Yext, Inc. (YEXT) Q2 2025 Earnings Report, Transcript and Summary

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

Thank you, operator, and good afternoon, everyone. Welcome to Yext's Second Quarter Fiscal 2025 Earnings Conference Call. With me today are CEO and Chair of the Board, Mike Walrath and CFO, Darryl Bond. During this call, we will make forward-looking statements, including statements related to our future financial performance, statements regarding the expected effects of our acquisition and integration of Hearsay Systems, expectations regarding the growth of our business, our outlook for the third quarter and full fiscal year 2025, our strategy and estimates of financial and operating metrics, capital expenditures and other indications of future opportunities as further described in our second quarter shareholder letter. These forward-looking statements are subject to certain risks, uncertainties and assumptions, including those related to the Yext's growth, the evolution of our industry, our product development and success, our ability to integrate Hearsay Systems business with ours, our management performance, and general economic and business conditions. These forward-looking statements represent our beliefs and assumptions only as of the date made, and we undertake no obligation to revise or update any statements to reflect changes that occur after this call. Further information on factors and other risks that could cause actual results to materially differ from these forward-looking statements is included in our reports filed with the SEC, including in the section titled Special Note regarding forward-looking Statements and Risk Factors in our most recently filed quarterly report on Form 10-Q for the 3 and 6 months ended July 31, 2024, of our earnings release and our shareholder letter that were issued this afternoon. During the call, we also refer to certain metrics, including non-GAAP financial measures. Reconciliations with the most comparable historical GAAP measures are available in the shareholder letter, which is available at investors.yext.com. We also provide definitions of these metrics in the shareholder letter. With that, I will now turn the call over to Mike.

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

We will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Tom White with D.A. Davidson.

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

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

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

Yes. No, thanks for the question, Tom. So this has kind of been our thesis, and I think we're seeing what we would expect to see in this environment. So I've been spending a lot of time with our customers and particularly our joint customers with Hearsay over the last particularly the last five weeks since we've closed that acquisition. And we're hearing the same themes over and over again. They have too much vertical software. It's creating workload on their teams, which are smaller than they have been. It's really all the same themes. So too much software, too many platforms, data inconsistencies, the inability to run analytics across these vertical siloed technologies. This is why consolidation makes so much sense. And so it's also one of the reasons why we've seen such a strong positive reaction from our shared customers. With Hearsay, on the two companies coming together because of the promise of being able to deliver better analytics, better data platform, more efficient workflows. And all -- I talked a lot in the letter about how important all of those things are going to be in a generative AI experience world. So none of that has changed. I think if anything, what we've seen from customers is that with the amount of uncertainty that there is in the world; elections, interest rates, recessions, geopolitical risk. A lot of our customers are seeing this as a great time to think about their tech stack, think about their investment and really figure out how to get the most value from it. And so from our standpoint, we're fortunate in that sense that we -- I think we're going to participate in a lot of those conversations because we already have a much broader platform than any of our individual competitors, and we're really just getting started with the organic innovation piece of this. Certainly, we will continue to ask our customers where we should go next. I think this is a big part of the innovation reboot that we've been going through here is having the customers drive us to what's the next most important product, which had a lot to do with the strategic rationale behind a deal like Hearsay. So I think these -- personally, I love these conversations. I think we get into problem solving with customers. We get into where the puck is going, and that's going to help us build a road map of organic growth and inorganic growth opportunities. One of the things I did in the letter is really lay out how we think of that as a long-term value-driving framework, both from a investing in organic growth, expanding inorganically where those opportunities exist. And then obviously, the third pillar of that is the ability to buyback our shares and create a positive antidilution effect to our shareholders.

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

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

Hey, thank you. A couple of questions. One is on kind of how do you think upsell into Hearsay or Hearsay's upsell into Yext's core customer base? How do you feel -- where is the greatest lowest hanging fruit in the next six, nine, 12 months. And I think you mentioned earlier that excluding the loss of a large customer, I think organic ARR growth could get to mid-single-digits by end of this year and high-single-digits in first-half of next year. Just wondering what are your latest thoughts on that organic growth based on -- and then perhaps you could update based on Hearsay. And then I have a couple of other Gen AI questions.

