Yext, Inc. (YEXT) Earnings Call Transcript & Summary

Let's get started, everybody. So good afternoon and thank you for joining us. My name is Stan Zlotsky from the Morgan Stanley software research team. And with us today, we have the pleasure of hosting Howard Lerman, CEO of Yext. Howard, how are you?

Well, before we get started today, I think we should probably address the question on everyone's mind. Please take a look at my friend [ Drum ] back here, our amazing video technician. You're probably wondering how he's going to be able to apply an N95 mask given his protruding facial hair. And the CDC has released guidelines on this, and so I do suggest that we check that all.

Okay. So sticking with precautionary language, I am going to now...

I'd just say that we kicked this thing off on a good start at the end of the day at 4:45.

I'm going to read these important disclosures, including personal holdings disclosures and Morgan Stanley disclosures. They all appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk right outside this door, which also has a lot of sanitizer for our virus killing needs. Howard, so to really kick things off, right, last year, I wore red socks.

I was going to say, I see the skeleton socks, [ so what it mean -- ] you're going to call now?

I'm not sure. But last year, you alluded to my red socks as a Red Sox fan and I was deeply offended. I'm not sure...

What message are you trying to send with these skeleton socks?

Well, the only thing -- I kind of try to stay neutral because I was afraid that you might call me like an Astros fan or something like that. And I was trying to stay away from that.

Ouch, ouch.

But yes, so it's just skeleton socks.

Why is like the occasional one orange?

It's to really throw you off.

It's a black swan event.

Maybe. You never know. All right. Welcome to the Howard and Stan show.

With that, Howard, so maybe focusing on Yext. You guys reported really strong results last night. Maybe investors were obviously very busy running around the conference. Give us a little bit of a recap of what you guys reported and what you guys -- what were you most excited about coming out of Q4?

Well, let me take a step back. Let's go back first to Q3. We launched our hit new product in Q3 Answers, and it caused sales disruption execution. As we took reps off the street for 2 weeks, we -- and it slowed down deal cycles where if you have a product and the customers like to buy it, and then you show them a better shinier newer product that you kind of say, "Wait a minute, I want that." But then you might have to go back and get different approvals or get a bigger budget amount, so it slowed and slipped some deals. I think it's pretty obvious, when you look at our numbers, we came back, we roared in Q4. That disruption is behind us. Furthermore, from a quantitative perspective, our Answers product is very clearly going to be a hit. We've closed 29 deals, 29 new logos on Answers representing $1.5 million of straight SKU ACV. The amount of influence deals is far greater than that because a customer, for example, let's take Vanguard, we signed a 7-figure deal with them in the quarter. They are a kind of customer that Yext could never have sold to before. When we launched Answers, we released roughly 4,000 new enterprise accounts in North America that do more than $500 million of revenue that did not qualify to purchase our Listings product because they didn't have physical locations. And so a deal like Vanguard where Answers is in that, and it's an Answers-led deal to a company that literally has robo advisers is a pretty big statement from Yext. Furthermore, the product itself, when you use it, it's just spectacular. There's a Fortune 500 cable company that if you go to their website right now, it's front and center. And the #1 question people ask is, is there an outage in my area? Every time someone asked that question and they answer it correctly, that saves somebody from calling up, which saves about $6 or $8 the company has told us. They're receiving 20,000 searches a day and we are responding with -- they're getting about 60%, 70% CTRs implying that the product itself is really, really powerful. So I think when you look at the highlights from the Q, great sales all around, great execution. We told you we had a hit product. It felt like we had a hit product because the beta customers were there. They loved it. We then proved it in the sales of Q1. We have a great pipeline going into -- I'm sorry, in Q4, we've got a great pipeline going into Q1. And we were able to release roughly twice as many accounts in the regions in which Answers has already translated to begin to attack these opportunities. The other thing I'd like to add to that is it really is a proof point that Yext is not just a company that's run like a portfolio. We actually can come up with a new product and launch it. And that's something that our investors, we've heard, are excited about that we've got an innovative team that's able to do this, and we proved it in Q4. And by the way, we are in the first -- to go back to your sports metaphor here, we are in -- this is like on deck before the first inning with Answers. I don't think we've ever seen a product quite like this. And it all is backed by our strategy and our founding principle that the ultimate authority on a business is the business itself that -- the truth about whether it's Cox Communications, cable company or it's Dignity Funerals or it's Vanguard or it's any company, that they're the source of truth for where there's an outage. And by the way, you can't get an answer to that question in Google. Google does not go that deep. Google goes really far. But when it comes to communications with a customer, the customer journey starts with a search and we're going to make site search sexy again.

