Yext, Inc.(YEXT)Q4 2024 法說會逐字稿

Good afternoon, and welcome to the Yext Incorporated Fourth Quarter Fiscal 2024 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Nils Erdmann, Senior Vice President, Investor Relations.

Thank you, operator, and good afternoon, everyone. Welcome to Yext’s fourth quarter fiscal 2024 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, expectations regarding the growth of our business, our outlook for the first quarter and full-year fiscal 2025, our strategy and estimates of financial and operating metrics, capital expenditures, and other indications of future opportunities as further described in our fourth quarter shareholder letter. These forward-looking statements are subject to certain risks, uncertainties, and assumptions, including those related to Yext’s growth, the evolution of our industry, our product development and success, 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 sections titled Special Note Regarding forward-looking statements and risk factors in our most recent quarterly report on Form 10-Q for the three months ended October 31, 2023, and our shareholder letter that was 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.

Thanks, Nils. Good afternoon, everyone, and thank you for joining us today. As we discussed last quarter, we have published our quarterly shareholder letter and financial commentary on our investor website, and we look forward to taking your questions here today. There are a few high-level themes I would call out from our letter before we dive into Q&A. First, we are pleased with the progress we made in fiscal year 2024, despite a very difficult operating environment. We believe our record profitability, increases in sales productivity, and some of the difficult decisions we made to be more focused will serve the company well in the future and drive more efficient growth. As I've talked about in the past, the recipe for efficient growth is a combination of increased sales productivity and the ability to measure qualified pipeline so that we can increase our investment in direct revenue-generating roles.

We will continue to focus on efficient operations, but we have seen enough to be ready to direct more investment into direct selling and sales development to drive growth in the future. Second, we made great strides last year in shifting more of our focus to the core product offerings our customers value most and have reoriented our roadmap around our customers' highest priorities. We have also reallocated our investment in customer support, services, and success to drive customer satisfaction and value. In fiscal year ‘25, we will continue to proactively deliver value-driving innovation in our core listings, pages, reviews, and search products, customer service, and support, and deliver new product functionality in adjacent product areas that are most valued by our customers. These include Generative AI features, including broader application of content generation technology, as well as much more robust social management and analytics features.

The strength and breadth of our platform, particularly the advantage of our content knowledge graph system, as a single data source of truth for our customers across all of the product use cases will serve us well in an environment where customers want fewer partners and more ROI. We will continue to invest R&D into high potential areas such as chat and other Generative AI technologies, but these investments will be more measured and focused on customer priorities than in the past. Finally, we continue to take a conservative point of view on the market environment and the timing of uptake of Generative AI solutions at scale. Our customers include some of the largest brands in the world, and they continue to digest and optimize their technology stack after over a decade of investment. Our outlook anticipates that this trend will continue this year as uncertainty around the economy, inflation, and interest rate environment continues.

We believe this is prudent and will support our customers in their work to identify areas to do more with our platform and be more efficient. We are highly positive on the future of Generative AI to drive efficiency for the enterprise, and we are seeing signs of early adoption as evidenced by increased use of Generative AI review response features. This week marks the two-year anniversary of my taking the CEO position. I'd like to take a moment to acknowledge that the last two years have been challenging on many levels for our team. I'm incredibly proud of our global team's willingness to take on the difficult tasks of reshaping the ex-operating profile, adjusting to a difficult operating environment, and recommitting the company to our customers. I believe the work has been harder than we would have anticipated two years ago, and the work will continue to finish our transformation. I'm incredibly grateful to our team for their resilience and commitment in the past couple of years and for the future. With that, I'd like to open it up for questions.

We will now begin the question-and-answer session. The first question is from Arjun Bhatia with William Blair. Please go ahead.

