This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Hello and welcome to the Yext Fourth Quarter and Fiscal 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw from the question queue, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Nils Erdmann. Please go ahead.
spk02: Thank you, operator, and good afternoon, everyone. Welcome to Yext's Fiscal Fourth Quarter 2023 Earnings Conference Call. With me today are CEO and Chair of the Board, Mike Walrath, COO and President, Mark Ferrantino, and CFO, Daryl Bond. During this call, we will make forward-looking statements, including statements related to our future financial performance, expectations regarding the growth of our business, our outlook for the first quarter and fiscal year 2024, our strategy, and estimates of financial and operating metrics, capital expenditures, and other indications of future opportunities, as further described in our fourth quarter earnings press release. These forward-looking statements are subject to certain risks, uncertainties, and assumptions, including those related to Yext's growth. the evolution of our industry, our product development and success, our management performance, and general economic and business conditions. We undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from those forward-looking statements are discussed in our reports filed with the SEC, including our most recent Form 10-Q for the quarter ended October 31, 2022, our annual report on Form 10-K, but the fiscal year ended January 31st, 2022, and our press release that was issued this afternoon. During the call, we also refer to certain metrics, including non-GAAP financial measures. Reconciliations with the most comparable historical GAAP measures are available in the earnings press release, which is available at investors.yext.com. We also provide definitions of these metrics in the earnings press release. I will now turn the call over to Mike.
spk04: Thanks Mills, and thanks everyone for joining us today. We are pleased to report our Q4 results and a solid finish to our fiscal year 2023. For the full year, we generated revenue of $400.9 million and a non-GAAP net loss per share of $0.02, which compared to a loss of $0.15 last year. We made meaningful progress in driving transformation across our business through continued product innovation, focused execution, and improved productivity. We strengthened our commitment to solving customer pain points and drove increasing adoption of our platform. At the same time, we delivered operating margin improvement and two consecutive quarters of non-gap profitability. When we presented our management changes one year ago, we made several commitments. We committed to increasing customer focus and satisfaction. We committed to shift our go-to-market model from a capacity-driven model to a productivity-driven model. We committed to operating more efficiently and more profitably. We committed to our shareholders and our employees to increase our transparency and communicate better. We've made significant progress with the objectives we set a year ago, and I would like to highlight some of the actions we took to improve our performance in a few key areas. First, we dramatically improved our go-to-market motion with a focus on increasing customer satisfaction. We rolled out new brand positioning that better aligns with what we do, making it easier for our customers to understand our product's value. We hired a new CMO to lead the development of our integrated marketing strategy and execution. And we hired a new CRO to drive improved sales execution, increase customer satisfaction, and accelerate global revenue growth. Rayanne and Tom have hit the ground running and brought fresh energy and perspectives to the organization. Our renewed focus on customer satisfaction has begun to show up in our numbers, with gross retention improving throughout the year to the high 80s in the fourth quarter. While we have much more to do here, I'm pleased with our early progress. Second, we executed on our commitment to sustain profitability by operating more efficiently, resulting in a non-GAAP profitable second half of the year. We did this by making strategic changes such as reducing layers, increasing spans of control, better aligning our people and resources, and enhancing coordination across teams to create a leaner, more agile organization. We began fiscal year 23 with approximately 1,400 full-time employees, and we began fiscal year 24 with around 1,100, a reduction of about 20%. I believe our company is stronger and more agile than it was a year ago, and we are committed to continuing to drive better operating results in fiscal year 24 and beyond. Third, we continue to drive product innovation to maximize our long-term growth potential. Throughout the year, we enhanced all our products with dozens of new features and upgrades, including our flagship listings product. This innovation is having a tangible business impact, resulting in several new logo wins where Yext replaced entrenched competitors after side-by-side comparisons demonstrated our product's ability to drive superior value. Our innovations across natural language processing, analytics and security, as well as our leading technology integrations are driving competitive wins in the marketplace and setting the stage for stronger growth moving forward. Finally, we made use of our strong balance sheet to repurchase 13.8 million shares in fiscal year 23, reducing share count by roughly 10%. We will continue to focus on minimizing dilution to shareholders and using our strong balance sheet strategically. Our work in these areas, driving customer value, operational efficiency, and product innovation are paying off, and I am confident that we are building a best-in-class SaaS company. We've made significant strides, and we're looking forward to further progress in the year ahead. Despite the challenges of the last year, our global team has remained committed and focused, and I couldn't be more proud of the way they have delivered in a very difficult