So when talking to investors, right, one area that some of them struggle with a little bit that we've noticed is trying to connect the dots between, hey, you have the Answers product, right, and then the company's core, which is location management, right, and business data around those locations. How do you -- how are those 2 products really synergistic? And how do they -- from a portfolio perspective, how do they -- these 2 products fit under the same roof of Yext?

Well, first off, we've always been way more recently than a location company. So the thing about Yext, if Morgan Stanley doesn't have locations, for example, and you guys issued a press release talking about how we're able to help your 17,000, 15,000 financial advisers with our platform. And to be clear about this, it all comes back to the massive sea change in search and the change in consumer behavior. So about 10 years ago, natural language processing got good enough from a technology perspective to understand the intent of a user's query and be able to return an answer back. That is a fundamental shift from old search. Think back to the early days of search, the Internet, 2001, 2002, it was all about documents. You type in a question or query and the search engine would retrieve the part of the document that literally had your exact string in it. So a search for like McDonald's would find all the places in the worldwide web where the keyword McDonald's exists and then rank them and then put them up there and sort of spotlight it. But now when you go to Google and you type in McDonald's, you get maps back instead of link to the document because they understood that the intent of your question, you were really asking, where's the nearest McDonald's, and so they can understand that. And by the way, as a consequence of the sea change in search, what we have seen is the consumer behavior has changed. So people don't just go to Google and type McDonald's anymore. They type much, much longer queries. And so they type questions like how many calories are in a Big Mac or give me the nearest McDonald's or give me a Morgan Stanley adviser that meets certain criteria. And as a consequence of that, when people then turned around and hit site search and tried to use that same thing, they would get the old document-based keyword search back and their consumer expectation was not met. And when that happens, people bounce back to Google. So our strategy has always been to say the shift in search has changed from unstructured document search to structured search, which is based off of knowledge. Every fact that's in the Yext platform is in what we call a Knowledge Graph. This is something we went out and we've told everyone about and is the core of our product is called a Knowledge Graph. And Knowledge Graph is a Brain-like database that contains all the facts about a company. And a company, when they use Yext, gets a UX where they can log in and basically set up their schema and enter all these facts. And our platform then puts those facts into Google Maps and into Apple Maps and into Alexa, that's our classic Listings product. That's the first product that sits on top of the Knowledge Graph platform. The second thing is our Pages product. We came out with that in 2014. And that enables a company to publish web pages that are on top of this structured knowledge in a way that's super friendly to a search engine so that it is likely to appear. The third place is now in a company's own site search so that they can answer questions. And the power and the synergy is when a company updates a fact in the Yext Knowledge Graph, it automatically updates in Google and Apple, across the Listings network, on their own website and now in Answers. And so what that means realistically or practically is when a company is already using Yext, when they purchase our Answers product, all of the facts are already sitting there in the Knowledge Graph. It gives us a huge head start to getting them live and being able to show them an incredibly compelling demo. If you're a customer of Yext and you're using our products, and you're using our Knowledge Graph and you have not purchased Answers, which the vast majority still have not, we can literally show you a search and how good it's going to be because we already have all of your data in a structured way sitting in the Knowledge Graph. There's an incredible synergy to answers when you're an existing Yext customer. I'll tell you a story about that. I told you we are working with a big cable company right now on their home page. And they're using us for their Pages product to promote all this stuff. But what they did, which we loved, was they said, let's just go ahead and put Answers up pretty fast because if you guys don't have the knowledge for the answer, what we're going to do is we're going to watch the searches come in and we'll quickly add it to the Knowledge Graph. So instead of trying to pre-anticipate everything that a consumer might go ahead and ask, what we're going to do is we're going to put it all on the Knowledge Graph and -- I'm sorry, we're going to go ahead and put the searchlight, see what people search for and add facts as we see searches come in, which, by the way, is what the hell has happened over the past 96 hours with the coronavirus. Around the world, Yext has seen a spike, on our own website, in the cable websites, in the funeral websites, around the world, people are searching for COVID-19, for coronavirus. I actually freaked out last week when I thought people will start to do this and that's when I knew it was real. And we were able to get ahead of this and start to think about, wait a minute, how can we help our customers? And remember, our second biggest category is health care. We work with the biggest health systems on the planet, powering doctor facts and hospital facts, insurance is accepted and medical information. If you saw the depth and rigor of our knowledge graphs in the health care industry specifically, it is stunning. And so we quickly enabled our customers to -- what we did was we looked at the CDC's website and created a custom Knowledge Graph based off of facts on the CDC, and we automatically inserted it into thousands of accounts around the world. And so now when you go, for example, to ihacares.com, a leading health care provider in Michigan, and you search for things around the coronavirus or COVID-19, I saw a surge come in, will the flu shot protect me from the coronavirus? These are the kinds of things that people ask. And every time we are able to answer a question for a patient and get them the right information and not to do something dumb, I think we're going to help them a little bit. So we were able to put our platform to use for good by using the power of the Knowledge Graph across Listings, Pages and particularly Answers in work speed, reacting to the spike we saw in searches. I don't remember what the question was. But I hope you enjoyed the answer.

