Yext, Inc. (NYSE:YEXT) Q3 2024 Earnings Call Transcript December 5, 2023
Yext, Inc. beats earnings expectations. Reported EPS is $0.09, expectations were $0.07.
Operator: Good afternoon and welcome to the Yext Fiscal Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nils Erdmann, Senior Vice President, Investor Relations. Please go ahead.
Nils Erdmann: Thank you, operator and good afternoon everyone. Welcome to Yext’s fiscal third quarter 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 fourth quarter and fiscal year 2024, our strategy and estimates of financial and operating metrics, capital expenditures and other indications of future opportunities, as further described in our third quarter earnings press release. 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 section 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 press release 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 earnings press release, which is available at investors.yext.com.
We also provide definitions of these metrics in the earnings press release. With that, I will now turn the call over to Mike.
Mike Walrath: Thanks, Nils, and thanks, everyone, for joining us today. This quarter, we continued to execute our plan to operate Yext efficiently while laying the groundwork for long-term growth. In Q3, we generated revenue of $101.2 million, adjusted EBITDA of $13.5 million and non-GAAP EPS of $0.09, which reflects our most profitable quarter ever on a non-GAAP EPS basis and a solid, sustainable foundation for us to grow our business. As we continue to improve our operations, we were hopeful this year would be a year of reacceleration for Yext, but we aren’t seeing this in our revenue or ARR growth rates yet. As we discussed on our Q2 call, the selling environment remains quite challenging with some deals slipping or downsizing during the later stages of deal cycles.
This caused softness in Q3 bookings as well as budget pressures on renewals. On top of this, we expect a singular large churn in Q4 attributable to a particular customer. We believe this is due to unusual factors that are unique to this customer. Darryl will discuss churn in more detail, but this particular account, a happy customer, seems to be facing budgetary pressures of the magnitude we are not seeing with other accounts. The net result is that fiscal year ‘24 revenues and ARR will not see the reacceleration we anticipated when we began the fiscal year. We think this is temporary because we see real improvement in underlying trends around pipeline, sales productivity and profitability, and we remain confident that we’ll see a return to high single-digit ARR growth next year.
We will share a full outlook on fiscal year ‘25 in our Q4 earnings discussion in March, but I’d like to take a few moments to share some of the reasons we remain excited for the future of our business. First, profitability has increased significantly. In addition to Q3 being our most profitable quarter ever, we are shaping up to deliver over $51 million in adjusted EBITDA for the full year, up over 200% versus last year. We’ve achieved this margin expansion the right way with gross margins up over 350 basis points compared to last year, sales and marketing expense down 7% year-over-year, while still investing in R&D, which was up over 13% year-over-year in Q3. Progress is not just on a non-GAAP basis. Stock-based compensation has declined to just 12% of revenue and operating cash flow creation for the year will be over 100% of adjusted EBITDA.
We are becoming leaner and more efficient. Second, our sales productivity is improving across all categories and geographies. While total bookings are down, bookings per rep is improving even in the face of an increasingly challenging macro environment. We’ve made these improvements by sharpening our focus on value-based selling, rep performance and qualified pipeline generation. A renewed marketing engine has been a bright spot for us this year, and our pipeline is strong and growing. It is unfortunate that the challenging macro environment is causing deal slippage and downsizing as otherwise, I think our renewed go-to-market effort this year would truly be a bright spot for us. With improving productivity, we have laid the groundwork for growth, including the potential to grow sales capacity, which we will look to accelerate once we have confidence in an improving macro environment.
Third, our reseller channel also showed some early signs of stabilization in ARR. We are encouraged by the progress and believe in the long-term growth opportunity of the reseller channel. We are focused on driving revenue through our resellers and are evaluating pricing strategies, including more usage-based models to drive growth in this channel as we move forward. We continue to focus on what we can control to put ourselves in the best position to capture growth as the macro environment improves. We are committed to improving customer satisfaction, and we continue to invest in the core products that are the main drivers of value for our customers today. We’ve aligned our sales motion and sharpened our focus on core product innovations across listings, reviews, pages, analytics and search that delivered tangible near-term results to our customer, and are increasing our focus on social features and functionality as well.
