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

All right. Good morning, everybody. My name is Stan Zlotsky from the Morgan Stanley software research team, and welcome to the final day of the Morgan Stanley TMT Conference. So with us this morning, we have the pleasure of hosting the CEO of Yext, Howard Lerman. Howard, good morning how are you?

Stan, how are you doing?

Not too bad, not too bad. Definitely, definitely busy week. But before we begin, very quickly, for important disclosures, please read the Morgan Stanley research exposures website at www.morganstanley.com/researchdisclosures.

So with that out of the way, Howard, always a pleasure to have you with us, and it's a complete bummer that we are not in person. It really takes a lot away from the dynamics of this conversation, but we will try to do our best to make this situation work.

Stan, I brought my 2 options for you here. So...

What do we have?

We can do computer chips?

Those are awesome.

Computer chip or we can do maps. Map use were down quite a lot this year. We have this. We can do kind of shiny. So I brought them all in order to make sure that we could recreate a little bit of the -- here over Zoom over virtual during this crazy time.

I am very much more partial to lie to the computer chips. The super months feels like very much like Golden Globes rather than Morgan Stanley TMT Conference. But I think -- I mean, looking at for what is worth, I at least put on suit pants, maybe they'll moderate from home. So I think that's already you win.

You win already.

So -- all right.

Well -- and by the way, I got a lot of good books back here. These are books you have actually read. I just read Jeff Lawson's book, Ask Your Developer. It was tremendous. Jeff, I think, really does a good commercial, obviously, for Twilio. If you check Page 314, you'll see the Dave Rudnitsky Playbook is mentioned, the enterprise sales playbook. We didn't even know that was going to happen. Dave was really excited when he's all mentioned. I also have the IPO Playbook back here by Steve Cakebread. Stan, when you write your book, we'll do a book chat.

For sure. For sure. You will definitely be -- you guys will definitely be for that's about out. Well, Howard, the really exciting part is that you guys reported Q4 results last night. And I think it really brought it into a challenging year. Look, for what it's worth, a lot of companies had challenging years because of everything that's happening in the world. Maybe just give us a quick highlight reel of what are some of the most important takeaways from last night's results?

Before we get to the outlook, which everyone is going to want to focus on, I think it's really important to look back on what we did accomplish during the past 12 months. The key number, which we disclosed last night, Google Maps views that's people looking for, driving directions, clicking the phone numbers, the action on Google Maps last year in Q4 -- last Q4 was 50% of what it was in -- had dropped more than 50% versus the year ago quarter. That is an astounding drop. That is the core value proposition of our Listings product. So this year, Listings in a world where locations are shut down faced extraordinary headwinds. Locations are closed, locations are open, they're closed. And so with lockdowns with locations being closed, particularly in industries where we've said a 25% to 30% of our AARs in retail and in food, we're going to have some headwinds, some unprecedented headwinds. Despite those headwinds, I am so proud of what we did this year. We did -- the way I kind of -- this is the message I shared in front of the company, 3 big things. One, despite headwinds, Listings still grew, which I think is a testament to the resiliency of the product, and the criticality of Listings; second, we got really efficient. We were cash flow positive for the year, had a great cash flow in Q4. We were net income positive in Q4. We had a 7% year-over-year improvement in sales and marketing as a percentage of revenue. We had a 17% increase in operating margin year-over-year. So we built and we became much more durable overall. We also -- and this is the third thing, stood up a new category with Answers. And everyone wants to know how big is Answers and when will it overtake Listings in terms of size, I get that. The fact is they're related, and we'll get more into that. But we had, in Q4, 130 Answers transactions. This is -- and we don't sell Answers to small businesses. We sell Answers to big companies. And if you follow us on Twitter, you see us tweeting about Slack Answers. You see us tweeting about Northern Trust Answers. You see us tweeting about big brands around the world adopting our revolutionary search product. Google brought natural language search to consumers. Yext is going to bring natural language search to every magnifying glass you see to the enterprise. That's what we're going to do. So I'm really proud of what we accomplished this year, despite extraordinary headwinds. I'm not sure we could have executed any better on Listings, given the climate, given the closures, given the fact that we're all still sitting here on Zoom. I'm looking at you, your Zoom, on the Zoom. Yes, Texas, I guess, took off the mask mandate last night or yesterday. I can't -- until the entire world gets to where Texas is yesterday, it's going to be hard for us to see going forward how the world -- how things are going to play out. So we've taken a cautious view, and we're feeling pretty good about where we are. But I'm really proud of what we've done and I look, by the way, at the second half of the year. If things come back, we have extraordinary opportunities ahead, Listings, workplace search, site search, support search. If things don't come back, which we've assumed, we still have extraordinary opportunities ahead, site search, workplace search, support search. So I feel really great about our performance last year, and I'm really optimistic about our performance going forward.

