Earnings Labs

Yext, Inc. (YEXT)

Q3 2018 Earnings Call· Thu, Nov 30, 2017

$3.92

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Transcript

Operator

Operator

Good day, everyone and welcome to the Yext Third Quarter Fiscal 2018 Earnings Conference Call. [Operator Instructions] And please note that today’s event is being recorded. I would now like to turn the conference over to James Hart, Vice President of Investor Relations.

James Hart

Analyst

Thank you, William, and good afternoon, everyone. Welcome to our quarterly conference call. With me today are Howard Lerman, CEO of Yext; Steve Cakebread, CFO and Jim Steele, President and Chief Revenue Officer. As a reminder, this call cannot be taped or otherwise duplicated without the Company's prior consent. Before we begin, I would like to remind everyone that this call may contain forward-looking statements, including statements about our industry outlook, market opportunities, business performance, financial outlook and other non-historical statements as further described in our press release. These forward-looking statements are subject to certain risks, uncertainties, and assumptions, including those related to Yext's growth, industry, product development, market opportunities and general economic and business conditions. These statements reflect the Company's current expectations based on its beliefs, assumptions and information currently available to it. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports with the SEC, including our most recent report on Form 10-Q and our press release that was issued this afternoon. During the call, we will also refer to non-GAAP financial measures. Reconciliations with the most comparable GAAP measures are also available in the press release which you may find at investors.yext.com. With that, we will begin by turning the call over to Howard.

Howard Lerman

Analyst

Thank you, James and thank you everyone for joining us this afternoon. We are very pleased with our results this quarter. Let me touch on a few of the highlights. Revenue grew 39% over the third quarter last year. We added 55 new enterprise logos, including one of the largest financial service providers in the United States, a large regional bank and one of the leading car rental companies in Europe and we continue to have great success in one of our largest verticals, healthcare, signing new deals this quarter with Boston Medical Center and Rush University’s Medical Center among many others. These brands recognize that the world is undergoing an intelligent transformation. Services powered by artificial intelligence and machine learning are fundamentally changing the way consumers are interacting with the world around them. For 20 years, the web was the centerpiece of every digital experience, fueled by blue links on a page. But today's services don't return web results. They give back direct answers in the form of maps, voice search answers, knowledge cards and conversational UIs. Gone are blue links, web pages and strings replaced by smart answers made up of things. Intelligent services have three parts. A UI for you to engage with it; AI that decides what answers to show you and these intelligent services each have their own knowledge graph that contains everything that they know about the world and how it's related, including what they know about a company. Now, companies cannot control the UI of these services and companies cannot control the AI of these services, but they can control what intelligent services know about them, which helps them to control what’s said about them and that's why just like it’s table stakes for every company to have a website today. We see…

Steve Cakebread

Analyst

Hey, thank you, Howard. We had a strong quarter and are very pleased with our results. Over 44.3 million of revenue this quarter and it exceeded the high end of guidance. This increase was 39% over the 31.9 million we reported a year ago. And keep in mind, as we said before, our small business team generates a relatively consistent amount of revenue each quarter and typically contributes little or no to growth to our top line. Small business accounts for about 10% of our total revenue today compared to 14% in the year ago period. And if we were to exclude the impact to small business, our revenue growth would be 45% as compared to third quarter last year. Last quarter, we told you about the merger of two large reseller partners. That merger resulted in a stronger, healthier partner for Yext, though the renegotiated deal with the combined entity created some short-term headwinds for us. We saw the impact of these headwinds in our net retention rate this quarter and which to remind you excludes small business in this calculated on trailing 12 months. Our net revenue retention was towards the lower end of our historical range of 113 to 120. On a logo retention basis however, particularly in enterprise, it continues to be very strong and we continue to add premier logos in the US, in healthcare and in Europe. As of October 31, our customers are managing more than 27 million attributes on our platform. This is an increase of more than 66% from October last year and an acceleration in the growth of our attributes versus last quarter. Also, as of October, we had nearly 1.4 million licenses, which is 58% greater than the year ago period. And just to note about this metric, we…

James Hart

Analyst

Thank you, Steve. William, we're now ready to begin the question-and-answer portion of the call. Could you please give the instructions again?

Operator

Operator

[Operator Instructions] And the first questioner today will be Alex Zukin with Piper Jaffray.

Alex Zukin

Analyst

So maybe first for you guys, 55 enterprise deals, some large enterprise marquee logos, very impressive, so maybe you can comment on how that compares with the previous two quarters and maybe just go a little bit deeper on the growth of the enterprise business as you see it and what kind of growth you see actually in the fourth quarter as well? And then I've got one follow up.

Howard Lerman

Analyst

So I think we were 57 last quarter, consistent with Q1 and Q2 in terms of what we added, in terms of new logos this quarter.