You answered it very well. The question was, how do you connect Answers with the core of what Yext does? So you eloquently answered it 10 minutes later. So going back to the various products within Yext, right, I think it was 2 years ago, at your user conference, you guys rolled out, Think and Brain, right? Once again, connect the dots between Think, Brain, Knowledge Graph and Answers. Are they all -- are all those building blocks to the broader -- ultimately leading up to Answers?

Brain is Knowledge Graph. We tested the brand and then Think is Answers. So those are the fully realized incarnation general availability products that we decided to use those brand names instead of the catchy or cooler fake brand names.

Got it. So going back to Answer, right, you guys announced a number of wins, 29 new logos, $1.5 million of net new ACV just signed in Q4, very impressive. When you think about the training that your sales organization has received thus far, right, on the product and the kind of slowdown that you saw in sales activity in Q3 when you needed to get them up to speed, do you feel that coming into fiscal '21, you guys are in good shape from a sales perspective?

Absolutely. What I would say is that sales productivity is something that's on our mind all the time. We made a big investment this year in building out this platform, particularly in the CBU, which we've never really done before. We've booted that up. That's a mid-market deal. There are 16,000 accounts in North America that do between $100 million and $500 million. We've never really addressed them. They are great candidates for our products and services because they need Answers. They're customers of Answers, and they don't really have Morgan Stanley's IT department that is capable of building a lot of stuff. And so that's a really big segment for us to address. From a sales productivity perspective, I think we said we ended the Q at around 250 quota-carrying reps, 42% growth year-over-year. Keep in mind, it's not just about the numbers. It's about how tenured these reps are. We entered Q1 with the most tenured set of reps we've ever had, the highest number of reps roughly we've ever had. There is a very strong, at any SaaS company, correlation between tenure and performance. So we feel pretty good about our sales productivity and capacity going into this year.

Got it. Just sticking with the Answers, pricing of Answers, right? Some of the math that we've kind of seen from investors do, at least from overnight, is when they look at your -- the $326 million of ARR that you guys disclosed, by the way, thank you for...

You told me you'd be happy -- I think it's in [indiscernible]. We gave you ARR, but we're bringing the [indiscernible]. Come on, Stan.