Perfect. Thank you guys. Mike, maybe one for you to start. On the product roadmap, it sounds like there's a little bit of a refocusing going on, on the core with listings. And I think in the shareholder letter, you also talked about some new capabilities like social media management. Can you maybe just give us a sense of where some of these investments on the product front are focused? How do you plan to build some of these new capabilities like social media management? And what might the platforms look like if we're talking in December versus in March right now?

Thank you for the question, Arjun. When we began this journey, we emphasized the importance of refocusing on our core offerings to ensure we deliver the value our customers expect in listings, pages, reviews, and search. As with any initiative, the process often takes longer than anticipated. Over the past few years, we've observed a shift in business priorities, with a greater focus on assessing the value received from existing multi-product software solutions rather than just seeking new technologies. We aim to demonstrate the significant product innovation occurring within our core offerings. While we have traditionally included social features, we've received clear feedback from customers expressing a desire for more of this functionality. They prefer fewer vendors and increased cross-platform visibility. Additionally, they seek a structured data framework that enables them to maximize the various functions available. We are actively working on these aspects, and as we move into the latter half of the year, we expect to see substantial progress in product innovation across all areas, particularly on the social media front.

I understand. You mentioned an increase in sales capacity and that now is an ideal time to invest based on the trends in the pipeline. I'm interested in your insights on sales productivity and how you define best-in-class for both Yext and in comparison to the industry. The trends in the pipeline seem promising, so please share where you're hiring, why it's the right time, and what additional expenses we might anticipate on the sales and marketing front.

Yes, so, you know, look, we are at the highest direct sales productivity that we've seen, I believe, in the last four years, which is what we stated in the letter. I'm not going to tell you we're best-in-class, because we're not best-in-class yet. But we've seen marked improvement there, and this is something I've talked about a lot over the last four or five quarters, is when you're seeing consistent improvement in sales productivity and the qualified demand, which obviously, you know, over the last five or six quarters, we've seen a really nice increase in our ability to both create, but also to measure our pipeline, that's when we can start growing our sales capacity again. And so we'll be doing that in a pretty measured way over the first half of the year, and that's where we expect to start to see contribution from actually growing our direct revenue-generating headcount in the second half of the year.

At the same time, you know, to your question about incremental expense, we continue to find areas of efficiency and optimize the cost structure of the business. And so the cost of the additional revenue-generating capacity, which is really mostly in the form of quota carrying heads and sales development or business development representatives, is all baked into our outlook for the year. So there's not a sort of unbudgeted incremental expense there. We're really just focusing a lot of our investment and efficiency work back into what drives the highest revenue-generating roles.

Perfect. I appreciate the caller. Thank you.

The next question is from Tom White with DA Davidson. Please go ahead.

Great. Thanks for taking my questions. Two, if I could. Mike, in the letter, you mentioned a significant increase in year-over-year lead volume in the quarter and higher pipeline creation. Curious to what degree that's being driven by some of the various initiatives around demand gen that you guys have been working on? Maybe you could just give a few examples of like the most successful kind of channels or tactics on that front? And then, or is there, you know, kind of an uplift from just maybe the client spending environment perking up a little bit exiting the year versus maybe, you know, kind of earlier in the year? And then I have a follow-up on the guidance.

Yes, absolutely. To address your first point, I don't believe we're seeing an increase in the spending environment. While we may have been perceived as a bit more pessimistic than some peers, we actually see some stabilization. Our expectation is that this environment will persist for a while, especially given the uncertainty surrounding macroeconomic conditions, inflation, and interest rates, which leads me to think there won't be a significant rebound in spending. We've been focused on creating a highly efficient demand generation process since bringing in our CMO, Ran. The key to success in this area lies in establishing a strong structure that optimally utilizes various channels like content and paid media to drive interest. It's also crucial to have the right mechanisms in place to qualify potential leads through a proper framework. There are numerous operational processes that need to function effectively to ensure what comes into the funnel can be converted into qualified pipeline and ultimately into bookings.

