Earnings Call Transcript - YEXT Q2 2022

Operator, Operator

Good afternoon, and welcome to the Yext Second Quarter Fiscal 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jeff Houston, Vice President of Investor Relations. Please go ahead.

Jeff Houston, Vice President of Investor Relations

Thank you, Gary, and good afternoon, everyone. Welcome to the Yext Fiscal Second Quarter 2022 Conference Call. With us today is CEO, Howard Lerman; President and Chief Revenue Officer, David Rudnitsky; CFO, Steve Cakebread; and Dom Paschel, Senior Vice President. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements, including statements about revenue, non-GAAP net loss, operating cash flows, operating margins, product roadmap and timing, demand for our new products, net dollar retention, 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 the growth, the evolution of our industry, our product development, including 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 earnings and annual reports and our press release that was issued this afternoon. During the call, we also refer to non-GAAP financial measures. Reconciliations with those 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

Thank you, Jeff. I'm pleased to report we had a solid second quarter. Revenue of $98 million exceeded the high end of our guidance by $2 million, driven by new customers and upsells. Non-GAAP EPS exceeded our guidance by $0.01 as we continue to increase operating efficiencies while maintaining a strong cash position, and we continue to build momentum with Answers, the cornerstone of our AI search platform. During the second quarter, we closed 70 Answers deals compared to 38 in Q2 of last year, and we increased the Answers average new logo ACV by 19% compared to Q1 of the year. Last quarter, we expanded our platform into customer support with our Support Answers offering. During the second quarter, Support Answers drove upsells to First Citizens Bank and new logo deals with Frontier Communications, First National Bank, and Revlon. Support Answers continues to drive larger deals and is helping to expand our relationships with existing customers and unlock opportunities in new industries. In fact, Support Answers has helped our pipeline of digital companies grow beyond our traditional base of customers with many physical locations. We've also won new Support Answers business over legacy search players, Algolia, Coveo, and Lucidworks, proving that our continuous innovation is helping distance Yext from the competition. To further scale Support Answers opportunities, we announced an integration with Zendesk. This enables our mutual customers to use Yext and Zendesk together to strengthen their overall customer support offerings. Our integration enables businesses to add an AI-powered search engine to their existing help sites, allowing customers to more easily get accurate answers to their questions directly from a brand's knowledge graph. By enabling customers to more efficiently self-serve, Support Answers helps reduce ticket volume and save operational costs. Naturally, there are issues that require a more hands-on approach, and Support Answers assists agents with their customer interactions. Yext AI search integrates directly with a company's internal Zendesk agent help desk, allowing agents to access relevant answers in real-time as customers are filling out the details of their issues. This means agents are more empowered and efficient, reducing friction in the customer experience, which leads to higher customer satisfaction scores. The Zendesk integration follows our successful collaboration with Adobe, which contributed to the Frontier Communications win. Most recently, we announced Yext AI search for Salesforce Service Cloud on the Salesforce AppExchange. Our collaboration brings the best of our platforms together as it enables our mutual clients to augment their existing Salesforce Service Cloud powered help sites, agent consoles, and support forms with Support Answers. We're excited about this integration with Salesforce as it highlights the large market opportunity that exists for Support Answers. In addition to scaling our solutions through new product relationships with notable companies like Zendesk and Salesforce, we continue to innovate our platform to unlock more opportunities. Our summer release introduced many cutting-edge features, including an updated data connector framework, enabling businesses to extract data from multiple new sources and connect it to their knowledge graph. For example, with these connections, Yext customers can integrate with their Zendesk account in only about 15 minutes. We built multiple connectors and plan to significantly increase that number by the end of next quarter. To make our search results even more powerful, we updated our search algorithm to enable dynamic reranking, meaning search results will be delivered in order of what users have previously engaged with, indicating preference. We also added semantic search, which serves as images and gifts to the already rich text-based results. These key enhancements are just a few examples of how we are helping to move the enterprise away from outdated index-based keyword search to a more intelligent, dynamic way of delivering answers to customer questions using natural language from a knowledge graph. In summary, we navigated the quarter well. I'm proud of our team for their focus and execution. While full global reopening remains difficult to predict, I'm confident that Yext will continue to play a critical role in helping businesses accelerate their growth with AI search. Now, I'll turn the call over to David Rudnitsky, our President and Chief Revenue Officer, to share more quarterly information on the second quarter.