I was very happy last night. You didn't see me doing the dances, but I was doing them.

That's a visual I didn't need.

Fully, fully -- you did it to yourself. But the -- so when we're celebrating the $326 million of ARR disclosure, 29% year-on-year growth, if we do the math, back out all the reseller business, right, and divided by the 1,900-or-so customers that you disclosed, you get to about like $111,000 or $110,000 per customer. And at the same time, if you do the math of 29 new logos, $1.5 million, it's about $50,000, $52,000 per customer on the Answers product. What's the profile of these Answers customers that you guys are signing up today? Is it smaller customers? Or is it very large customers, but they're using Answers for just a small subset of their website? Or is it maybe something in between?

Well, keep in mind, we only launched the product at the end of Q3, which give us 90 selling days. So almost definitionally, any logo that showed up in that 29 that drove the $1.5 million is going to be a shorter cycle deal. That means you're going to see a skew towards more CBU deals, which are a bit lower than our enterprise deals. So that's the first thing. I think the average deal in enterprise for Answers is going to be quite a lot bigger than $50,000. We've already seen that happen. I think that I mentioned Vanguard, a 7-figure deal that was not all Answers, but that was an Answers-led opportunity.

Right. And overall, right, when you...

And I just want to point one more thing out. When we think about the TAM here, if you're able to almost double the ACV you can get from a customer with a new product, but also, don't forget, we now have almost twice as many potential customers that we could sell to that we never before were able to. So you are looking at a dramatic expansion of TAM. And we think we estimate that, that TAM is now close to $20 billion -- or in excess of $20 billion.

Yes, those are certainly really big numbers and lots of runway of growth. So when you think about the pricing for the Answers product, right, how will this product be priced? Is -- do you feel like you have the pricing scheme fully in place now? Or is it still being tweaked as you're getting feedback from your early GA customers?

What -- right now, we are going. So I don't feel a need to make any massive gut renovation to what seems to be working. The pricing for Answers works just like the pricing for other products. It all starts with the Knowledge Graph. We put facts into the Knowledge Graph. We charge you roughly per record in the Knowledge Graph. You can think about buying them in buckets. You pay per record for Listings, you pay per record for Pages, you pay per record in Answers. It is not usage-based pricing. It is record-based pricing. And we have found that, that is how we've sold before, and it is kind of a logical, clear, clean way to sell to our customers going forward.

So what's an example of a record that would go into Answers that would subsequently trigger a price?

Well, I think I said a minute ago that we took all the CDC FAQs and put them into people's accounts. That we gave for free to everyone during this time of crisis. But if you, for example, wanted to create an FAQ and have 50 different answers for different questions, that'd be 50 records right there.

Got it. Got it. That makes sense. Well, maybe actually sticking with health care, right, health care has been a big area of success for you guys, right? What are you seeing in the vertical now outside of the virus and everything that's happening there?

Well, health care is a big vertical for us. We're in a lot of industries. And one of the coolest things about this is now we're able to sell Answers to any company. You go to our own website, I saw a ton of people yesterday before our earnings call. We saw a ton of searches for Q4 earnings call time, Q4 earnings call phone number, Q4 earnings call location. If you do that in our own software, we're not the company we could have ever sold to before. So when you look around at the verticals, there's huge opportunities. And I'll point out, one of the things that we have begun to do and do effectively is organize our sales groups by vertical, too. So we have dedicated -- so our sales works around the world, we have international, we have EBU and we have CBU in North America. In the EBU and the CBU in North America, we have 4 vertical teams. We have health care, we have a retail and CPG team, we have a financial services team and a food team. And they slightly tune our products and our Knowledge Graphs for those verticals, and then we sell into the geos everywhere else. So we think that, that is a playbook that you watch a company like Salesforce keep block. That is what he did at Salesforce. And that's a playbook that we've begun to implement at Yext. And I think the vertical approach to slightly tailoring the products is going to be something that helps our productivity as well.