I think that's a great overview. And I think as far as look, obviously, there are investors -- there are different types of investments, right? Investors that are investors who are looking at Yext. So they're thinking about it from like a 3- to 5-year horizon. Others might be having slightly shorter horizons. But even the ones who're looking over the next 3 to 5 years, they still care about, hey, like what's the next year going to look like? And I think it's important to -- do you understand what really underpins the guidance that you guys put forward last night on the earnings call? And that might be loss in some people, right? But because the headline is, look, 6% growth, like that's certainly not inspiring. That's -- I'm sure that's not what you're aiming for as you're building the company. But I think it's important to understand like what really -- what's underpinning that 6%, right? And I think you really said it best that it's essentially assuming that the world doesn't reopen in 2021, like Texas just did. Is that a fair statement?

It's precisely right, Stan. And if you look at what we've done all of last year, as conditions deteriorated, we sort of sat there and said, okay, let's be -- well, first off, my favorite quote is from Winston Churchill who said, "Never let a good crisis go to waste." And we certainly didn't. I mean we took the opportunity to get way more efficient, put in a new sales motion to land with Answers, which is durable and is proving quantitatively to be more efficient. There's a way bigger TAM. We serve a new category of product, and meanwhile, we still grew our Listings product. As it relates to the guide, every quarter this year, we have taken a cautious approach we don't know what we can't see. And even though Texas reopened, we still don't see -- and I just would say, it feels like things are about to reopen, right? I feel -- everyone feels like the back half of this year, we might be able to see each other in person again. It just quantitatively is not there yet. And until we can quantitatively see that, we're going to continue to do what we've done every quarter, which is be cautious, be cautious with investments. But that said, as we see things begin to come back, we will lean into investment and begin to invest in growth and begin to continue to sell Listings and sell all the different types of search solutions that we want to lean into. So it feels like a little different than it did 3 months ago. That said, Texas opened up and a lot of people made fun of them. So until we have quantity -- until those Google Maps views go back up, I don't think anybody thinks that driving directions are going to be at 50% of what they were forever. I think that is a temporary dislocation that, that will come back, that industries will come back, people will be able to travel at the way that they were before, people will be able to go out the way that they were before. And -- but until we see that happen, we're going to keep being cautious. Until we have -- until we actually see it happen as opposed to speculating on when it might happen. We just don't know the specific date when this conference next year is not over Zoom. A lot of people, too, by the way, Stan, have tricked themselves into thinking that this is normal. A lot of people, a lot of tech companies are saying, "Hey, this is the new normal." Now many of them are self-serving. Many of these tech companies want this to be the new normal because they want people to work. I mean do you think Zoom wants the world to go back to normal? This is literally the greatest possible thing ever for Zoom. It's terrible for everyone else, but with a few other people, but this is wonderful tailwind for Zoom. Now they're going to say, "Hey, this is the new normal." I don't believe this is the new normal. I don't believe it's normal for our kids to be in virtual schools and wearing masks. It's just not normal. And so I think that the world is going to come back. I just don't know when. And until we do, we're not going to get out there and say, that said, we are going to be opening our offices in April when permitted by authorities and starting to let people back in if they feel comfortable. I think people need -- many people are having emotional and mental issues right now because they've been stranded and isolated for so long. So I think it's important to begin to open up. But until we see that, we're going to keep being cautious.