Sure. So thanks for the questions, Rohit. So on the first question, I think that there are several opportunities. Where we have joint relationships with customers who are customers of both Yext and Hearsay, there's an opportunity to create more value, as I mentioned by unifying the data platform, the analytics, the workflows over time, and that's something our customers are really excited about. Probably the most actionable opportunities for us are the ones -- are the opportunities where we may -- Yext may have a customer that Hearsay doesn't work with or vice versa. And this consolidation theme remains a -- becomes a tailwind in those discussions because the customers can look at ways to -- can we save money, can we save expense, operating expense. I mean, one of the things I think people overlook a lot is when we -- and we've done it at Yext too. When we overbuy software, it's not only the cost of the software and when we have all the -- when we have too much -- too many pieces of vertical software in the business, there's an operational load on that diversity of software as well, where the people running these systems are moving back and forth between different systems throughout the day, and that's just inefficient. So those are where we see the opportunities. And probably the most -- the best thing about the Hearsay acquisition so far is how quickly the conversations with customers have turned from being a Yext conversation or a Hearsay conversation or really about a partnership discussion. And so it's really remarkable and one of the things meeting with customers I've seen is -- there isn't a -- these businesses are merging together very quickly and it's almost immediately indistinguishable, is this a Yext opportunity or Hearsay opportunity. It's a, how do we create value for the customer opportunity. So that's really encouraging. I think your second question was on organic ARR growth. And one of the things that we talked about in the letter is that we're seeing a lot of stability overall in the ARR picture. And we're also accounting for a lot of risk. And I think we all entered this year, and I've talked to a lot of other software CEOs about this, entered this year thinking that this year was going to be an improvement in the environment. We haven't seen evidence of that. And as we look at the risk factors in the second-half of the year that I've laid out a couple of times already, we're just going to take a cautious approach on how we talk about expected ARR growth. So what I would say is we -- in total, we expect stable to modest growth in ARR this year. And maybe we'll be pleasantly surprised by an environment that helps us, but we're just going to be overall conservative in how we look at that.

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

Yes. So as you know, I've been a little bit of a curmudgeon on this topic. And I think that's probably because I've been around too long and seen a few of these cycles before. And we get really excited and then we sort of entered this phase, which I think where we're living now, which is we're asking ourselves as an industry is this real beyond -- obviously, it's driving a ton of value for anyone producing hardware to support the AI infrastructure build-out, and it's driving a lot of workloads, but it's really, as I think has been broadly commented, it's not driving a lot of -- it's not -- certainly not driving the wave of bookings that I think we were hoping AI would drive. And so this reminds me of mobile and social and even the Internet in the late '90s when I was just kind of cutting my teeth, where it was happening right now and then -- then it wasn't happening right now, and then it took a long time, but it turns out when it did happen, it happened a lot bigger than even we could have expected. And so I draw on those experiences and what I see is, I see. I just don't think in a couple of years that we're going to two, three, four, five years, and it's hard to put a timeframe on it, that we're going to be talking about AI so much as we're going to be talking about the value that's being generated through the platform. And so foundational to that, we talk a lot inside Yext about your AI strategy is your data strategy. And so the more fragmentation that we see across the consumer experience, the more important it's going to be that you have a cohesive content and data strategy and that the applications that you're using to deliver that data to those consumer experiences, in particular, it has to be organized. It has to be authoritative, it has to be actionable. And when that happens, we expect this becomes an extraordinary tailwind. Now some of the risk factors, what I would call time-based risk factors are the compliance level for engaging through LLM and various other forms of AI with the consumer is going to be a very high bar, particularly inside large enterprises like financial services, institutions and health care. And so that is a -- the promise of the technology will -- and the ability of the technology will outrun the comfort level that large enterprises are going to have with using it. So now the flip side of that coin to try to give you a thorough answer to the question is, we're already seeing it benefit inside the platform. So when we talk about things like listings, recommendations like automated generated review response, we're beginning to see customers dip their toe in the water using these technologies in a very safe and very constrained way. And not everyone is a regulated industry. So hopefully, that doesn't sound too contradictory. This is going to take a while. When it happens, it will be bigger than people think. And the way we're going to deliver as an industry, the way we're going to deliver a lot of this AI innovation is through software platforms that have the right componentry around data, workflow, analytics, learning and things like that.

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

Okay, thanks, Ray.

