explore cost-conscious ways to generate content, without having to devote significant internal or external resources. By meeting with several of the company's C-level executives, we were able to showcase how Yext AI-based products and platform capabilities could provide better digital experiences to their customers. Yext is in a strong position, particularly at this moment in time, to help businesses leverage AI-based technology and improve their digital experiences through our composable digital experience platform. I couldn't be more excited about the buzz around AI, that's helping drive awareness amongst C-level executives and helping our teams demonstrate how powerful a partner Yext can be to businesses, particularly in today's environment. Now I'll turn the call over to Darryl.

Darryl Bond, CFO

Thanks, Marc. As our financial results demonstrate, the first quarter highlighted our continued operating efficiency and profitability. Our Q1 revenue of $99.5 million exceeded the high end of our guidance range. Revenue growth was approximately 2% in constant currency and 1% on an as reported basis. This represented a year-over-year negative impact of approximately $1.3 million due to FX. While still facing uncertainty in the macro environment, our newly reorganized sales and marketing teams are executing on a prudent and productivity-led growth strategy. We achieved year-over-year growth to sales organization that is much leaner than it was a year ago, which indicates that our emphasis on productivity and accountability is delivering the desired outcome. Our growth in Q1 was driven by continued demand in our direct business. Our customer count for direct excluding SMB increased 5% year-over-year to over 2,970. Annual recurring revenue or ARR was $398.3 million, up 3% year-over-year in constant currency as well as on an as reported basis. Direct customers represented 82% of total ARR. Direct ARR at the end of Q1 totaled $326.1 million, an increase of 5% year-over-year in constant currency as well as on an as reported basis. Third-party resellers, which represented 18% of total ARR at the end of Q1 delivered ARR of $72.2 million, a decrease of 6% year-over-year in constant currency, as well as on an as reported basis. As of the end of Q1, our net retention rate was 97% for our direct customers and 92% for our third-party resellers. These rates were consistent with our rates as of the end of Q4, and we're pleased with the level of stabilization that's occurring due to the efforts of our sales and customer success team. Turning to non-GAAP results, which are reconciled to GAAP in our earnings press release, Q1 gross profit was $78.7 million, representing gross margin of 79.2% compared to 76.4% in the year-ago quarter. The positive impact to our gross margin was the result of the changes we described in Q4, related to the shifting of some of our lower-margin services to our SI and partner ecosystem. These changes, as well as continued improvements in our operating efficiency contributed to margin improvements that were better than anticipated. At the time of our Q4 earnings report in March, we expected gross margin improvement throughout the rest of the year that would eventually put us at the high end of our 75% to 80% range. However, we were able to implement organizational changes and recognize cost savings earlier than anticipated. We expect our gross margins for the remainder of our fiscal year to remain at the high end of this range. Our operating expenses in Q1 were $69 million or 69% of revenue compared to $82.9 million or 84% of revenue in the year-ago quarter. The key part of our operating expense discipline has been the realignment of our sales and marketing team and our sales and marketing costs as a percentage of revenue were 40% in Q1 compared to 55% in the first quarter last year. Our Q1 net income was $10.6 million compared to a net loss of $7.8 million in the year-ago quarter. Our Q1 net income per basic share was $0.09 compared to a net loss of $0.06 per basic share in the first quarter of last year. Cash and cash equivalents were $217 million at the end of Q1 compared to $190 million at the end of the fourth quarter. The increase in our cash balance was driven primarily by collections, partially offset by continued share repurchases in Q1, which totaled $4.6 million or 600,000 shares. Since the commencement of the program, share repurchases have totaled $82 million or 14.4 million shares. We intend to continue to maintain a strong balance sheet and cash position going forward and will remain open to buying back our stock at attractive prices. Net cash provided by operating activities for Q1 was $26.7 million compared to $17.9 million in the year-ago quarter and our CapEx was $900,000 compared to $1.6 million in Q1 last year. Turning to our outlook for the second quarter and full fiscal year '24, the macro environment remains challenging and customer behavior across all businesses suggests continued uncertainty. Longer sales cycles, tighter budgets, and additional approval layers are common and our guidance assumes that these weaker macro conditions and their effects will persist throughout this year. As of today, for the second quarter, we expect revenue in the range of $101.5 million to $102.5 million, adjusted EBITDA in the range of $11 million to $12 million and non-GAAP EPS in the range of $0.06 to $0.07, which assumes a weighted average basic share count of approximately 124.6 million shares. For the full year fiscal '24, we expect revenue in the range of $404 million to $407 million, adjusted EBITDA in the range of $49 million to $51 million, and non-GAAP EPS in the range of $0.28 to $0.29, which assumes a weighted average basic share count of approximately 125.1 million shares. We are now ready to open up the line for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Today's first question comes from Tom White with D.A. Davidson. Please go ahead.