David Rudnitsky, President and Chief Revenue Officer

Thanks, Howard. We had a solid second quarter, as we continue to win new logos and upsell customers. Our Answers platform is leading the competition. Our expansion into customer support with Support Answers, combined with our Zendesk and Salesforce strategic partnerships, have given us even more opportunities. Our product team continues to innovate at a remarkable speed, and our messaging around how AI search can immediately transform a business is really starting to resonate. I'm pleased with what we've achieved, and I couldn't be more excited for the road ahead. I'll take you through the details and share some highlights from last quarter. The total number of Yext direct customers, excluding SMB and third-party reseller customers, increased 23% year-over-year to 2,600. Our direct customer count, excluding SMB and reseller customers with ARR over $100,000, totaled 592 at the end of Q2, up 17% year-over-year, reflecting continued success with larger customers such as Main Line Health, Frontier Communications, and Wells Fargo. We continue to see momentum with the Answer search platform, closing 70 Answers-led deals in the second quarter, up from 38 deals in the second quarter last year. I'm also happy to share that the average Answers new logo deal size increased 19% quarter-over-quarter as we continue to build momentum with Answers. New logo signings included world-class brands such as UNC Health, Jackson Hewitt, Giorgio Armani, Prisma Health, and Tag Heuer. We continue to make solid progress selling Support Answers, which has only been in the market since the first quarter. As I noted back then, Enterprise Support is a big ticket item, and we are starting to see large RFPs for Support Answers. In the second quarter, First Citizens, Frontier Communications, and First National Bank signed Support Answers deals. Notably, we are quickly evolving from a product-driven sale to a platform-focused sale as we expand our offerings across multiple solutions to sign new customers, as well as to renew existing ones and upsell others. Notable renewals included FedEx, Liberty Mutual Insurance Company, Marriott International, Mount Sinai Hospital, Tiffany & Company, Enterprise Holdings, and Guaranteed Rate. We also renewed a number of technology companies, such as Cellular South, Virtusa, and Vodafone as we continue to expand in this sector. Upsells during the quarter included well-known luxury brand Christian Dior Couture, healthcare providers such as Miracle Ear, Medical University of South Carolina, and United Healthcare Services, as well as financial services companies such as Broadridge, Goosehead Insurance, and Toronto Dominion Bank. We did face some challenges in parts of the world with the resurgence of COVID due to the Delta variant. Our international markets became challenged in July, particularly at the end of the month. This delayed some contracts in Europe, and we experienced similar obstacles in Japan. However, we focused on what we could control during the quarter and delivered results that beat our guidance. This is because what we offer solves big problems and delivers significant ROI, which has led to high activity levels and, in many instances, engaging in C-level conversations. Overall, I'm happy with our navigation in Q2. Looking ahead, we have a solid pipeline entering the second half of the fiscal year, and I look forward to delivering our best-in-class AI search platform to new customers. With that, I'll turn the call over to Steve.

