Yext Inc

NYSE:YEXT

Earnings Call Analysis

Yext Reports 13% Revenue Growth Amid Stabilizing Business Environment

In its third-quarter results, Yext reported a promising 13% year-over-year revenue growth, driven partly by the acquisition of Hearsay Systems. The company noted a stable core business with the legacy direct ARR showing slight fluctuations. Looking forward, Yext expects the revenue in Q4 to potentially dip slightly due to foreign exchange fluctuations but remains optimistic about overall stability. The leadership emphasized a focus on improving margins and accelerating growth, aiming for a Rule of 40 benchmark. With ongoing advancements in AI-driven search landscapes, Yext is strategically positioned to leverage these changes in consumer behavior.

Strong Revenue Growth Amid Stable Business Environment

In the latest earnings call, Yext reported a revenue growth of 13% year-over-year, largely driven by the integration of Hearsay Systems. The company emphasized the stability of its core business, which is benefiting from early signs of improved market conditions. The selling environment appears to have stabilized, suggesting a positive trajectory for future performance. This stability is critical as it forms a strong foundation for further growth.

Navigating Currency Fluctuations

Yext also addressed the impact of foreign exchange (FX) rates on its financial guidance. The company experienced a favorable FX effect in Q3, which is expected to reverse in Q4. CEO Mike Walrath indicated that the revenue estimate for the next quarter suggests a slight sequential decline impacted by these FX dynamics, although the underlying business remains stable. Investors should note that currency fluctuations could affect short-term performance but are not indicative of the company's long-term health.

Focus on Growth and Margin Improvement

There is a renewed focus on improving the company's margin profile while driving revenue growth. Yext aims to achieve a 'Rule of 40', which refers to the sum of revenue growth rate and profit margin, with a goal to outperform it. The executives expressed satisfaction with the recent progress on margins, with further improvements expected in Q4. This alignment towards operational efficiency and growth presents a compelling narrative for investors looking for sustainable expansion.

Hearsay Systems Integration Yields Positive Insights

As Yext integrates Hearsay Systems into its operations, the company is starting to see significant momentum. Hearsay contributed $16.4 million in revenue in Q3, with the overall annual recurring revenue (ARR) contribution from Hearsay reaching about $62.8 million. The integration efforts have been progressing well, and by year-end, leadership anticipates being largely complete with this process, positioning Yext for further growth opportunities.

Capitalizing on the Fragmentation of Search

The executives highlighted an emerging trend of fragmentation in search environments spurred by generative AI developments. This shift is expected to create new demands on brands to develop and structure their content effectively to cater to diverse search experiences. Yext is well-positioned to help brands navigate this landscape, potentially leading to increased organic growth as companies seek flexible and structured data solutions.

Evolving Market Needs Introduce Potential Growth Areas

The call reflected a firm understanding of evolving market requirements, particularly in relation to compliance and communication channels. The integration remains focused on enabling clients, especially in regulated industries like finance, to manage complex communication needs. As businesses accelerate digital transformations, Yext expects an uptick in demand for its solutions, reinforcing long-term growth strategies.

Looking Ahead with Caution

Despite optimistic growth indicators, Yext's leadership issued a conservative outlook for the immediate future, aiming to validate improvements in demand and operational performance before adjusting forecasts. The executives stressed the necessity of evidence to substantiate the forecasted growth, particularly as they navigate potential economic fluctuations. Investors should consider this cautious approach as a sign of prudent management amidst a dynamic business environment.

Earnings Call Transcript 2025-Q3

[Operator]

Good afternoon, and welcome to the Yext, Inc. Third Quarter Fiscal 2025 Financial Results 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, executive]

Thank you, operator, and good afternoon, everyone. Welcome to Yext's Third Quarter Fiscal 2025 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, statements regarding the expected effects of our acquisition and integration of Hearsay Systems, expectations regarding the growth of our business, our outlook for the fourth 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 third quarter shareholder letter.

These forward-looking statements are subject to certain risks, uncertainties and assumptions, including those related to Yext growth, the evolution of our industry, our product development and success, our ability to integrate Hearsay Systems business with ours, 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 3 and 9 months ended October 31, 2024, and our earnings release and our shareholder letter that were 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.

