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

All right. Welcome, everyone, to our next session with Steve at Yext. Steve, thank you for being here. I believe this is your first Barclays TMT conference. Hopefully, we may make it a tradition.

Absolutely. And, in person next time.

Yes, definitely, in person next time. So I'll get right into it. You guys posted Q3 results recently and investors, obviously, were not happy with some of the guidance that you gave out there. I was hoping you can give us a recap of the guidance, the thought process into what you guided?

Sure. Well, as you know, we had a great Q3, and particularly given the macroeconomic environment we're in. I think our guidance typically is fairly being realistic about what's going on in the marketplaces. We had the insight and in some we've got hindsight as we got into preparing for our guidance to watch more countries locked down again and kind of return to what we saw in Q1, Q2. We think we have a strong business, but we're going to be realistic about our Q4 for a couple of reasons: One is we have a lot of renewals coming up in the quarter because our business is back-end loaded. We have a lot of great opportunities and a strong pipeline. But in all of that, Europe was slow in Q3, and about 25% of our business comes from location-based businesses, like restaurants and hospitality, et cetera, and those people are clearly not upsizing. We're getting renewals there, and we talked about that, but they're not upsizing as one would expect and anticipate. And then for our Answers free trial customers, we -- like I said, we have a really strong pipeline, but I think we're just reflecting the fact that there may be a pause in their buying decisions for a couple of months until they see us come out of it. So we provided what I'll call realistic guidance for Q4. And we're excited to get through that. Pipeline is strong. Business and solutions look strong, but customer buying behaviors are being a little bit erratic right now, and we're just being realistic about that as we get into the quarter.

Got it. Okay. So 25% of the business being affected by the pandemic. Obviously, some of the sales cycles are a little bit longer now. From the demand environment, what are the conversations that you're having with customers?

Yes. I think it's -- honestly, we've had great conversations with customers. They're learning about our product, as we said, in Q3. We had one of the top 3 banks sign-up with us for Answers, and that's been great, and it's a multiyear deal. We'll be standing them up this quarter, obviously. But I think the conversation with the customer is high interest, great opportunity for them. It's just the macroeconomics will slow some of the buying decision. But at the same time, we -- like I said, we have a great pipeline and great interest. And so it's just a matter of how potential prospects and customers see their future and their industry. The good news is Answers, as we've been saying for the last 2 quarters, has taken us into other segments. So we talked about and saw a lot of universities sign up for Answers in Q3, and we talked about some of those. And the government, we got New Jersey state signed up for their COVID site, so that's helping us continue to grow our business. But like I said, there's a whole lot of confusion in the macroeconomics for the next 60 days, and we're just going to be realistic about that. But the conversations about Answers, about our Pages, about our knowledge Graph, have been really, really strong. And we're getting prepared to make sure we can get through all this macroeconomic stuff and be ready to go when the customers see openings and light at the end of the tunnel to move and start buying more from us now.

Got it. It's end of the year. If you look past the virus and the lockdowns, how are you preparing Yext to kind of take advantage when the demand starts to snapback?

Right. That's a great question because we've -- all in tech have been through these ups and downs and some tech companies pullback. We've taken a very aggressive stance. We've told everybody we're going to hit 255 quota-carrying sales reps by the end of the year. That goal is still in place, and we're still on track to make that, so we have sales capacity going forward for one. You've started to see us do marketing campaigns to raise awareness, both here and in Europe. The Answers, not ads, has been a great campaign. And those of you in San Francisco, you drive by 101 on your way into Downtown, San Francisco, you'll see a nice Yext ad on a billboard across from the Yahoo! table that's there. So we're raising our visibility, we're adding sales reps. And I think the third part of this, with Answers is improving our sales motion, now decision-making may have been slowed down a little bit, but getting through the sales process is still getting faster than we've ever had before. And the fourth part is we're actually working very hard internally to change our infrastructure and get more efficiency there. And I think that manifested itself in the Q3 earnings call, where you saw us only have a $0.02 non-GAAP loss as opposed to something fairly dramatic last year. So it's all of those combined. The Yext employees, yes, we've all learned to work at home. Yes, we've all learned to get more efficient in this environment. And yes, we put in great new systems, tools and products. And I think as things start to open up, even the 25% that might -- that they're definitely renewing with us, but they're not expanding with us. I think those lay the foundation for, as the economy starts to open up, we're going to be well positioned to take advantage of that growth.