Thomas White, Analyst

Great. Thanks for taking my question guys. Nice start to the year. Two, if I could. Mike, maybe you could elaborate a bit more on kind of how you're progressing on some of the initiatives around sales productivity and building pipeline in some novel ways? And curious sort of where that stands and how you're currently thinking about potentially adding quota-carrying reps this year? And then second question on net retention for direct, same as last quarter, 97%, I think historically it's been sort of 110%, 112% range. Can you kind of refresh our memory or maybe like is the market for an offering like yours today kind of meaningfully different in any way versus when you had retention in that higher range? Just kind of curious whether maybe the offerings were penetrated or anything like that. Any color you can share there would be helpful? Thanks.

Michael Walrath, CEO

Sure. Let me address the first question. We have made significant strides on the sales and marketing front, particularly with our executive team, including Tom and Raianne, who have been in their roles for just over half a year. We've noted increased productivity in the first quarter, along with growth despite a reduced sales and marketing expense, indicating we're achieving more efficiency. However, I must emphasize that our work in this area is ongoing, and improving it takes more than a few quarters. It requires not just identifying what needs fixing, but also implementing those fixes, especially considering our sales cycles. If it takes six to twelve months to improve and we have sales cycles of six to nine months, we can expect to really see the impact of our efforts in the coming quarters. Regarding productivity and quota-carrying representatives, we've discussed this previously, and it's vital for our analysis. Currently, we're operating with fewer reps than before while maintaining similar performance numbers. To drive growth, we indeed need to expand our sales capacity, but this should be based on a solid and qualified sales pipeline. We are being cautious due to the macro environment and the extensions we’re observing, and we want to ensure the quality of our pipeline is clear before we increase our sales capacity. Recent campaigns launched are part of a demand-generation strategy that focuses on building demand analytically. As demand increases, we'll assess more granularly to determine where to enhance sales capacity for greater annual recurring revenue. Regarding the second question about our net retention rate, which stands at 97% compared to our historical range of 110% to 112%, my short answer is that there haven’t been any fundamental changes in the business affecting this. We aim to maintain or exceed that range. We’re currently facing some headwinds due to our focus on certain types of revenue that we previously discussed, which, while positively impacting our gross margins, isn't going to help our net retention metrics in the short term as we strategically move away from less efficient revenue streams. Overall, I don’t see any structural issues within the business; in fact, with our diverse product offerings and ongoing innovations, we ultimately should have more upsell and cross-sell opportunities that will help us return to and surpass the 110% net retention mark in the long run.

Thomas White, Analyst

That's great. Thanks. I was on mute before, but I appreciate the color.

Operator, Operator

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

Ryan MacDonald, Analyst

Hi. Thank you for taking my questions. Congratulations on a nice quarter. Michael, to start off, could you talk about Yext Chat and some of the new AI-enhanced offerings that are currently in beta? It's encouraging to see the early progress and interest. As you engage in conversations, are you noticing more demand from new customers or from existing ones? Based on the discussions you've had so far, do you see an opportunity to counter the broader trends of tightening spending and potentially experience shorter sales cycles in this hot investment area?