I think the prudent approach, I think it makes a lot of sense. And the way that I wanted to -- I'm asking the next question, right, is there's a very delicate balance between prudent investments and not trying to time the exact day that the world opens. And on the other hand, it's -- look, the investments that you're making and the investments in people and hiring and salespeople, I mean, especially on the sales side, right? You don't just bring a salesperson in and then he or she are "boom" productive next day, there's a ramp cycle. So if hypothetically, right, the world starts to open up in the September, October time frame, right, considering a typical ramp for a salesperson is, let's call it, 6 months, shouldn't you be making those investments now or because if you actually wait until in October, we get the green light, world opens, New York City takes the masks off, and then you have to wait another 6 months.

I don't think there's going to be a specific date. We talk about this a lot. I don't think there's -- I think everyone would love to wake up 1 day and for the nightmare to be over. I don't think it's going to happen like that. I think over a period of time, it will slowly become normal again. We are going to open our office, and I suspect we'll see some people start to come in, but most people will still not. So I think we're going to keep slow rolling things, if you will, in terms of investing in forward until we have more confidence, but it's not going to be a binary event. It's going to be a gray event where as the clouds sort of part, we'll be able to see better and better and better. And we'll make smart decisions along the way with regard to investing in growth and continuing to focus on reaccelerating the growth of the company.

Right. That makes sense. So maybe just a tangential question to this, which is...

By the way, I don't think I've said the F bomb on this transcript, which would be a first. So I'm just going to go ahead and say, f*** right now. We have -- just get that in there.

Yes. We snuck it in. Perfect.

You never transcribe it either. It's always like F... something.

Right. Or asterisks.

I'll tell you a story about a translator in Japan sometime.

Okay. That translated into a different language?

No. I speak a little Japanese, and I've used the word in English that she didn't translate, and I was like she didn't translate it.

So you called her out on there.

Yes.

That's appropriate. I think that makes sense. So going back to sales productivity, right? One of the things that I think we're all aware of is that salespeople are very much -- they're coin-operated, right? So they like to make money most salespeople, especially enterprise, big expensive lifestyle. How do you motivate your sales organization into 2021 when you put 6% growth, not looking in front of them? How do you make sure that they're engaged that they're pounding the payment as we're going into -- going through the year with all the uncertainty in this environment?

