Earnings Call Transcript - YEXT Q4 2021

Operator, Operator

Good afternoon, and welcome to the Yext Fourth Quarter Fiscal 2021 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 Yuka Broderick, Head of Investor Relations. Please go ahead.

Yuka Broderick, Head of Investor Relations

Thank you, Gary, and good afternoon, everyone. Welcome to Yext’s fiscal fourth quarter 2021 conference call. With me today are CEO, Howard Lerman; President and Chief Revenue Officer, David Rudnitsky; and CFO, Steve Cakebread. Before we begin, I’d like to remind everyone that this call may contain forward-looking statements, including statements about revenue, non-GAAP net income, operating cash flow, sales efficiency, hiring targets, expense margins, market opportunities, business performance, including our Listings and Answers products, 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, and general economic and business conditions such as the impact of the COVID-19 pandemic. 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.

Howard Lerman, CEO

Thanks, Yuka. I couldn’t be more proud of what we accomplished during a challenging year. First, despite extraordinary headwinds from location lockdowns that disrupted the core value proposition of Listings, its product annually recurring revenue still grew this year. Next, we built a more durable and sustainable business model going forward. We were operating cash flow positive for the year, non-GAAP net income positive for Q4, and we showed a tremendous 16-point improvement in non-GAAP operating margin versus a year ago quarter. Finally, we stood up a new search category disruptive product, Yext Answers. As the world comes back, we’re ready. But it has not been easy. Our fiscal year started last February, and in a matter of days, we were dealing with the onslaught of a global pandemic. Like every business, we faced challenges and had to make a number of adjustments. Our typical event and in-person sales approach was severely hampered. But this forced us to focus on efficiency, leading to a dramatic 7-point improvement in our non-GAAP sales and marketing spend as a percentage of revenue, from 61% in the year-ago quarter to 54% in Q4. Listings felt the force of the macroeconomic headwinds that brought foot traffic to businesses to a halt. Now, people still search for many important answers that our listing solution provides, including information on products and doctors, FAQs, and job listings, just to name a few. This is critical across most industries. However, the reality is that seeking information about physical locations, like driving directions or operating hours, has been severely impacted by COVID. In fact, in Q4, Google Maps views for our customers declined over 50% year-over-year on a per-location basis. Recall that we told you early in fiscal 2021 that 25% to 30% of our total ARR comes from retail and food services, which are heavily location-oriented. These industries have still not recovered. I recently took a drive around Aventura, Florida, and the popular mall was nearly empty, with shopping centers at about 20% capacity. Despite all of that, ARR for our Listings product still managed to grow last year, demonstrating its resilience and strategic significance for our customers. Meanwhile, we saw strong momentum with our Answers site search product. We closed 130 Answers-led deals in Q4, up from 86 in Q3, and Answers search queries in Q4 grew 16 times year-over-year. This is just the beginning. Keyword search hasn’t changed in 40 years. It’s a subpar customer experience that slows businesses down, yet it remains ubiquitous. Companies make huge investments in search, including site search, workplace search, e-commerce search, app search, and support search. Building these search experiences is expensive; you need a team of experts, and the end result is never good enough when it’s keyword search. Thus, keyword search is ripe for disruption. With Yext Answers, we’ve invented better, faster, and cheaper search. Why hire a team of PhDs to build a search engine over years that only handles keywords when you can simply turn on ours in an hour and have a modern, sleek, natural language search experience that delivers answers rather than a bunch of links? We’ve got extraordinary innovations in search coming out in two weeks, including extracted Q&A document search and a web crawler. I can’t wait to show you more about all that, and I look forward to sharing more about it and our vision at Investor Day in a couple of weeks. We don’t have a specific date for when life will return to normal, but I’m confident that as industries like retail and food services get back to business, we will see our Listings product rebound. Meanwhile, our Answers search platform will help us disrupt the significant search category and make keyword search a thing of the past. The founding principle of Yext is that every business and organization in the world ought to be in control of their information online. With our Answers search platform and its powerful, multifaceted solutions, all powered by our Knowledge Graph, we are well positioned to achieve this goal. Despite many unknowns, I believe we’ve set up our Company for an extraordinary future. Finally, I’d like to congratulate David Rudnitsky on his promotion to President and Chief Revenue Officer. Unifying our global go-to-market under a single leader makes the most sense as we gear up to disrupt the search category with our better, faster, and cheaper Answers search platform.