Steve Cakebread

Analyst

Yeah. In terms of the growth, we talked about the 45% ex-small business. If you keep looking at that enterprise and mid-market, as we've always described, this has been the strong point of our business and that's why we're investing in the sellers and the opportunities around the world in those market places. For our Q4 growth, it obviously is impacted when you just do full business by the partner reseller merger that we had. So we see that as a bit of an anomaly, but we're really excited about the mid market and enterprise and the investments that we're making there and the growth that we're seeing.

Alex Zukin

Analyst

And then maybe as a follow up, can you talk a little bit about enterprise sales rep productivity, maybe how many kind of hiring plans, how many reps you hired over the past quarter and then with respect to the cash burn going down in the fourth quarter, is it possible to get your kind of timing expectations or updated timing expectations for breakeven free cash flow?

Jim Steele

Analyst

Hey, Alex. This is Jim Steele. I'll talk to the enterprise hiring and investment. We're not going to share the numbers, but you recall in the beginning of the year, during the roadshow, we talked about how the beginning of last year, we were about 11% of our headcount for the company was in sales, direct sellers and we finished the year, last year at 15% in our plan that we talked about in the surge in hiring for sales was to get to 20%. We are absolutely on track. We are recruiting. We've been hiring and we are attracting some great talent people with tremendous experience as software salespeople, SASP in particular, industry expertise around marketing as well as vertical skills. So the hiring is aggressive and we're on track to get to that plan that we talked about at 20%. So definitely on track. And in terms of productivity, I mean, we talked about how the typical ramp for enterprise sales is very similar to the industry at about 12 months. We're seeing about the same thing with our hiring in the enterprise, but clearly, the enterprise and midmarket were making major investments and after ONWARD, we saw just a tremendous amount of excitement from the enterprise customers, a lot of great customer stories. We’re obviously innovating. You saw lot of new announcements in terms of products and innovation. The solution set and roadmap are strong and what's most exciting is you look by industry, by geography, by product, by vertical and we’re only single digit penetration. So that's what -- that's what gets people excited and that's why we've been able to recruit very aggressively.

Steve Cakebread

Analyst

Jim gets all the exciting stuff. I guess to talk about cash burn.

Howard Lerman

Analyst

I get exciting stuff too.

Steve Cakebread

Analyst

So, it is true that Q3 in terms of our cash from operations is it's all about timing. I mean, the receivables are up. Some of that's billing, some of that's collection. We also, as a company, operate on a payroll cycle of every two weeks and we had three payroll cycles in September. So that had an obvious impact. And then as you guys all know, we had ONWARD the first week of November and so we spent some money in Q4. So, sorry, Q3. So I think it's a bit of an anomaly. We expect to return back to what you've seen in the first couple of quarters at roughly a 4 million quarter cash burn, 4 million to 5 million. That's not guidance by the way guys. It's just what we expect to do is get back to that if you do the math. We're still on track to look at cash flow breakeven late next year as we described before.

Operator

Operator

And our next questioner today will be Brent Bracelin with KeyBanc Capital Markets.

Brent Bracelin

Analyst

Wanted to start out with a question for Jim on the enterprise side. If I would kind of back out SMB from Enterprise, it looks like we have now two consecutive quarters of accelerating growth in the enterprise side. If I look at kind of new enterprise logo adds, it's kind of 50 to 57 range. So no big material change there, so walk me through the dynamics of what's driving the acceleration and enterprise growth, is this just bigger new logo adds that you're adding? Is this kind of footprint expansion at existing enterprises, walk me through the drivers of the acceleration of growth in Enterprise.

Jim Steele

Analyst

Yeah. I think, well clearly, the new logos are big and that's a big part of it. The 55 that we talked about and then the upsell, what we're seeing is our enterprise customers are -- the retention is very high. And that helps us a lot and that means that our customers are seeing a good return. They're seeing good value and they're coming back for more. They're adding both locations and as Howard and Steve have talked about, we're kind of changing from what we used to count as just locations to now licenses. So we have an opportunity now to sell additional entities that are not location based. We talked about healthcare with doctors for example and other entities as we get into our new products that round food and event. So it's really the upsell and it's the expansion of the existing footprint, companies that begin with maybe a region or a country and then they add to that. So it's selling into our existing install base as well as expanding to new logos. That's what's driving it and plus, building our capacity of our sales organization or go to market, we're hiring people out in the geographies, a couple of years ago, all the hires were pretty much in New York. We're now hiring in the regions where our customers are and we're hiring people with the skillset and that's the result of some amazing talent that we’re attracting to the company. So -- and if you saw like, I wish I could take like a just a summary of the ONWARD, our conference, the presentations by the customers, I mean, it was just incredibly exciting. Our existing customers were thrilled because they see that this where a couple of years ago they might have been the early adopters. Now, they see that there's a lot of other companies and a lot of different industries. We talk about financial services and healthcare, two of our top ones obviously, food services and auto, retail. These are all huge growth opportunities for us. So it's by industry, it's by geography and it's by additional entities which drive additional licenses.