This is structural, labor-intensive work, and I commend our teams for their excellent execution. Another important aspect is adapting campaigns to the current environment. Looking back at last year, we did not execute as well as we could have because we focused on future use cases for our platform at a time when the market was anticipating a quicker recovery. As a result, we noticed demand flowing in through campaigns centered on products that were not aligning well with our core offerings. Our focus on AI and transformational messaging didn’t convert as expected; instead, we found more success with core offerings. Now, with a shift towards value-based messaging that aligns with our platform's capabilities, we expect better alignment of our campaigns with what customers are interested in right now. This includes enhancing existing setups and integrating fragmented solutions into cohesive ones. We believe this alignment between customer interests and our marketing will improve the functionality of our entire demand generation system.

Yes. That was very helpful color. Thank you. Just maybe a follow-up on the guidance for this year. I guess at the midpoint, the full year outlook implies that adjusted EBITDA expenses are down about $10 million year-over-year. Can you maybe just parse out a little bit more the drivers, and maybe Darryl can weigh in here too if he wants? But you talked about adding some heads, which will take a little bit of time to ramp. But then I guess you have the sort of the full year impact of some of the operational changes you made last year. And just trying to understand how much more kind of further rationalization of the cost base is kind of baked into the outlook, or is it just kind of like the full-year kind of benefit, if you will, from some of the stuff you've implemented last year?

I will begin, and I know Darryl will provide more detailed insights on the numbers. Essentially, what we're doing is reflected in the actions of our customers. It's a key aspect that shapes our perspective on the environment. Once an organization becomes focused on operational efficiency, it tends to discover ongoing opportunities for improvement. This can involve analyzing organizational structures and addressing duplication within silos. We've been discussing these strategies for a couple of years. Ideally, this journey is never truly complete, but the effort required lessens as we pursue more precise optimizations. I believe this is the stage we are currently in for this year. It has become a part of our culture to consider efficiency and recognize opportunities for improvement across the organization. This mindset enables us to continue enhancing our expense and EBITDA figures while making important investments that will drive product development and revenue growth.

Yes. And Tom, the only thing I'd add to that is when you look at the EBITDA number in Q1, we've got some seasonal spend that happens in Q1 for certain sales events that don't happen in other quarters of the year. And then to the point that Mike was making earlier about our marketing campaigns and us being able to really attack that area. We pulled some marketing spend up on demand gen into Q1, which is also going to impact the quarterly number when you sort of look at the rest of the year.

The next question is from Naved Khan with B. Riley. Please go ahead.

Hi, thanks for taking my question. I was wondering if you could talk about the customer budgets for the upcoming year and whether there's room to drive upsells into the customer base? And then related to that, I was also hoping to get some clarity around the opportunity for mid-tier customers versus enterprise customers? And then I have a follow-up after that.

I believe we will continue to have similar discussions this year as we have over the last six to eight quarters, often beginning with what value customers are deriving from our platform. This is an excellent starting point for the conversation. Then, we discuss what additional capabilities our platform might offer that could be more efficient than alternatives. We are witnessing significant interest from customers, particularly larger ones, who prefer more versatile solutions over specialized software for their marketing departments. This opens up opportunities for bundling and upselling our offerings, benefiting companies with broader solutions. I don't want to predict whether the focus on efficiency will increase or decrease in the enterprise this year, but I believe that trend will persist. Smart management teams will continue to evaluate how to operate more efficiently and identify opportunities, which leads to more productive discussions than the competitive challenges we face with vertical software competing for increasingly constrained budgets. Regarding your question about small to mid-market and enterprise customers, we observe similar dynamics across these groups, with a strong focus on the higher end of the mid-market and enterprise segments.

Okay, got it. Thank you. And then also, I guess my next question is, you had talked about it in the last earnings call, you also mentioned it in the prepared remarks, but the impact of the churn from the large customer in the fourth quarter. I was wondering how that's going to impact fiscal year '25, the next few quarters, growth and comps.