I will now turn the call over to Mike.

[Michael Walrath, executive]

Good afternoon. Thank you all for joining us today. Our quarterly shareholder letter has been posted to our Investor Relations site. I hope you've all had a chance to read it. Before we jump into Q&A, I'd like to emphasize a few points from the letter.

We're pleased with our results for Q3. Our revenue grew 13% year-over-year with the inclusion of Hearsay Systems. The core Yext business is very stable, and we're seeing growth contribution from Hearsay. The selling environment appears to have stabilized in the second half of the year, and we are seeing early signs of the extreme cost optimization moderating. We're seeing the early phases of a fragmenting search environment driven by generative AI search experiences. We believe this environment is positive for Yext as brands will need to lean into the best ways to structure their content and data and deliver to a much broader set of consumer search and find experiences.

I am pleased with our operating results. We're a much more efficient business today, and while there is still opportunity to continue to improve our margin profile, we are increasingly focused on accelerating growth. None of this would be possible without the commitment and efforts of our global team, and I'd like to take a moment to thank them for their ongoing contributions here.

Now we'd like to open it up for questions.

[Operator]

[Operator Instructions] Our first question is from Ryan MacDonald with Needham & Company.

[Ryan MacDonald, analyst]

Congrats on a nice quarter. Mike, maybe to start, you talked about quite a bit in the letter and just there in the prepared remarks that we're in the early phases of a fragmented search environment. So it's a lot of new generative AI search kind of starting to disrupt sort of Google's traditional monopoly and sort of SEO and SEM strategies today. Can you just talk about how this is translating into customer conversations and potential pipeline generation? And what do you think this could potentially do for organic growth as we think out over the next couple of years?

[Michael Walrath, executive]

Yes, sure. Thanks for the question, Ryan. So this is probably -- I mean, this is certainly the #1 conversation that we're having with both customers and with prospects. And it's really interesting because over the last 5, 6, 7 years, the centralization of the Search business with a single party, the focus on a kind of single party focused SEM and SEO has been a challenge for us, and I think we've talked a lot about this.

As we start to see that what seems clear to us is going to be a fragmentation there are going to be different ways that AI search experiences address consumer questions, answer questions and ultimately, deliver those answers to the questions. One of the things that is going to have to be top of mind for marketers is, the rules are going to very likely be different. How do I create content that is more adjustable by these generative search experiences? How do I deliver that content to these different generative search experiences? It's not going to be as simple as updating my -- the data pipes that I have into Google, and making sure that I'm following the rules of Google's SEO and SEM marketplace -- or SEO dynamics and SCM marketplaces.

There's no customer that we're not talking about this with. And from Yext point of view, this is very much -- this is a problem we faced historically with the fragmentation that came from the mobile device. In a lot of ways, it's the reason why Yext exists. And having a really advanced platform for gathering brands information, structuring that data and then making that data deliverable through an increasing number of digital channels is going to be central to a brand strategy.

And so we're not making predictions today about exactly when we start to see the impacts of this, it's already happening in the boardrooms, in the management rooms. And I don't think there's any topic for brands, especially brands who are thinking locally that is more top of mind in this topic right now.

[Ryan MacDonald, analyst]

Helpful there. And then it seems like from the shareholder letter, like a very good quarter, lots of new logo additions, especially in health care, some nice expansion activity. Can you just kind of the -- maybe then sort of compare that with kind of some of the -- maybe the implied guidance for fourth quarter on the top line where we're taking a sequential step down. Just how should we think about where things stand in terms of the trajectory? And maybe you can divide it between sort of organic business versus -- or the core Yext business versus maybe some of the initial things you're seeing with your say?

[Michael Walrath, executive]

Yes. Sure, Ryan. So thanks for the question. So I'm going to let Darryl get into the specifics, but I think the sort of punch line to your question is it's the sort of confusing sequential nature of the revenue in Q3 and the guide in Q4 is FX related. Darryl, I don't know if you want to jump in...

