Yext Q4 2024 Earnings Call Transcript

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March 6, 2024

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to the Yext, Incorporated 4th Quarter Fiscal 20 24 Financial Results Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Nils Erdmann, Senior Vice President, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Yext's Q4 fiscal 2024 earnings conference call. With me today are CEO and Chair of the Mike Walrath and CFO, Daryl 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 Q1 and full year fiscal 2025, our strategy and estimates of financial and operating metrics, capital expenditures and other indications of future opportunities as further described in our Q4 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 management performance and general economic and business conditions.

Speaker 1

These forward looking statements represent our beliefs and assumptions only as of the date made, and we undertake no obligation to revise or update any statements to reflect changes that occur after this call. Further information on factors and other risks that could cause actual results to materially differ from these forward looking statements is included in our reports filed with the SEC, including in the sections titled Special Note Regarding Forward Looking Statements and Risk Factors in our most recent quarterly report on Form 10 Q for the 3 months ended October 31, 2023, and our shareholder letter that was 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 dotcom.

Speaker 1

We also provide definitions of these metrics in the shareholder letter. With that, I

Speaker 2

will now turn the call over to Mike. Thanks, Nils. Good afternoon, everyone, and thank you for joining us today. As we discussed last quarter, we have published our quarterly shareholder letter and financial commentary on our investor website and we look forward to taking your questions here today. There are a few high level themes I would call out from our letter before we dive into Q and A.

Speaker 2

First, we are pleased with the progress we made in fiscal year 2024, despite a very difficult operating environment. We believe our record profitability, increases in sales productivity and some of the difficult decisions we made to be more focused will serve the company well in the future and drive more efficient growth. As I've talked about in the past, the recipe for efficient growth is a combination of increased sales productivity and the ability to measure qualified pipeline, so that we can increase our investment in direct revenue generating roles. We will continue to focus on efficient operations, but we have seen enough to be ready to direct more investment in direct selling and sales development to drive growth in the future. 2nd, we made great strides last year in shifting more of our focus to the core product offerings our customers value most and have reoriented our roadmap around our customers' highest priorities.

Speaker 2

We have also reallocated our investment in customer support, services and success to drive customer satisfaction and value. In fiscal year 'twenty five, we will continue to proactively deliver value driving innovation in our core listings, pages, reviews and search products, customer service and support and deliver new product functionality in adjacent product areas that are most valued by our customers. These include generative AI features, including broader application of content generation technology, as well as much more robust social management and analytics features. The strength and breadth of our platform, particularly the advantage of our content knowledge graph system as a single data source of truth for our customers across all of the product use cases will serve us well in an environment where customers want fewer partners and more ROI. We will continue to invest R and D into high potential areas such as chat and other generative AI technologies, but these investments will be more measured and focused on customer priorities than in the past.

Speaker 2

Finally, we continue to take a conservative point of view on the market environment and the timing of uptake of generative AI solutions at scale. Our customers include some of the largest brands in the world and they continue to digest and optimize their technology stack after over a decade of investment. Our outlook anticipates that this trend will continue this year as uncertainty around the economy, inflation and interest rate environment continues. We believe this is prudent and will support our customers' work to identify areas to do more with our platform and be more efficient. We are highly positive on the future of generative AI to drive efficiency for the enterprise and we are seeing signs of early adoption features.

Speaker 2

This week marks the 2 year anniversary of my taking the CEO position. I'd like to take a moment to acknowledge that the last 2 years have been challenging on many levels for our team. I'm incredibly proud of our global team's willingness to take on the difficult task of reshaping Yext operating profile, adjusting to a difficult operating environment and recommitting the company to our customers. I believe the work has been harder than we would have anticipated 2 years ago and the work will continue to finish our transformation. I'm incredibly grateful to our team for their resilience and commitment in the past couple of years and for the future.

Speaker 2

With that, I'd like to open it up for questions.