Got it. As far as the efficiencies that you've achieved this year, how do you think about how much of those are going to be sustained into next year? I almost think of it as game theory where if your competitors are starting to spend and go and meet people in person, you kind of have -- you're kind of forced to do the same.

Right. Well, a couple of good things. We don't have much competition in the space that we're in with the solution, so we get to call our own shots. But there -- I think there's a fair amount of permanence in our selling processes that will manifest itself next year. And I say that for a couple of reasons: One is, with Answers, you get a free trial, so you pretty much precondition the customer to understand what they're buying, which helps. Two, we clearly learned in this process that we don't have to send as many people to a customer site as we used to. And we'll probably send 1 or 2 people. And yes, our travel will pick up a little bit, but it's not the 5 to 10, we used to send because we can also add those 3, 6, 5 people in on a Zoom conference to be just as a backup. The third part is, as we've been growing our sales force, we've been putting our resources in the territories where we want them to sell. As you start a company, you start small and the sales reps are traveling all over the world, the United States, et cetera, the one thing with the sales rep growth is we started to place salespeople in territories where we have marketplace. And so that, by definition, will cut down some of the travel as well. So we think there's a lot that we've done to reduce our sales and marketing. We're still goal to get into the mid-50s, like everybody else, for that. We're still a goal to reduce the G&A expenses to more normal levels. And I think you're seeing that and it will manifest itself in the couple of years going forward that these efficiencies are real and they're sustainable. And by the way, as you well know, we've been having to pay for multiple facilities while we transitioned offices and that's all over. So next year, we'll see facilities efficiencies as well because we're there. At some point, we'll move the people back in, but I think a lot of the stuff that we've done is going to be more sustainable then one realizes on looking in from the outside.

Got it. So you have the infrastructure ready, the quota-carrying reps, you're on track. I guess, the one part is demand that has to return. What kind of indicators are you looking internally and maybe helping investors out and seeing when that starts to come back?

Yes, sure. I think a couple of things. Pipeline flow and lead gen is always a critical one. We continue to find new opportunities to generate leads and reach out to potential prospects and customers. Clearly, that's been difficult in the COVID era just because people weren't easily found because they weren't in the office. We've done a great job, and I think our marketing team and sales team have done a great job for outreach and do discovery, if you will. And so I feel comfortable that as we get through next year, I think, quite frankly, people are kind of worn out right now. You and I were talking before we're on air, we're going to find the time to take a break. But I think we've developed a lot more sophisticated lead gen and outreach to our potential customers. The Answers free trials, which we've never been able to offer in the company, we can now, and that's really working. I mean, that's how we got New Jersey and a few other big accounts. That's how we get the universities. So we're looking at those, but I'm also looking at macroeconomics. I mean, you have to see people go back to work. And I don't necessarily always mean physical that as you well know. I mean, within the U.S., there's whole industries that are still shut down here, and I'd like to see them come back to work because we can serve them as well.

Got it. And I think your enterprise and mid-market customers, they accelerated in the quarter, but they are decelerated. To me, that top of the funnel is really good. It's the conversion and it's the large deals that are missing, is that the right way that we should be thinking about it?

Yes, there's some of that. I think they're not missing so much as some deals got pushed depending on the industries you're in because we do very well, for example, in the hotel industry. Clearly, if you're in the hotel industry around the world, you're not necessarily expanding your footprint with us as was the case in the past. I think some of that is -- so it's delayed buying decision. Some of it too, keep in mind, is we do work with partners in small business and they've seen some, obviously, some slowdowns as well. But all in all, I think we've been pretty stable here. And like I said, we're looking forward to next year and the opportunities that kind of getting out of all this Zoom fund helps us with, but we need to see it. The timing is still uncertain. That's why I think you've got what I'll call a realistic guidance for Q4. But we're certainly looking at when that inflection point happens. We're certainly looking at our math models and making sure we have the capacity and sales. We have a whole new product roadmap that's going to be talked about as we get into next year. We have Investor Day coming up on March 17, and we'll share some of that. And then we have new marketing campaigns that we're rolling out across the globe. So I think it's us getting more prepared for what's going to happen and see the future in a much more positive light. But this quarter is just uncertain because of all the lockdowns and everything else that's going on.

Yes, that's fair. I guess kind of diving a little bit deeper into the company itself. A lot of attention, obviously, is being paid to Yext Answers. It's -- you enabled a lot of integrations that you've talked about during the earnings call to reduce friction. What else do you need to do to reduce the bottlenecks for adoption?