[Darryl Bond, executive]

No, that's right. And Ryan, in the Q that we filed this afternoon, there's a few more specifics on the Hearsay business and their contribution in Q3. But at the end of the day, we view the sort of the legacy Yext business is pretty stable. When you sort of back off the ARR contribution from Hearsay at the end of Q3, which was about $62.8 million and look at the sort of Yext direct ARR. It was up a little bit from Q1 to Q2, down a little bit from Q2 to Q3. So we feel pretty good about the stability that we're seeing there. We talked about in the shareholder letter some of the modest improvements we're seeing in retention rate. So the business there feels pretty stable.

On the -- revenue side is another way you could look at it. We also quantified the Hearsay revenue in Q3 at $16.4 million. And when you sort of look at that from Q1 to Q2 to Q3, the sort of legacy Yext revenue is pretty stable as well. So I think we've got a pretty stable business. We've talked a lot about Reseller, which is going through a similar dynamic where the committed ARR might be coming down. But as we've talked about for a few quarters, we're really focused on driving up usage there, and commitments are great, but it's not how we're driving the business.

And the way that you sort of look through that and see the evidence of that is the Reseller revenue. And that's been pretty consistent over the past few quarters, despite that committed ARR number coming down. So overall, we feel pretty good about where the business is at and the addition of Hearsay we're really excited to get through Q4 and into next year to start to continue to build on the momentum that we've got post-closing.

[Michael Walrath, executive]

Yes, Ryan, just to add to that. I think the part of your question was sort of explain the delta between the revenue that we had in Q3 and the revenue guide for Q4, and it would appear that, that sort of revenue guide suggests that the revenue could be down a little bit sequentially. I think what you're dealing with there is that there was -- the way that the FX fluctuated, there was upside in Q3, and there's downside in Q4. And when you watch those things out, they're actually -- there's just really sort of stability in the revenue, which is what we talked about last quarter and what we expect as we get through the end of the year is that the kind of revenue picture and the overall ARR picture is stable, and then we're really starting to look forward into kind of getting those metrics growing as we move into the future.

[Darryl Bond, executive]

Yes. And Ryan, just to elaborate a little bit on the FX. We did get a benefit from FX and revenue in Q3. But post October 31, we saw the FX rates come down, and that's what we use to set our guide.

[Operator]

The next question is from Tom White with D.A. Davidson.

[Thomas White, analyst]

Great. Maybe just a couple on Hearsay. Now that you guys have had a little, I guess, more time to maybe deeply dive into the books. Just curious if there's any new insights you could share about trends in that business, maybe the quality of the pipeline versus when we heard from you guys 3 months ago? And maybe just update on whether there's any -- curious if there's any difference in the deal cycles for Hearsay versus the legacy business given that it's exposed to like enterprises having to satisfy compliance requirements. I'm just curious if it's maybe a little bit more resilient on that front. And then I have a quick follow-up.

[Michael Walrath, executive]

Yes. So I would say there's not really any big surprises here. We knew the business was growing, and that trend continues. As we get through the integration, which we're making great progress against, and I really think by the end of the year, we would expect to be largely complete with that.

What we're seeing is that there's real momentum in that business and that the best conversations we're having are with our mutual customers and also the customers who use one platform or the other about the power of unifying these platforms and having a unified data system and having unified insights. So I think when we talked a little bit in the letter about we're starting to see some of the sort of extreme headwinds to budgeting and cost cutting that we've seen over the last couple of years abate.

Part of that is we're seeing -- and it's not just Hearsay, it's also on the Yext side, we're starting to see deals that have -- over the last couple of years have slowed down or starting to now maybe accelerate a little bit. And that I think there's a feeling overall around the business and around the customers that they've done. And look, we're in this bucket too. We've done a lot of cost cutting over the last couple of years, and we now have a margin profile that we see as much more sustainable.

And so we're also going to be looking -- we're always going to look for ways to optimize that margin profile, but we're also going to be looking for ways to accelerate growth and take advantage of -- I'm not sure we're ready to talk about tailwinds yet, but we're certainly ready to talk about some of the headwinds are abating.

