Yext, Inc. — Form 10-Q Summary
Reporting period: Quarter ended July 31, 2017 (the second quarter of Yext’s fiscal 2018); comparative results are for the quarter and six months ended July 31, 2016. Figures are unaudited. Yext provides cloud software for businesses to manage digital information across its network of more than 100 services.
Financial performance and position
- Quarter revenue: $40.8 million, up 38% year over year. Gross profit was $30.2 million; gross margin rose to 74.1% from 69.3%.
- Quarter results: Operating loss was $16.5 million versus $9.0 million; net loss was $16.4 million versus $9.0 million. Basic and diluted loss per share was $0.18 versus $0.29.
- Six-month results: Revenue was $77.8 million, up 37%; gross margin was 74.0% versus 68.4%. Operating loss was $31.9 million versus $18.3 million, and net loss was $32.5 million versus $18.4 million. Loss per share was $0.49 versus $0.59.
- Expenses: Quarter sales and marketing expense increased 69% to $30.7 million; research and development rose 39% to $6.5 million; general and administrative rose 43% to $9.6 million. Sales and marketing was 75% of quarterly revenue.
- Cash flows: In the six months, operating activities used $13.4 million, compared with $2.2 million provided in the prior-year period. Investing activities used $96.3 million, mainly reflecting $94.4 million of marketable-security purchases and $1.9 million of capital expenditures. Financing activities provided $118.0 million, principally from the IPO.
- Liquidity and debt: Cash and cash equivalents were $32.9 million and marketable securities were $94.4 million at July 31, totaling $127.3 million. The company had no debt outstanding, after repaying its $5.0 million revolving-line balance in April. Current deferred revenue was $57.6 million.
- Equity and IPO: The April IPO sold 12.075 million shares at $11 per share. Net proceeds were approximately $119.1 million after underwriting discounts and offering costs. Existing preferred stock converted into common stock. Common shares outstanding were 90.2 million at July 31.
Changes versus the prior comparable period
- Revenue growth was driven by customer-base growth and expanded subscriptions to existing customers. Locations on the platform exceeded 1 million as of July 31, versus approximately 345,000 in January 2015.
- Gross margin improved because revenue grew faster than cost of revenue. Cost of revenue rose 16% in the quarter, while operating expenses increased 58% overall, contributing to a larger operating loss.
- Higher operating expenses reflected increased headcount and personnel costs, commissions, and stock-based compensation. Six-month stock-based compensation expense rose to $9.1 million from $3.8 million.
- The IPO substantially strengthened cash and equity: total stockholders’ equity was $92.9 million at July 31, compared with a deficit of $127.8 million at January 31.
Outlook, risks and unusual items
- Management said available cash, cash equivalents and marketable securities should cover projected operating requirements for at least the next 12 months. The filing gives no specific revenue or earnings guidance.
- Management plans continued investment in international expansion, research and development, and sales and marketing. It cautions that historical results are not necessarily indicative of future performance and that losses may continue; Yext reported a $199.4 million accumulated deficit at July 31.
- Key disclosed risks include continued losses and expense growth, ability to scale sales and retain customers, dependence on resellers and third-party listing-network providers, competition, international expansion, cybersecurity and service availability, and privacy and regulatory compliance.
- The company disclosed two previously identified material weaknesses in internal control over financial reporting: revenue-recognition controls and financial-close review. Management said remediation was ongoing; disclosure controls and procedures were deemed effective as of July 31.
- A customer lawsuit, Tropical Sails Corp. v. Yext, was settled in April 2017 and dismissed with prejudice. The filing reports no current material legal proceedings. Contractual commitments at July 31 included $29.0 million for operating leases and $13.6 million for application providers and other obligations.
- Dex Media merged with reseller YP Holdings; Yext signed a revised agreement with the combined company in August and said the relationship represented less than 10% of revenue and was not expected to have a material impact.
Important facts for investors to verify
- Whether customer and subscription growth can continue to outpace the rapid rise in sales and marketing and other operating expenses.
- How operating cash use, losses, and cash conversion evolve, including the distinction between cash balances and available liquidity in marketable securities.
- Progress in remediating the two material weaknesses and whether controls remain effective as a recently public company.
- Renewal, expansion and concentration trends, including the actual financial effect of the Dex-YP merger and reliance on resellers and network partners.
- Stock-based compensation, outstanding options and restricted awards, and potential dilution; also monitor the planned expiry of IPO-related lock-ups.