Well, first off, I'm really excited that we've unified our sales work under Dave. I think you know Dave. Dave is tremendous. He was on the call yesterday. Dave is a legend. We're talking about Dave Rudnitsky right now, our President and Chief Revenue Officer. We promoted Dave, who's going to run the global sales work. Dave has an incredible track record of running an enterprise playbook that attracts amazing, incredible talented reps. Remember, Stan, though, it's not just about the number of reps you have, it's about the tenure. So one of the things that's happened is we've targeted 255, I think, is the number quota-carrying heads that we want to be right around. But going into this year, the tenure on those reps or what we would -- the way we would look at it is the full-time equivalents is higher than it's ever been, given the fact that these guys are more tenured, and tenured reps tend to perform better than those that are still on their ramp. Ultimately, as you say, it comes down to the coin and, ultimately, what reps want is opportunity. And here's the coolest thing about Yext. Gosh, we literally have a Listings product that everyone believes is going to come back. We also have a brand-new search product that totally disrupts existing site search products. In addition to that, we have a vision to expand this search technology platform into big new search categories like support search, like workplace search, like app search, like e-com search. The opportunities that sit in front of our reps are greenfield, it's white space. Half the accounts, we never ever touched. If you're a rep coming to Yext, you get a big territory. And you get to call out some of the world's biggest companies that many of whom, given that we have previously when we sold Listings to, we never called them on them before. Take a look at a company like Slack, couldn't sell them Listings, they're a tech company. So we have these huge new categories that reps can come in and have a pretty big impact on it. So I think everyone is excited for the day when Listings comes back, and we also have these huge new opportunities with Answers. By the way, you should -- I'm sure many of you will come to our Investor Day in a couple of weeks. I'm excited to do a deep dive on Extractive Q&A, which is our new search technology that can answer questions from unstructured text. Classically, Yext has been about answering questions from structured text, which is our knowledge graph, which is an amazing way to answer questions when you have a bunch of structured data. But what about support documentation? You have some metadata around every document, but now you can just load those up into us, you can connect us with -- you'll be able to connect us with a system like ServiceNow or Zendesk, loading your support documentation and put an amazing natural language search on top of your support site so that people can ask a question and bam, find the snippet of the answer without having to kind of hunt around and use the link. So we have this incredible technology. We have great leadership and we have huge untapped accounts. We just got to be conservative until the world comes back.

Well, I think that's actually the perfect segue into products, right? And the thing that's actually really interesting is when we talk to investors about Yext and kind of the evolution of your products, a lot of them really struggle connecting your legacy -- not legacy, but your original Listings products, with your Answers product, right? And explain to us how -- Answer is not actually like a completely different product. It's actually just a very natural evolution of what Listings created and what -- with the core of what is Yext.

Stan, that's exactly right. Quick history lesson on search. Keyword search was the way that search was made for a long time. People type in a query or a keyword and a document -- we'd find the place in the document that exactly matched the query. So you type in Morgan Stanley. We find all the places it's like hitting control up in a Word doc. That's how keyword search was founded. As the Internet exploded, the amount of places we had to search became vast. And so what happened was the companies that won were those that made the best algorithm to rank by relevance, all the places that contain the keyword, Morgan Stanley, Google clearly won there. But that was Search 1.0. Search 2.0 is taking -- it became natural language. And so most search stopped and keyword search ranked by algorithm. Google though took things to the next level, and they invented natural language search and natural language search made it possible to hear and understand a question and return an answer. But the thing is, in order to have an answer, you have to have the answer in your database as opposed to finding a place in the document that contains the answer. So if I ask Google what year is Marco Polo born? It doesn't matter if they can understand the question. If they don't happen to have Marco Polo's birthday in a database that they know how to retrieve. And so Google made a technology called The Knowledge Graph that enabled their natural language search. Yext, as a consequence of making our Listings product, which took data from Google and from Apple and -- sorry, from customers and gave it to Google and Apple and Amazon, Facebook, they don't accept unstructured data. So we had to give them structured data, which meant it turned out we built for every one of our customers, a knowledge graph. So our customers have a knowledge graph, if you use Yext and you're using our Listings product, that contains the structured information about your locations and your people and your products, whatever you put in the Yext web structure, your knowledge graph, which we're giving to all these companies. And then 1 day, we woke up about 3.5 years ago, and I said, "Oh, my goodness, we're giving all the structured data to Google and Apple and Facebook and Amazon so they can answer questions." I think -- we think -- we believe we can answer questions with natural language because we have this knowledge graph structured data. And so all the other search engines in the world, with the exception of Google, are in the enterprise, algorithm first, keyword search. Yext has a completely different approach. We are knowledge first. We are natural language search. And we use multiple algorithms, and that's a critical thing. When you run a Google search today for Morgan Stanley, you're going to see 5 different parts of their search engine results page. You're going to see a snippet, you're going to see the links, that's the old way. You're going to see parts from a knowledge graph. You might see things on a map. You might see their stock price. All those different parts that come together from the page are coming from different parts of the -- from different algorithms. That's called a multiple algorithm approach. Yext is taking a multi algorithm approach. What we want to do simply, Stan, is give every enterprise their own Google. When you use -- when an enterprise uses Elasticsearch or builds on solar or lucid works, which are open source or were open source, Elastic is no longer open source as of about a month ago. They just took it in-house. When you use one of those technologies, you got to show up with your engineer. You got to show up with your developer. It takes months, it takes a long time to build the search and worst of all, when you're done building the search, you get links back from the search. And it's a keyword search. It takes a long time to build. Nobody likes the result. And it's expensive and requires practically having your own ML experts to tune the models. What we're doing is totally different. We're bringing a natural language search to the Internet, backed by knowledge graph, backed by the ability to just -- and this is the important point, turn it on with an administrator. So just kind of like how Twilio, that's a company turn on communications devices, our vision is to let every company turn on Search as a Service or, more importantly, natural language search as a service that lets companies just build search into their apps, into their sites, everywhere they want. Google brought natural language search to the consumer, Yext is going to bring natural language search to the enterprise.

