Earnings Call Transcript - YEXT Q2 2025

Operator, Operator

Good day, and welcome to the Yext, Inc. Second Quarter Fiscal 2025 Financial Results Call. All participants will be in a 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. Please go ahead.

Nils Erdmann, Conference Moderator

Thank you, operator, and good afternoon, everyone. Welcome to Yext's Second 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 third quarter and full fiscal year 2025, our strategy and estimates of financial and operating metrics, capital expenditures and other indications of future opportunities as further described in our second 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 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 recently filed quarterly report on Form 10-Q for the 3 and 6 months ended July 31, 2024, of our earnings release and our 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. With that, I will now turn the call over to Mike.

Mike Walrath, CEO

Hi, everyone, thanks for joining us today. Hopefully, by now, you've had a chance to read our press release as well as our second quarter letter to shareholders, which was posted to our website after the close of the market. We'd like to jump right into your questions. We can go ahead and do that now.

Operator, Operator

We will now begin the question-and-answer session. Our first question today comes from Tom White with D.A. Davidson.

Tom White, Analyst

Great. Thanks for taking my questions. Two, if I could. I guess, just first off, on the updated revenue guide. Is that all Hearsay contribution? Or is there a change to the outlook on the core business? And I guess if the only change is related to Hearsay, my arithmetic says the new guide implies maybe a full-year revenue number for Hearsay of maybe around $51 million. I think you said it did $60 million in revenues last year. Can you just maybe help me square those two things? And then I've got a follow-up. Thanks.

Darryl Bond, CFO

Hey Tom, it's Darryl. Yes, since we closed the Hearsay acquisition on August 1, the Q3 and full year guide includes two full quarters of Hearsay revenue. Previously, we had said the Hearsay ARR was around $60 million. So you can kind of infer what the revenue is based on that. I'm not sure sort of how you got to your numbers. But when we look at the balance of the year, adding in the Hearsay business for the second half, we've talked about the top-line synergies that we believe are available and we're starting the joint go-to-market motions to continue to accelerate both the legacy Hearsay business and our business. So all of that is contemplated in the guide.

Tom White, Analyst

Okay. That's helpful. And then maybe just a higher-level one, Mike. The last couple of quarters, you've talked a bit about this broader theme of consolidation of software vendors when the broader market slows and how that's driven by customers. Just hoping you could maybe just talk a little bit about what you're seeing or sort of where we are in that general cycle right now? Do you think there are any signs that things are kind of loosening up a bit? Or if not, what's your sort of appetite for potentially looking to add other products to the portfolio if this consolidation theme continues?

Mike Walrath, CEO

Yes, thanks for the question, Tom. This has been our approach, and we’re observing what we anticipated in the current environment. I’ve spent a significant amount of time engaging with our customers, especially our joint clients with Hearsay in the last five weeks following that acquisition. We keep hearing recurring issues. They feel overwhelmed by too much vertical software, which is putting strain on their smaller teams. The main challenges are excessive software, multiple platforms, data inconsistencies, and the inability to perform analytics across these specialized technologies. This highlights the need for consolidation. We've received a greatly positive response from our shared customers regarding the merger with Hearsay, as it promises improved analytics, a better data platform, and more efficient workflows. I mentioned in the letter how crucial these elements will be in an era driven by generative AI. Nothing has changed in that regard. In fact, with the current uncertainty in the world—ranging from elections and interest rates to recessions and geopolitical risks—many of our customers see this as an ideal time to assess their tech stack, reconsider their investments, and determine how to maximize value. We are fortunate that we believe we will be involved in many of these discussions since our platform is broader than any of our individual competitors, and we are just beginning with our organic innovation. We'll continue to consult our customers on where to go next. This is a core aspect of the innovation reboot we've been undergoing, allowing customers to guide us on what the next crucial product should be, which was a significant factor in the rationale for acquiring Hearsay. I enjoy these conversations, as they facilitate problem-solving with customers and help us anticipate future trends, guiding our roadmap for both organic and inorganic growth. In the letter, I outlined how we view this as a framework for driving long-term value through investment in organic growth, exploring inorganic expansion where opportunities arise, and of course, being able to buy back our shares to create a positive antidilution effect for our shareholders.

