Stock idea - YEXT

Hey Fools,

Just came across YEXT as an investment idea. An initial glance shows there is a lot to like, though the grown rates might not be high enough for some of you.

What they do
Invented a new category that they call “Digital Knowledge Management”. Basically, they help companies
gain control of their branding across the internet by monitoring hundreds of public facts that appear in maps, applications, search engines, voice assistants, directories, social networks…etc. This helps companies ensure that their messaging and information is correct across popular platforms like Google Maps, Yelp, Facebook, Instagram, Foursquare, Amazon Alexa…etc. That’s important because there currently isn’t an easy way for companies to keep tabs on and manage all of this third-party data about them. YEXT helps fill that gap.

What’s super interesting here is that the company doesn’t think it has any direct competition. They list their primary competitor as "businesses that choose to handle digital knowledge management in-house using manual processes.

They operate using a SaaS model. Here are the recent numbers:

Revenue:
Fiscal 2019: $228 million (+34%)
Fiscal 2018: $170 million (+37%)
Fiscal 2017: $124 million (+38%)

Dollar-based net retention rate
Fiscal 2019: 110%
Fiscal 2018: 109%
Fiscal 2017: 119%

Net income:
Fiscal 2019: ($74.8 million)
Fiscal 2018: ($66.6 million)
Fiscal 2017: ($43.2 million)

So, growth is good, but not off-the-charts stellar. The net loss is growing, too, though the company recently became FCF positive.

Here’s how the company stacks up on my quality checklist:


**Metric (score potential)                                            YEXT** 

**Financial:**
Financial Resilience:(0 - 5)                                        5
Gross Margin: (<50%, 50% to 80%, >80%) (0 - 3)                      3 
Returns On Capital: (Low, Average, Rising)(0 - 3)                   0 
FCF: (Negative / Positive / Positive and growing fast) (0 - 3)      3 
EPS: (Negative / Positive / Positive and growing fast) (0 - 3)      0 
 
**Moat:**
Network effect (None / Weak / Strong) (0 - 15)                      
Switching costs (None / Weak / Strong) (0 - 15)                     15
Durable Cost Advantage:(0 - 15)                                     
Intangibles: (0 - 15)                                               
Moat Direction: (Narrowing / Stable / Widening) (0 - 5)             5 (more services)

**Potential:**
Optionality:(0 - 7)                                                 4 
Organic Growth Runway: (G.D.P. / 2x or 3x G.D.P. / 15%+) (0 - 4)    4  
Top dog And/Or Industry Disruptor:(0 - 3)                           3 
Operating Leverage Ahead?(0 - 4)                                    4 

**Customers:**
Acquisition:(0 - 5)                                                 2 (expensive to onboard)
Dependence: (0 - 5)                                                 5 

**Company-specific factors:**
Recurring Revenue: (None / Some / Tons) (0 - 5)                     5 
Pricing Power: (None / Inflation / Tons) (0 - 5)                    5 
 
**Management & Culture:**
Soul in the game: (Founder/Family Run/Long Tenured CEO) (0 - 4)     4 
Inside ownership: (None / Modest / Very High) (0 - 3)               3 
Glassdoor ratings: (0 - 4)                                          4  
Mission statement? (Simple, Inspirational, Optional-able) (0 - 3)   2 

**Stock:**
Performance Vs. S&P 500:(0 - 4)                                     3  
Shareholder Friendly Actions:(0 - 3)                                0  
Consistently Beats Expectations?(0 - 4)                             3.5

**Pre Gauntlet Score: 82.5 (excellent)** 

**The Gauntlet**
Customer Concentration:(-5 , -3, 0)                                 0 
Industry Disruption:(-5, -3, 0)                                     0 
Outside Forces:(-5, -3, 0)                                          0 
Big Market Loser: (-5, -3, 0)                                       0
Binary Event: (-5, 0)                                               0  
Extreme Dilution: (-4, -2, 0)                                       -4  (10% dilution in fiscal 2019)
Growth By Acquisition: (-4, -2, 0)                                  0 
Complicated Financials (-3, 0)                                      0 
Antitrust Concerns: (-3, 0)                                         0
Political Risk: (-3, -2, 0)                                         0
Currency Risk:(-2, -1, 0)                                            

**Final score: 78.5 (very good)**

For perspective, the highest score possible is a 100, and the lowest score possible is -44.

YEXT’s 78.5 is very good, and it will likely head higher over time after it flips to profitability.

YEXT is an interesting business for sure, and I love that it is founder-led, gets rave reviews from employees, is growing revenue at 30%+, and appears to face no competition.

The high stock-based compensation, growing net loss, and moderate dollar-based net retention rate give me pause right now, but I think this business is very interesting.

Brian

*******
FAQ:

Is there a spreadsheet that has all of your data? Yes, but I do not want to make it publicly available. I will post on a company by company basis to the boards. Feel free to follow me if you want to see my most recent rankings.