I mean that makes a lot of sense, and that's actually -- that's a very eloquent explanation of how all these come together because I do think that it's not directly intuitive for people who are just starting out. Now the interesting thing that, Howard, you mentioned, I presume we're going to hear a lot more about it at the Analyst Day next week, which is the direction you're looking to take Answers, right, away from just like the typical site search so you have, but you mentioned support. What are some of the other ones, like you mentioned e-commerce, right? What will be the use case there?

There are 5 categories of search that we see. The first is site search. The second is support search. Support search would be like health.yext.com, where there are support articles. By the way, that one is huge because companies today, as they go digital, want to push people away from picking up the phone and calling in for an answer and just being able to help and find the answer in a support site. So support search is the second category. App search. This is a term that implies a lot of different things, but think of every app you use, not just on your phone, but on the desktop, if you use Slack, if you're using Zoom and there's a search field. When a developer is building an app or a product for their company, they often are using either solar, which is a totally -- which is a technology built on leucine, which was made in the 1970s. Or Elasticsearch, which is a more modern version of that, yet still requires showing up with a machine learning expert and takes a long time. That's app search. The fourth category is e-com search. That's -- think of all the Shopify sites that are being set up. Think of all the e-com search that's happening on big sites. Many companies have a huge effort in search and spend tens of millions of dollars a year on -- or even more on e-com search. We have something that just works better and it's faster, and you can turn it on tomorrow and it's cheaper. And then finally, workplace search and, Stan, I'm sure, internally at Morgan Stanley, you have all kinds of tools that have a search box that you can't stand. And whenever time you type something in there and you get blue links back, you give up right away. That's where we're going to put natural language search. Those are the 5 categories of search. We've got a lot of work to do to beat all those, but we're going to unify it with our knowledge graft platform. All comes down to The Knowledge Graph. And support search is a great next one for us, given our focus on digital customer experience and the fact that it's outside the environment.

I mean, look, that's certainly exciting. And I think what investors are starting to take away from this is, look, Answers is not just like a one stop -- I mean, not just like a one-trick pony, but there are so many different use cases for Answers. And I mean, I think, particularly, I think we've all had struggled with like the internal website search and app search. I do think it's pretty terrible. And obviously, the app search component opens up a completely new use case and a completely new audience of developers and companies that you would typically not necessarily be talking to, even in any other context. So certainly, Howard, it's exciting things that are happening at Yext. And we just need the world to start getting better and, hopefully, we'll start seeing it in the numbers. So well, I think we're a little bit over time, but this is -- it's probably a good place for us to stop. Howard, thank you so much for your time this morning. Always an exciting and entertaining discussion.

Stan, thank you so much for putting your conference on this day. So I could have put my earnings call yesterday.

Awesome. We try. Okay. Thanks so much, everybody. Have a great rest of your day.