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YEXT Inc - Deep Dive
Bessemer Cloud Index Series
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I spend most of my time investing in Seed & Series A companies, which are relatively isolated from the goings-on of the public market. However, like most diligent investors, I do spend a fair amount of time paying attention comparable companies in the public sphere (public-comps). The tool I most frequently is the Bessemer Cloud Index as it helps me better understand exit expectations and revenue multiples (among other things), for the companies I get the opportunity to invest in.
Unfortunately, the last time I cracked open the index and started flipping through the names of the members, there were a bunch I candidly didn’t know a ton about. As someone who prides himself on trying to constantly improve my understanding of the SaaS universe, I think it behooves me to try and dig into the biggest publicly traded firms. In theory, many of the companies that I invest in are trying to break into this group. Most of the BCI provide a ton of information about how their business models work, for free, every quarter, in the form of SEC Filings.
As an academic exercise, I am going to spend the next several months digging into one company from Bessemer’s cloud index per week, understanding said company’s business model, the financial profile, and other pertinent details. Luckily, there are a bunch of them that I have already written about, such as Shopify, Wix, and Qualtrics.
My first targeted Company is a firm based in New York called Yext. Candidly, I am picking this name because it was the one that I had recognized the least when flipping through the BCI. In my adult life I had never heard of this company and it was, at one point, worth $2 billion. It’s worth at least trying to understand a little.
What is Yext
Yext is a SaaS platform that focuses on providing a suite of tools to businesses so that they can optimize their online discoverability and digital search functions. The Company was founded in 2006 by Howard Lerman, Brent Metz, and Brian Distelburger, a group of buddies who had experience founding smaller internet businesses during the dot-com and post-bust era. The Company was originally started as an outsourced ad business for local gyms, and grew into a larger entity when it started specifically selling leads for small businesses. This lead-management business was eventually spun out in 2012 so that the Company could again pivot into being a more focused SaaS platform.
By 2016, the new Yext business had expanded to $90 million of ARR and raised $115 million in venture capital (although a large chunk of that, maybe $30-$40mm, was focused on the prior business entity that had been spun out). The next year, in 2017, the Company went Public at an approximate market cap of $2 billion. At the time of it’s IPO, it was on track to cross $124mm in annual revenue in 2017, tracking an approximate 16.0x revenue multiple. By 2018, the Company reached $170 million in annual revenue. It’s worth noting that the Company’s fiscal year-end is January 31st.
It’s effective growth curve heading into it’s IPO showed an ability to grow by ~40% every year while improving gross margins. The company did not achieve positive net income margins in the four years leading up to IPO and it did not have positive free cash flow in any of those years, either. This is largely driven by the Company’s ever ballooning sales and marketing costs, which we will dig into in just a bit.
So what do they actually do? They list out three core products in their 10K, including Listings, Pages, and Answers. Listings provides tools for customers to update and manage online data, such as map information on services like google maps, and other external search features. Pages provides tools for customers to manage and build landing pages that can help increase conversion and improve digital experiences. Answers provides “natural language” search for customer-owned website search and improves overall searchability of content internally and externally.
More detailed overview of some of their products:
Site Search: provides software for companies to manage their online presence and website searchability. That means that they will enhance a company’s website’s search function by using better search tools and making all data more easily discovered. This includes ecommerce search functions.
Additional ecommerce products include SEO-centered product pages, map search enhancement for offline shopping, ecommerce data management, etc.
Location Listings: if a customer searches for something on any search engine, it will be up-to-date and accurate.
Reputation Management: allows for companies to manage and respond to reviews on a broad scale.
Additional features surround these core products, such as NLP for search, chatbots, SEO optimization for internal tools, etc.
The key thing that the Company wants you to understand is that they take all of your data found within every system of record, and turns it into a knowledge graph, thus powering improved search tools because everything is easily organized. The knowledge graph aggregates listings, web pages, reviews, search features, and analytics to power an improved digital presence and online customer experience. And that, can power all sorts of ROI’s for some of Yext’s logos.
The Company integrates with a ton of services, including Apple Maps, Bing, Cortana, Facebook, Google, Google Maps, Instagram, Yelp, etc. The overarching goal of the Company is to make a customer’s digital knowledge more readily accessible and more manageable. Instead of letting crowd sourcing, third-party data sources, or other entities controlling a company’s online presence, Yext tries to put that power back in the hands of their customer.
From the S-1 in 2017: For example, in food service, the address, phone number or menu details of a restaurant; in healthcare, the health insurances accepted by a physician or the precise drop-off point of the emergency room at a hospital campus; or in finance, the ATM locations, retail bank holiday hours or insurance agent biographies. We believe a business is the ultimate authority on its own digital knowledge, and it is our mission to put that business in control of it everywhere.
In other words, if someone searches for something online about one Yext’s customers, the response back will be correct if you use Yext’s tools correctly. This can be a big problem if you are a restaurant chain and recently changed your hours of operation, but don’t want to update every single location on Google Maps.
The Company has several types of customers, such as restaurants (specifically those with chains), hospital systems, hotel chains, and brick & mortar retail chains. In the S-1, the Company describes a case study with Denny’s, one of it’s larger customers in 2017, that details how the chain manages the digital presences for over 240 locations. Denny’s started out using the Listings tool and then expanded to use its Pages product, which helped increase search traffic by 35% per store in less than a year.
