Yext, Inc. (YEXT) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon my name is Angela and I will be your conference operator today. At this time I would like to welcome everyone to the Yext Second Quarter 2018 Earnings Conference Call. [Operator Instructions] Thank you. James Hart you may begin your conference.

Thank you, Angela, and good afternoon, everyone. Welcome to our quarterly conference call. With me today are Howard Lerman, CEO of Yext; Steve Cakebread, CFO and Jim Steele, President and Chief Revenue Officer. As a reminder, this call cannot be taped or otherwise duplicated without the Company's prior consent. Before we begin, I would like to remind everyone that this call may contain statements that are forward-looking as that term is defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, discussions regarding industry outlook, opinions, expectations regarding the performance of the Company's business, its liquidity and capital resources, its strategies and transactions, 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 risks related to our expectations regarding Yext's growth, industry, product, development and market opportunities and general economic and business conditions and are based on management's beliefs, as well as assumptions made by and information currently available to management. When you listen to this call, the words believe, anticipate, estimate, expect, intend, and similar expressions are intended to identify forward-looking statements. All forward-looking statements made today reflect the Company's current expectations only. And although management believes that its expectations reflected in these forward-looking statements are reasonable, the Company undertakes no obligation to revise or update any statement to reflect events or circumstances that occur after this call. Important risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from these forward-looking statements are identified and discussed in the reports filed by Yext with the Securities and Exchange Commission as well as in our press release that was issued this evening. During the call, management will provide certain information that will constitute non-GAAP financial measures under the SEC rules. Certain information required to be disclosed about these non-GAAP measures, including reconciliations with the most comparable GAAP measures, is available in the earnings press release that we issued this afternoon. With that, we will begin by turning the call over to Howard.

