Yext, Inc. — Form 10-Q Summary
Reporting period: Quarter ended October 31, 2018 (Yext fiscal 2019 third quarter); comparisons are with the quarter and nine months ended October 31, 2017. Amounts are in U.S. dollars unless stated otherwise.
Business context
Yext provides a cloud-based platform for businesses to manage and distribute digital information through a network of approximately 150 services and applications. Revenue is primarily subscription-based. The company reported one operating segment and continued to cite new customer acquisitions and expanded subscriptions as its main revenue growth drivers.
Financial performance
| Metric | Three months ended Oct. 31, 2018 | Change vs. 2017 | Nine months ended Oct. 31, 2018 | Change vs. 2017 |
|---|---|---|---|---|
| Revenue | $58.7 million | +33% | $164.9 million | +35% |
| Gross profit / margin | $43.9 million / 74.7% | Margin: +1.0 percentage point | $123.2 million / 74.7% | Margin: +0.8 percentage point |
| Operating expenses | $68.7 million | +38% | $187.2 million | +34% |
| Operating loss | $(24.8) million | Loss widened from $(17.2) million | $(64.0) million | Loss widened from $(49.1) million |
| Net loss | $(24.8) million | Compared with $(17.1) million | $(64.0) million | Compared with $(49.6) million |
| Basic and diluted loss per share | $(0.25) | Compared with $(0.19) | $(0.66) | Compared with $(0.67) |
- Quarterly revenue growth reflected continued customer additions and subscription expansion. International revenue was $8.2 million, up from $4.0 million; North American revenue was $50.5 million, up from $40.3 million.
- Sales and marketing was the largest expense: $45.7 million in the quarter and $122.9 million for the nine-month period. Management attributed expense growth mainly to higher personnel costs and stock-based compensation as it expanded its sales force and workforce.
- Stock-based compensation was $12.9 million for the quarter and $31.9 million for the nine months, versus $5.9 million and $15.0 million, respectively, in the prior-year periods.
- For the nine months, net cash used in operating activities was $25.6 million, versus $30.3 million used in 2017. Investing activities provided $1.2 million, mainly reflecting marketable-security maturities net of purchases and capital expenditures. Financing activities provided $18.8 million, principally from option exercises and employee stock-plan proceeds.
Balance sheet and liquidity
- At October 31, 2018, cash and cash equivalents were $28.3 million and marketable securities were $78.7 million, totaling approximately $107.0 million. Total assets were $186.3 million; total liabilities were $114.4 million; stockholders’ equity was $71.9 million.
- Current assets were $163.1 million and current liabilities were $111.7 million. Current deferred revenue was $83.2 million.
- The company had no borrowings under its $15.0 million revolving credit line, had the full $15.0 million available, and reported compliance with its debt covenants. The facility matures March 16, 2020; the agreement also provides a $7.0 million letter-of-credit facility.
- Management stated that existing cash, cash equivalents and marketable securities were expected to meet projected operating requirements for at least 12 months.
Material changes, outlook and notable items
- Revenue grew faster than cost of revenue, lifting gross margin, but operating expenses grew faster than revenue in the quarter and the operating loss widened. The company remained loss-making, with an accumulated deficit of $297.4 million.
- Management described plans to invest in international expansion, research and development, and sales and marketing. The filing provides no clear numerical revenue or earnings guidance in the supplied text.
- Yext planned to adopt the new revenue-recognition standard on January 31, 2019 using the modified retrospective approach. It expected to amortize deferred commissions over an estimated three-year benefit period, longer than its existing contract-term approach; the financial impact was still under evaluation.
- The company planned to adopt new lease accounting on February 1, 2019 and expected operating lease right-of-use assets and lease liabilities to increase reported assets and liabilities.
- The filing disclosed two previously identified material weaknesses in internal control over financial reporting—revenue-recognition controls and financial-close review/oversight. Remediation was ongoing. Management nevertheless concluded that disclosure controls and procedures were effective as of October 31, 2018.
- Management considered the Tax Reform Act accounting assessment provisional in certain respects and expected to finalize it by the fourth quarter of fiscal 2019. The filing reported no material legal proceedings and considered the likelihood of a material adverse impact from ordinary-course claims remote.
Key risks and facts for investors to verify
- Whether revenue growth and customer expansion can continue while operating expenses and losses remain high, and whether the company can approach sustained profitability.
- Cash burn, working-capital movements, collections, and the continuing sufficiency of liquidity; operating cash flow remains negative.
- The scale and persistence of stock-based compensation, its impact on reported expenses, and potential dilution. Common shares outstanding were 100.8 million at October 31, 2018.
- Progress in remediating the two material weaknesses, particularly before the anticipated transition out of emerging-growth-company status and additional reporting requirements.
- The eventual effects of revenue-recognition and lease-accounting adoption on reported results, deferred commissions, assets, and liabilities.
- Dependence on the Knowledge Network and resellers, including the risk that provider relationships may change or be terminated; provider and other contractual commitments totaled $12.1 million, in addition to $19.3 million of operating lease commitments.
- International expansion, privacy and data-protection compliance, cybersecurity, competition, customer renewals, and the company’s ability to scale its sales force were identified as significant business risks.