Operator

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

Speaker 3

Perfect. Thank you, guys. Mike, maybe one for you to start. On the product roadmap, it sounds like there is a little bit of a refocusing going on, on the core with listings. And I think in the shareholder letter, you also talked about some new capabilities like social media management.

Speaker 3

Can you maybe just give us a sense of where some of these investments on the product front are focused? How do you plan to build some of these new capabilities like social media management? And what might the platform look like if we're talking in December versus in March right now?

Speaker 2

Sure. Yes. And Haraj, thanks for the question. So I think we talked I mean, we talked about this when we started this journey. We talked about the need to refocus on the core to deliver the value that our customers were paying us in listings and pages and reviews and search.

Speaker 2

And like everything, it takes longer than you think to get things going in the right direction. I do think one of the things we've seen over the last couple of years is as businesses focus on less how do I add new technologies to my stack, how do I experiment with new things and more am I getting the value that I'm paying for in my various vertical or multiproduct software solutions. We need to demonstrate and I think we are demonstrating to them that there's a lot of product innovation happening inside the core. And where I think our previously our focuses were a little bit further out. When it comes to social, we've always had social features in the product.

Speaker 2

But I think it's an area that we've heard really clearly from our customers that they want to see more of this. They want fewer vendors. They want more cross platform visibility. And the other thing they really want, and I mentioned this in the letter also, is a data structure that makes sense and allows them to do more with all these different functions. And so this is something we continue to work on and we expect as we get into really get into the second half

Speaker 3

of the year that there'll be

Speaker 2

a lot more coming through the product innovation cycle on all of the products, but increasingly on the social media side as well.

Speaker 3

Okay. Got it. And then you mentioned, right, increase in sales capacity and this being the right time to invest given some of the trends that you're seeing in the pipeline. I would be curious to hear what you're seeing in terms of sales productivity and how you're kind of benchmarking what best in class is, both for Yext and just as you compare yourself to the industry. I think it's the pipeline trends certainly are promised or seem promising.

Speaker 3

But talk about where you're hiring, why it's the right time and how much incremental expense maybe we can expect on the sales and marketing side?

Speaker 2

Yes. So, look, we are at the highest direct sales productivity that we've seen, I believe, in the last 4 years is what we stated in the letter. I'm not going to tell you we're best in class because we're not best in class yet. But we've seen marked improvement there and this is something I've talked about a lot over the last 4 or 5 quarters is when you're seeing consistent improvement in sales productivity and the qualified demand, which obviously over the last 5, 6 quarters, we've seen a really nice increase in our ability to both create but also to measure our pipeline. That's when we can start growing our sales capacity again.

Speaker 2

And so we'll be doing that in a pretty measured way over the first half of the year. And that's where we expect to start to see contribution from actually growing our direct revenue generating headcount in the second half of the year. At the same time, to your question about incremental expense, we continue to find areas of efficiency and optimize the cost structure of the business. And so the cost of the additional revenue generating capacity, which is really mostly in the form of quota carrying heads and sales development or business development representatives is all baked into our outlook for the year. So there's not a sort of unbudgeted incremental expense there.

Speaker 2

We're really just focusing a lot of our investment and efficiency work back into what drives the highest revenue generating roles.

Operator

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

Speaker 4

Great. Thanks for taking my questions. 2, if I could. Mike at Melletta, you mentioned significant increase in year over year lead volume in the quarter and higher pipeline creation. Curious to what degree that's being driven by some of the various initiatives around kind of demand gen that you guys have been working on?

Speaker 4

And Maybe you could just give a few examples of like the sort of the most successful kind of channels or tactics on that front? And then or is there kind of an uplift from just maybe the client spending environment perking up a little bit exiting the year versus maybe kind of earlier in the year? And then I have a follow-up on the guidance.

