Yext, Inc. (YEXT) Q2 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Yext Second Quarter Fiscal 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

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 road map and timing, demand for our new products, net dollar retention, capital expenditures and other no historical statements as further described in our press release. These forward-looking statements are subject to certain risks, uncertainties and assumptions, including the get 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 actuals to have a material difference 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?

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 driven upsell to First Citizens Bank and new logo deals with Frontier Communications, First National Bank and Revlon. Support Answers continues to drive larger deals and it's helping to expand our relationship 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. And 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 health sites, so that customers can more easily get accurate answers to their questions directly from a brand's knowledge graph. And 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 helps agents with their customer interactions. Yext AI search directly on a company's internal Zendesk agent help desk. With that, agents can access relevant answers in real-time as customers are filling out the details of their issue. This means agents are more empowered and more efficient, reducing friction in the customer experience, which leads to higher customer SAT 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 the data from multiple new sources and connected 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. In an effort to make our search results even more powerful, we updated our search algorithm to enable dynamic reranking, that means search results will be delivered in order of what users have previously engaged with since that is a strong indication of preference. We also added semantic search. This serves as pictures and gifts to the already rich text-based results. And 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 more intelligent dynamic way of delivering answers to customer questions using natural language and from a knowledge graph. In summary, we navigated the quarter well. I am proud of our team for their focus and execution. While full global reopening remains difficult to predict, I am confident that Yext will continue to play a critical role in helping businesses accelerate their growth with AI search. Now I'm going to turn the call over to David Rudnitsky, our President and Chief Revenue Officer, to share more quarterly information on the second quarter. David?

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 of the highlights of the 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, 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, with 70 Answers-led deals closed in the second quarter, up from 38 deals in the second quarter last year. I'm also happy to share 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, First National Bank of Revlon, all 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; rental company; Enterprise Holdings; and mortgage service provider, 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, Health care providers such as Miracle Ear, Medical University of South Carolina and the United Healthcare Services. In addition to financial services companies, such as Broadridge, Goosehead Insurance and the 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 big 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?

You might be on mute.

Yeah. Sorry. Thanks, Dave. We had a good quarter, 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, we're 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, and that's up 12% year-over-year. Our total trailing 12-month net dollar-based retention, which excludes SMB customers was 98%. And our trailing 12-month net dollar-based retention for direct, which excludes 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 the reopening being elongated and even now. Turning to non-GAAP results, which are reconciled to GAAP in our press release. Q2 gross margins were 75 points this quarter and that's compared to 76.5% in the year ago quarter. The deep 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% and in Q2 of fiscal year '21 to 52% Q2 fiscal year '22. And G&A expenses 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 $7.9 million loss in the year ago quarter. And our Q2 net loss per share of $0.06 to 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, and it positions us to invest in growth we expect going forward. Net cash flow from operations for the 3 months ended July was a negative $32.6 million, and that compares to a negative $15.6 million for the 3 months ended July 2020. On a 6-month basis we generated $2.4 million of net positive cash flow from operations and that's up from a negative $16.3 million for 6 months ended July ‘20. CapEx was $3.1 million in the 3 months ended July '21, and that compares to $18.8 million in the 3 months ended July 2020. $2 million of that $3 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 between $0.06 and $0.08. That has a weighted average basic share count of approximately 128.6 million shares in Q3. For full year fiscal year '22, we expect revenue of between $386 million to $388 million. Our non-GAAP loss per share is expected to be between $0.20 and $0.24. And this assumes 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 the reopening going slower due to Delta variant, employment, 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?

Thanks, Steve. In closing, instead of our annual onward event that we basically held, 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 stemmed around a reunion for the class of 1999. And it also feels like it's been about 20 years since we've got together with our professional colleagues and friends. So we will be activating these experiences in local markets over the coming weeks and look forward to seeing there. And also join us on September 14. We're hosting 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.

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

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?

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 runs a question and ask the question, they're going to be getting maps back and customers -- or other types of transactions, and customers can create whatever transaction button they want. So increased transactions is the first. Second is reduced support tickets. And 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 crushed with the number of support tickets. But we really want to help them with, with our Support Answers solution is reducing the number of tickets that come through. And there's a different -- a number of different ways you can do that, but one of them for case deflection is the ability for Yext Answers to scan a ticket as it's being written. And as their customer – as one of their customers 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 and Zendesk or Service Cloud, and that reduces support tickets. And then, as you said, obviously, better customer satisfaction. There's two places that search can happen. It can happen in your own site. It can happen on Google and Google doesn't answer support questions about your brand as well as you can. And every time you can answer a question, you're keeping that customer journey engaged with you and not letting them go back to Google.

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 percent 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?

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

All right. Thank you very much.

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

Hi, thank you for taking my question. Congrats on a nice quarter. Just be curious to hear what -- 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?

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. With regard to Listings, we continue to see mass transactions still on their way back to 2019 levels. And 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 are able to get going with Answers because all the data that are sitting there in their Knowledge Graph. And continue to believe that Listings is going to be a good business for us going forward. North America was pretty good this quarter and Europe got challenged by the Delta in July.

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, 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? Thanks.

Yeah. That's a good question. I think most of our increases, yeah, we did do some agent salary increases this past quarter. But it's also -- we're hiring more professional services people. And that, of course, impacts the margin a little bit until they get up to speed and get going. So I expect our margins to continue to be in the mid-70s as we talked about. And I think this is more of us ramping up our professional services group a little bit than it is necessarily seeing wage inflation at this point. No doubt though there's competition for workforce in the marketplace.