Tom White, Analyst

Great. Thank you very much. I'll get back in the queue.

Operator, Operator

Our next question comes from Rohit Kulkarni with ROTH Capital Partners. Please go ahead.

Rohit Kulkarni, Analyst

Thank you. I have a couple of questions. First, how do you view the potential for upselling Hearsay or integrating Hearsay into Yext's core customer base? Where do you see the most immediate opportunities over the next six to twelve months? Earlier, you mentioned that aside from the loss of a large customer, organic ARR growth might reach mid-single-digits by the end of this year and high-single-digits in the first half of next year. What are your current thoughts on that organic growth, especially considering Hearsay? I also have a couple of other questions regarding Gen AI.

Mike Walrath, CEO

Thank you for your questions, Rohit. Regarding your first question, there are multiple opportunities for us. We have joint relationships with customers who use both Yext and Hearsay, and there's potential to enhance value by integrating our data platform, analytics, and workflows over time, which our customers are enthusiastic about. The most actionable opportunities may lie where Yext has customers that Hearsay does not, or vice versa. This theme of consolidation serves as a positive factor in these discussions, as customers are looking for ways to reduce costs and operational expenses. It's often overlooked that over-purchasing software brings additional challenges. When businesses have too many software solutions, it creates an operational burden as employees must navigate between various systems throughout the day, leading to inefficiencies. These areas present significant opportunities for us. One of the most encouraging aspects of the Hearsay acquisition has been how swiftly conversations with customers have evolved from separate Yext and Hearsay discussions into partnership dialogues. It's impressive to see how quickly these businesses are integrating, making it difficult to distinguish between a Yext or Hearsay opportunity; the focus is now purely on delivering value to the customer. As for your second question regarding organic ARR growth, we've observed overall stability in our ARR picture. However, we are also mindful of potential risks. Many of my peers in the software sector anticipated this year would demonstrate improvement in the market, but we haven't seen evidence to support that. Given the risk factors I've previously outlined for the latter half of the year, we will approach our expected ARR growth cautiously. We anticipate stable to modest ARR growth this year, and while there is a chance we could be positively surprised by a favorable environment, we will remain conservative in our outlook.

Rohit Kulkarni, Analyst

Okay. Great. I guess I like the commentary around Gen AI and the fact that I'll take the glass half full interpretation that where you say that the wave is coming. So perhaps talk about how are you thinking from your conversations with decision-makers and enterprises around kind of puts and takes as to when or how Gen AI related tool that you provide would start to move the needle and would start to essentially be the driver in more and more deals and bookings? And over what period do you feel that's a reasonable assumption to make?

Mike Walrath, CEO

Yes, I've been somewhat skeptical about this topic, likely due to my extensive experience and witnessing several cycles before. There's often excitement, followed by a phase of questioning if it's sustainable. Currently, while AI is creating significant value for hardware producers and generating substantial workloads, it hasn't translated into the level of bookings we anticipated. This situation reminds me of the early days of mobile, social media, and the Internet, where progress was uneven and took time, but when it finally took off, it exceeded expectations. I believe that in a couple of years, the conversation will shift from focusing on AI itself to the value it creates. At Yext, we often emphasize that an effective AI strategy hinges on a solid data strategy. As consumer experiences become more fragmented, it's increasingly crucial to have a unified content and data approach, ensuring that the applications providing that data are organized, authoritative, and actionable. Once we achieve that, we expect to see a significant positive impact. However, there are time-related risks to consider. Engaging with consumers through language models and various AI forms will pose high compliance challenges, especially within large enterprises like financial services and healthcare. The pace of technological advancement may outstrip these enterprises' comfort levels in adopting it. On a positive note, we are already witnessing benefits within our platform. For example, features like listings, recommendations, and automated review responses show that some customers are cautiously experimenting with these technologies. Not every industry faces the same regulatory hurdles, which helps provide some clarity on this matter. This transition will take time, but when it does occur, it will be more impactful than many anticipate. As an industry, we will deliver much of this AI innovation through software platforms equipped with the right data, workflow, analytics, and learning components.