environment. Fiscal 2023 was a pivotal year for YACS, and our Q4 performance demonstrates the strength of our platform, our focused execution, and a go-to-market strategy that is increasingly resonating with our customers and partners. For the fourth quarter, we delivered revenue of $101.9 million and non-GAAP net income per share of $0.05, both of which were better than the high end of our guidance ranges. As we seek to expand our margins through focused investment on our highest ROI opportunities, we made a number of decisions in Key4 to sharpen our focus and reduce investment in areas of the business that were inefficient from an operating perspective. These actions included moving to a partner-centric go-to-market strategy in Japan and reducing our direct sales efforts to SMBs. The most significant restructuring effort we made in Q4 was the decision to focus our services offering on the highest value activities for customers, which I'd like to discuss in more detail. Our services business represented a small amount of overall revenue, approximately 9% of total this year, but our focus on delivering the vast majority of services ourselves has had a meaningful impact on gross margin. We plan to transition a portion of our services business to our systems integrator and partner ecosystem over the coming years. We will also continue to invest in automation that will require less services and create more value with customers. By making this decision now, we've been able to significantly reduce the size of our professional services organization. In fact, this was the largest part of our Q4 restructuring, and the result will be an immediate improvement in our non-GAAP gross margin, which Daryl will discuss in more detail. Over the last several months, the world has been captivated by the potential of generative artificial intelligence to transform customer experiences. ChatGPT is one of the most rapidly adopted technologies of all time, and general purpose large language models have potential to bring disruption to the dominant search paradigm. These models are trained on a wide variety of public data sets, which often include little to no authoritative information about a business. And because of this, the accuracy of generated responses is unreliable or can't be independently verified. As an example, we addressed this problem with Yext Chat, which can provide every business with conversational AI experiences that are generated from accurate information stored in their own knowledge graph. In fact, the R&D investment we have made in integrating large language models and machine learning throughout the Answers platform ideally positions us to help enterprise customers leverage the potential of AI while eliminating the risks of unanswered, so-called hallucinations, and data insecurity. We've been meaningfully investing in AI and large language models in the X Answers platform since 2017. We also intentionally built our platform to be model agnostic, which positions us well to add value for our customers regardless of what happens with consumer search. As chatbots and other content generation models continue to gain adoption, we believe this will lead companies to place increased strategic emphasis on ensuring their knowledge and information are optimized. For Yext, this presents an exciting future growth opportunity. We can help our customers leverage this emerging technology to deliver perfect answers across every digital experience. Today, we believe that we're in a great position to take advantage of the rising needs of businesses to safely and effectively put AI to work across their digital experiences. We will continue to take a thoughtful and cautious approach to formulating our financial guidance, which Daryl will discuss in greater detail in a few minutes. there are three potential revenue headwinds factored into our guidance for fiscal year 24. First, deemphasizing certain areas of our go-to-market focus, such as direct sales to SMBs and direct sales in Japan. While these choices will be a net positive in terms of focus, efficiency, and profitability, they will have a modest impact on the revenue in the short term. Second, our decision to focus on building systems, integrator, and partner relationships for managed and professional services and limiting our own services business to the highest value expert services will benefit our clients in many ways. This decision will also benefit gross margins and our bottom line. However, we anticipate that it will put modest pressure on revenue and renewals as we restructure some existing service agreements. Finally, we continue to consider the uncertain macro environment and assume that elongated sales cycles and budget pressures could persist for the foreseeable future. FX also remains a headwind to revenue growth. Despite the anticipated revenue headwinds in fiscal 24, we expect a more efficient and profitable business next year and believe we're on the path to sustainable and profitable growth for the long term. I have great confidence in the long-term success of our business. We have significant opportunities ahead given our expanding base of new and existing customers and the increasing value of our Answers platform. Satisfaction across our customer base is improving and we are uniquely positioned to add increasing value in ways that our customers are only just now beginning to appreciate. We will remain laser focused on driving sustainable growth and running an efficient organization. We look forward to discussing our financial objectives in greater detail, along with our strategy and technology developments at our upcoming Investor Day on April 4th in New York City. In this meeting, we'll discuss the drivers of our fiscal year 24 financial plan, measures we are using to benchmark and forecast our growth, our product and go-to-market strategies, as well as customer testimonials on why they chose our platform. We invite all investors and analysts to attend, and we're excited to see you next month. With that, I'd now like to turn the call over to Mark.