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

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

Yes. So we think there's a -- it's kind of a layer cake of opportunity there. On the revenue side of things, I think we see a sales process and a customer support process that's very similar between Yext and Hearsay, I think the deal cycles are very similar. It's a lot of the same buyers and the same buying centers or at least similar within the organization. And so -- as I mentioned before, I think we really -- we do see an opportunity where -- anywhere where there is a Yext customer, who's not a Hearsay customer will have a, I think, an opportunity to have a discussion there around the benefits of a unified platform and data layer. And we also -- as you know, we've been probably the biggest investment we've made from a product standpoint over the last 12 months is in a nonfinancial services, social management and analytics platform, which I think we're talking about getting to GA within days in the letter. So that's coming. We're really excited about it. We've had a large customer beta going there, and we think there -- it's going to be a really nice addition to the portfolio. As we integrate the products, there are going to be many opportunities to take Hearsay functionality and extend it beyond the financial services vertical and also potentially bring Yext's core products to those core -- Hearsay financial services team. So all of that, I think we need a little bit of time to work through organizationally, how we're going to manage this. And obviously, there's a whole product road map element to this, too. And we're going to approach that patiently because fortunately, we have the time that we need to figure that out. There's obviously the other side of it as well, which is the cost synergies element, and there are clearly going to be opportunities for us to bring the teams together and drive both revenue upside and cost synergy, which is part of what you see us kind of alluding to in the outlook with a consolidated low single -- low-20s margin by the end of the year, but improving upon that next year.

Yes, appreciate the color there. I wanted to ask on that -- on the adjusted EBITDA margin. So is it right to assume as you talk about the low-20s consolidated adjusted EBITDA margin exiting the year that at that point, Hearsay is still a bit dilutive to EBITDA margin now and that much of the potential expansion or growth upon that in fiscal '26 is primarily synergy driven? Or are there -- is there incremental leverage you're kind of seeing in the core business as well? Thanks.

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

Yes, that's right. I would just add to that and just reinforce that point that Darryl just made, which is when we look at our capabilities as a combined company, we're going to look at all the opportunities within the portfolio to deliver innovation, to deliver growth opportunity and also to unify teams. And so it's been fantastic to see the teams come together. I think we're seeing -- and it's been part of a lot of acquisitions. I think what we're seeing is -- we're seeing the teams really immediately coming together. There's cultural alignment and it's really gratifying to see how well the teams are working together and just the energy and the level of effort across the whole organization. As we go into next year and as we think about sort of improving margins, there are obviously two elements to that. There's the opportunity to get the revenue growth going again and then there's also the opportunity to be more efficient and to determine how we allocate the portfolio of investments that we make. We do believe that there comes a point, and I'm not -- I'm going to stop short of predicting when this point is where we get through this kind of macro. And then the market gets really interesting because the consolidation opportunity will be a headwind for some companies and a tailwind for other companies and breadth will be a huge advantage. And that's really where I think we're setting ourselves up to make a lot of progress. Even as I think the operating environment gets easier, there's still going to be for quite some time, I think the digestion of 10, 12 years of what we would call like kind of the technology hyperbuying environment. And in those -- in that type of environment, we just feel we have some very strong value proposition and capabilities to unify platforms and make things work better.

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

Thank you.

[Operator Instructions] Our next question comes from Naved Khan with B. Riley Securities. Please go ahead.

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

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

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

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

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

Yes. So this has always been part of that business, but I think it's -- I think, there's been an -- it's been an easy default to -- we want the committed revenue predictability and sometimes what -- I would file this under customer centricity. I would file this under -- in a lot of cases, what we've determined is that we might be missing opportunities, companies who don't want to commit to a certain level of spend, but have a set of customers who they want to deliver the platform to. And so what we're trying to do here is create a lot of flexibility for our customers in a lot of -- in many, many cases, they want to make a commitment and they want a lot of -- and I think it's fairly simple, like the more volume of products that someone -- that any customer commits to, the better the pricing is going to be. But I think we probably over-rotated to that type of a structure to the point where it probably felt like we were demanding commitments from customers whose business might be at a stage, it might be a smaller business, a growing business, who needed less commitment, who might have less of a predictability to their own business. And so really, it's just been a focus shift to meeting our customers where they are and making sure that there's always a trade. It might -- the unit pricing might not be as good for a deal that has less commitment or no commitment. So I think what we're trying to shine light on here is that as we do this, it can have a dampening effect on the reported ARR because conservatively, we only report contractually committed ARR. And so you'll have to -- as we move forward here, and we've kind of been signaling this for a couple of quarters, and we'll try to make this as clear as possible. We're not going to change the way that we report ARR, at least we don't have plans to right now. But we'll try to give you some indications around you'll be able to look at the revenue trend, but also the committed ARR number for the reseller business. And I think that will help you figure out what's going on there. So we wanted to call it out this quarter just because there was that kind of $2 million-ish, I think, drop in committed ARR for the reseller business. But if you look at the revenue and then you adjust for kind of the days in the quarter, thing what you get is there's basically flatness in that revenue. And obviously, as we go forward, we continue to kind of call that out. Hopefully that make some sense.

It does. Appreciate the details. Thank you. Thank you guys.

My pleasure.

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

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

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