Thank you, James, and thank you to everyone for joining us this afternoon. We are very pleased with our results this quarter. We'll call out just a few highlights. Revenue grew 38% over the second quarter of last year. Our gross profit margins are at an all-time high of 74%. We added 57 new Enterprise logos this quarter, including Boston Market, Ermenegildo Zegna and Scotch & Soda in the United Kingdom. And I want to highlight the great success we had this quarter in healthcare, it is one of our largest verticals, we signed deals with Northwestern Medicine, Sharp Healthcare, Vanderbilt University Medical Center and the University of Miami Health System among many others. Structured knowledge in healthcare can help answer questions like, Hey Siri, where I find a doctor? [Presentation] And when are they open? [Presentation] Intelligent answers are replacing blue links in every vertical and we could not be more excited about digital knowledge management. To seize this huge opportunity, we added key sales talent around the world. We opened our office in Japan and we continued our incredible innovation with amazing new product features for our knowledge engine like our App Directory. These are all great indications with the phenomenal progress we're making in building an enduring and what we believe will be a very large Company. Digital knowledge management has a total adjustable market of more than $10 billion, it is in it's infancy and Yext is the clear leader. We could not be more excited about our long-term future. Let me take you through some of our accomplishments in the quarter. I am going to start with our App Directory, which we launched in June. Now to understand the potential of the App Directory, let me first take a step back. For 20 years, the Company's website, with the centerpiece of their digital experience fueled by blue links in a search engine results page. But we are witnessing a major platform shift, the rise of intelligent services. Gone are blue links replaced by smart answers in the form of maps, voice search, knowledge cards, intelligent agents and conversational UIs. Intelligent services have three layers. The user interface for you to engage with it, the algorithms which decide which answers to show you and their knowledge base. This contains the facts that show up in their answers. Companies can control these facts about them that show up in intelligence services with a system of record for digital knowledge called their Knowledge Graph. The Knowledge Graph is a database that describes how a company’s public facts are organized, includes any type of entity, places, people, products and venues. The Knowledge Graph provides the foundation for structured answers and intelligent services. And with the rise of intelligent services, we realize that companies are going to need to have a single system of record for all their digital knowledge, they want to be consumed by intelligent services. So we created the Yext Knowledge Engine. The Yext Knowledge Engine lets our customers manage their digital knowledge in the cloud and automatically think it to over 100 third-party intelligence services like Siri, like Apple Maps, like Google Home, Google Maps, Facebook, Bing, Yelp, and service in their own first party intelligent experience. Now there are a few key parts of the Yext Knowledge Engine. First, knowledge management. This is a cloud-based system of record that companies use to make their own Knowledge Graph. Next our network. We built deep integrations with over 100 intelligent services so information from knowledge management syncs automatically in those services. Next, our pages and platform API. The customers conserve knowledge from Yext, built in their own first-party experiences like websites, mobile apps and chat boxes. And our analytics, which lets them see a clear measurable ROI based on the customer actions driving revenue. So McDonald's, for example, could see how many people requested driving directions to a particular restaurant from Google Maps yesterday. There are more than 23 million attributes now stored in Yext and about 1/3 of them were changed last quarter. It's a huge challenge for companies to stay on top of all this changing digital knowledge and it's compounded by the fact that this knowledge is often stored in various systems across the enterprise. Store ops live in a store op system; product specs within a POM or ERP system; promotions with the market. We saw many of our customers integrating the Yext knowledge APIs with their internal systems, both to bring knowledge into Yext and to push knowledge from Yext into other systems. Often, they are integrating Yext with some of the same popular SaaS platforms like Salesforce, like HubSpot, like Zendesk, and to make these integrations easy, we created the Yext App Directory. Here's an illustration. The Yext customer who is enrolled in our ultimate package is using the review monitoring feature to see which new reviews are published about their brand. They really want to know if they get a poor review. So they set up alerts in Yext to notify customer service when they get a one or a two star review. Now, say this customer uses Zendesk for its customer service. Next time there's a review that meets the one or two star criteria, Yext hears that the review occurs and a ticket is automatically created in Zendesk. This seamless connection between Yext and Zendesk helps to just satisfy user over to the top of support channel for resolution. Other app integrations give businesses the ability for one-stop publishing a store hour updates, for example from Storeforce to the export data for example from our analytics into Domo. Now as part of the App Directory launch, we have 23 built integrations today and we'll be adding more as we expand the platform. And then our platform emphasizes a very important part. Most SaaS companies today are features of an existing platform. But the biggest winners in SaaS deliver a comprehensive platform of their own. This is what we saw in CRM with Salesforce, what we've seen in employee data with Workday and our key service management with ServiceNow. The opportunity that we see here is to become the platform of record for digital knowledge. The total addressable market is huge. It's at least $10 billion from what – that we can see for the location entity alone. Just like every company needs a website, we imagine a future where every company builds the Knowledge Graph think that the hundreds of global intelligence services and uses it to serve answers from the company own intelligent experience. All fueled by the massive platform shift, this rise of intelligence. We see a future with the Yext Knowledge Engine immediately supports all of them. We launch the Yext App Directory, its part of our spring release and you should expect to see a regular cadence of releases where we unveiled new functionality, incredible new features and new global publishers. In fact, this quarter we expanded the reach of our network, adding new publisher partners in the UK with Yell and FindOpen, in Germany with Das Ortliche and GoYellow and Italy with PagineGialle and Virgilio. Now to be the big winner over the long run in digital knowledge management, we need a strong sales organization to help educate the market that is in early stages of rapid growth. As we've discussed before, Jim Steele and David Rudnitsky joined the Yext executive team earlier this year, they bringing with them vast experience and how to build world-class enterprise sales team. I'd like to turn the call now over to Jim for his thoughts on the progress we've been making there.

