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Yext, Inc. (YEXT) Q2 2024 Earnings Call Transcript

Yext, Inc. (YEXT)

Q2 2024 Earnings Conference Call

Company Participants

Nils Erdmann - SVP, IR

Mike Walrath - CEO and Chair of the Board

Marc Ferrentino - President and COO

Darryl Bond - CFO

Conference Call Participants

Tom White - D.A. Davidson

Rohit Kulkarni - ROTH MKM

Naved Khan - B. Riley Securities

Chris Madison - William Blair

Ryan Macdonald - Needham

Presentation

Operator

Good afternoon, and welcome to the Yext Fiscal Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [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 second quarter 2024 earnings conference call. With me today are CEO and Chair of the Board, Mike Walrath; President and COO, Marc Ferrentino; 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 third 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 second 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.

For further information on factors and other risks that could cause actual results to differ materially 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 July 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.

I will now turn the call over to Mike.

Mike Walrath

Thanks, Nils, and thanks everyone for joining us today.

I'll start by highlighting our continued momentum in Q2, followed by a discussion of progress we're making with our sales and marketing initiatives, and then I'll cover some of our expectations for the back half of the year.

In Q2, we delivered results that were consistent with or slightly ahead of our expectations. We generated revenue of $102.6 million, non-GAAP EPS of $0.07, and $11.8 million of adjusted EBITDA. Our performance in the second quarter demonstrated a balance of operating efficiency and profitability consistent with the strategy we outlined last year.

In Q2, total ARR grew 3% year-over-year and direct ARR was up 5%. Sales productivity and execution are continuing to show improvement and I'm pleased with the progress we're making in our end-to-end demand generation efforts. Our go-to-market transformation remains a work in progress where we are executing well and beginning to see increases in total and qualified pipeline production.

Our midmarket team who calls on smaller enterprise customers continues to execute well consistent with the progress we saw from this group in Q1. We continue to believe this momentum will eventually carry over to larger enterprises so it is likely to take longer in the current macro environment. Customer buying trends, budget scrutiny and prolonged closed processes with multiple decision makers are still the norm and the larger the enterprise, the more of these factors repeat the sales cycle.

Interest in our digital experiences solution is building. We see measurable increases in total pipeline year-over-year. However, we have not yet seen buying trends from larger enterprise customers re-accelerating. Our assumption is that enterprise deal cycles, budget pressures and close rates will remain challenged through the rest of the year.

Further, this budget scrutiny and caution impacts every renewal as well. RFPs, large buying committees and procurement engagement are more prevalent, and in some cases, cost-cutting efforts within customer accounts are severe. This coupled with headwinds and shedding unprofitable services revenue and the decisions we made last year to de-prioritize direct SMB sales and Japan market will continue to challenge our ARR growth and retention through the end of the fiscal year.

A different dynamic is at play with our reseller channel. We are seeing some positive indicators from our reseller partners and there continues to be interest from resellers in our non-listing solution. At the same time, there was a drop in ARR from our reseller business in Q2 that was attributable to a single customer churn from an M&A event. Absent this customer churn, our reseller ARR would have ticked up slightly from the first quarter. We continue to believe that there is an opportunity over the long-term to grow ARR in this channel, though our primary focus for the time being remains to optimize and accelerate our direct business.

As we discussed in March, we expected to see improvement in our go-to-market execution first in sales productivity, then in qualified demand generation, which creates a framework for accelerating growth. We are encouraged to see both an improvement in sales productivity and an increase in qualified demand. We will use these signals to determine the right time to invest in sales capacity. As of today, we do not feel constrained by our sales capacity and continue to be laser-focused on improving the performance of that organization.

The value proposition of our DXP is resonating with customers. As we mentioned in previous quarters, our campaigns are helping open the door at smaller and large enterprises. Executives are interested in finding AI-enabled solutions to enhance their digital experiences, yet many businesses lack the highly specialized technical expertise to realize its transformational power. Yext summer release features DXP enhancements that leverage AI within chat, content and reviews, which Marc will discuss in more detail shortly.

Our continued focus on margin improvement has enabled us to grow our bottom line and execute with a greater level of consistency. The total of our expenses in the second quarter, including both non-GAAP cost of revenue and operating expenses decreased roughly 9% year-over-year. Overall, we experienced business conditions in Q2 that were similar to the previous several quarters, if not a bit more challenging. We achieved year-over-year growth with a smaller sales organization which indicates that our emphasis on productivity is having the desired effect.

We've made steady progress in Q2 despite a continuing cost-conscious demand environment. And as our go-to-market and demand gen engines begin to ramp, we're looking forward to picking up momentum, but remain very cautious about the environment in the back half of the year. Our team remains committed to growing our business profitably and managing efficiently.

Considering the continued macro uncertainty, our outlook remains the same as it was when we reported our first quarter results. But given the improvements we've made across the organization, we remain confident in our long-term growth opportunities. Pleased to announce that our Board has approved an increase of $50 million to our share repurchase program. This is an addition to the $100 million that we have been utilizing to buy back our stock since March of last year.

Our ability to manage the growth of our business while also generating value for our shareholders, highlights the strength of our balance sheet and our ability to generate cash flow. Once again, I would like to thank our entire global team for their commitment in bringing about these results, and I'm grateful to our customers, partners and our shareholders for their ongoing trust and support.

With that, I'd now like to turn the call over to Marc.

Marc Ferrentino

Thanks, Mike.

We continue to innovate and deliver powerful solutions across our digital experience platform to new and existing customers looking to meet new market demands and customer expectations. A big accomplishment during the quarter was our summer '23 release, which featured DXP enhancements to simplify how companies generate experiences for any customer across, both owned and third-party channels at scale.

As part of the summer release, we changed the name of the knowledge graph to Yext Content. We believe Yext Content is the first headless CMS built on a foundation of AI and knowledge graph technology. Content includes enhancements to expand how companies can use AI to generate any experience across both owned and third-party channels all from a single headless content management system....

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