The Company believes that it has several key differentiators, but the biggest one is its data set. They have millions, if not billions of data points and attributes that it collects, reviews, and acts upon under its current customer set, and as a result is able to understand best practices, flow of search, and other important product features better than any of its competitors.
Financials & KPIs
While the Company was able to demonstrate impressive growth leading up to its IPO, since that point, it has slowly slowed down, with only 10% growth in 2022, and declining growth rates every year since 2015. While the growth has slowed down, it has at least shown an ability to improve its gross margin profile to a more software-acceptable ~75%. However, it has not demonstrated any real ability to generate free cash flow since being public, and it’s operating margins have been negative for what I am willing to bet have been the Company’s entire existence.
The Company’s negative operating margins are largely driven by Sales & Marketing Expenses. In 2020, S&M was nearly 100% of Gross Profit. In 2022, the Company actually reduced the size of it’s sales force by approximately 25 FTEs (225 from 250), which is not a ton, but at least a sign that they recognize that profitability is a problem. Sales & Marketing and G&A have remained relatively flat for the last several years. While that might be to explain for the slow down in growth, it could also be because the Company is experiencing slower growth and they are trying to turn on the profit spigot that should be associated with software companies of this nature.
One of the core KPIs that the Company tracks is Net Revenue Retention, which I have written about here in the past. The Company’s net retention rate was 98%, 102%, and 106% for the fiscal years ended January 31, 2022, 2021 and 2020, respectively. It attributes the decline in NRR to COVID-19. Candidly, even pre-decline, 106% NRR is not great, potentially a sign that the upsell products are not very differentiated in the market. The Company’s R&D budget is larger than I would expect, so potentially management is trying to develop better products to improve upsell efficiency. However, there is not sign of that yet.
If we review the Company from it’s most recent quarter, we can find that it still hasn’t quite picked itself out of unprofitability. It is showing signs of improving profitability, but not really anything concrete. Sales & Marketing expenses did decrease quarter over quarter and year-over year largely driven by reduced headcount in this space, however it was not a significant RIF that drove this, from what I can tell. I have not seen any news of major RIFs from Yext based on a cursory search.
Overall, the Company was beat up pretty badly by COVID, or at least that is it’s chief assertion. This logically makes sense as most of its customers are folks who were impacted strongly during 2020’s pandemic - restaurants, brick & mortar retail, hospital systems, etc. The Company’s solutions help folks with their physical presence search and customers who depend upon physical locations to make their businesses work smoothly. So even if the Company’s other products are not dependent upon physical-location, such as pages and answers, the customers are using those products to enhance in-person experiences in some regard.
The Company recently saw a management change with co-founders Howard Lerman and Brian Distelburger having stepped down in the past twelve months. Lerman gave up the reigns as CEO to Michael Walrath, who is not a complete outsider. He has been with the Company since 2009 as Chairman of the Board and has spent his career in software both as an operator and a growth investor. (Side not, he also founded the Ohoopee Match Club, which, if you know, you know).
It’s hard to say exactly why Lerman stepped down, but it makes sense given the current financial situation for the company. The high-growth software company, whose return profile is largely driven by the company’s ability to grow, slowed down growth significantly, without any significant improvement in margin profile.
It’s also likely that the Company reached scale at more than $400mm of ARR and that the founder that took them from zero to more-than-one is not the right person to help them maintain scale. In Lerman’s letter to the Company announcing his departure, he even says as much, stating that sometimes the founder is not the person best suited to keep running the company. He is also working on another startup, so it’s very possible that he just is no longer interested in building the Company.
The Company is currently being sued according to it’s financial disclosures. This also includes the co-founder and the former CFO, who also stepped down this year. While I don’t know enough about the lawsuit (and am not a lawyer, lol), it is interesting that this suit came to the fore and the Company shed three of it’s most important executives, including two founders. It’s entirely possible that something fishy could be going on. Alternatively, public companies get sued all the time for frivolous claims.
Of course, like many public companies, there exists downside / short research for the Company. Edwin Dorsey wrote about the Yext in February 2020 and again in March 2020. The February article has to do with the Company committing what amounts to online extortion, Lerman’s fishy behavior around an internally developed product called confide, and bad financial performance. The March article relates to the Company being positioned very poorly for the coronavirus outbreak. There is also this article from 2019 about them being called a Robocall Scheme.
It’s hard to say how accurate or to what magnitude any of these accusations and concerns carry. It’s clear that Yext has the makings of a Company that could be experiencing an inflection point, and the timing couldn’t be more important. The market is telling software companies that growth is no longer king and that they need to start showing signs of profitability. Turning on that greatest-business-model-ever-created software margins would be very advantageous for Yext. They now have new blood running the business and the table is well set for change. Of course, they have a long road ahead to prove their ability to do that and very little early signals to prove that this will happen.
[Knowledge Graph: In knowledge representation and reasoning, knowledge graph is a knowledge base that uses a graph-structured data model or topology to integrate data. Knowledge graphs are often used to store interlinked descriptions of entities – objects, events, situations or abstract concepts – while also encoding the semantics underlying the used terminology.]