David Rudnitsky, President and Chief Revenue Officer

Thanks, Howard. I’m excited to lead the team as we look to scale Yext to much greater levels in the years ahead. Given the continued challenging environment, we had a solid Q4. We saw renewed strength in EMEA following a tough beginning of the year due to their strict lockdowns and a solid second half for mid-market. Our enterprise team fought hard in a tough macroeconomic environment. The total number of Yext direct customers, excluding SMB and third-party resell customers, increased 21% year-over-year to over 2,400. We’re introducing a new metric for investors this quarter, which we believe is a good indicator for our business and our progress with larger customers. Our direct customers, excluding SMB and reseller, with ARR over $100,000 totaled 550 at the end of Q4, up 12% year-over-year. This metric is replacing deals closed after this quarter. In Q4, Yext overall closed 216 new and renewal deals with at least $100,000 in total contract value, including 22 deals with more than $1 million in total contract value. We ended the fiscal year with nearly 250 quota-carrying reps, roughly in line with our target of 255. Our new logo signings included La Poste, the French national postal service; Endeavor, Casio Computer, and Popeyes. Financial services, including insurance, showed continued strength for the year with upsells from JPMorgan Chase, Liberty Mutual, and Farmers. Other upsell deals during the quarter included United Healthcare Service, Core Hotels, and Panera. We’re cautiously optimistic about our opportunities with food service companies when businesses begin to reopen. Renewal deals included AT&T and Luxottica. We continue to see momentum with Answers site search. As Howard mentioned, we closed 130 Answers-led deals in Q4, which included our first quarter’s significant contribution from EMEA and Japan, following the release of Answers in Spanish, French, Italian, German, and Japanese in the summer and fall. Answers site search continues to open doors with use cases and significant opportunities with new companies that we haven’t sold to previously. I want to share a bit about our six-figure deal with CoinMover this quarter. CoinMover runs a network of cryptocurrency ATMs, providing its customers with a simplified and safe experience for buying and selling digital currencies. They wanted to ensure customers could find the right information about CoinMover across the Internet, so they purchased Answers to address customer questions on their website and Listings to provide information about their network of physical ATMs in New England and the Pacific Northwest. CoinMover is seeing tremendous value from our partnership, with a significant boost in website engagement and conversion rates by leveraging Answers on the site. In the past 90 days, Yext has driven an 83% increase in their Google search impressions and a 41% increase in Get Directions clicks. We’re excited to partner with them in this rapidly growing space. I’ve never been more optimistic about Yext’s long-term future than I am right now. We have a great team and a platform that drives demand from a diverse group of clients and prospects worldwide. We believe we are well positioned to capture that demand as it materializes. I couldn’t be more excited about the opportunities ahead and the team fueling our growth. With that, I’ll turn the call over to Steve.