We are hearing from our customers that they want a partner who does more across the entire digital experience. And our product road map is designed to concentrate on solutions that deliver tangible, measurable value. These innovations include our ongoing work with AI and large language models, which enhance the functionality of our core products across areas like content generation, review response and AI chat. Several competitive wins in Boomerang customers during the third quarter underscore how important it is that we continue to innovate to set ourselves apart from our competitors. In Q3, we had several upsells and new logo wins across a variety of business verticals. In health care, for example, we signed deals with multiple providers, and in each case, we were able to identify and solve pain points that were unique to these customers.
We’ve established a strong position in health care by demonstrating that our platform is cost-effective, efficient and uniquely suited to managing customer information across our publisher network. One client in particular, was an immediate win back from Q2 when they signed with a competitor and almost immediately ran into issues as the competitor failed to deliver on their deadlines. In August, they approached Yext and wanted to move back to our platform as soon as possible. We’ve similarly seen numerous competitive wins across the technology sector, including Altice and Vodafone, and in retail, restaurants and hospitality with authentic restaurant brands, Golf Technolog ph], Raising Cane’s restaurants and TJX U.K. to name a few. All of our competitive wins in the quarter not only underscore the importance of focusing on innovation, but also signal the healthy demand for our products.
We continue to see strong interest from our customers in consolidating functions across our portfolio of products. We are making progress on our cross-platform motion and customers are seeing the additional value that’s possible through leveraging our knowledge graph across more than one of our solutions. During the quarter, we were particularly successful of selling several large financial services customers. One of these customers, a multiyear deal in a new product build-out was a notable upsell during the quarter. We created a strong value use case based on our success and the positive response we received building their financial adviser experiences for their wealth management businesses. We had similar success with the global investment management service firm, which is launching three search experiences on the homepages of their personal investing, pensions and financial adviser websites with a Yext search bar prominently displayed on each.
We continue to invest in search and AI content generation products, which we believe will represent large incremental ARR opportunities in the years ahead. One of the world’s largest retailers, for example, saw how our AI products could help enhance communications across Internet sites. Our team demonstrated the ease and effectiveness of implementing our knowledge graph and identified how AI-driven search could drive increasing employee satisfaction, which led them to becoming a new client in the quarter. We are committing development resources to deliver what our customers are ready to buy in the current macroeconomic environment. Our core listings, reviews and pages products continue to be best-in-class. The top new logo in Q3 was with one of the world’s largest tax preparation software services.
The customer was looking for a flexible open API platform to help their developers quickly stand up websites, listings and reputation management. After seeing how our platform could help their tax professionals become discoverable across all digital channels, they chose Yext products as their digital experience solution. Shifting to the fall release, we launched over 80 new features with enhancements across every area of our platform based on feedback from our customers, partners and employees. We will continue to focus our attention on product enhancements to help our clients and partners drive internal efficiencies, boost their online presence and delight their customers. We feel strongly that Yext remains well positioned to capitalize on the digital transformation taking place across organizations worldwide.
We have laid the groundwork for future growth acceleration and our highest priority is to capitalize on this opportunity when the buying environment has improved. As we complete our sixth full quarter of operations since our leadership transition last year, I feel great about the team we have in place globally, the future opportunity across our broadening set of products and the leading indicators we are seeing of a return to accelerating growth in the future. I am very grateful for the focused and steady efforts of our entire global team in a very challenging environment. With that, I’d like to now turn the call over to Darryl.
Darryl Bond: Thanks Mike. I’ll start with a review of our third quarter results before moving on to our guidance for Q4 and fiscal year ‘24. Revenue for our third quarter grew to $101.2 million, up 2% on an as-reported basis or up slightly in constant currency. Our growth in Q3 was driven by demand in our direct business as we continue to see good sales productivity and qualified demand across verticals, both domestically and internationally. Our Q3 revenue was slightly below our guidance range of $101.5 million to $102.5 million. This was primarily due to foreign exchange rate fluctuations, drop in foreign exchange rates that occurred from the time we provided our guidance in early September through the close of our quarter resulted in a revenue impact of over $0.5 million.