Got it. And Howard, you just brought up international, right? International is a big focus area for you guys. You guys are certainly investing a lot last year and into this year and I'm sure for years to come in expanding your footprint internationally. What are you seeing outside of the U.S., right, that's really giving you that the push to go so hard into these global regions?

Well, I think quantitatively, you saw in our international financials, it grew really fast. We are very strong in Japan. We are very strong in the United Kingdom and Northern Europe, in Central Europe and Southern Europe, around the world. But those are the only reasons we're in. We're not in Italy -- sorry, we're not in India. We're not in Africa. We're not in China. We're not in a lot of the big markets around the world. We're not in Latin America yet. But in the markets in which we operate, we've started to see a lot of productivity. And there's clear product-market fit for what we do. Now there is no Answers yet in French. There is no Answers yet in Spanish. It's only in English right now. So Answers is only available in English-speaking countries, although a lot of companies in Japan want to buy our English-speaking version of Answers for their customers. But that's going to take us a year to get everything translated and get the product booted up in those countries, too.

Got it. And is the expansion of Answers into all those international regions, is it purely localization and language or is there something else from...

Localization and language is all fun and cute -- well, it's all fun and cute when you're talking about translating a website from English to German. But when you're talking about natural language processing, it's actually a fairly more complicated thing. However, it is achievable, and we are pretty close, I think, to having -- and I don't want to promise this right now, but it looks like we'll have beta Romance, which is really Spanish and French around the spring and then potentially GA in the fall. And then German would follow after that and Japan after that.

Got it. So maybe the flip side of that coin, right, as much as you're investing a lot internationally, but there's also a really big opportunity for you guys -- continues to be a big opportunity for you in the U.S.

That's right.

Right. What are you seeing in the U.S. and really making sure that you're focused appropriately on where all the opportunities are?

Well, capital allocation across our sales and marketing team is something we think about a lot. It's pretty clear that our enterprise channel is productive. And it's -- and we close big deals, and we have a great team led by Dave Rudnitsky from Salesforce under Jim. And if you read Marc Benioff's book Behind the Cloud, there's a chapter called the Rudnitsky Playbook for Enterprise Sales, that is clearly going. Like I said, just this year, we got the CBU booted up under Patrick Blair. And Patrick is also an ex-Salesforce guy, does not have a chapter in Benioff's book, but he is going to have a chapter in my book. So it will be the Blair playbook. Maybe the Blair Witch Project actually now that I think about it. One person I want to highlight before I forget, is Jules Maltz over here. Does everyone know Jules? Jules originally met me in 2009 and is a partner or Managing Director, what's the term? Okay. It's a valley thing. I don't get it. He's a VC, and Jules originally backed us in 2009 and wrote us a big check when I was a lot younger and crazier. And I just want to thank you for your support over the years, Jules. You somehow still show up to these things. You were -- how many Board meetings did you go to at Yext over the years?

35.

35 or more. It was a sad day when he had to roll off the Board due to DC-related stupidity at 3000 Sandtrap Road. But thank you, Jules.

All right. Well, I'm going to throw out one question and we'll open up the floor to anything from the audience. So coming into fiscal '21, right, where are you really focusing your investments?

Well, I think it's going to be an even distribution. One thing to say is, when it comes to R&D, it's not like you have to do more than you've done before because R&D is way more about quality than quantity. And we've proven we can be innovative. We're focused on growth and productivity at the same time. And Jim said on the earnings call, I think you heard him yesterday say, the Answer sales cycle seems to be easier and shorter. So if you think about leading with that, it tends to drag our other products into the deal. It's pretty easy to show up to a website and look at their site search and see that it generally is not very good and point that out to somebody that's responsible for it where there's a budget being spent on it, where we can show up and solve a pretty obvious problem. If we can help save a big cable company from getting lots of phone calls, they're going to think that's a pretty big thing and make that a priority. So productivity is a huge area of focus for us, getting the CBU really going is a big area of focus for us and building awareness of Yext and the fact that we're the answers company with the mission of stamping out wrong answers everywhere and misinformation everywhere and putting the truth online, these are all the things that I've been saying literally since 2009 when I first pitched Jules and put the same slide, that's roughly the same idea, just the surfaces have changed. So it's the same stuff. We're going to focus on being productive and we're going to focus on growth.

