Q1 2025 Yext Inc Earnings Call

Participants

Nils Erdmann; Senior Vice President - Investor Relations; Yext Inc

Michael Walrath; Chief Executive Officer and Chair of the Board; Yext Inc

Darryl Bond; Chief Financial Officer; Yext Inc

Tom White; Analyst; D.A. Davidson & Co

Rohit Kulkarni; Analyst; Roth Capital Partners, LLC

Ryan MacDonald; Analyst; Needham & Company LLC

Naved Khan; Analyst; B. Riley Securities Inc

Presentation

Operator

Good afternoon, and welcome to the Yext Inc. first-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 of Investor Relations. Please go ahead.

Nils Erdmann

Thank you, operator, and good afternoon, everyone. Welcome to Yext's first-quarter fiscal 2025 earnings conference call. With me today are CEO and Chair of the Board, Michael 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 timing and expected effects of our pending acquisition of Hearsay Systems, expectations regarding the growth of our business, our outlook for the second 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 first 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 ability to complete, our acquisition of Hearsay Systems and integrate its 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 months ended April 30, 2024, 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.
I will now turn the call over to Mike.

Michael Walrath

Thanks, Nils. Good afternoon, and thank you for joining us today. Hopefully, by now, you've read both the press release announcing our definitive agreement to acquire Hearsay Systems, as well as our first quarter letter to shareholders, which was posted to our website after the close of market.
I'm very excited to discuss the news with you today, and our first quarter earnings call is the perfect forum to discuss recent events. I hope it was clear from reading our shareholder letter that we feel the opportunity to combine Hearsay's Client Engagement Solutions with Yext industry-leading digital presence platform is a game changer.
As a trusted global leader in digital client engagement for financial services, Hearsay Systems empowers over 260,000 advisers and agents to proactively guide and capture the last mile of digital communication in a compliant manner. The world's leading financial firms rely on Hearsay's compliance-driven platform to scale their reach, optimize sales engagements, grow their business and deliver exceptional client service.
Yext and Hearsay are both trusted by leading financial firms and insurance providers who rely on our platforms to manage their digital presence and compliant customer engagement. Combined, we helped empower over 3,000 global brands.
Yext is proud to work with 9 of the 10 largest US banks and the 4 major wirehouses. Hearsay's base includes the top 5 US life insurance firms and 4 of the top 5 global wealth management firms. Our joint customers will benefit from seamless access to new tools and capabilities to strengthen their management of the complete customer journey.
A few important points regarding the financial terms of the deal. First, the purchase price is for $125 million. Subject to customary adjustments as set forth in the merger agreement, Yext may be required to pay additional contingent consideration of up to $95 million in cash or Yext common stock based on the achievement of certain milestones over a two year period.
Second, while the final audit of Hearsay's financial statements is still pending, we believe Hearsay generated approximately $60 million in revenue during its prior fiscal year ended December 31, 2023. Third, we believe Hearsay's operations are highly compatible with Yext and though unaudited, they currently operate around free cash flow breakeven.
Fourth, and finally, we estimate Hearsay's business is growing on the basis of ARR. Hearsay has approximately 300 employees globally, and we will be working in the coming months to finalize the plan for the integration of the two companies.
Execution of the integration plan will begin after the transaction closes. We are not in a position to comment further on integration plans at this time, except to say that with Hearsay Systems, we believe Yext will be able to provide even more ways for brands to connect with their customers one-to-one.
This acquisition will advance our efforts to deliver the products and solutions our customers value most. We look forward to welcoming the Hearsay team to Yext once the transaction closes. And with that, we'd like to open it up for questions.

Question and Answer Session

Operator

(Operator Instructions)
Tom White, D.A. Davidson.

Tom White

Great. Thanks for taking my questions. Congrats on the Hearsay deal. I guess maybe it was a little more sizable than maybe we would have thought you guys were considering as it related to kind of your social capabilities specifically.
I guess, Mike, maybe you can comment, like was this something that this size sort of always maybe your intention, or just any color on how the process evolved? And then I have a quick follow-up on the guidance.