Annual recurring revenue, or ARR, was $396.8 million at the end of Q3, up 2% year-over-year or 1% in constant currency. Direct customers represented 82% of total ARR and direct ARR totaled $326.6 million, an increase of 3% year-over-year or 2% in constant currency. As of the end of Q3, our customer count for direct, excluding SMB, was approximately 2,980. Third-party resellers, which represented 18% of total ARR at the end of Q3, delivered ARR of $70.2 million, a decrease of 3% year-over-year or down 4% in constant currency. As Mike mentioned earlier, we are encouraged by the improvement relative to last quarter and believe that our reseller channel will return to growth over time. As of the end of Q3, our net retention rate, which is calculated on the basis of ARR, was 97% for our direct customers and 95% for our third-party resellers.
Turning to non-GAAP results, which are reconciled to GAAP in our earnings press release, Q3 gross profit was $79.8 million, representing gross margin of 78.9% compared to 75.3% in the year ago quarter. As we’ve mentioned previously, the improvement relative to last year was largely attributable to the organizational changes within our services organization, which was a process we kicked off in Q4 of last year. We expect our gross margins for the remainder of this fiscal year to remain at the high end of our 75% to 80% range. Our operating expenses in Q3 were $69.9 million or 69% of revenue compared to $72.1 million or 73% of revenue in the year ago quarter. A key part of our operating expense discipline has been the realignment of our sales and marketing team and our sales and marketing costs as a percentage of revenue were 41% in Q3 compared to 44% in the third quarter last year.
Our Q3 net income was $11.3 million compared to net income of $2.5 million in the year ago quarter. Q3 net income per basic share was $0.09 compared to net income of $0.02 per basic share in the third quarter last year. Cash and cash equivalents were $182 million at the end of Q3 compared to $201 million at the end of Q2. The decrease in our cash balance was driven in part by continued share repurchases in Q3, which totaled $11.9 million or 1.8 million shares. Since the commencement of the program, our share repurchases have totaled $100 million or 16.8 million shares. Net cash used in operating activities for Q3 was $1.6 million compared to $10.8 million cash used in the year ago quarter. And our CapEx was $800,000 compared to $1.5 million in Q3 last year.
In summary, our third quarter results highlight the continued progress we’ve made in improving sales productivity and operating efficiency to have achieved record non-GAAP profitability despite the persistence of unfavorable macroeconomic conditions is a testament to the discipline and hard work of our team. When these pressures ease, we are confident that the improvements we made will allow us to drive growth in our ARR followed by our top line. Turning to our outlook for the fourth quarter and full fiscal year ‘24, our guidance factors in the outsized impact of the large customer churn Mike mentioned earlier. We calculate the impact of this customer churn alone to be approximately $11 million in ARR and our Q4 revenue guidance factors this in.
Our outlook also includes our assumptions for the continuing effects of a challenging macroeconomic environment. As of today, for the fourth quarter, we expect revenue in the range of $100 million to $100.5 million, adjusted EBITDA in the range of $12 million to $13 million and non-GAAP EPS in the range of $0.07 to $0.08, which assumes a weighted average basic share count of approximately 124.4 million shares. For the full year of fiscal ‘24, we expect revenue in the range of $403.2 million to $403.7 million, adjusted EBITDA in the range of $51.7 million to $52.7 million and non-GAAP EPS in the range of $0.31 to $0.32, which assumes a weighted average basic share count of approximately 124.1 million shares. We will provide more detail about our plans for ARR growth in fiscal ‘25 as well as the rest of our financial outlook for fiscal ‘25 during our Q4 earnings call in March.
Before we open up the call for questions, we wanted to provide an update on our plans for future quarterly earnings calls. Beginning next quarter, we plan to publish quarterly commentary on our website at investors.yext.com shortly after the market close and begin Q&A directly at the beginning of the call rather than read prepared remarks. We believe this is a more efficient way to share this information with you and to make the most of our Q&A sessions going forward. Now we would like to open up the line for questions.
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