**What companies have received the highest scores so far?**Alphabet (88), Paycom Software (86), MercadoLibre (85), Amazon (85), HubSpot (85), Adobe (84), Paylocity (84), and Q2 Holdings (84)

What data do you have to show that this methodology works? Very little. I’m currently thinking through ways to measure its long-term effectiveness, but my gut feeling tells me that it will help me pick better stocks.

What about valuation? This data is only designed to help me determine business quality, which is far more important than valuation. Whenever I personally make buy/hold/sell decisions, I always consider valuation too, but I think it is small “f” foolish to not buy a truly great business just because of valuation concerns.


33 Likes

Thanks Brian

I have a position in YEXT

The enterprise grade growth rates are 38% for Q4 and 40% for the year. The SMB growth is what they are transitioning away from and leaving to their partner channels.

The last ER call was very optimistic and positive

Yext, Inc. (YEXT) CEO Howard Lerman on Q4 2019 Results - Earnings Call Transcript https://seekingalpha.com/article/4246838?source=ansh $YEXT

The mgmt pedigree is good

They are founder led and have a lot of scaling experience from CRM

https://www.yext.co.uk/about/leadership/steve-cakebread/

https://www.yext.co.uk/about/leadership/jim-steele/

The tailwinds of voice search are real. The amount of structured data stored is growing quickly.

As of January 31, our customers were storing more than 185 million authoritative facts in our platform. That’s an increase of approximately 50% from a year ago.

My holding is up over 50% ytd but I have keep it a smallish position for a few reasons

DKM is a new and growing area. But pioneering it comes with the cost of educating the target market. The operating margins skews pretty negative without the 50%+ topline growth that lets me easily look past that. The modified rule of 40 (I use op margins + rev growth) is 2 iirc.

It does seems to me like the business at this stage is more of a vitamin than an aspirin, and in a recession I think it could be vulnerable, which is different from my perception of my Tier 1 holdings (TTD AYX, ZS, TWLO).

That said, there is confidence in last cc that clients get good ROI from the service. I imagine this is more true for multi-site enterprises than SMBs (its not hard to find negative reviews from small businesses about yext). A number of SMBs probably could do OK with local SEO expertise instead.

The biggest problem I have with adding to my position is that I often can’t find a good reason why I wouldn’t be better off adding to AYX as an example instead. But if growth rates accelerate in 2019 ill be interested in increasing my holding.

4 Likes

Also a minor point but from your gross margin framework score, it looks like you have a 4 point scale of 0-3 but only three categories

Non GAAP GM are ~75% for YEXT

1 Like

Also a minor point but from your gross margin framework score, it looks like you have a 4 point scale of 0-3 but only three categories

Yes, good catch. I add an extra point if gross margin is steadily rising.

Brian

Just want to provide some anecdotal context about Yext and its competition.

I have been in digital marketing for 12 years. In the past, I’ve worked at an agency that had clients of all sizes. Some clients had just a few thousand dollars per month for their overall budget. Others spent over a million dollars per year on digital marketing. I’m currently the director of digital marketing for a regional financial institution.

Yext was a potential vendor for my largest client during my agency stint. At my current company, they’ve been presented to us by an existing vendor who has a partnership with them. In both cases, Yext was not a good fit.

Let’s start with the first example. My client was a national apartment community company, with an overall digital marketing budget of over a million dollars, plus agency retainer, plus staff. They had roughly 225 apartment communities around the country, and they had a need to manage each community’s online listings, which a primary value proposition of Yext. The subscription model didn’t make financial sense. My client would’ve been paying Yext even if the locations’ listings had correct info and didn’t need active management. So, we opted for Bright Local, which had a more suitable pricing model where we paid only when we needed to update location listing info. It was much more budget-friendly.

In the example of my current company, the regional financial institution, we have around three-dozen locations in three states. The same rationale as the first example applies here. There’s no reason for us to sign up for a Yext subscription to keep up with each location’s listings.

As an added bonus, one of my employees at my current company came across Yext when he worked for a national franchise. His opinion of Yext vs. the competition is the same as mine.

In my opinion, Yext is best suited for much larger companies. While it doesn’t make sense for a regional financial institution to be a subscription client, it could make sense for Wells Fargo or Bank of America because there are so many more locations to manage, and they probably adjust their physical locations more often than we do. Think national restaurant chains, too. That’s probably an ideal client profile. Part of Yext’s competitive advantage is the sheer number of API integrations that they have with numerous websites that curate online listings, which includes many that I had never previously heard of. That competitive advantage doesn’t have much bearing for my current company. We need to have accurate location info for Google, Bing, Facebook, Yelp, and a few other sites. It doesn’t make sense for us to focus too much on a lot of other smaller sites, but it probably does make sense for those national companies with a ton of locations.