Speaker 2

Yes, no problem. So the first I'll take the last thing you said first, which is I don't think that we're necessarily calling or seeing an uptick in the spending environment. And I think our outlook on this, we've been accused of being slightly more dower maybe than some of our peers. But our outlook on this is that we expect I think we've seen if anything we've seen some stabilization. And our expectation as laid out in the letter is that the environment will be like this for a while.

Speaker 2

And I think as long as we have uncertainty around the macro and inflation and interest rates and all that stuff, I just don't expect that there's a big snapback in spending. I think when it comes to developing a really efficient demand generation machine and we've been talking about this since we brought Rayyan in as CMO and really her sort of core expertise and her team's core expertise around this is you have to get a few things right. So structurally, you have to get the machine right so that you can use various channels like content and paid media to obviously drive into the top of the funnel. And then you need the mechanisms to take that top of the funnel and move it through a qualification framework. So there are a whole mess of operating mechanisms that have to be done right in order to trust that what you're seeing coming in the top of the funnel is going to convert into qualified pipeline and ultimately into bookings.

Speaker 2

And that's all very kind of structural and very hard work and the teams have done an amazing job of building that machine. The second thing you have to get right is you have to match your campaigns to the environment. And so I think that's it's probably one of the things that we didn't do quite as well last year as we could have is, I think we were marketing a lot of more future state use cases for our platform at a time when I think we're still I think maybe the market was expecting that the snapback would come faster. And so what happened there and it was really interesting to watch is because we have the demand generation machine built, we can see the demand coming in the top of the funnel through campaigns that were geared around products that weren't really as much part of the core. So we were leading with AI messaging and more transformational CMS messaging.

Speaker 2

And then what we were finding was that a lot of those things were converting more in the core. And so that is a I would call like a half miss in terms of the marketing execution. As we've shifted to more value based messaging around the things that you're that are the breadth and capability of our platform buying centers are interested today, which is much more in how do I either do more with what I have or how do I improve a set of fragmented vertical solutions into a broader one. And so that's another thing that we expect as we run better campaigns this year. We think that the matching of what our customers are really interested in today and the areas of expansion that they're most interested in with our Hopefully, that makes some sense.

Speaker 2

Hopefully that makes some sense. Okay.

Speaker 4

Yes, that was very helpful color. Thank you. Just maybe a follow-up on the guidance for this year. I guess at the midpoint, the full year outlook implies that adjusted EBITDA expenses are down about $10,000,000 year over year. Can you maybe just parse out a little bit more the drivers and maybe Daryl can weigh in here too if he wants.

Speaker 4

But you talked about adding some heads, which will take a little bit of time to ramp. But then I guess you have the sort of the full year impact of some of the operational changes you made last year? And just trying to understand like how much more kind of further rationalization of the cost base is kind of baked into the outlook? Or is it just kind of like the full year kind of benefit, if you will, from some of the stuff you implemented last year? Thanks.

Speaker 2

Yes. So I'll start and I'm sure Gerald will do a better job talking through some of the numbers. But like principally, I think what we're doing and by the way, this is something we see our customers doing. It's part of the thing that colors our view on the environment is that once you start getting the organization really focused on efficient operations, you continue to find opportunities to in various ways to be more efficient. So that can be spans and layers, that can be duplication within the organization silos and we've been talking about all this for a couple of years.

Speaker 2

I think in a perfect world, it never really ends, but obviously the lifting gets a lot less heavy as we get into finer and finer optimization. So I really think that's probably the phase that we're in for the course of this year. It's just it's become part of the, I think, the culture here to think about the efficiency impact and the opportunities to be more efficient across the board. And that allows us to continue to show improvement on the expense line and on the EBITDA line, while making really critical investments that are going to be product investments and revenue driving.

Speaker 5

Yes. And Tom, the only thing I'd add to that is, when you look the EBITDA number in Q1, we've got some seasonal spend that happens in Q1 for certain sales events that don't happen in other quarters of the year. And then to the point that Mike was making earlier about our marketing campaigns and us being able to really attack that area. We pulled some marketing spend up on demand gen up into Q1, which is also going to impact the quarterly number when you sort of look at the rest of the year.