Steve Cakebread, CFO

Hey. Thanks, David. As Dave said, we had a solid quarter, with revenue above our guided range, achieving breakeven for the first time ever on a non-GAAP EPS basis, positive operating cash flow, and continued improvement in sales and marketing efficiency. I want to thank the finance and IT teams who are executing incredibly well and delivering these results in a challenging work environment and setting us up for economies of scale as the economy recovers. We’re really well positioned for growth going forward. Our fourth quarter revenue grew 13% year-over-year to $92.2 million. For the fiscal year, '21 revenue grew to $355 million, an increase of 19% over last year. Unearned revenue increased 8% year-over-year to $192 million. Annual recurring revenue, or ARR, at the end of Q4 was $354 million, up 8% year-over-year from the year-ago quarter. Our trailing 12-month net dollar-based retention, which excludes our small business customers, was 102%. For direct clients, also excluding small business and third-party reseller customers, it was 103%. Our retention in Q4 was impacted again by muted upsells in this challenging macro environment. Before turning to margins and expenses, I’d like to note that I’ll be discussing non-GAAP results unless I specify otherwise. We provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Q4 gross margins were 78.4%, compared to 75.7% in the year-ago quarter, driven primarily by leverage on employee costs and publisher fees, partially offset by higher data center costs. Fiscal year '21 gross margin was 77.3%, compared to 75.6% a year ago. Q4 operating expenses were $73 million, or 79% of revenues, down from $75.3 million, or 93% in the year-ago quarter. We continued to execute on cost management and efficiencies this quarter and drove year-over-year margin leverage in each of our OpEx line items. Sales and marketing expense decreased as a percentage of revenues from 61% in Q4 fiscal year '20 to 54% in Q4 fiscal '21. G&A expense decreased as a percentage of revenues from 19% in Q4 last year to 15% in Q4 this year. The primary drivers of operating expense decreases were leverage on employee costs, reduced spending on travel and events, and increased productivity. Fiscal year '21 operating expenses were $296 million, or 83% of revenue, compared to $281 million, or 94% of revenue a year ago. We see many of our cost efficiency efforts as sustainable changes that will drive our operating margins higher over time. These efforts include reduced selling cycles and productivity enhancements through system and process improvements. We’ll continue to invest in innovation and revenue-generating opportunities and will accelerate these investments as we see demand improve. Regarding investments in our sales efforts, we’re targeting a quota-carrying sales rep headcount of 255 at the end of fiscal year '22, balancing our prior investments in revenue-generating opportunities against driving productivity. Recall that we maintained our sales force hiring plans last fiscal year, despite the pandemic impact. This fiscal year, we plan to capitalize on that capacity. As macroeconomic conditions improve, we will begin to accelerate our investments in quota-carrying headcount. Q4 net income was $94,000, and we recorded our first-ever quarterly net profit. This compares to a loss of $13.7 million in the year-ago quarter. Our Q4 net profit per share was breakeven, compared to a $0.12 loss in the year-ago quarter. In Q4 fiscal year '21, our net loss on a GAAP basis was $18.3 million, resulting in a GAAP loss per share of $0.15. Cash and cash equivalents stood at $230 million at the end of fiscal year '21, compared to $256 million at the end of fiscal year '20. This is a strong result given the $61 million in facilities CapEx we incurred in fiscal year '21. We believe our balance sheet is strong and positions us well to weather the current economic environment and provide resources for investment in future growth. Net cash flow from operations for Q4 was positive $24.9 million, compared to positive $11.7 million in the year-ago quarter. For fiscal year '21, net cash flow from operations was positive $1.2 million, compared to a negative $30.8 million a year ago. We anticipate continuing to maintain at least breakeven operating cash flow on a full year basis going forward from here on out. CapEx was $11.2 million, compared to $4.5 million a year ago, and for fiscal year '21 was $65.1 million, of which $60.6 million was related to our building projects in New York, Washington D.C., Tokyo, and Paris. These projects are now nearly complete. We expect remaining CapEx related to these projects to be about $8 million, mostly occurring in Q1. Once these building projects are completed, we expect to return to more modest levels of CapEx spending as a percentage of revenue, more similar to our historical levels. Now, let’s turn to our outlook. We expect Q1 revenue to be between $87 million and $89 million and anticipate a non-GAAP net loss per share of between $0.05 and $0.07, with a weighted average basic share count of approximately 125.4 million shares in Q1. As we came through Q4, we saw continued softness with new and existing customers due to pandemic-related business pressures. Until we see positive changes in the economy, we will manage the business as we did this past year, focusing on driving cost efficiencies and sales productivity. However, once we see positive improvements in the economy, we will invest in the available growth opportunities that arise. For full fiscal year '22, we expect revenue of between $375 million and $380 million. Our projected non-GAAP loss per share range is between $0.17 and $0.22, assuming a basic weighted average share count of approximately 128.4 million shares. We are confident that our Listings product will rebound as businesses reopen, but visibility on the timing of that reopening remains limited. We base our guidance on the business conditions we see for ourselves and our customers currently, in a macro economy that remains sluggish and customers who remain cautious. We are well positioned for when the business environment improves, especially for the long term. We are excited to push forward with our expansion into various areas of search, with expanding products and features driving a broad new set of solutions on our Answers search platform. To wrap things up, we are pleased with our resilience in Q4 and overall for fiscal year '21, given the challenging environment for our products. We acted nimbly to support our employees, focused our sales efforts, accelerated our search innovation, and drove efficiencies. We’re poised to grow when the macro environment improves. With that, I’ll turn it over to Yuka.