A quick word about optimizing for voice search. It’s relevant for companies like the ones mentioned above because of the increase usage of search phrases that include location-based searches like “near me” or other similar phrases. Business need to do a few different things to be optimized for voice search. This blog post has a good summary: https://neilpatel.com/blog/seo-for-voice-search/. This post gives context around which listing sites (Google My Business, Yelp, etc.) need to be optimized in order for your business to have a chance for voice search https://localmarketinginstitute.com/optimize-local-business-…. What you’ll find is that there are a select few listing sites that matter for a majority of voice search devices. It doesn’t take something as expensive as Yext for all companies to optimize for voice search. Again, large national companies are great potential customers.

What would it take for me to become a Yext customer? Simple, more competitive pricing and probably a non-subscription option. As the numbers show, they’re doing a lot of things right, they have competitive advantages, and companies are signing up. But there is viable competition that can better satisfy the scopes and budgets of many other companies.

-ElonFeeNix
no position in Yext

33 Likes

Thanks ElonFeeNix

I agree with your perception, which confirms my suspicion that the LT strong market here will be multi-site enterprises. In fairness to the company, this is what they have also determined.

I may keep a small position in YEXT, but it’s hard to answer the question of “why YEXT over the alternative places for the money” imho

Superb feedback ElonFeeNix.

Your view makes complete sense to me. YEXT seems to be a great fit for large companies that can easily afford it and have thousands of locations to manage, but not for smaller businesses with more limited budgets.

This is a great example of why it is so useful to post to the boards – the first-hand experience of others can be priceless.

Brian

5 Likes

Saw this recently…
https://discussion.fool.com/hii-looked-into-yext-early-in-2018-f…

🆁🅶🅱
wordlessly watching, he waits by the window and wonders…

Been a while since I’ve posted since I feel like I often have nothing to add, but I have stayed away from YEXT for a few reasons.

  1. As revenue is growing, so are losses. YEXT went from about 120M(estimate, looking at graph) rev in 2017 to 170.2M in 2018; however, their net income went from about -45M(estimate) in 2017 to -66.56M in 2018. This could be fine if their overall margin improved; however, it appears to me their profit margin has gone down over time as they’ve grown (could be wrong here, going off graph)

  2. You can also see losses growing in their free cash flow. Up until 2018, they had steadily been becoming closer to cash flow positive, but then they spiked down in 2018.

Here are some estimates of FCF over time (once again going off graph so estimates)
2015: -16M
2016: -20M
2017: -11M
2018: -35.6M(actual)

  1. All in all, I’m not that impressed with a growth rate of 36.5% and I have no idea if it will re-accelerate.

If you have a growth rate of 36.5% AND your losses are widening, I don’t see this as a viable investment when compared to some of the other companies we are looking at. They might be going through an investment phase right now, but if that is the case, I’d wait until that investment phase is over, and we start seeing YEXT being able to profit off their revenue growth before investing.

P.S. Please let me know if any of the numbers I’m presenting don’t take into account the full picture, or if I’m missing something. I did not do heavy research into every aspect of YEXT so there could be good explanations to my points above.

2 Likes

Addition to above post.

You say they recently became Cash Flow Positive, I don’t see that on my charts? I see FCF for 2018 being -35.58M. Did they just become FCF positive on a most recent quarter? Is this expected to continue for the future?

Hi brennanadler

This is a useful framework for the SAAS operating margins issue.

http://www.slideshare.net/DavidSkok/the-saas-business-model-…

So the - ve op margins while scaling the sales force seems perhaps OK to me as long as the LTV is high. I agree that the headline growth is decent, but not spectacular.

The last ER add some decent colour as to how the mgmt see their positioning and potential for accelerating. The numbers may back up the talk - we will see over this year.

I continue to hold it albeit on a short leash.

From the Tinker screener

[Y]Founder lead
[Y]First Mover
[Y]Dominant Disruptive Company
[Y?]Overvalued - arguably yes given the growth rates and op margins
[X]High Relative Strength.
Depends on your perspective. Yes since Jan. On the technicals, a recent cup and handle breakout and possible consolidation for another leg up but it was no MDB during December.
So it’s a no from me overall
[Y]Market cap to opportunity compelling.

It’s a vitamin and not so much of a painkiller to me.

but the real question for me if I am honest, is why not put the money in something that has already hit it’s inflection point for the S curve instead?

https://koyfin.com/s/xgLLB7uE2p

1 Like

Just now on CNBC Jon Najarian just recommended YEXT. I wonder if he’s following this board?

Just now on CNBC Jon Najarian just recommended YEXT. I wonder if he’s following this board?

I would not have been able to recognize YEXT from his thumbnail description. He and his brother are big proponents of following bumps of volume on calls and puts to direct their trades. The are not know for fundamental analysis.

Rob

Did they just become FCF positive on a most recent quarter?

Yes, just this past quarter.

Brian