Michael Walrath, CEO

It's still early to discuss specific products; Yext Chat is in beta, and we just launched Content Generation, with more advancements expected. Companies are clearly focused on utilizing generative AI, and we've been investing in this space for the past five years. In my discussions with customers, there's significant interest, but enterprises are also cautious about deploying these technologies due to potential downsides. Although there are challenges, I believe there are opportunities for us. We haven't had an efficient demand generation process that converts qualified leads into bookings, which has caused some frustration. As we work on improving this, we hope to overcome some macro challenges, but we're being cautious in our projections due to limited visibility beyond the next quarter. While we feel optimistic and see some progress, we're also being careful about the potential environment ahead.

Ryan MacDonald, Analyst

It's a tricky balance, I get it. But sounds great. Maybe on the second question, I noticed in the prepared remarks there was sort of a heightened level of focus maybe on the customer call-outs of a number of win-backs that you had during the quarter. And I'm just curious as you think about sort of the go-to-market strategy, are you placing an increased level of emphasis on winning back previously lost customers and maybe what you're doing there? And then is this really being driven by anything, any dynamics or evolving dynamics within the competitive landscape at all? Thanks.

Michael Walrath, CEO

I see a few things to address. First, I think we've improved our communication about the innovation occurring in the listings and reviews products, which we hadn't focused on as much before. More importantly, the current environment is making it challenging for some of our smaller competitors to strike deals that don't make financial sense and to serve their customers effectively. Smaller private companies trying to compete with us are now facing a very different capital landscape than they did in previous years, leaving them with less scale in their operations. As a result, we are likely seeing a disparity where these companies, lacking technological parity, find themselves in a tough financial situation. We will continue to focus on winning back customers and demonstrating that we offer the best solutions. Additionally, in this environment, being able to offer multiple services as a package becomes crucial, especially since many companies are looking for ways to save costs. These factors are influencing our strategy moving forward.

Marc Ferrentino, President and COO

The main point I want to add to what Mike mentioned is that a few years ago, we observed customers gravitating towards low-cost, low-quality providers during the economic downturn caused by COVID. It's becoming clear that you often get what you pay for. Many of these customers are now realizing that the promises made for those lower price points may not have been legitimate. We're witnessing this growing recognition, particularly regarding the quality of our products and the value they provide. As a result, we're starting to see these customers return to us. Furthermore, since we have broadened our product offerings and improved existing products while adding new ones, customers now view Yext not just as a single solution provider but as a partner across various domains. As Mike pointed out, the ability to consolidate services under one vendor is a significant factor behind the return of some of these customers, which we highlighted in our earlier remarks.

Ryan MacDonald, Analyst

Awesome. Appreciate the color. Congrats again.

Operator, Operator

The next question comes from Rohit Kulkarni with ROTH MKM. Please go ahead.

Rohit Kulkarni, Analyst

Thank you. I have a couple of questions about your impressive quarter. Firstly, I'd like to know about your progress with AI products and any customer feedback you've received from demos. I found the demo at Investor Day to be quite impressive and well-developed. I'm eager to hear about any updates regarding the rollout of real products and how they are being received by customers. Secondly, regarding the boomerang customers, thank you for the insights. Can you discuss the opportunities you see in bringing back these customers compared to upselling existing customers or acquiring new ones? If you had to prioritize your go-to-market strategy over the next six months, how would you rank the focus on boomerang customers against upsells and new customer wins?

Michael Walrath, CEO

Sure, Marc, we missed part of the first question, but I believe it was about the momentum of our AI products in the market and the feedback we're receiving from customers on newer offerings like Chat and Content Generation. Could you provide some additional insights on that?