Steve Cakebread, CFO

Yeah. Sorry. Thanks, Dave. We had a good quarter, with revenue above guidance, a strong cash position, and continued operating efficiencies. We're making meaningful progress building the Answers platform and increasing awareness while reopening has been inconsistent around the world as Dave described. Return setbacks in Europe have put us in a good position to help our customers when they start reopening. Our second quarter revenue grew 11% year-over-year to $98 million. Unearned revenue increased 12% year-over-year to $165 million. ARR was $378 million, up 12% year-over-year. Our total trailing 12-month net dollar-based retention, which excludes SMB customers, was 98%, while our trailing 12-month net dollar-based retention for direct customers, excluding SMB and third-party resellers, was 100%. As we mentioned last quarter, net retention is a trailing 12-month number. And similar to Q1, Q2 comparisons include the ongoing impact of the pandemic from Q2 last year, with reopening being elongated even now. Turning to non-GAAP results, which are reconciled to GAAP in our press release, Q2 gross margins were at 75% this quarter compared to 76.5% in the year-ago quarter. The dip in margin was primarily driven by higher employee costs. Our Q2 operating expenses were $79.8 million, or 81% of revenue, and this is down from 84% in the year-ago quarter. We remain focused on cost management and efficiency and once again drove margin leverage in sales and marketing and G&A, with sales and marketing expense decreased 3 percentage points as a percent of revenue from 55% in Q2 of fiscal year '21 to 52% in Q2 of fiscal year '22. G&A expenses also decreased as a percent of revenue from 18% in Q2 of fiscal year '21 to 16% in Q2 of this year. We continue to focus on improving selling cycles, productivity with systems and process improvements while investing in revenue-generating opportunities in the second half of this year, such as marketing, events, and product launches. Our Q2 net loss was $7.1 million compared to a $7.9 million loss in the year-ago quarter. Our Q2 net loss per share of $0.06 compares to a $0.07 loss last year. Cash and cash equivalents were $240 million at the end of the second quarter. We continue to have a strong balance sheet, positioning us to invest in growth we expect going forward. Net cash flow from operations for the three months ended July was a negative $32.6 million, compared to a negative $15.6 million for the same period ended July 2020. On a six-month basis, we generated $2.4 million of net positive cash flow from operations, up from a negative $16.3 million for the six months ended July '20. CapEx was $3.1 million in the three months ended July '21, compared to $18.8 million in the three months ended July 2020. $2 million of that $3.1 million was for facilities build-out. For fiscal year '22, we continue to expect total capital expense to be about $15 million. As a percent of revenue, we expect it to return to more normalized annual run rates closer to historical levels going into next year. Turning to our outlook, we expect Q3 revenue to be between $97.5 million and $98.5 million, and we expect non-GAAP net loss per share to be between $0.06 and $0.08. This assumes a weighted average basic share count of approximately 128.6 million shares in Q3. For the full fiscal year '22, we expect revenue to be between $386 million to $388 million. Our non-GAAP loss per share is expected to be between $0.20 and $0.24, assuming a basic weighted average share count of approximately 127.9 million. I'm excited about our continued innovation across the Answers platform and the potential our solutions offer. We're encouraged by the uptake and conversations we're having in the marketplace. While the macro picture continues to develop and remains difficult to predict, we're investing into the opportunity to best position ourselves for when reopening occurs. In summary, things are good. We're just waiting for things to get better, but as the reopening is going slower due to the Delta variant, employment, and supply and demand alignment issues persisting, we are well positioned as macroeconomic conditions continue to improve. We're improving our products, diversifying our customer base, as you heard from Dave, improving our processes, and working on the things that are under our control. With that, I'll turn it back to Howard with some closing remarks before Q&A.

Howard Lerman, CEO

Thanks, Steve. In closing, instead of our annual onward event that we typically hold, we've decided to host 40 events for our customers and prospects across the globe over the next several months. We're referring to these as reunions. Our recent brand campaign was centered around a reunion for the class of 1999, and it also feels like it's been about 20 years since we've gathered with our professional colleagues and friends. We will be activating these experiences in local markets over the coming weeks and look forward to seeing you there. Also, join us on September 14, as we host a webinar with one of our first Support Answers customers, technology provider Samsung, for customers and prospects to learn about how Samsung is preparing its Support solution for the holiday season. Operator, we are ready to open up for Q&A.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Matt Coss with JPMorgan. Please go ahead.

Matt Coss, Analyst

Hey, good afternoon. Thank you for taking my question. Quick question on Answers. I know it's very early, but are you seeing any NPS scores or other success metrics improve at your customers who've implemented Support Answers? I know you might not have that data quite yet, but I’m just trying to get a feel for the tangible ROI customers might be sharing with you after they've been using Answers for a little bit?