Rohit Kulkarni, Analyst

Okay, fantastic answer, Mike. I'll go back in the queue.

Mike Walrath, CEO

Okay, thanks, Ray.

Operator, Operator

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

Ryan MacDonald, Analyst

Hi, Thanks for taking my questions. Mike, maybe the first one is now that you've got Hearsay closed and you're starting the integration work, how quickly can you start to maybe recognize some of those revenue synergies? What are some of the processes or steps you're taking to be able to start to better go after the not shared customers and maybe some of your key verticals? And can you just remind us how Hearsay sales cycles compared to sort of core Yext?

Mike Walrath, CEO

Yes. We believe there's a significant opportunity here. On the revenue front, the sales and customer support processes for Yext and Hearsay are quite similar, with comparable deal cycles and similar buyers within organizations. We see a chance to engage with Yext customers who aren't yet Hearsay customers, discussing the advantages of a unified platform and data layer. Over the past year, we have made substantial investments in a non-financial services social management and analytics platform, which is set to reach general availability soon. We're excited about this development and have seen positive results from a large customer beta. This addition will enhance our portfolio. As we integrate the products, we expect many opportunities to leverage Hearsay's capabilities beyond the financial services sector and potentially introduce Yext’s core offerings to Hearsay's financial services team. We do need some time to determine how to manage this organizationally, including product roadmap considerations, and we'll take a thoughtful approach since we have the time to do so. Additionally, we anticipate cost synergies from bringing the teams together, which will contribute to both revenue growth and cost efficiency. This is reflected in our outlook for a consolidated low-20s margin by the end of the year, with expectations for improvement next year.

Ryan MacDonald, Analyst

I appreciate the insight. I wanted to ask about the adjusted EBITDA margin. Is it correct to assume that as you discuss the low-20s consolidated adjusted EBITDA margin at the end of the year, Hearsay is still somewhat dilutive to the EBITDA margin, and that much of the potential growth in fiscal '26 is mainly driven by synergies? Or are you also seeing incremental leverage in the core business? Thank you.

Darryl Bond, CFO

Yes. Ryan, it's Darryl. I think the first part of that is right. The consolidated margin that we guided to includes both businesses, and the Hearsay component is a little bit dilutive to overall margins. I think as we get into next fiscal year, we'll continue to sort of run the business in an efficient way. Since we're integrating the businesses and putting things together, it's hard to say if the efficiencies come from the legacy Yext business or the legacy Hearsay business because to us, it's really just one business at this point. We're going to look at how we're allocating capital, how we're making decisions with respect to investments and efficiency that are going to throw off the best returns. We don't necessarily think about it as two different pieces; it's really just one overall set of operations.

Mike Walrath, CEO

Yes, I would like to emphasize the point that Darryl made. As we evaluate our capabilities as a unified company, we are exploring all opportunities within our portfolio to drive innovation, foster growth, and unify our teams. It has been wonderful to witness the collaboration of our teams. We are observing that they are coming together quickly, with a strong cultural alignment, which is gratifying. The energy and effort across the organization are impressive. Looking ahead to next year and focusing on improving margins, we recognize two key elements: the potential for revenue growth and the need for greater efficiency in how we allocate our investment portfolio. While I cannot predict exactly when we will overcome the macro challenges, I believe the market will become very interesting. The consolidation of companies may present challenges for some but opportunities for others, and having a broad reach will be a significant advantage for us. This positions us well for substantial progress. Even as the operating environment improves, we will still need to process the impacts of a long period characterized by heightened technology purchasing. In this context, we feel confident in our strong value propositions and our capabilities to integrate platforms for better functionality.

Ryan MacDonald, Analyst

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

Operator, Operator

Our next question comes from Naved Khan with B. Riley Securities. Please go ahead.