Michael Walrath

Yes. So as far as, I mean, we think the size of the business is a great complement for our business. As I've said many times over the last few quarters, we think that consolidation is going to be a key theme as we look forward.
And we have looked at a number of things, obviously, as opportunities, and we've been talking about this. I think we're more focused on how complementary is the set of solutions, how important is it to our customers that we'd be bringing solutions together.
I think that's a more important question for us than very specifically size. We have a lot of confidence that the solutions and products that Hearsay offers are highly, highly complementary, having a highly overlapping set of customers already. We have a lot of intelligence about the value that is being driven by these products.
And so I'd say any time we look at an acquisition opportunity, we're going to look first and foremost at how complementary is it, and how much synergy is there in being able to combine the platforms. And we'll continue to look across the size spectrum, and opportunities for consolidation.

Tom White

Okay, great. Thank you for that. And then just on the full year revenue guide, I think it came in a little bit. I mean, can you just provide a little bit more color on kind of what's changed? Is that purely related to maybe kind of slower conversion of the pipeline related to the longer sales cycles and kind of budget scrutiny?
Stuff that you guys have been, and a lot of people, have been encountering? Or was there anything kind of else to maybe call out just kind of in the existing book of business? Thanks.

Michael Walrath

Yes, I don't think we're seeing anything that you're not seeing elsewhere. When we gave the guide for the full year, we talked about assuming a level of stability or even some level of recovery. I think what we're seeing and what we hear from our peers is it's certainly not getting any easier to convert demand, budget constraints, deal cycles. It's all still there.
And the other thing that's happening there is as we go through renewal cycles, we're being very intentional about making sure that we're solidifying the relationship with the customer, that we're setting ourselves up for future upsells and that we're building a stronger relationship with the customer. So all of those things are going to challenge bookings and they're going to challenge retention.
One of the things we talked about in March is that we had planned a pretty significant sales capacity ramp early in the year. As we saw how the quarter was playing out and how sort of challenging some of these headwinds were, we did grow our sales capacity, but we certainly slowed down the pace of hiring a bit, And I think part of what's flowing through on the full year is just a different set of assumptions about how fast we build that sales capacity, and how fast we can convert the demand.
I talk about this all the time, but you don't want to build the sales capacity ahead of the ability to convert the demand because then you take a step backward on productivity. And we haven't taken a step backward on productivity. We're still seeing the productivity improvement. So that's good. It's just -- I think it's really a question of how quickly do we hire that sales capacity and how quickly do we start to see the demand converting.

Tom White

Okay. Thank you very much.

Operator

Rohit Kulkarni, Roth Capital Partners.

Rohit Kulkarni

A couple of questions. First on the acquisition. I guess, any more color, Mike, you can provide on overlap with Yext? As in, how large is financial services at Yext?
And perhaps, the other way around, how applicable is Hearsay's kind of value prop to use some of the core verticals at Yext, be it retail, restaurants, hospitality, where do you see that those kind of synergies manifest over time?

Darryl Bond

Rohit, it's Darryl. I'll take a couple of parts to that and then hand it off to Mike. In terms of financial services, a little over a year ago, we did an Investor Day. We included in that deck some of our largest verticals. And I think health care and fins were around the 21%, 22% mark.
Those continue to be our two largest and strongest verticals. We feel really good about the complementary nature of Hearsay given their strength in fins, and the ability for us to have some common customers but also customers they have that we don't and vice versa.
So we think there's certainly some opportunities for revenue synergies just within fins. And I think when we look broader into the rest of our verticals, I think there's opportunities there, particularly as we continue to build out our own social product and flesh out that road map.

Michael Walrath

Yes. I think it's important to understand the overlap in clients. So in our financial services vertical, Yext is very strong with wealth management verticals within the financial services verticals, agent-based businesses, insurance.
And part of the reason for that is that you have this complexity of kind of, how do you market local agents or local wealth management? It's very similar to the way that you want to market a local retail, local restaurant, local doctor's office, dentists. That problem is similar. In financial services, you have a higher bar with the compliance and measurement elements.
And so I think where Yext is really strong there is on the listings, the pages and the reputation management components as well as the internal search use cases. And butting right up against that are things like social media management, text and voice communications and all the compliance features and functionality there.
The opportunity is to bring those things together and bring together a single data layer, a single set of workflows and analytics that creates a flywheel around content generation, analytics, ROI for our customers. And this is something we've been thinking about and working on for quite some time.
The synergies with Hearsay are really no brainer-ish when it comes to how we service and bring value to those customers. And sorry, it's a bit of a long answer, but I think the second part of your question was about the ability to take these solutions outside of financial service. Darryl touched on it.
We have a road map for social, which was really very focused on nonfinancial services institutions. So this is a massive accelerator of our ability to be, from a social media management standpoint, in the financial services vertical. We still think there's an enormous opportunity for best-in-class social media management, particularly around that local social use case.
But one thing that may be underappreciated is just how strong Hearsay's product is from a texting and communication standpoint. And so while other verticals may not have the same compliance hurdles as financial services, they certainly have a lot of the same communication hurdles.
And so the ability to one-to-one text customers, to engage, and ultimately to do that in brand compliant and more trackable ways, for larger corporations, we feel is an underappreciated opportunity, and this acquisition really introduces a new set of product opportunities there.