And then to your last question about compliance and the need for financial institutions to be compliant. That need is only going to get greater as the demand for different ways to communicate with the end consumer increases. So Hearsay has followed a really nice innovation trajectory focusing on compliance social media, and then getting into a growth area for their business, which is compliant, texting and communications.

We think that the fragmentation of the search environment also leads to the fragmentation of how do you talk to your customers through different social channels, through different communication channels. And all of that creates a headache for compliance that we can help solve. And so these are some of the reasons why we're starting to feel a lot better about, I think, the selling environment as we look forward in the medium- to long term.

[Thomas White, analyst]

Okay. Great. Mike, that was very interesting. Maybe just in the letter, I think there was a mention that you guys will continue to evaluate M&A opportunities. And I guess letter also talks about, and you've discussed this fragmentation of search experiences and just how the search space and digital knowledge space continues to evolve quickly. I'm just curious, like, are there any other products like if you look out a few years that adjacent products that you can imagine wanting.

And I kind of say that thinking about Hearsay Systems and Social, like I feel like we didn't hear a ton about you guys talking about Social for a few years. And then all of a sudden, we heard about it for a couple of quarters. And you decided that it was something you needed to have. I'm just curious if there are any other adjacent products that you think might make sense for you guys to think about either building or buying?

[Michael Walrath, executive]

Yes. I think a big part of -- and we've talked about this is a big part of the -- both our development of the non-financial services Yext Social product as well as the Hearsay acquisition. We're really driven by our customers, right? They were driven by our customer demand for a unified platform that would unify listings, pages publishing, reputation management, search, social media, communications, compliant communications, compliance, social media.

And so what we've done is we've -- and we've talked a lot about this, we've rebooted the company around the customer. And our customers are going to tell us what the most important things for them are. And so we see opportunities in health care, we see opportunities in data and analytics and insights. And we see really a lot of opportunities to continue to broaden the value proposition to our customers.

There are two things we're going to remain incredibly focused on. One is listening to our customers and understanding. And they're in different verticals. So not every customer needs the same thing, and we're going to be very focused on delivering the different things that customers need. And then we'll continue to take a very pragmatic, very disciplined approach to organic growth and research and development and also the opportunities in M&A.

[Operator]

The next question is from Rohit Kulkarni with ROTH Capital Partners.

[Rohit Kulkarni, analyst]

A couple. One on the letter, you have said that last couple of weeks, you're seeing some deals accelerate as businesses focus on more initial transformation. And then perhaps tie that with your guidance, maybe ex FX to the extent you can provide, is this -- is FX the only reason for the guidance? Or how does the trend that you're seeing in the last few weeks, tie into what the guidance is? And then I have a couple of follow-ups on the big picture things.

[Michael Walrath, executive]

Sure, no problem. So I'll take the second one and let Darryl talk about the FX stuff.

I think what you have probably come to expect from us is that our financial guidance is going to be conservative, generally speaking, in the short term. And so we're not going to -- because we're seeing -- just because we're seeing maybe some abatement of headwinds and things like that, I think we're going to want to prove that the dynamics are there. And so we feel comfortable with the guidance that we've given. There is some FX noise in it, which I think Darryl can talk in more detail about.

But mainly what we are is feeling confident that the business is going to start to perform better from a growth standpoint, but we're not going to get into the business of predicting when that happens until we have clear line of sight to it.

[Darryl Bond, executive]

Yes. And I think it's deal timing, too, right, like deals that come in, in Q4 towards the end of the quarter are not going to really impact revenue all that much. But the FX that we're seeing, it's a couple hundred thousand at least impacting the business in Q4. So as Mike said, we want to be thoughtful and conservative about how we put that guide out there, knowing that we're still operating in a dynamic environment.

[Rohit Kulkarni, analyst]

Okay. And also, I think a couple of tidbits on Yext Social, seems like a pretty nimble and quick launch and integration and Hearsay. And you've also talked about how you're integrating with conversational AI search and chat with probably which I can think of Meta AI. So perhaps talk about what is the go-to market? And where do you see the greatest near-term opportunity in the Yext Social, perhaps getting new logos in or upsell opportunities in the near term?