Howard Lerman, CEO

Matt, thanks for the question. Customers usually implement Yext Support Answers for three parts of their ROI. The first is increased transactions. As you know, with natural language search, when a customer asks a question, they're going to receive results back, such as maps, and customers can create whatever transaction button they want. The second is reduced support tickets. I'm friendly with a number of the large support platforms' CEOs and executives, and they tell me that right now their customers are being overwhelmed with the number of support tickets. What we want to help them with, with our Support Answers solution, is to reduce the number of tickets that come through. One way to do that is for Yext Answers to scan a ticket as it's being written. As their customer types in a ticket, if we can find a potential answer, we'll surface that using Yext Search. We'll also show that same answer to the help desk agent within the agent's help desk in Zendesk or Service Cloud, and that helps reduce support tickets. Finally, better customer satisfaction is another important aspect. There are two places that search can occur: on your own site and on Google. Google doesn't answer support questions about your brand as well as you can. Every time you can answer a question, you're keeping that customer journey engaged with you and preventing them from resorting back to Google.

Matt Coss, Analyst

That's helpful, Howard. Thank you. And Steve, I know you've been enjoying year-over-year gains in sales and marketing leverage, and the sales and marketing as a percentage of revenue has been fairly steady recently. I know at some point you'll get back to traveling and doing a lot more in-person customer visits among your sales force. Is there a chance to see some of that sales and marketing leverage erode? Or should we sort of look to gradual leverage there?

Steve Cakebread, CFO

Yes. I think you'll see a little bit slower, obviously, in improvements in the sales and marketing number. But our goal is to continue to improve that year-over-year and quarter-over-quarter. So, it might flatten out a little bit as we get back in there and get our feet on the ground, which is really important. As Howard said, we need to get out in front to meet our customers again, but I don't see us going backwards.

Operator, Operator

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

Ryan MacDonald, Analyst

Hi, thank you for taking my question. Congrats on a nice quarter. Just be curious to hear an update on the listings offering and what you're seeing with customers in terms of we're starting to see foot traffic back again domestically. Obviously, Delta is creating some uncertainty, but how your customers are starting to think about expansion opportunity? And what that could mean for Listings billings as we look into the back half of this year?

Howard Lerman, CEO

Thanks, Ryan. We had a pretty good quarter in North America, in particular. I think as Dave said, we encountered some challenges in the last month of the quarter in Europe. Regarding Listings, we continue to see mass transactions still on their way back to 2019 levels. The reality is that Listings is the fuel for Answers, and so we sell a solution to our customers, and many customers that have purchased Listings can get going with Answers because all the data that sits there in their Knowledge Graph. I continue to believe that Listings will be a good business for us moving forward. North America performed well this quarter, while Europe faced challenges due to the Delta variant in July.

Ryan MacDonald, Analyst

Thanks, Howard. And maybe a follow-up for Steve. You called out on the gross margin impact from sort of higher costs for labor. Just curious if this is a trend we're starting to hear from more and more organizations. How should we think about that continued impact of higher labor costs as we think about the back half of this year as it relates to gross margins?

Steve Cakebread, CFO

Yeah. That's a good question. I think most of our increases recently did come from agent salary increases this past quarter. However, we're also hiring more professional services personnel, which impacts the margin a little bit until they get up to speed and start contributing. I expect our margins to remain in the mid-70s as we discussed. I think this mostly reflects us ramping up our professional services group rather than seeing wage inflation at this point. There is competition for workforce in the marketplace, certainly.

Operator, Operator

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

Nic Cronin, Analyst

Yes. Hi. This is Nic Cronin on for Naved. Thank you for taking my question. I know you said reopenings have been inconsistent across geographies. Can you give a sense of how sales trends changed in August versus the second quarter and also in August versus July?

Howard Lerman, CEO

Dave, do you want to take that?

David Rudnitsky, President and Chief Revenue Officer

Sure. So, hey, Nick, it's Dave Rudnitsky. We did see things get a little challenging towards the end of July, but started picking up again in August. There's a fair amount of activity going on. Some of those deals that we thought were a little more challenging at the end suddenly started moving forward. We can't declare victory in terms of what's happening right now, but it certainly looks promising coming into August.

Nic Cronin, Analyst

Got it. And then maybe just a follow-up. How much of a driver to growth do you think that the Salesforce integration can be?

David Rudnitsky, President and Chief Revenue Officer

It's brand new. However, when I look at it, if you consider how large the Service Cloud is and the footprint they have, I think it could be significant.