Speaker 4

Okay. Appreciate it, guys. Thank you.

Operator

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

Speaker 6

Hi. Thanks for taking my question. This is Ryan on for Naved. I was wondering if you could talk about the customer budgets for the upcoming year and whether there's room to drive upsells into the customer base. And then related to that, I was also hoping to get some clarity around the opportunity for mid tier customers versus enterprise customers?

Speaker 6

And then I have a follow-up after that. Thanks.

Speaker 2

Sure. So I think as we see it as we expect to see a lot of similar discussions this year that we've been having over the last kind of 6 to 8 quarters, which is they usually start with, what's the value that I'm getting from my the platform today. And I think that that's a great place to start the conversation. Then it becomes what are the other things that this platform can do potentially more efficiently than other things. So we still continue to see a lot of interest from customers, particularly larger customers in having less vertical software and less kind of very specialized software doing lots of different things in their marketing department versus more versatile, broader solutions that can do more.

Speaker 2

And so I think what that does is it clearly creates an opportunity to bundle and package more things together in the form of upsells, and it advantages companies who have broader offerings. And I just think that that cycle will continue. I'm not going to predict whether it gets a little bit whether there's a little bit less or a little bit more focus in the enterprise on the efficiency work this year. I just I don't think it's done and I think we'll continue to see smart management teams will think about how to just the same way we are, how do I operate more efficiently and where's the opportunities. For us, those are really, really those are actually better conversations than I think some of the competitive challenges we face when when kind of every vertical software was competing for a budget that was I think a lot more elastic than it is today.

Speaker 2

As far as your question about the kind of smaller versus what we would call the mid market and the enterprise, I think we see similar dynamics now across those different groups. We are certainly focusing on the higher end of the mid market and the enterprise. And one of the benefits of having a really robust reseller channel is that, which is primarily how we access SMBs is that the area between SMB and the smaller end of the mid market can get pretty blurry. And so we're very much focused on enabling our partners to access to move up market from just pure SMBs and into more of the mid market because that allows us to focus our resources and our time much more on the what we would call the higher end of the mid market and the enterprise.

Speaker 6

Okay, got it. Thank you. And then also, I guess my next question is, you had talked about it in the last earnings call. You also mentioned it in the prepared remarks, but the impact of the churn from the large customer in Q4, I was wondering how that's

Speaker 2

going to

Speaker 6

impact fiscal year 2025, the next few quarters growth and comps?

Speaker 5

Yes. So I think we mentioned it was about an $11,000,000 customer and their contract ended at the end of December. So we saw 1 month of impact to revenue in this Q4. And then as we get into this Q1, we'll see a full 3 months of impact. And obviously, it comes out of ARR.

Speaker 5

It comes out of revenue for the fiscal

Speaker 2

year. Got it. Thanks. And I think it'll just add to that, it'll impact a lot of metrics that we'll do our best to share the effect of the sort of ex that singular customer churn. So for example, our net I'm sorry, our gross ARR retention, we mentioned that this has been in the high 80s for since we started giving this metric and we said we're going to let you know if it changes.

Speaker 2

With the effect of that large churn, it would have dipped into the mid-80s when we take that out. We were still sitting in the high-80s there. So it will certainly be a headwind in terms of revenue growth, in terms of revenue, which you can see in Q1, and in terms of things like net retention and the gross ARR retention as we go through the year until we lap that next at the end of next December. But all of that is baked into our guidance and we do anticipate that in spite of that we'll see reacceleration of ARR growth into the high single digits by the end of the year.