[Michael Walrath, executive]

Yes. I think it's both. I do think most of our customers, particularly our larger customers are using something for social today. And so part of the reason why really Yext Social and Hearsay Social are two different initiatives that are on a long-term convergence path, but the needs of non-financial services customers to manage social media and social media analytics for location-based marketing. They're different because most of the other industries don't have these compliance features.

And so we'll look to ultimately converge the strengths of both of those platforms into an offering that is at least converged, if not singular over time. But not everybody is going to need the level of sophistication and compliance that Hearsay has.

It's early on the Yext Social side, we launched that product officially in September. We feel really good about the product that we've built and we're seeing some headway, which we'll talk about more in future quarters. But we know that it's a focus for customers because they've been telling us they don't want to manage multiple systems to handle listings and reputation management and pages publishing and social and all the analytics and insights that go with that.

We also know that when you create a structured data system, which Yext proprietary Knowledge Graph is, from our point of view, the best-in-class structured data system that enables all of that workflow and all of those insights and analytics, you're going to get better results. Where that's going to be -- where you're going to see that the most is in an environment where things are getting more complex.

And so the complexity that we see is that as a marketer, as a brand, as a CEO, you're going to have to think about all these different places and all these different experiences, where I need to make sure that my products, my stores, my advisers, my doctors are all going to be visible and findable and they're not all going to do it in the same way. So the core of all that is going to be a structured data system that will enables you to have a source of truth and to distribute that data, which is synonymous with content in the future.

[Rohit Kulkarni, analyst]

Okay. And if I could ask, Mike, to the extend you can provide your latest thinking on the breakdown in the Rule of 40 kind of North Star that you have had given where you are with the revenue growth and profitability today, how do you expect over the next few quarters to approach the Rule of 40?

[Michael Walrath, executive]

Yes. So obviously made a lot of progress, right? And I think we haven't put a line in the sand on a date when we expect to get there, and we'll continue to talk about the progress that we're making. I think we -- from our standpoint, there's a lot of different areas. We think our margin profile improved a lot in Q3, we expect it to improve further in Q4. And we still think there's opportunity there, although we do expect that more of the contribution to kind of Rule of 40 growth and beyond will come from revenue growth, and there are different flavors of that as well. So there's organic revenue growth and inorganic revenue growth.

And we're going to pursue all of those different levers. We've been steadfast since we started that our goal is to be a Rule of 40 or better. And we're obviously much closer to that today than we have been at any point in the last 2.5 years or so. So it sort of satisfied but not satisfied. Satisfied that we're making good progress. We're not where we want to be yet, but we have a trajectory that we think is going to get us there.

[Operator]

[Operator Instructions] The next question is from Naved Khan with B. Riley.

[Naved Khan, analyst]

So two questions from me. One on ARR. Darryl, maybe, can you just clarify that the direct ARR decline from Q2 into Q3? And if that's the case, then why that happened?

[Darryl Bond, executive]

Sure. So what I was saying before is if you back out the Hearsay contribution to ARR in Q3 of $62.8 million. The sequential decline from Q2 to Q3 is down like, I think, $1.5 million in that range. So on $312 million, $313 million of revenue, it's down a little bit. Now some of that could be FX. But again, like our business we've got things up for renewal in each of the quarters, and there's a little bit of seasonality in some of the quarters. Q4 is generally our biggest quarter in terms of volume.

So overall, we were up a little bit from Q1 to Q2, down a little bit from Q2 to Q3. Obviously, we've got Q4 coming up. So that feels pretty stable to us. And keep in mind, when we get to Q4 of this year and report Q4, we'll be lapping that large customer churn that we mentioned, and that will sort of obviously impact the growth and retention metrics.

[Michael Walrath, executive]

Naved, this is Mike. If I can just add a little bit to what Darryl was talking about. I think we talked about this last quarter, and we talked about sort of the Yext core business being kind of stable and then ultimately getting that business to grow again. And we talked about Hearsay, was a growing business, which it is.