Operator, Operator

The next question is from Arjun Bhatia with William Blair. Please go ahead.

Arjun Bhatia, Analyst

Perfect. Thank you very much. I wanted to touch on maybe the Delta variant impact again. I know you mentioned that most of the impact was in Europe and Japan. However, we're seeing that impact in North America as well with business reopenings delayed a little bit, with mask mandates, etc. I'm wondering if that's coming up in your customer conversations in the U.S. as you look at your domestic customers or if it’s more just an international issue at this point?

Howard Lerman, CEO

Dave, do you want to take that?

David Rudnitsky, President and Chief Revenue Officer

Yes, we're seeing a very high level of activity and interest. There is a lot of customer engagement. Folks are discussing it, but if we rewind a year ago, I would say most software vendors were better prepared for work from home, while our customers weren't. Most didn't have their setups ready, had to navigate challenges like taking care of children at home and working remotely. The world has changed, and our customers are now used to it. Many want to meet in person. We've opened this beautiful new building at our headquarters, and we've had important meetings there. Customers are eager to come in, showing a great deal of enthusiasm. We’ve seen considerable engagement. Yes, they do mention the Delta variant, but I haven’t seen them hesitate in engaging with us, wanting to meet, and using our headquarters as a venue for discussions.

Arjun Bhatia, Analyst

Perfect. Is there any kind of bifurcation that you can share between Answers deals and Listings deals? It’s been argued that the Answers deals might receive a tailwind as it is a digital product for possibly digital-only or online companies without a physical footprint.

David Rudnitsky, President and Chief Revenue Officer

I can tell you that, as I mentioned in prior earnings calls, we've oriented ourselves around being a platform company. More than 50% of our pipeline is Answers-led now. So, Answers is an integral part of how we position ourselves. It's part of our normal course of business to see it as a solution, a platform-oriented sale rather than just a product sale.

Operator, Operator

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

Rohit Kulkarni, Analyst

Thanks for taking my questions. Nice quarter, guys. You talked about Support Answers, but historically you've mentioned a couple of other verticals: Marketing Answers and then Develop Answers and E-commerce Answers. Could you provide any more color on how other verticals or specific solutions are progressing? Any new deals or other announcements that you can share?

Howard Lerman, CEO

Rohit, thanks. The customer journey starts with the question, and that question can happen on your site, your help page, your website, or on Google. Our Marketing Answers and Support Answers solutions are designed to help companies engage with their customers regardless of their location. The Support Answer solution is uniquely tailored to be sold to the head of Support, focusing on a different use case where we can integrate with Zendesk or Salesforce's Service Cloud to pull in help articles into a knowledge graph, which can improve SEO, and provide an AI search box on the company's help site to assist customers at their moment of inquiry. This leads to reductions in tickets and increased customer satisfaction scores. One single knowledge graph powers answers on the company's help site, marketing site, and even in Google, rather than relying only on keyword-based indexing. The e-commerce solution we have can help companies display their products effectively. However, our primary focus right now, where we're seeing momentum, is in Marketing and Support Answers, both of which address the customer journey. We're also working on Workplace Answers, which will allow a company to create a knowledge graph from their enterprise data, but we are not quite ready for that yet and are focused on our Answers platform to assist the Chief Digital Officer in managing their customer journey effectively.

Rohit Kulkarni, Analyst

Great. I also have a question for Steve regarding the comment on delayed contracts in Europe and Japan. Can you help quantify or qualify your thoughts on Q3 and the second half outlook with regards to what you're observing lately?

Steve Cakebread, CFO

As David mentioned, we observed significant slowdowns towards the end of July. August is typically a month where people are on vacation, making it challenging to chase down commitments. I believe pull-ups and push-outs will average themselves out. I don't foresee any major upward or downward movements for now. It’s somewhat challenging to chase down this activity with everyone working from home on Zoom and other platforms. However, I’m confident that as our sales teams return to engaging customers in person, it will enhance our interactions. But currently, there is no substantial up or down in that regard.

Operator, Operator

This concludes our question-and-answer session. And the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.