2023-04-10 17:53:22 ET
Summary
- Yext provides businesses with web content management and related software.
- The firm has recently launched its Yext Chat conversational AI product.
- However, management has guided to virtually no revenue growth for the fiscal year ahead.
- I'm on Hold for Yext in the near term.
A Quick Take On Yext
Yext ( YEXT ) is a company that provides online information management services to organizations worldwide.
The firm has recently moved into the AI-enabled space with its Yext Chat conversational AI product.
However, management has issued forward guidance of almost no revenue growth.
I’m therefore on Hold for Yext in the near term.
Yext Overview
New York, NY-based Yext was founded in 2006 to enable businesses to manage their online information on other websites and across the internet and to provide answers to customer and prospect questions.
The company also more recently began to provide a conversational AI capability it calls Yext Chat, based on OpenAI’s GPT-3, to businesses seeking to automate and improve their customer communication and engagement.
The firm is headed by Chairman and CEO Michael Walrath, who was previously co-founder and Chairman of Moat, later acquired by Oracle, and founder, Chairman and CEO of Right Media before its acquisition by Yahoo.
The company’s primary offerings include the following:
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Knowledge Graph
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Listings
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Pages
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Search
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Reviews
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Analytics
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Chat
The firm also provides integrations with other platforms, including Zendesk, Salesforce, Adobe, WordPress, Drupal and Freshdesk.
Yext’s Market & Competition
According to a 2023 market research report by Research And Markets, the global web content management market was estimated at $5.6 billion in 2022 and is forecast to reach $18.6 billion by 2030.
This represents a forecast CAGR of 16.1% from 2022 to 2030.
The main drivers for this expected growth are higher growth in the Asia-Pacific region, with China forecast to grow at a higher-than-average CAGR of 20.9% through 2030.
Also, Japan and Germany are expected to grow at slower than the industry average rates during the reporting period.
Major competitive or other industry participants include:
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Infogroup
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BrightLocal
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Birdeye
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Localeze
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Major web platform operators
The company is also competing in the enterprise chat AI space, which is rapidly evolving and will likely grow to multi-billion dollar market size in the coming years.
Yext’s Recent Financial Trends
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Total revenue by quarter has largely flatlined in recent quarters, so management has hired a new CRO and has begun implementing changes to its go-to-market strategy in certain regions and reducing its direct sales efforts to SMB businesses:
Total Revenue (Seeking Alpha)
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Gross profit margin by quarter has been largely flat to slightly down and management also reduced its professional services organization in Q4, the largest part of its recent reorganization:
Gross Profit Margin (Seeking Alpha)
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Selling, G&A expenses as a percentage of total revenue by quarter have trended lower in recent quarters:
Selling, G&A % Of Revenue (Seeking Alpha)
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Operating income by quarter has remained negative, but improved recently, likely as management's reorganizing efforts take hold:
Operating Income (Seeking Alpha)
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Earnings per share (Diluted) have followed a similar trajectory to that of operating income:
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, YEXT’s stock price has risen 36.4% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) drop of 8.4%, likely due to its positioning in the hot chat AI sector and reduced operating losses, as the chart indicates below:
52-Week Stock Price Comparison (Seeking Alpha)
The company’s ARR retention rate was 97% for direct customers and 92% for third-party reseller customers; a figure under 100% indicates a need to improve product/market fit and/or sales & marketing efficiency.
For the balance sheet, the firm ended the quarter with $190.2 million in cash and equivalents and no debt. Unearned revenue was the same as at the end of Q1 2022.
Over the trailing twelve months, free cash generated was $11.7 million, of which capital expenditures accounted for $6.2 million. The company paid $63.1 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Yext
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 2.4 |
Enterprise Value / EBITDA | NM |
Price / Sales | 2.6 |
Revenue Growth Rate | 2.6% |
Net Income Margin | -16.5% |
GAAP EBITDA % | -13.0% |
Market Capitalization | $1,010,000,000 |
Enterprise Value | $941,940,000 |
Operating Cash Flow | $17,850,000 |
Earnings Per Share (Fully Diluted) | -$0.52 |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
YEXT’s most recent GAAP Rule of 40 calculation was negative (10.4%) as of FQ4 2023’s results, so the firm has performed poorly in this regard, per the table below:
Rule of 40 - GAAP | Calculation |
Recent Rev. Growth % | 2.6% |
GAAP EBITDA % | -13.0% |
Total | -10.4% |
(Source - Seeking Alpha)
Future Prospects For Yext
In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, management highlighted the advantage the firm has with its new product, Yext Chat, which promises to provide better answers by using the client company's data combined with its large language model software.
The company expects to focus on building out its systems integrator and partner channels to improve its go-to-market efficiencies at scale.
However, this shift will put downward pressure on its revenue growth in the near term.
Management is also seeing increased sales cycles and continued strength in the US dollar, which creates foreign exchange headwinds when weaker foreign currencies are translated back to dollars at a lower rate.
The company's financial position is strong enough, with slightly positive cash flow and no debt.
However, its Rule of 40 performance is negative, indicating poor results for this rule of thumb.
Regarding valuation, the market is valuing YEXT at an EV/Sales multiple of around 2.4x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.3x on March 30, 2023, as the chart shows here:
EV / Next 12 Months Revenue Index Multiple (Meritech Capital)
So, by comparison, YEXT is currently valued by the market at a substantial discount to the broader Meritech Capital SaaS Index, at least as of March 30, 2023.
The primary risk to the company’s outlook is a likely macroeconomic slowdown or recession due to a possible already-underway credit crunch, which may accelerate new customer discounting and produce slower sales cycles, lowering its revenue growth trajectory even further, possibly into negative territory.
A potential upside catalyst to the stock could include faster than expected uptake of its new AI chat software by enterprises.
However, management is guiding fiscal 2024 revenue growth to be only $3 million, from $401 million in the fiscal year just ended to $404 million in the fiscal year ahead. That’s a paltry 0.7% revenue growth.
Given such a tepid growth outlook from management, it’s hard to get excited about an upside catalyst to the stock.
Accordingly, I’m on Hold for Yext in the near term.
For further details see:
Yext Will Need To Reignite Growth In The Year Ahead