Yuka Broderick, Head of Investor Relations

Thanks, Steve. Before we move on to Q&A, we’d like to invite you to register for our Investor Day on Wednesday, March 17, 2021. Please go to investors.yext.com for more details. Joining the Q&A session are CEO Howard Lerman, President and Chief Revenue Officer David Rudnitsky, and CFO Steve Cakebread. Gary, can we please open to questions?

Operator, Operator

We will now begin the question-and-answer session. Our first question is from Naved Khan with Truist Securities. Please go ahead.

Naved Khan, Analyst

Yes. Thanks a lot. Just a couple of questions. So, I’m trying to understand the outlook for Q1 and the sequential decline versus the fourth quarter, and what the components of that might be. Relatedly, are you seeing customer wins primarily centered around smaller deal sizes? Any additional insights on your pipeline would be helpful. Thank you.

Steve Cakebread, CFO

Yes. Why don’t I start with the quarter? We recognize our revenues daily. The fourth quarter has three more days than the first quarter does because of February. So, that accounts for a couple of million dollars of the sequential decline, and that’s predominantly most of it. I don’t foresee real problems with the decline in terms of dollars; it’s more of a math exercise. Clearly, we didn’t have upsells in Q4 that we would have wished for, and that contributes as well. But it’s mostly a day count for us. David or Howard, do you want to take the customer win question?

Howard Lerman, CEO

Yes. We’ve talked about some of our customer wins in Q4. One place to follow what's going on is on Twitter; our social media team is very active, often tweeting new Yext Answers experiences that go live. I recently retweeted about Northern Trust, which is a notable project. As for our Q1 pipeline, it looks solid, although we continue to take a conservative outlook due to current macroeconomic pressures. Our business primarily serves location-based businesses. When their locations are closed, that presents challenges in several location-based verticals, but we plan to invest as they reopen.

Naved Khan, Analyst

Thank you.

Operator, Operator

The next question is from Mark Murphy with JPMorgan. Please go ahead.

Matt Coss, Analyst

Hi, good afternoon. This is Matt Coss on behalf of Mark Murphy. Thank you for taking my questions. Steve, can you quantify the improvement in sales and marketing efficiency this year? Additionally, what kind of improvement do you expect going forward as you leverage your new sales hires?

Steve Cakebread, CFO

Yes. You can look at our year-over-year dollar spend from last year to this year and the percent of revenue, which has improved significantly. This improvement comes from more tenured sales reps and more effective selling and marketing processes. Going forward, we plan to continue driving our sales and marketing as a percentage of revenue down, in line with what you might see from other SaaS companies. The speed of that will depend on revenue and our efficiencies.

Matt Coss, Analyst

Very helpful. Thank you. Are you making any changes in the way you guide, perhaps incorporating lower close rates or any notable differences from how guidance was viewed historically?

Steve Cakebread, CFO

Sure. Our guidance for Q1 reflects a similar approach we took for Q3. The upcoming quarter covers February, March, and April, where many locations and states remain closed. We’ve taken a realistic stance given ongoing conditions, and we continue to see strong interest and opportunities. However, upsells haven’t materialized to the extent we feel they should; this again links to macroeconomics. Customers remain cautious in their spending until they can see clear signs of recovery.

Matt Coss, Analyst

Sure, thank you very much.

Operator, Operator

The next question is from Stan Zlotsky with Morgan Stanley. Please go ahead.

Arjun Bhatia, Analyst

Hey, thank you. Steve, I want to follow up on the optimism surrounding the light at the end of the tunnel. What are your conversations like with customers that have paused expansion? Are they beginning to think about expansions or cross-sells with Answers as they see potential recovery?

Steve Cakebread, CFO

That’s a great question. I think David or Howard can provide more insights.

Howard Lerman, CEO

Arjun, I’ll take that question. The key stat we discussed on the call is that Google Maps views have declined over 50% year-over-year per location for our customers, which is a primary value proposition for our product. Although we are optimistic about recovery, we have yet to see quantitative evidence of that yet. While we continue to focus on efficiency, we hope to see a return in demand correlations once locations begin reopening.

Arjun Bhatia, Analyst

Got it. That’s helpful.