Yes. So I think we mentioned it was about an $11 million customer and their contract ended at the end of December. So we saw one month of impact to revenue in this Q4. And then as we get into this Q1, we'll see a full three months of impact. And obviously, it comes out of ARR, it comes out of revenue through the fiscal year.

Got it. Thanks.

I think it will impact a lot of metrics, and we'll do our best to share the effects of that singular customer churn. For example, our net retention has been in the high 80s since we started reporting this metric, and we will inform you if it changes. With the large churn, it would have dipped into the mid-80s when we exclude that, but we are still sitting in the high 80s. This will definitely be a headwind for revenue growth and revenue, which you can see in Q1, as well as metrics like net retention and gross ARR retention as we progress through the year until we lapped that next period at the end of December. All of this is included in our guidance, and we anticipate that despite this, we will see a reacceleration of ARR growth into the high single digits by the end of the year.

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

All right, thanks for taking my questions. Mike, maybe to start on the sort of strong pull line commentary. Can you just talk about perhaps sort of what products you're seeing the most demand for whether it's listing, search, pages, reviews? If there's any new verticals that maybe you've been able to sort of unlock with some of the marketing and demand generation. And then as we're getting through the early stages of the year here, are you seeing better signs or maybe signs of quicker progression through that pipeline that's given you some of the confidence on, I think, the idea of reaccelerating growth in the back half of the year? Thanks.

I'm happy to elaborate. There are several elements to discuss. One point we mentioned in our letter is the rise of boomerang customers. We've observed an increase in these customers, particularly amidst strong competition around listings and other products in recent years. Specifically, we identified 20 direct customers last year, with 10 acquired in Q4. Part of this success can be attributed to our proactive engagement with former customers and our commitment to addressing their key concerns, alongside the fact that they are realizing they can achieve more with us compared to smaller, niche solutions. Additionally, our focus on demand generation has been significant. When marketing campaigns align effectively with customer messages and content, it creates opportunities that can be acted upon swiftly. Our recent virtual customer summit achieved record attendance, which facilitates the process since prospects come in already informed.

In contrast, some earlier campaigns last year did not fully align with the immediate needs of customers, making it necessary to spend more time requalifying their requirements. This pattern isn't surprising, and after five or six quarters of refinement with our teams, our approach is becoming more efficient. We're discovering what works best, and by enhancing our communications to be more aligned with customer needs, particularly regarding social management capabilities, we are finding that customers increasingly prefer not to use multiple systems for different tasks. This, combined with the productivity improvements we've observed, gives us confidence to begin increasing our quota-carrying and direct revenue-generating headcount, which has seen a decline over the past few years. We believe we now have the necessary signals to feel confident in this growth strategy moving forward.

Okay. That's super helpful. Maybe just on the topic of the Boomerang customers. Of the ones that you were able to win in the fourth quarter, how has the initial land trending? Or how did the initial land trend in the fourth quarter relative to the size of customer they were when they left you? And then as we think about fiscal '25 what's the rough mix of the pipeline that's from Boomerang customers versus sort of net new?

I am unable to provide the specific breakdown of boomerang versus net new customers. Our product offering has expanded significantly, making it possible for a boomerang customer to engage with multiple products or just one. Consequently, I can't quantify it in that manner. There are numerous trends influencing boomerang customers. Many of them switched to cheaper solutions that ultimately didn't give them the returns they expected, with unfulfilled promises being a common issue. Additionally, we have not been stagnant; the innovations we've introduced in our platform have added substantial value. One major change is our increasingly customer-friendly approach in how we interact with our clients, as well as how we package and deliver our services. We have gained a better understanding of the services and support our customers seek, and I expect that we will continue to enhance their overall experience, including the level of support provided and the proactive nature of that support, thanks to the efforts we've made over the past year and a half.

Appreciate the color. Thanks.

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mike Walrath for any closing remarks.

We'd just like to thank everybody for joining, and we look forward to speaking with you next quarter.

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