Yes, I think that's a great question. We've launched our Hitchhiker program, which will help our customers and ourselves stand up products quicker and, if you will, get power users into the community, that will be great. I think the other thing is, we are clearly, and Howard about this on the earnings call, focused on more and more self-serve. So customers don't have to wait for us, so we don't have to wait for them. They can get in and stand their products up and use their products in a more -- in a easier to do way. All of that cuts selling, cycle time and selling costs. So those are the things we're working on. And then like I said, the new product roadmap, we have not stopped invention. And in fact, I think you'll see a broadening of the knowledge graph and the Answers product offering as we get into next year. And we've announced additional relationships with Shopify and Magento and others, where we're building connectors that adds value to our existing customers and any new customers as well. So things haven't really stopped on the inside. We're still working just as hard in making sure all this stuff is getting set up. And I think, like I said, as macroeconomics start to change, we're going to be really well prepared to take advantage of that.

Got it. I think what's interesting about that is, you said that Answers is leading to a more efficient sales motion. I was hoping you could kind of expand on that. What are the implications for that for next year? And have you been able to transition from Answers to the bigger platform in terms of sales motion?

Well, keep in mind that when we sell Answers, we're also selling the Knowledge Graph, which is the platform. So if you're a new customer to us, you put in the Knowledge Graph and the Answers and standing that up, depending on how quick or how big your target is, can take a little bit of time or can be very quick. I mean, it's also true in the Knowledge Graph, you can get on Answers very quickly. And watch in-bound questions and if you don't have an answer for it, put it in and respond in a quick turnaround time. Or you can say, "Gee, I want to make sure I cover 80% of the obvious answers from the get-go, and that will take a little bit more time." But I'd also think what we're being able to do for the first time that we couldn't do with listing some pages. And by the way, keep in mind, we said on our earnings call, 30% of our ACV was tagged with Answers and drag along, which means we're still selling a lot of Listings and Pages there as well. And it is part of our platform. So once you get the Knowledge Graph, you can get any combination or all, which is what we hope you do. But I think there, it's just about us educating our customers. They get to see ROIs on Answers, either a cost savings because they don't take a question and move it to the call center, which saves them a lot of money or a revenue opportunity. And that's why the connectors with Shopify, you can say, "Hey, I got the answer I wanted from you, now take me to an e-commerce website where I can buy from you." So all of that, I think is that -- one is it's coming out and it's going to benefit us and our customers and prospects going forward next year.

Got it. The way I see the core platform, it makes for a sticky customer like Answers, which is more of a solution mix for a faster adoption. How do you manage the business with goals for both those things?

Yes, that's a great question. I think right now, because we're in the early days with Answers, we can manage that. But that's why the Hitchhiker program becomes an important part of all of this, educating the sales reps becomes an important part of this. And the self-serve becomes an important part of it. That's why we've got those 3 agenda going on at the same time. But for us, it's selling a solution to the customer, listening to them and finding out, "Geez, you want to improve your site search?" The large financial services -- the large financial institution that we closed in Q3, they were looking for answers on their site. It was just debt center what we do with answers. And so that's why we worked with them to get that deal and we'll work with them to get them stood up this quarter. Other companies are looking to solve Pages issues or even Listing, so they can start to be found as they know the economy opens up again. In some of the restaurants and stuff that we have, and you know this, and we all know it, they're open close, open close, open close. So there's some benefit to them if there are existing customers. If there are new customers, I think, it's still challenged in those industries simply because they don't know whether they have a business at the end of this or not.

Yes. I guess, just taking a step back, you guys have talked about Answers, opening up your TAM. I was hoping you can just kind of broadly define what your TAM is? And maybe try to quantify qualitatively, quantitatively, Answers' expense?

Well, first off, I'd say stay tuned, that's why you want to come to the March 17, St. Patrick's Day, Yext Investor Day because we're working through that. But we kind of think of it in 3 ways: One is obviously, the Listings, and we said we think that's about a $10 billion TAM. I don't think we've come off that number, the opportunity is still there and greater. As we got into Pages, that TAM has been a little bit harder to categorize and determine the value, but we kind of figured around another $5 billion to $10 billion in that business. And then the Answers gets us into search. I mean at the end of the day, Yext is a search company. And that search TAM, depending on who you talk to and depending on what other companies are there, somewhere between $40 billion and $200 billion. So I would just suggest that we feel pretty comfortable in a rather large TAM. Like I said, we are working with a number of people and will present that more formally and more articulately than I can right now at the Yext Investors day. So if that's not a hook to get you to show up in March, I don't know what it is? But we feel comfortable that this TAM is large enough for us to continue to grow this business for the foreseeable future.