Perfect. All right. Well, let's see if there are any questions in the audience. And if not, I can just keep on -- right on going.

I want to hear from Drum.

What do you want to hear?

He's such a drummer. Are you actually a drummer?

Played drums my whole life but [indiscernible]

This room is -- he's the most interesting man in the room. Can we just switch seats or something? I mean...

I bet you can -- he knows a lot about Yext.

[indiscernible]

And you would recommend buying our stock or not? What would you say after this?

I'm kind of trying to figure out what we're going to do for dinner before the [indiscernible]

I don't know how all this is going to show up on the transcript, but I'm sure it's going to be fascinating.

What happens if you say the word f*** in the transcript?

No. Oh, very, very bad things. Lots of little dots show up. It's -- well, Howard, we found out about it last year, what happens when -- and I took the transcript from last year's conference and it's in my office. It's...

Framed?

Framed, yes.

It's funny. I -- in Japan, I learned that they won't translate the word f*** either. So you're sitting there, you say something and they translate it. And I -- just to test them, I went f*** really loud. And she, the translator, like didn't know what to say. She didn't say anything at all. And I said, did she just say what I said, and everyone was like, no, she didn't translate it.

That's probably for the best. I don't know where to go from here. Actually, maybe...

[ Tom ] here. So you were talking about the new metrics as you look at kind of Yext. What are the key growth drivers on those metrics when you look at ARR and total customer count? How do you look at that?

Well, we released ARR. We're excited about that. We're going to grow by adding new logos, and we're going to grow by upselling Answers into our existing logo base, and we're going to grow by upselling Pages into the guys that bought Answers from us. So it's going to be adding some more reps. It's going to be around the world. It's going to be occasionally opening a new geography, although we are in the places we really want to focus on right now, and it's going to be on selling what we have. And in the future, if you look out 5, 10 years, we're going to -- this is a forward-looking statement, we will have new products. We're an innovative company. And I want to run this thing for a long time. And as long as I'm running it, we're going to come up with stuff. And that's a cool, fun thing to do, but it's not as fun as hanging out with Stan.

Nothing can be as fun as hanging out with me. But you know what can be just as fun is asking a question about growth versus profitability unless there's a question from the audience. Is that the question? All right. How do you think about growth versus profitability?

I think, first off, I'm really focused on -- we're focused on growth. And Steve has said and we continue to say, 30% growth is our marker for where we want to be for the long run. And then from there, we want to drive towards cash flow breakeven and cash flow profitability. I will point out, we were cash flow positive in fiscal '19. And we've been cash flow positive for, I think, 3 or 4 of the last 8 quarters on an operating cash flow basis. This year, we have a double lease that's going to hit us a little bit. We have $4.8 million, and we signed a new lease in 61 Ninth Avenue. It's about $10 million a year. And the way the timing of the lease worked out is we're incurring double rent for -- we did in, I think, Q3 and Q4. Is that right, Darryl? Q3 and Q -- by the way, do you guys know Darryl? He is our Chief Accounting Officer. Don't try to steal him because he's awesome, by the way. I love Darryl. He -- I think he has like Mr. Ernst on speed dial and Mr. Young, because once Ernst -- once Young approves it, then you have to get Ernst to approve it. So Darryl is amazing. But it was Q3 and Q4 where we had the double rent, right? Yes. So we have that hitting us. And this year, I think, is going to be a year where we are focused on productivity. And we're not going to guide on cash flow, but that is something that I think you're going to see over the next year or 2.

All right. Perfect. Well, I think this is a good place for us to stop. And Howard, I think the expectations of last year's fireside were met today as well. So thank you for that.

Thank you guys all. Great to see you guys.