I think when you think about how we're operating and how we've been focusing in this environment, we've been very focused on solidifying our partnerships with our customers. We've been very focused on making sure that they're getting the value that they need from the platform that in areas where potentially they -- I mean -- and I think a lot of our software peers are doing this, too, that we may have had customers who overbought licenses and things like that.

And so there are still headwinds in there and we're making the kind of long-term decisions that we need to make. And that's why we're -- I think right now, we find sort of stable ARR to be -- I'm going to say we're not thrilled with it, but we find it acceptable because the trends that we're seeing in the business, we're seeing that we've seen three straight quarters of gross retention, net retention improvement. We've also seen -- this isn't a number we give out, but we've seen three straight quarters of improvement in our overall renewal rate.

And so that tells us that we're doing the things that we need to do fundamentally to set ourselves up for ARR growth in the future. And that I think we've answered the question about whether or not this is a melting ice cube or a declining business. And now we can really turn our attention with a stronger margin profile and a stronger operating profile and the ability to create operating leverage to the growth picture.

[Naved Khan, analyst]

Got it. Okay. The other question I have, Mike, is just on your commentary around the fragmentation of search and maybe even more so than that, the fragmentation of the user. So just in kind of looking at the trends, it's still early in terms of the consumer behavior, and how much of that is changing versus just the proliferation of products that's out there. It seems like the consumer is still kind of very much still on search. So the change may be happening? I mean, you listed out on that in terms of how much that can happen. Any thoughts on like how quickly you think things might change? Or how -- if they don't change, then how Yext is positioned in that case also.

[Michael Walrath, executive]

Yes. So I think -- I mean, I would heavily discount the notion that there's a scenario where things aren't going to change. I think we've seen enough to know that there are going to be really interesting ways that human beings interact with AI that take on a different shape in a different form than what we've seen traditionally from search, which has become you asked a question in bullion, you ask a search language question and you get a bunch of links and a bunch of sponsored links and things like -- in a structure sort of search results page. We know because we can see the consumer behavior that's happening across OpenAI and Perplexity and Facebook with their search engine and Apple Intelligence, that there's going to be a lot of different ways that customers explore questions that are top of mind for them.

One of the things that I think is harder to predict is, when do we move from there being a lot of choice on exploration to a lot of choice on the exploit, right? So we talk a lot -- when we talk about search, we talk about in the customer journey, there's a lot of exploration that precedes the final exploit, which is when I'm ready to buy something, I ask a different question, where is the best place for me to get XYZ product at this price, right? That's an exploit question.

But there could be countless interactions historically, with a search platform like Google asking for exploration information about those questions. And so I think what we're seeing today is that there's a lot more exploration happening on different experiences, which include the AI search experiences, we're seeing much more search happening on social media networks like TikTok and things like that. What we're not yet seeing is evidence that there is a significant amount of sort of transactional exploit happening across those experiences.

But our faith in kind of capitalism and the way that the world works says that those search generative experiences are not going to be satisfied with just being exploration engines and that there's going to be a lot more exploit. The way that they're going to do that is they're going to look for where can I get data that makes it easier for me to make my generative search experience exploitable. I need structured data. I need product information, I need location information. I need access to things like that in order to be able to deliver answers to questions.

And so one of the things that we see today, and I apologize, it's a long answer, but I'm going to give you a thorough answer to your question. One of the things we see today is that on a lot of these generative search experiences, when you asked the question about, well, where can I get a great hamburger near me. They're likely to tell you that you're going to need to go to sites like Yelp or Google and places like that to get the answer to that question. I think in order to believe that things aren't going to change, you have to believe that those consumer generative search experiences are going to be satisfied with only the explorer and not the much more monetizable exploit queries.

We just don't believe that's the case, and we think that our advice to everybody is it's time to get your data in order so that you're ready to manage the exploit as the exploit element of this fragments. I hope that makes some sense.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Walrath for any closing remarks.

[Michael Walrath, executive]

I'd just like to thank everyone for joining us today and look forward to speaking to you in another quarter, if not sooner.

[Operator]

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