David Rudnitsky, President and Chief Revenue Officer

So, Arjun, Answers has been a key mechanism in our strategy for entering new sectors. We have successfully moved into sectors, such as higher education and direct-to-consumer, through various successful transactions.

Operator, Operator

Your next question is from Rohit Kulkarni with MKM Partners. Please go ahead.

Rohit Kulkarni, Analyst

Thank you for taking my questions. Can you provide more details on guidance, perhaps what you're assuming in terms of the contribution from Listings versus Answers? And how has that changed during the year as you model your expectations?

Steve Cakebread, CFO

We’ve looked at Q1 through a similar lens as Q4, remaining realistic about the macro environment. Although Listings dominate our business, Answers is emerging. Growth rates may seem significant, but the impact is still limited when compared to our established base. We expect Listings to recover but cannot provide specific timelines for that till we see macroeconomic improvements.

Howard Lerman, CEO

To add to that, we’ve seen positive traction with our hybrid service offering, which includes both Listings and Answers, supporting our expansion into unsold markets.

Operator, Operator

The next question is from Brett Knoblauch with Berenberg Capital Markets. Please go ahead.

Brett Knoblauch, Analyst

As you look at your customers in Florida or Texas, do you see any differences in performance given that those states are more open compared to other regions?

Howard Lerman, CEO

It's challenging to draw geographical conclusions; large enterprises are often headquartered all over the country. Any shifts typically mirror the overall country performance rather than being specific to a state.

Brett Knoblauch, Analyst

That makes sense. Lastly, with businesses possibly reopening sooner, what makes you confident that Yext will be a primary solution they return to?

David Rudnitsky, President and Chief Revenue Officer

Brett, it’s David. Businesses never truly turned us off. What we see is a muted upsell; many companies still utilize us for relevant customer information and will continue to expand their engagement as they reopen without having turned it off.

Howard Lerman, CEO

To add on, we aim to expand within our existing client base. Companies start with our Listings, develop relationships, and eventually incorporate Answers and other solutions.

Operator, Operator

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

Ryan MacDonald, Analyst

First on Answers, it’s great to see the progress going from 86 to 130 deals. Can you discuss any shifts in pipeline or sales cycles related to customer preferences for demo over trials?

David Rudnitsky, President and Chief Revenue Officer

Ryan, we’re transitioning towards faster sales cycles thanks to customer familiarity and demonstrable success in our offerings. We’re now closing deals directly instead of requiring lengthy trials, leading to stronger conversions.

Ryan MacDonald, Analyst

As the sole CRO, any changes in org structure, comp structure, or plans for international strategy?

David Rudnitsky, President and Chief Revenue Officer

Yes, we are unifying our international approach and domestic strategies into a cohesive structure to facilitate scaling effectively. We want to share best practices from all fronts to enhance synergy.

Steve Cakebread, CFO

Clarifying the operating cash flow perspective—we're focused on achieving breakeven operating cash flow annually moving forward. The quarterly dynamic can vary due to seasonal factors.

Operator, Operator

The next question is from Stan Zlotsky with Morgan Stanley. Please go ahead.

Stan Zlotsky, Analyst

Thank you. With the Answers product momentum, when do you expect it to be material enough to shift the growth baton from your other products?

Howard Lerman, CEO

The opportunity with Answers stems from our Knowledge Graph structure, allowing for significant growth and integration. While both Listings and Answers are crucial to our offering, the transition and timing remain uncertain given economic factors.

Steve Cakebread, CFO

I concur with Howard. It's important to note that while Answers will play an increasingly larger role, Listings remains dominant and both need to meet growth aspirations. Timing of this remains to be fully understood.

Tom White, Analyst

Can you clarify the retention versus upsell dynamics? Is the softness restricted to retail and restaurants or extending across your customer base?

Howard Lerman, CEO

While we have faced challenges primarily within location-based businesses, our financials reflect efficiency improvements and a focus on sustaining our business model for future opportunities.

Steve Cakebread, CFO

For those who do not convert from the free trial, we’ve seen mostly positive responses. The macro backdrop could enhance conversion rates as businesses stabilize.

Yuka Broderick, Head of Investor Relations

Thanks for your time today. We're looking forward to seeing you at Investor Day on March 17. Please register on our website. Talk to you all later. Thank you.

Operator, Operator

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