Brent Bracelin

Analyst

Shifting gears to Steve here, as we think about kind of the change in net retention rates. You talked a little bit about kind of the two partners merging, having some impact towards the lower end of the range. You also talked about a bigger impact, a full quarter impact in Q4. One of the components impacting the retention rate here, is this mostly SMB and mid-market that's being impacted by the two partners merging, is this upsells that are being disrupted, is this actually logo renewals that are being disruptive, could you provide a little more color on what's driving the change in retention rate with the two partners merging?

Steve Cakebread

Analyst

That's a good question. I mean, the small business retention is not getting impacted by this at all, because this is our direct small business nor is mid-market and enterprise, but when we do have reseller partners like these two guys, when some of the revenue goes away, it impacts our retention calculation. So the retentions -- the decline in the lower end of this is solely due to the merger and not any losses in anyplace else. The rest of our upsells as Jim described in our customer logos, retention remains very strong.

Brent Bracelin

Analyst

And then the last one for Howard, obviously, coming out of ONWARD, you’ve talked to a lot of customers, what was the one product that stood out that customers were kind of most interested in talking to you about?

Howard Lerman

Analyst

Well, it depends if they were speaking to me in Mandarin or English. If they were speaking to me in English, we heard a ton of great feedback about Knowledge Assistant. The ability to have a conversational UI that you can update stuff is a very simple natural way to go, but that's kind of like asking you to pick who your favorite kid is, because we heard amazing feedback about events and that, the TAM there, there's no third party evidence for this, but it's a hugely opportunistic -- opportunity for us in that we're going to be able to synchronize. You should all do these on your phones, search for events or events near me, you'll see that structured calendar pop up in Google. Every brand is going to want to have their information about their events in that calendar, just like every brand wants to have their locations in Google Maps. And so this presents us with an incredibly new big opportunity. I personally am most excited about that opportunity, although I heard customers excited about all three of our major announcements.

Operator

Operator

Mr. Zlotsky, your line is open.

Stan Zlotsky

Analyst

So, very quick one, just following up on the enterprise line of questioning earlier, so we're going into your big Q4 and -- which is typically a lot of enterprise activity happens and we're also coming out of your big ONWARD User Conference. What are you guys seeing just qualitatively in your pipelines heading into this big enterprise Q4 quarter?

Steve Cakebread

Analyst

You know what, it's a little too early in the quarter to tell you. I mean, we have a lot of deals on the table obviously and Jim is working hard at them. So, as you know, Stan, we don't talk about our pipelines at all. So it’s tough to characterize that. I will say to Howard's point, a lot of energy and enthusiasm. So, we'll just have to stay tuned for that.

Stan Zlotsky

Analyst

Maybe just a little bit more tactically, as we just sit down with our models and look at billings, calculated Billings, how should we think about deferred revenue builds, once again with, keep in mind the potential for big enterprise activity?

Steve Cakebread

Analyst

Yeah. Well, some of the -- obviously Q4 will have good deferred revenue numbers. So billing cycles influence your billing calculation dramatically and I don't honestly know what the mix is going to look like. So we haven't seen much change in our mix as your calcs would reflect and deferreds are going to be driven by the business that we do in Q4.

Stan Zlotsky

Analyst

And then maybe just one clarification question, so the build in AR that in the sense, we didn’t see the cash come in on the cash flow statement, but did that – is that also -- do we get the benefit of that in deferred revenue.

Steve Cakebread

Analyst

Yes. I mean that's why deferreds are up, right.

Stan Zlotsky

Analyst

And then just very last question for me, as far as this guidance for Q4 and obviously the full year revenue guidance not moving up versus the guide that we heard earlier after Q2, is it just the merger between Dex and YP or is there another dynamic there we need to keep in mind.

Steve Cakebread

Analyst

No. I mean if you look at it and we’ve said that that merger had an impact of about 1% in our revenue. That's pretty large in the quarter for our SaaS business, for the year, but I mean it is moving into this quarter too. So for the year, it's predominantly that, if you do your math and take it out, our growth rates for Q4 are pretty much in line with where we've been. William, next question please.

Operator

Operator

Yes. And our next questioner will be Mark Mahaney with RBC Capital Markets. Please go ahead.

Mark Mahaney

Analyst

Thanks. Two questions please. The impact of the Dex YP merger, can you help us think about how long that will last for and then you talked about the integration with both the WeChat and Facebook Messenger, particularly with Facebook Messenger. To what extent do you find that Facebook itself is actively or will actively work to promote integration with Yext? And I say that having looked at Facebook that’s got some huge assets on its hand that are completely unmonetized. So to what extent are they incentivized than they should be to figure out ways to work with Yext to actually start monetizing those messaging platforms?