Thanks, Howard. Dave and I spent much of the last six months getting to know our customers and understanding their needs. We learned about how we have been going to market, our end-to-end sales process and the strategies we've been using to sell. This learning process has helped us identify areas where we needed to add talent in order to scale our business to the next level. And over the last few months, we did just that by bringing some world-class additions to our sales leadership team. This past quarter, we created a new financial services vertical in North America, to lead the sales team for this vertical in the Eastern enterprise sales region, we hired a GVP who has significant enterprise experience and worked with the inside sales and also Salesforce. He brings deep expertise at creating and executing strategies to sell enterprise solutions to the Fortune 1000. Another example, during the quarter, we also hired an EVP to run our SMB in midmarket segments. He opened the Chicago office at Salesforce and scaled the team to 400 people in two years. And during his time at that office, the Chicago Tribune named Salesforce the number one rated technology company to work for in Chicago. He obviously understands how to build and scale an enterprise sales model and has held sales leadership positions at other leading software and technology companies. We couldn't be more excited with these additions to our team. I believe we now have a strong foundation in place to effectively scale the business at a rapid pace. So with the progress we have made in the first half of the year and the second quarter in particular, we plan to step on the cash with the expansion in our sales capacity in the second half of the year. And we are confident that having leaders like this will help us attract the best sales people in the market. Because digital knowledge management is a huge global opportunity, we continue to take action around the world as well. And we accomplished a significant milestone this quarter with the opening of our office in Japan, as Howard mentioned. This establishes our presence in the region and marks the first time our platform will be available to businesses headquartered in Asia. We believe Japan is the perfect place for us to launch our platform and given the high rate of mobile adoption there, the proliferation of intelligent search and the market's acceptance of cloud-based technology. As excited as we are about launching the market, we're really excited about who we are bringing on board to lead the region. This summer, Eiji Uda joined Yext as Chairman and CEO of Yext Japan. I think many of you may already know, Uda-san because of his previous experience working for software and technology companies in the region. For 10 years, he was President and CEO of Salesforce Japan. He also as President and CEO of Softbank Commerce and previously spent 20 years at IBM in various leadership positions. With his three decades of experience, Uda-san is one of the leading cloud computing experts in Japan and as I believe the most experienced executive in building SaaS businesses in Japan. With Uda-san joined Yext, we have instantly established our credibility in a leading high growth market. With that, I'll turn things back over to you, Howard.

Thank you, Jim. Now whether our sellers based in North America, Europe or Asia, the best, most experienced people want to work in a well-run successful organization because that's the kind of environment where quality sales person can do really well. With our substantial total addressable market and greenfield in the enterprise market, sales people find its very compelling to join us at this early stage. And we work really hard to make Yext the kind of environment where people feel as though they have the opportunity to succeed big. Fortune magazine recently named Yext the Number One Place to Work in New York City for small and medium-sized businesses their methodology, local workplace culture, communication, transparency and opportunities for professional growth. And we could not be more proud of this accomplishment. Before I turn things over to Steve, I wanted to give you a quick update about ONWARD. This is our annual conference event. This year ONWARD will be held at the Conrad Hotel in New York City on November 1 and conclude from the floor of the New York Stock Exchange the following evening. This event is very important to us, because it's an opportunity to bring together leaders in marketing, technology, discuss how the world is changing. AI, digital assistants, intelligent agents, this is the intelligent future and that's the theme of our conference. This year, our Keynote speakers are Megan Smith, the Former CTO of the United States and VP of BD at Google and Mark Hamill, the legendary Jedi who plays Luke Skywalker and is a star of the upcoming Star Wars Episode VIII. We also have an incredible lineup of presenters in over 50 companies and to highlight just a couple of those presenters, we've got Amazon's Chief Evangelist for Alexa, David Isbitski; we've got Naomi Makofsky, Google's Head of Strategic Partnerships; and we have the Cofounder of Cortana and Microsoft's Director of AI, Dr. Ed Doran. The common thread across ONWARD is how AI, machine learning and voice search are revolutionizing the way that businesses engage with their customers. We are incredibly excited and hope you will be able to join us. But you should know we have a ton of demand and this is first come, first serve, so if you want to come, make sure you e-mail James ASAP. I'm now going to turn the call over to Steve. And after his remarks, we'll open this up for Q&A.

Howard, thank you. And I already have my ticket to ONWARD, so I'll be there.

Excellent.