Rohit Kulkarni

Okay, okay. Awesome. I guess another question is just on your ARR growth outlook. Maybe talk about this mid-single-digit growth rate by end of '25, and high single digits by first half of next year?
Maybe talk through what gives you confidence that we are going to see that kind of level of acceleration in the next six to nine months, perhaps, sort of given the recent 6 months, ARR growth is kind of going in the wrong direction. So sorry, to ask a tough question, guys, but I'd love to hear what your thinking is.

Michael Walrath

Yes, no, I think it's a fair question. I mean I think the thing that's clearly challenging us right now is the large customer churn that we had at the end of Q4, so that has obviously challenged year-over-year. The other thing that's challenging us more sequentially is what I talked about upfront, which is, we're proactively engaging with renewals to make sure that we're doing everything we can to solidify those partnerships.
And I don't think this is unique to us. I think this is going on across the board. It creates either it can be licensed counts, it can be pricing, it can be various headwinds, it can be budgetary pressures inside our partners, and we try to take all those things into account as we restructure partnerships at the time of renewal.
And so those all create headwinds. The reason why we're optimistic about the back half of the year is because we have visibility into demand, and we're, I think, ahead of the curve in terms of addressing a lot of the renewals.
And we're much further ahead than we have been historically on addressing the renewals in the back half of the year, and so our estimates, I think, remain conservative, but it's pretty clear to us that we'll see the ARR growth in the second half of the year, even if the market stays challenging like it has been.

Rohit Kulkarni

Okay, okay. Thank you. I'll go back into queue. Thanks, Mike. Thanks, Darryl.

Operator

Ryan MacDonald, Needham.

Ryan MacDonald

Thanks for taking my questions. Maybe just adding on with Hearsay questions. Can you just talk about general growth rate of the business or the end market that they're operating, maybe in the context of last year, if you're not giving updated guidance to include it yet?
And then as we think about the efforts that you took recently with the workforce reduction in the core business and sort of pairing that with expected integration of Hearsay, how should we think about sort of what the integration of this business does for the margin profile of the business? Is it accretive, dilutive to sort of the core Yext business at this point?

Michael Walrath

Yes, so Ryan, thanks for the questions. When it comes to Hearsay, we'll obviously be updating. None of the guidance that we're giving today takes anything into account with respect to the Hearsay acquisition, so it's entirely organic.
Once we get the acquisition closed, we will certainly be updating all of the financial outlooks and providing a lot more information around things like our expected growth rate and expected revenue. We're just not ready to talk about it yet, and I think it wouldn't be wise to get into speculating about it.
As far as, I think you had a question, you mentioned the end markets that they operate in, there are businesses entirely today operating in the financial services vertical, and so we're incredibly bullish on that opportunity, but we also think where we have an entire go-to-market system built around a much broader set of verticals there, theirs is very much built around the financial services vertical.
And so we see some real opportunities ultimately to bring their products to bear as well as to merge their products with our products on the social side of things as we move more aggressively into that in the back half of the year in order to attack a much broader market.

Ryan MacDonald

Super helpful. Maybe as a follow-up, maybe just asking about some of the newer AI modules, obviously starting to get in the hands of customers and getting some positive feedback there. As you think about sort of the expectations for sort of acceleration of growth in the back half of the year, what's being contemplated if anything at all on the AI side?
Do we think that the monetization opportunities in the near term, or still sort of wait and see as the market develops?