Howard Lerman

Analyst

Gosh, I mean do you want me to go first or Steve. Mark, to your question about Facebook Messenger, we chose it because Facebook Messenger has a really neat UI that allows for kind of touch with various choices, almost like branches, instead of just straight up SMS. We do support SMS as well, but we can do easier things like, hey, proactively reach out intelligently. When we look for example, let’s say, the knowledge assets that Yext has and all the information about every business is a incredible advantage for things like machine learning. We can look across all the businesses to find potential patterns that may inform a particular thing. So we might say, hey, are you really open on Christmas. If most businesses are closed on Christmas, we might ask a business, are you really open on Christmas. And then with Facebook Messenger, we're able to say yes or no or maybe or don't -- this is not a relevant question to me with just one single tap as opposed to SMS where the user actually has to type in a reply. It basically gives you some nicer branches. Also, a lot of people use it. So, as you say, there's a big unmonetized there. We’re a B2B application for this. So imagine that this is not just a user, an end user using this, this is a store operator of say, Massage Envy using their Facebook account to be able to do this, which is what we demoed at ONWARD. That allows us to be able to do stuff. I think Facebook is hugely incentivized to help any company build a chat application or a chatbot on top of their platform. And by the way, it's not just Facebook. It's in Alexa, it’s Amazon, you saw today they announced their business platform. You can imagine a scenario in the future where people are going to want to tell Alexa that they're closing early for the day and walking out of their store. There's so many B2B use cases. Everybody is focused on the personal assistant. Yext is more focused on helping be the business assistant.

Steve Cakebread

Analyst

Right. And with the merger market, clearly, takes some of the uplift in Q4. I mean, we're just going through our numbers for next year and looking at that, there's a lot of opportunities in different places. We have a great partner in Dex YP and we'll see what we're going to do with them as well, but it's a little too early for us to talk about what's going on next year. There's a lot and so we're excited about the numbers, but we're not ready to share those yet.

Operator

Operator

And our last questioner today will be Mark Murphy with JP Morgan. Please go ahead.

Albert Chi

Analyst

This is Albert Chi stepping in for Mark Murphy. One for Howard who's Mandarin is better than mine I think. I wanted to ask about the WeChat in China announced and kind of get a sense of whether you think this deal could be some sort of a tipping point of getting more meaningful -- getting more meaningfully into China and maybe you could help frame the size and the opportunity -- of the opportunity for us.

Howard Lerman

Analyst

Well, gosh, I want to start off by saying thank you, although [Foreign Language]. I am not really good at all. That said, the opportunity in China isn’t even contemplated in everything we've shared with you. The 100 million locations, the opportunities for event, the opportunities for all the different types of entities that we manage and the revenue that comes into Yext is all from, it’s all outside of China. And China is totally in addition to everything that we see there. So, that’s -- Google and Facebook are blocked in China as you know. So that said, the opportunity to integrate with Chinese services as a feature for our Western multinational customers is broad. There's a ton of different services in China, an entirely different ecosystem, ranging from bike sharing companies all the way on up to WeChat, to BABA to Baidu to [indiscernible] to all the different places that people look. We're really fired up about helping our Western customers with locations in China for many of whom it's one of their fastest growing markets. We work for example, just raised a bunch of money to do a JV in China and needs to get the word out and to get all their digital presence ready, we’re a great option to be able to do that in China. And so it's easy for us to upsell new entity licenses for domestic Chinese locations, however the contract is still with a Western company.

Albert Chi

Analyst

And one for Steve, so we saw a pretty healthy billing speed, especially off of tough comps in the year ago quarter and so is there any color that we should know about and kind of bouncing what happened with the merger and the headwinds and I know that kind of comes more into Q4, but maybe specifically, could you comment on whether the contract duration is shifting more favorably towards the annual mix.

Steve Cakebread

Analyst

There's a little bit of that, but I think it's -- as we described it, as we get more experience with existing customers, they start to bake in longer contracts and yeah, we've brought in 55 new logos. So they tend to be shorter contracts right now. So, I don't think any of that has fundamentally changed in the last year for us other than we're just doing better at closing deals and adding capacity to Jim’s sales force.

Operator

Operator

And this will conclude our question-and-answer session. I would like to turn the conference back over to James Hart for any closing remarks.

James Hart

Analyst

All right. Thank you, William. Thank you, everyone for joining us today. That concludes our call. We look forward to coming back to you in the fourth quarter of the New Year to report our fourth quarter results.

Howard Lerman

Analyst

Thank you. May the force be with you.

Operator

Operator

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