Operator

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

Speaker 7

Thanks for taking my questions. Mike, maybe to start on the sort of strong pipeline commentary. Can you just talk about perhaps sort of what products you're seeing the most demand for, whether it's listing, search, pages, reviews? If there's any new verticals that maybe you've been able to sort of unlock with some of the marketing and demand generation? And then as you're we're getting through the early stages of the year here, are you seeing better signs or maybe signs of quicker progression through that pipeline that's given you some of the confidence on, I think, the idea of reaccelerating growth in the back half of the year?

Speaker 7

Thanks.

Speaker 2

Yes, sure. I'm happy to get into it. I think there's a bunch of different things there. So one of the things we mentioned in the letter is Boomerang customers. So we're seeing and it's well I think it's well documented that there's a lot of competition around listings and some of the other products, but particularly listings over the last few years.

Speaker 2

So we saw an acceleration of Boomerang customers. We're seeing I think we said we called out 20 direct customers last year and 10 of those were in Q4. I think some of that is the way that we're engaging with former customers and the commitment that we're making to focus on the things that are important to them as well as what they're I think some of the dynamics I've described, which is they're seeing that they can do more with us than they can with some of the smaller more vertical solutions in an environment where they want to be able to do more. I also think it's partly what I talked about on the demand generation side of things, which is when you really start matching up marketing campaigns and messages and content and we just had a great virtual customer summit with, I think, record attendance numbers for virtual events at Yext. All of these things create opportunities that you can actually action faster because the kind of the prospect is ultimately coming in through a door where they understand what it is.

Speaker 2

When I juxtapose that against some of the campaigns that we ran last year that were maybe a little bit mismatched with what the customer's sort of near term need is. It's not that you don't have the opportunity with that customer. It's just that more of your time goes into requalifying that customer and reestablishing the customer need. And so this is not really surprising, but we've now been at it with this with our with Ran and Tom and their teams for whatever it is 5 or 6 quarters now and the machine is getting better, it's getting more efficient and we're figuring out what's working better. And I think when you combine that with messages and discussions with customers that feel much more focused on their needs and what they need next, right?

Speaker 2

So when we talk about social management and those capabilities, it's one of the things we're hearing consistently from customers is, I don't necessarily want to have multiple systems doing these different things. And so that combined with the productivity that we've seen, which is all related to that, gives us confidence that we can start increasing once again. I think we are quota carrying and direct revenue generating headcount, which we're not disclosing numbers, but has been decreasing for most of the last 4 or so years. I think we're ready to start increasing that again because we finally have the signal that we need to feel really confident there.

Speaker 7

Okay. That's super helpful. Maybe just on the topic of the Boomerang customers, of the ones that you were able to win in Q4, how was the initial land trending or how did the initial land trend in Q4 relative to the size of customers they were when they left you? And then as we think about fiscal 'twenty five, what's the rough mix of the pipeline that's from Boomerang customers versus sort of net new?

Speaker 2

Yes. I don't know that I would be able to tell you the mix of Boomerang versus net new. And again, because our product has become so broad, the Boomerang customer could be multiple product or single product. And so we're not I I think there's a lot of trends that drive boomerangs. I think in a lot of cases what we're seeing with boomerang customers is that they left for a less costly solution that didn't deliver the return on investment they wanted.

Speaker 2

There were promises were made that weren't kept. And also in a lot of cases, the platform that these customers may have we haven't innovation that we've driven through our platform creates more additional value as well. I think one of the big shifts is that our overall approach to how we deal with customers and how we bundle and how we package and how we deliver services has become and will continue to become more customer friendly, as we've really gotten our arms around the types of services and support that our customers want. So that's another area that I anticipate that we'll just continue to improve the overall customer experience, the amount of support that they get, the proactive nature of that support, as we've been doing a lot of really hard work on that front over the course of the last year, year and a half.

Speaker 7

Appreciate the color. Thanks.

Operator

As there are no further questions, this concludes our question and answer session. I would like to turn the conference back over to Mike Walrath for any closing remarks.

Speaker 2

We'd just like to thank everybody for joining and we look forward to speaking with you next quarter.

Operator

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

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