Thanks very much. I’ll hop back in queue.

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

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. But maybe can you give a sense of how sales trends changed in August versus the second quarter and maybe also in August versus July?

Dave, do you want to take that?

Sure. So, hey, Nick, it's Dave Rudnitsky. We did see things got a little challenging towards the end of July and all of a sudden things start picking up again in August. And we've got fair amount of activity going on. Some of those deals that we thought were a little bit more challenging towards the end. So we can't declare victory in terms of what's happening right now, but it certainly look promising coming into August.

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

And -- well, it's brand-new. But when I look at it, if you think about how big the Service Cloud is and the footprint they have, I think it could be significant.

Got it. That’s helpful. Thank you.

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

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 in Japan. But obviously, we're seeing that impact in North America as well with business reopenings to back to work delayed a little bit, mass mandates, et cetera. I'm wondering if that's coming up in your customer conversations at all here in the U.S. as you look at your domestic customers or it’s more just an international issue at this point?

Dave, do you want to take that?

Yeah. So here’s what we’re seeing. We still have a very high level of activity. We have a lot of interest. We have a lot of customer engagement. Folks are talking about it. But if you think about -- if we rewind a year ago, I would say most every software vendor was better prepared for work from home, our customers weren’t. Most of them didn't have set up at home, might have had to navigate the challenges of having children at home, how to get themselves set up. We're not accustomed to working remote. The world's changed. They are used to it. And I think what's happening now is the reason we're having a high level of engagement, A lot of it is in person. They want to get together. And I will tell you that we have this gorgeous brand-new building we opened up with our headquarters. And we've got several really, really important meetings that we've been having there. We have this executive briefing center. We've had a number of customers come in. They can’t wait to get in there. The level of enthusiasm has been terrific. And so we've seen this engagement quite a bit. Are they talking about it? Yeah. But I haven't seen them hesitate in terms of engaging with us, wanting to meet. And quite frankly, using our headquarters as a venue to get together and have some of these conversations. So it's been pretty encouraging. But yes, they do talk about it. We're not out of the woods yet in terms of face with, but I certainly have seen a lot of momentum building up in terms of engagement.

Okay. Perfect. Is there any kind of bifurcation that you can do between Answers deals and Listings deals? But obviously, the Answer deals someone could make an argument that there might be a little bit of a tailwind because it is additional -- it is a digital project product for possibly digital only or digital only companies without a physical footprint.

Well, I can tell you that and I spoke about this in prior earnings calls. We've oriented ourselves around being a platform company. And so more than 50% of our pipeline is Answers-led now. So Answers is an integral part of how we position ourselves. It's an integral part of the platform. And so it's very much part of what we -- it's part of our normal course of business to look at it as a solution, a platform-oriented sale versus a product sale.

All right. Perfect. Very helpful. Thank you.

Thank you.

[Operator Instructions] The next question is from Rohit Kulkarni with MKM Partners. Please go ahead.

Hey, thanks for taking my questions. Nice quarter guys. I guess you talked about Support Answers, but historically you've talked about a couple of other verticals Meet Marketing and then Develop Answers and E-commerce Answers. Any more color on how other verticals or solutions to specific verticals are progressing? Any new deals or other announcements that you can share?

Rohit, thanks. The customer journey starts with the question and that question can either happen on your own site, your own help site, your own website and one of your own apps or it can happen on Google. And our Marketing Answers and Support Answers solutions are designed to help companies engage with their customers regardless of where they might be. And so the Support Answer solution is uniquely tailored to -- be sold to the head of Support. That is it solves a little bit of a different use case in that we can integrate with Zendesk or now, Salesforce, Service Cloud to pull in a help site, to the health articles into a knowledge graph to make sure that they're SEOed. And then be able to put a true AI search box on top of the company's help site in order to meet that customer at their exact moment when they might have a question, and the results of that is reduced tickets, increased CSAT scores. And one single knowledge graph to power answers on the company's health site on their own marketing site and even in Google. One single knowledge graph to do all that, as opposed to keyword-based index, which simply look for literal string equivalency matching in documents and don't help really truly answer the customer's question. The e-commerce solution, we have technology to be able to help companies get their products in and do that. But really, our main focus right now and where we're seeing momentum deals are in marketing and Support Answers as those are fully focused on the customer journey. We also are working on Workplace Answers. Workplace Answers enable a company to index and have a knowledge graph of facts across their enterprise and bring in data from various systems, connect it, and be able to offer employees an experience. But we're not quite ready for that yet, and we're totally focused on our Answers platform serving the Chief Digital Officer in helping companies manage their customer journey with their answers today.

Okay. Great. And then maybe a question for Steve on this comment around delayed contracts with Europe and Japan. Any way that you can help quantify or even qualify how you thought about 3Q and second half revised guide with regards to what you're seeing recently?

I mean, we did -- as David said, we saw some pretty significant slowdowns at the end of July. It's August where people are on vacation, so chasing people around. My particular view is that sometimes pull ups and sometimes push outs net out. So I don't really see any major bumps going forward right now, either up or down. But it is with everybody being working from home on Zoom and others, it is a bit challenging sometimes to chase down this stuff. But I think as customers get more experienced, we're dealing with that. And I'm pretty sure as we get our sales teams back in front of customers in live person, if you will, that's going to help it out. But there's no real up or down here that you're seeing in terms of that right now.

Okay, thanks. Thanks, guys.

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.