Michael Walrath

Yes, well, you remember, I made myself pretty unpopular about a year ago by saying that the AI bookings wave that everyone was expecting in the second half of last year wasn't going to materialize. I don't think I made a lot of friends in that statement.
I think we still see it the same way, which is it's coming. We see less of a tidal wave and more of a rising tide. But when it comes particularly to the larger enterprises, they're going to be cautious, and there's not going to be as much of a giant cresting wave, as there's just going to be a slowly rising tide over time.
The way we think that plays out is that and this is a little different, I think, than the sort of prevailing narrative of there are going to be just sort of binary winners and losers when it comes to software and AI. That may be true when it comes to purely productivity-based pieces of software.
But I think we're combining data layer with workflow with analytics and a content generation flywheel, what winds up happening is all of these AI technologies get built into the platform, and they get used in lots of different ways that makes the platform more valuable.
And so we're not necessarily thinking about it so much as selling AI as we're thinking about it as what are the things that AI makes better inside the platform. So we gave a couple of these examples, manage review response, and ultimately, AI generated review response is a great example of something that there's, I think, increasing adoption and increasing comfort with the idea, that you can save a ton of time having your review response is written in a brand voice.
And then in most cases, still be reviewed by a human being. On the listings recommendation side of things, what we're starting to see is that bringing the combination of data science and AI to bear in the form of automated recommendations around.
Today, things that you can do within your listings configuration and ultimately, more broadly across the platform are going to be really exciting ways that we bring those technologies into the platform. And so we're still incredibly bullish about this and as we see our customers using it, we're probably even more bullish than ever.
And I'll probably will continue to make myself somewhat unpopular by not predicting that there's going to be a massive tidal wave of bookings in the second half of the year for this. And right around the time people give up on AI driving bookings is probably when we'll start to see that the tide is rising across the board.

Ryan MacDonald

Appreciate the color. Thanks, Mike.

Operator

(Operator Instructions)
Naved Khan, B. Riley.

Naved Khan

Yes, hi. Thanks a lot. So maybe just on the ARR trend, if I look at the direct and third-party ARR, sequentially both dipped, is that related to maybe some give back or as you said, maybe solidifying relationship, reviewing the number of licenses and so on? What's the driver of that?

Michael Walrath

Yes. I think there are different drivers there. I think the biggest driver that we see is as we go through renewal cycles and again, I don't think we're remotely alone in this. There's budgetary pressures.
There are business realities to our customers who might have signed the last contract two years ago and maybe they had more stores or more agents and things like that. And so I don't think that this type of pressure is particularly different for us than it is for other software businesses that sell licenses.
And in some cases, it's potentially less intense for us because less of our software sold on a seat license type basis. But at the end of the day, what we're going to do is, we're going to make the right decisions for our customer relationships over the long haul because we see so much opportunity.
And certainly, with an acquisition like Hearsay, we see even more opportunity for us to grow those relationships over time. And so optimizing for very near-term ARR increases, which we get annoyed when vendors try to do it to us, we certainly try not to annoy customers too much as we go through this.
In a lot of cases, what that does is, it increases the level of downgrade pressure. And I think we've been saying for a long time that we'd rather have downgrades than logo churns. And if you become very inflexible about the downgrades, then you get the logo churns.

Naved Khan

Got it. So your outlook for return, just call it, mid-single-digit kind of growth by the end of this year. Is that just based on the pipeline, the conversion rates as well as the fact that you might be anniversary-ing some of these changes as you exit the year? How should we think about that?

Michael Walrath

Yes. I mean, we don't get, obviously, we don't lap the big churn from last year until we get to the end of Q4. But yes, I think what we're constantly doing is evaluating the pipeline, the amount of capacity we have to convert that pipeline and then the renewal is a big part of it.
And so when we look at that whole picture and we apply a pretty conservative lens to it, we still see growth in the back half of the year and a return to a more permanent state of growth in the back half of the year.

Naved Khan

Okay. And then one final question maybe on Hearsay. You mentioned 300 employees. Are most of the people in the sales function or technology, or any kind of color on that?

Michael Walrath

Yes, so I mean, it's a diverse company, and they have all the functions. So we don't see anything out of line with the way that they're organized, and they operate in a very similar way that we do. So that's actually, we'll talk more, hopefully, in the next call.
Hopefully, we'll close the acquisition and we'll be able to talk a lot more about how it's going to impact our various functional financial areas and things like that. But again, I mean, it's a great business today. It's a business that, as we mentioned, it has ARR growth.
I think they face their challenges over the last few years. And from what we've seen there, execution has been brilliant. They've introduced new products. They've got growth drivers in the business and it's a business that's operating around cash flow breakeven today.
So we feel really good about the financial profile of the business and the ability to find synergies as we integrate it.

Naved Khan

Thank you.

Operator

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

Michael Walrath

Well, I would just like to thank everybody for joining us today and for your questions, and we'll look forward to speaking with you next quarter.

Operator

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