Naved Khan, Analyst

Great. Thank you very much. So just the commentary on Boomerang customers and the fact that you managed to get 9 back in the last quarter, that's pretty encouraging. I'm curious if you're continuing to see these trends into the third quarter as well? Also about the terms on which these customers may be coming back, are they coming on similar terms and tiers as they used to be, and what are the primary reasons for them coming back?

Mike Walrath, CEO

Yes. So thanks for the question, Naved. Yes, we're thrilled about this. I think it's well-known that it has been a tough couple of years. There's been tremendous competitive pressure. A lot of promises made. One of the things we're seeing is that those promises are not always delivered upon. When that happens, one of the things that we've done a better job over the last, particularly 12 months of doing is making it clear to our customers that we're ready to help them come back. In this type of environment if the thing that you left for isn't working, the ROI implications of that can be enormous. What you look at is the if you're losing organic traffic, if you're less competitive in a rapidly fragmenting search channel world, it can be devastating for your business. We're taking a very partner mindset to our customer relationships and renewal cycles, making it as easy as possible for companies who have left and feel that the value they've been promised hasn't been delivered to come back. Many of these cases are happening faster because we're able to revert back. We maintain a lot of the infrastructure to be able to quickly get them back up and running and solve the whether it's listings or pages or reviews, challenges they're having. This is a trend we think it’s a credit to our teams staying close to the customers and really remaining partnership-minded even when the customers decide to go experiment with other solutions, that we can get them back up and running really quickly. I want to credit the global team on this. It's a different mindset and it creates long-term partnership value that is hard to quantify, but it's significant.

Naved Khan, Analyst

That's great to hear. And then maybe a quick follow-up. So just on the guidance for the full year versus the third quarter. If I try to back into the EBITDA margin for the fourth quarter, it kind of implies mid-20s kind of range, just wondering if I'm off somewhere or just give us some color on how to think about that.

Darryl Bond, CFO

Hey Naved, it's Darryl. I think if you look at Q4 implied EBITDA margin, it's around 22%. When we talk about getting up into the mid-20s, I think the legacy Yext business is kind of there. As we talked about a couple of minutes ago, Hearsay is a little bit dilutive to that. As we get into next year, that's where we see the opportunity to continue to expand the margins, both, like Mike said, through finding efficiencies in the business, but hopefully getting some benefit from growth.

Naved Khan, Analyst

Got it. And last question, if I may. So maybe just on this move from contractual ARR to usage-based on the third-party reseller side of things. Just kind of what is driving that move? If it really doesn't affect revenue, then just kind of what are the dynamics behind the scenes to kind of lead to this change?

Mike Walrath, CEO

Yes, this has always been part of the business, but there's been a tendency to prioritize committed revenue predictability. In many cases, we have realized that we could be overlooking opportunities with companies that prefer not to commit to a specific spending level but have customers they want to serve. Our goal is to provide greater flexibility for our clients. Many of them want to make a commitment, and generally, the more products someone commits to, the better the pricing is. However, we may have focused too heavily on this structure, making it seem like we were requiring commitments from customers whose businesses were smaller or still growing and needed less commitment or had less predictability. We have shifted our focus to better meet our customers where they are, recognizing that there’s always a trade-off. The unit pricing may not be as favorable for deals with less or no commitment. Moving forward, we will continue to signal this, and while we do not plan to change the way we report ARR right now, we will provide indications about the revenue trend and the committed ARR number for the reseller business to clarify the situation. We wanted to highlight this quarter because there was a $2 million drop in committed ARR for the reseller segment. If you adjust the revenue for the days in the quarter, it essentially shows flat revenue. We will keep pointing this out as we progress. I hope that clarifies things.

Naved Khan, Analyst

It does. Appreciate the details. Thank you.

Mike Walrath, CEO

My pleasure.

Operator, Operator

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

Mike Walrath, CEO

I'd just like to thank everyone for joining us again today. I just want to take a moment to thank our global team. I know many are listening, and the team is doing an amazing job delivering value for our customers and focusing on long-term value creation. It would be remiss not to acknowledge this at every possible moment. I really appreciate everyone's time today and look forward to speaking with you next quarter.

Operator, Operator

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