Marc Ferrentino, President and COO

It's been truly remarkable what's happening in the market right now. We're benefiting from the increasing interest in AI, particularly in what Generative AI can offer organizations. Our unique position lies in providing tangible products rather than just hype or stories. This has given us an advantage in discussions, as the initial interest in AI often serves as a gateway to more concrete solutions. We can demonstrate how our products enhance productivity for teams, and this has generated a lot of excitement. The new customer experience around Chat is capturing the imagination of many, as it is something very noticeable and not merely hypothetical. This has led to significant interest in our broader range of products, allowing for larger conversations about our entire platform. We have a strong product roadmap and are energized by these discussions with customers. Regarding your question about focusing on returning customers versus upselling and new clients, it's all important, and we prioritize customer opportunities. Recently, I engaged with a former customer who had initially used only our listings; the discussions revealed past issues with our service and focus. As we updated them on our advancements and the opportunity to consolidate functions, what started as a conversation about non-listing products evolved into a discussion about our full platform, potentially bringing them back as listings customers. This reflects a broader trend where businesses are looking to reduce the number of software contracts and focus on integrated platforms. We will continue to pursue demand in all areas as vigorously as we can.

Operator, Operator

Great. Thanks, Mike. Thanks, Marc. The next question comes from Arjun Bhatia with William Blair. Please go ahead.

Christopher Madison, Analyst

Hi. Thank you. This is Chris on for Arjun. So the first thing I wanted to talk about was, obviously, the Generative AI space in general is evolving very quickly. Have you seen much buyer hesitation due to just how quickly the space is moving and maybe some of the larger customers wanting to wait kind of let things settle down a bit before making long-term commitments or purchasing decisions? And if so, what's the right message to get past that adoption barrier?

Michael Walrath, CEO

Yes. Marc will provide the details, but here's my perspective. It's important to remember that the significant shift in the market due to ChatGPT happened about six months ago. Typically, we discuss enterprise cycles lasting six to nine months. There’s been talk of elongation, which is clearly visible. We are likely still three months away from the deal cycles in the industry that may have started around Generative AI reaching their conclusion. Therefore, it's too early to assess enterprises' willingness or reluctance to engage with these technologies. Every business faces a dilemma: if they are overly cautious, they risk falling behind while competitors leverage these advancements. Conversely, if they underestimate the implications, they could make costly mistakes, especially in regulated sectors. It’s a balancing act where organizations should approach these technologies with a healthy caution, but it shouldn't hinder them from utilizing them. Companies that don't embrace these technologies will struggle to compete against those that are modernizing their digital experience and prioritizing a consumer-grade digital offering. That’s my overall view, and Marc might have specific insights on customer experiences.

Marc Ferrentino, President and COO

Yes. Anecdotally, everything Mike mentioned aligns with what we are currently observing in the market. I am not noticing any hesitation or fear regarding new technology. Instead, we are witnessing the typical buying cycle that you would expect for any new technology. When we talk about chat specifically, it serves as a significant channel for digital experience. The cycles for these types of products should be deliberate, following the usual steps, including the piloting phase and other necessary processes when implementing a dominant digital experience channel into your offerings. In many instances, this technology is actually creating new use cases that were never considered with previous chat technologies, which I find to be one of the most exciting aspects: the emergence of innovative use cases that hadn't been thought of before.

Michael Walrath, CEO

Yes. I think the advantage of being ahead in this area is that it has likely caused less internal disruption in terms of having to rework our entire roadmap and catch up. We witness this every day as many companies that previously had not discussed generative technology are now developing strategies around it. We view this as positive and believe it draws more attention to the space. However, we have been focused on this for a long time and have maintained our ability to drive significant product innovation without being sidetracked. While we always adjust our priorities based on customer needs and market trends, we have the advantage of having worked on this for several years, which gives us confidence in our current prioritization.

Marc Ferrentino, President and COO

Yes, I believe the foresight we had in choosing this direction a few years ago is definitely yielding benefits now. The variations in our product roadmap are primarily influenced by customer needs. This has been our approach to the product roadmap for quite some time. We identify the customer problems that exist and focus on addressing them. We have been incorporating various types of AI, including generative AI and different transformer-based models, into our roadmap for an extended period, so there hasn’t been much drastic change. In many ways, the market is approaching us, which has been fantastic.

Operator, Operator

This concludes our question-and-answer session and the call has now concluded. Thank you for attending today's presentation. You may now disconnect.