We had a strong quarter and a solid first half. Our revenue of $40.8 million this quarter exceeded the high-end of our guidance range. This was an increase of 38% over the $29.6 million we reported in the year-ago quarter. Our annualized run rate basis now has more than $160 million. Our growth this quarter was again driven by continued success of our land and expand strategy. Our net retention this quarter excluding small businesses remained within our historical range of 113% to 120% on a trailing 12-month basis. Our logo retention, particularly in enterprise, continues to be very strong. As of July 31, our clients are managing nearly 23 million attributes on our platform. This is a 62% increase from last year, and it shows the growing usage of our platform and demonstrates our clear leadership in this category. Turning to profitability. Gross margins this quarter were 74.1% as compared to 69.3% in the second quarter last year. As expected, our publisher costs are continuing to decline as a percentage of revenue as a fixed component of these costs gets spread over an increasingly larger top line. Quarterly operating expenses increased from $29.5 million a year ago to $46.7 million this year. As in previous quarters, the increase was driven primarily by two items; one, higher sales and marketing expense, due mostly to the increases we’ve made in our sales organization and the expansion of our geographic footprint; and two, increased G&A to support the rapid growth of our businesses globally and to operate as a public company. Quarterly GAAP net loss increased from $9 million a year ago to $16.4 million this quarter. On the basis of our 90.1 million weighted average shares outstanding, our net loss per share of $0.18 this quarter compares to $0.29 net loss a year ago. We also look at non-GAAP net loss, which excludes stock compensation as we believe that's the better reflection of our business operations. Our quarterly non-GAAP net loss increased from $6.8 million a year ago to $11.4 million in the current quarter. On the basis of our 90.1 million weighted average shares outstanding, our non-GAAP net loss per share of $0.13 this quarter was in line with our guidance of a loss of $0.13 to $0.15 in comparison to $0.22 non-GAAP net loss per share a year ago. For a comparison of our historic non-GAAP results to GAAP, you should review the press release we issued earlier today, which also includes a reconciliation of our share accounts. Our cash, cash equivalents and marketable securities on the balance sheet totaled more than $127 million. In the second quarter, cash used in operating activities was $5.1 million and is an improvement from the $5.3 million of cash used in the year-ago quarter. Deferred revenue at the end of the period was $57.6 million, an increase of more than 54% from the second quarter last year. And as we previously discussed, our quarter-to-quarter deferred balances impacted by both seasonality and billing cycle. We have customers on annual, quarterly and monthly payment terms. This makes no difference from a revenue perspective but does, of course, impact the balance shown for deferred revenue. Certain deals may carry shorter billing cycles but still provide a long runway for revenue growth with the customer. Turning now to our expectations for the upcoming quarter and the rest of the year. We continue to be enthusiastic about our business. Our TAM continues to expand. And as Howard described, we continue to make strides building a world-class sales organization to ensure that we have the best selling people selling our solution. We've done a great job of putting in place a world-class sales leadership team and are now focused on growing our quota-carrying sales reps in the back half of the year. We expect the on-boarding and ramp of these new sellers will be very typical of what you've seen in other SaaS sales organizations. I also wanted to note that two of our reseller partners recently merged. While the partners on a combined basis account for less than 10% of our revenue, each partner has a stand-alone entity was among our top 10 largest customers. We just recently signed an amended agreement with the merged entity. This new agreement resolves our uncertainty over the merger's impact on our results, though the amended terms do create some revenue headwind this year. And the guidance we're giving today reflects the terms of this new agreement. The merger reduced our expected rate of revenue growth in fiscal year 2018 by about 1 percentage point. But despite this impact, we are still increasing our revenue guidance for the full year to $169.5 million, up to $170.5 million. In the third quarter, we expect revenue of between $43.5 million to $44 million. In terms of profitability, we expect third quarter non-GAAP net loss per share to be $0.12 to $0.14 and this assumes weighted average share count of 90.2 million shares. For the full year, we expect non-GAAP net loss per share of between $0.50 and $0.52 and that’s based on an assumed non-GAAP share count of 90.5 million shares. So in conclusion, we're very pleased with the first half of the year and we're excited about the company's outlook for the second half of the year. Our product roadmap is very strong. We've added great sales leadership with the experience to meaningfully scale our sales organization. And with that, I'll turn the call back to James.

Okay, thank you, Steve. Angela, we're ready to begin the question-and-answer session.

Okay, well, doesn't look like – Angela, I think we're all set. Thank you, everyone, for joining us this afternoon. We look forward to you attending our ONWARD event. Please reach out to me if you are interested in attending the event. Thank you.

Thanks everybody.

Thank you.

This concludes today's conference call. You may now disconnect.