Got it. So your net dollar retention rate for enterprise, it's about 104%. How should investors think about expansion rates versus new customer growth going forward?

Yes, that's a good question. I mean we clearly have continue to lower our net retentions for a while. And as we said on the call, our gross retention numbers are at historically stable levels. So we're not losing customers any faster than we typically would at this point. What we did see though is people are not upselling right now for all the obvious reasons. So a lot of our headwind is macroeconomic. That's why we feel so good about continuing to invest in the company, to continue to grow our product, our sales capacity, et cetera. And the last 2 quarters have been in an arena where people, like I said, are renewing with us, but their traditional expansion is not happening right now. And so that had an impact on our net retention numbers. We'll see in Q4. I think that we're still going to have certain industries that are slow to continue to upsell, but they'll still sign up because they see around the corner, things are going to get better. And in some of the industries like the universities, once they see the benefit of the product that we have, those expansions might go fairly quickly. So that's why we took this kind of realistic approach. We've got things moving both ways. And over time, and if you believe that the second half of next year looks good, things start to change, we're going to be well positioned for that. But this is a company that is creating new categories, that is introducing things that are challenging conventional concepts, and I think we've done a great job. I mean, the Answers, not ads is really beneficial to a company, but it's taking a while to get rolled out, particularly with the macroeconomic problems that we have.

Makes sense. You've said, just a couple of minutes ago, that you don't have competition. So when you do win a customer, you're clearly not replacing someone. So what exactly are you -- are you replacing dollars, if not a product?

Yes. I think -- I mean -- so there is not external competition per se, but there's internal competition, particularly when you're talking about large corporations because they obviously have website services, departments, et cetera, that are trying to do this. What I do think we are doing, though, is being able to shift the money spent on external search and keywords back to putting it on your website, you controlling it. And we talked on our earnings call, we've seen this with our own website, we saw about a 30% reduction in our searches on other properties, but those same searches move to our website. And we're finding the more you can get the right answer from our website, the less you have to go to the third parties to do the search because the third parties is one, putting ads in front of you, then blue links, then an answer; where with Yext Answers, you just get the answer if you go to the website. So we are seeing that behavior on our own website today. And I think as more people get onto Answers and we see that benefit, you'll start to see that shift. So we don't have direct competition. But clearly, there's always the internal people that you have to convince, you can do better than they are, but also help them be more successful.

Yes. Have you done some case studies around that ROI? Because that to seems compelling if you can see your costs go down, external searches versus internal?

Right. Well, even on the free trials, what we do is as we bring you up on the free trial. And admittedly, it's a limited set of questions and the limited set of entities, but you can actually make a decision about the questions being asked. Are they saving you cost by going to the -- not going to the call center or their revenue opportunity. So within the trial, you can see the ROI itself. Within the trial, you can see the type of inbound questions that are going on. So that's why the sales motion is going to change because the customer gets to see and experience that benefit before we really get into the sales cycle. And we've had some -- I mean, large corporations don't really do free trials, but we do pilots with them, and they can see those benefits real time. And it's on the analytics dashboard that is part of the Yext Knowledge Graph and Yext Answers.

Got it. And you mentioned the conference a couple of times, but...

You can make me do that, so -- just so you know, you can make me heal. Yes, next in the conference.

I don't get it. I've spoken a couple of times. Maybe you can lay out or give us some quick tidbits on what to expect.

Sure. I think you're going to see the March time frame. Because of our seasonality, we selected March because you get to see a full year in the metrics. Because in any given quarter, things move up and down and then more exaggerated sometimes in this cycle. Our new product cycle and roadmap will be at a point where it's easy to describe and discuss in demo. So you'll get to see roadmap, you'll get to see customer success from Answers and some of those demonstrable things. You'll see our full year analytics. We're looking at opening up some more analytics for the company. So folks like yourselves and others can delve a little bit deeper into our numbers. We're thinking about giving different metrics that we haven't given before. And we're looking at that, but those metrics are only useful if they're given on an annual basis. That's why the March time frame is right. So you'll get some additional metrics. You'll get insight into the road map and some demos of new products. You'll get a chance to meet the management. And you'll get, I think, some clear customer testimonies from our Yext Answers as well.

Great. Thank you so much, Steve. I think we'll end it there, and I'll see you soon in March.

Yes. True. Yes, I look forward to seeing you there in March, there is going to be. And thank you very much for hosting Yext today at the Barclays conference.

Thank you.