Yext, Inc. annual report, FY2020

Business context and reporting period

Yext, Inc. provides a subscription cloud platform for businesses to manage and publish verified business information across their websites and a network of approximately 175 third-party services. This Form 10-K covers fiscal 2020, the year ended January 31, 2020. Its final quarter ended on that date; this is not a calendar-year 2019 Q4 report.

Financial performance and liquidity

Revenue increased 31%, principally from new customers and expanded subscriptions; enterprise and mid-size customer revenue grew 34%. Sales and marketing expense rose 37%, research and development 37%, and general and administrative expense 50%. Total operating expenses reached $344.8 million, or 115% of revenue. Gross margin fell 70 basis points. Net loss widened about 62%.

For the quarter ended January 31, 2020, revenue was $81.4 million versus $63.8 million a year earlier; net loss was $30.6 million versus $15.5 million. Quarterly gross margin was approximately 74% versus 75%.

At year-end, cash and cash equivalents were $256.1 million, with a further $12.1 million classified as restricted cash; current assets were $377.8 million and current liabilities $244.9 million. The company reported no marketable securities at year-end. It said existing cash and cash equivalents were expected to cover projected operating needs for at least 12 months. Operating cash outflow contrasted with positive operating cash flow in FY2019. Financing cash flow of $168.4 million included $147.0 million net proceeds from a March 2019 stock offering. No debt balance is shown on the year-end balance sheet; the prior $15 million revolving line was fully available.

Changes, outlook, and material risks

• Product and growth: Yext launched its Answers site-search product in October 2019 and expanded integrations, including services used by Chinese travelers. Dollar-based net retention was 106%, down from 110% in FY2019.
• Costs and unusual item: Stock-based compensation was $67.8 million, up from $44.2 million. General and administrative expense included a $3.6 million one-time RSU cancellation-related charge. The company capitalized $41.4 million of contract-acquisition costs during FY2020.
• Cash generation and commitments: Operating cash use reflected the net loss and increases in receivables and capitalized contract-acquisition costs, partly offset by non-cash compensation and higher unearned revenue. Reported contractual obligations included $202.1 million of operating leases and $52.5 million of other obligations. Lease liabilities on the balance sheet totaled $123.8 million.
• Controls and audit: The financial-statement audit opinion was unqualified, but the auditor issued an adverse opinion on internal control over financial reporting. A material weakness concerned processes for calculating, recording, and accounting for sales commissions and related capitalized contract costs. Management reported no resulting material misstatement or restatement and was pursuing remediation; disclosure controls were deemed ineffective.
• Subsequent credit facility: On March 11, 2020, after year-end, Yext replaced its prior facility with a senior secured revolving facility of up to $50 million, with a conditional option for up to an additional $50 million. It carries financial and other covenants and is secured by substantially all company assets.
• Outlook and risks: The filing gives no numerical revenue or earnings guidance. Management described plans to invest in sales, international expansion, and product development. It noted that the then-emerging coronavirus outbreak had disrupted operations and travel and could affect customers, sales cycles, and results, but the impact could not be estimated. Other stated risks include sustained losses, execution and customer-renewal risks, dependence on third-party network integrations, privacy and security obligations, competition, and the sales-commission control weakness.

Important facts for investors to verify

1. Whether revenue growth and customer expansion can offset rising operating expenses and narrowing gross margin, and whether retention stabilizes.
2. Whether operating cash flow improves and how much of the reported liquidity is available after restricted cash, lease obligations, and other commitments.
3. Progress and independent validation of remediation for the sales-commission control weakness, including its effect on capitalized contract-acquisition costs.
4. Terms, utilization, and covenant compliance under the March 2020 secured credit facility, including the impact of its collateral and restrictions.
5. The eventual effects of the coronavirus disruption and other economic conditions on bookings, collections, customer renewals, and reported results.