Online reputation and search platform Yext (NYSE:YEXT) announced better-than-expected results in the Q1 FY2023 quarter, with revenue up 7.4% year on year to $98.8 million. However, guidance for the next quarter was less impressive, coming in at $99.5 million at the midpoint, being 0.2% below analyst estimates. Yext made a GAAP loss of $25.8 million, down on its loss of $17.6 million, in the same quarter last year.
Yext (YEXT) Q1 FY2023 Highlights:
- Revenue: $98.8 million vs analyst estimates of $96.7 million (2.16% beat)
- EPS (non-GAAP): -$0.06 vs analyst estimates of -$0.07
- Revenue guidance for Q2 2023 is $99.5 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year, at $401.3 million at the midpoint
- Free cash flow of $16.2 million, down 42.1% from previous quarter
- Customers: 2,830, up from 2,700 in previous quarter
- Gross Margin (GAAP): 74.9%, down from 76.2% same quarter last year
Founded in 2006 by Howard Lerman, Yext (NYSE:YEXT) offers software as a service that helps their clients manage and monitor their online listings and customer reviews across all relevant databases, from Google Maps to Alexa or Siri.
For example, a new car dealership can easily share information such as addresses, phone numbers, and product details to a broad audience by uploading these details on Yext. The information is synchronized across a network of third-party apps and websites such as Google Maps, Facebook, and various local directories. This helps improve the brand's visibility to online shoppers in search engines.
Yext is also using the data it gathers about a company’s products and offerings to power a search technology that its customers can embed on their website, and that allows website visitors to search and find answers to questions more efficiently.
As the number of places that keep business listings (such as addresses, opening hours and contact details) increases, the task of keeping all listings up-to-date becomes more difficult and that drives demand for centralized solutions that update all touchpoints.
Competitors include Moz, Uberall, Algolia and Elastic Search (NYSE:ESTC).
As you can see below, Yext's revenue growth has been unremarkable over the last year, growing from quarterly revenue of $91.9 million, to $98.8 million.
Yext's quarterly revenue was only up 7.4% year on year, which would likely disappoint many shareholders. But the revenue actually decreased by $2.13 million in Q1, compared to $1.4 million increase in Q4 2022. However, the sales also similarly dropped a year ago and management is guiding for revenue to rebound in the coming quarter, which might hint at an emerging seasonal pattern.
Guidance for the next quarter indicates Yext is expecting revenue to grow 1.4% year on year to $99.5 million, slowing down from the 11.4% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 4.77% over the next twelve months.
You can see below that Yext reported 2,830 customers at the end of the quarter, an increase of 130 on last quarter. That is a little better customer growth than last quarter and quite a bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Yext's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 74.9% in Q1.
That means that for every $1 in revenue the company had $0.74 left to spend on developing new products, marketing & sales and the general administrative overhead. This is around the average of what we typically see in SaaS businesses, but it is good to see that the gross margin is staying stable which indicates that Yext is doing a good job controlling costs and is not under pressure from competition to lower prices.
Cash Is King
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Yext's free cash flow came in at $16.2 million in Q1, down 41.2% year on year.
Yext has burned through $2.95 million in cash over the last twelve months, resulting in a negative 0.74% free cash flow margin. This below average FCF margin is a result of Yext's need to invest in the business to continue penetrating its market.
Key Takeaways from Yext's Q1 Results
With a market capitalization of $693.8 million Yext is among smaller companies, but its more than $247.7 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.
We were very impressed by Yext’s very strong acceleration in customer growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that Yext's revenue guidance for the full year missed analyst's expectations and the revenue growth was quite weak. Overall, this quarter's results could have been better. The company currently trades at $4.73 per share.
Is Now The Time?
When considering Yext, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Yext we will be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its strong gross margins suggest it can operate profitably and sustainably, unfortunately customer acquisition is less efficient than many comparable companies.
Yext's price to sales ratio based on the next twelve months is 1.7x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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