spk01: Thanks, Mike. I'm also proud of the progress our team has made in a short amount of time, and I want to acknowledge and thank them for their hard work. Over the past 12 months, we've completely remodeled our go-to-market motion and our entire product platform, while improving efficiencies across the entire organization. In short, we got leaner and stronger this past year and didn't skip a beat on product innovation. I want to pick up on a point that Mike made, which is that we are well positioned to add value for our customers regardless of how the search wars play out. The knowledge graph is a key foundation of conversational AI for business, and we've been helping customers build their knowledge graph for years. We've been leveraging AI and transformer-based models in our digital experience platform for many years, specifically in our search and connector offerings. Within the family of transformer models we work with, We have been developing generative models and have been piloting them with customers for the past year. Over the coming years, we will continue to take a model-agnostic approach to helping our customers deliver digital experience, which will include developing our own models and using the many great third-party models on the market today. We believe that AI will fundamentally change the digital experience for every user and every brand. In order for businesses to take advantage of this market shift, they will need new building blocks and a new composable architecture that leverages the best in breed technologies to deliver the digital experiences that their customers expect. This new digital experience architecture will be built on the foundation of AI and knowledge graph technologies, which will allow for companies to deliver conversational and consistent experiences across all their digital channels such as search engines, websites, mobile apps, chat, messaging, social, and hundreds of other digital touchpoints. At Yext, we continue to drive innovative ways to incorporate AI into digital experiences. In addition to announcing Yext Chat in mid-February, last week we announced content generation. We believe by adding the content generation feature to our knowledge graph that we are the first content management system that automatically and proactively generates its own content. The X content generation uses multiple large language models, including GPT-3 and existing information from a customer's knowledge graph to automatically generate and suggest rich, business-specific content that is on-brand and aligned with the writing styles or patterns found throughout an organization's content library. The X chat and content generation announcements have both generated a lot of interest from customers and prospects. Within a week of announcing Yext Chat, we had hundreds of requests to be included in the beta, and over half of them were with new prospects. And while it's only been a few days since announcing content generation, the flood of inquiries looks like it might even exceed that level of interest. The responses to Yext Chat and content generation make it crystal clear to us that our digital experience platform is resonating with the market, and that Yext is at the forefront of enabling businesses with the tools to leverage the latest generative AI. We believe this creates an opportunity for Yext to solve problems for a diverse range of verticals, leveraging our entire product platform. We are making it easier for businesses to enhance their digital experience through Yext, and we saw great examples of this in Q4. We expanded our leadership position across financial services, healthcare, and technology, while also adding some significant wins and multi-product cross-sales in e-commerce, financial services, and the energy sector. I'll name a few of these. Our go-to-market team executed an excellent renewal and expansion of Heartland Dental, who have been a customer of Yext since 2013. Heartland was looking for a web platform provider to create a fleet of websites for thousands of dentist practices they support. After a detailed bake-off against other established web platform vendors, Yext was selected as the vendor of choice. Heartland chose Yext over existing web platforms because of our headless content management capabilities, our open source standards, developer experience, and modern web architecture. Working with one of our new marketing partners, Philly Marketing Labs, we successfully won a competitive bid with a new customer who is among the largest global money service providers and one of YACC's largest accounts in terms of location volume. Our client was frustrated in seeing some of their global locations not existing in Google Maps through their previous vendor. As a result, Philly Marketing Labs led MCX because of our top position in the G2 listings grid. We're presently deploying a highly customized solution that will enable the client to improve the discoverability of their 600,000 global locations more efficiently and cost-effectively than their previous provider. A major win in the managed healthcare and insurance vertical was UnitedHealth Group. This was a renewal with a customer that historically had used the entire suite for a portion of their Optum locations and providers, as well as Optum.com. Because of our successful implementation and the value our platform delivered, they asked us to expand their rollout. These three customers are great examples of the strength and innovation that we continue to see with our listings product. An important commerce win was with a global online brick and mortar specialty retailer. This is a customer that had worked with various different vendors across listings, pages, and search. The customer was not initially looking for any changes to their providers, but after showcasing the value of having a single channel-agnostic content repository by using the Knowledge Graph and the interrelated benefits of our Answers platform, they selected Yext as their sole provider of all these services. A couple of notable wins for support search during the quarter included 8x8 and a large web hosting company. In the case of the former, 8x8 chose Yext because of our self-serve functionality, seamless UX, and their ability to own the integration process. With the latter customer, we wanted a head-to-head POC, and our team beat out an arsenal of enterprise search competitors. As a result, Yext will power the backend of the company's health center. we built and optimized a fantastic search experience for the POC, which has the potential to extend to other areas of the customer's business. Also in support search, a wireless service provider had originally developed marketing and support search functionality internally for them. And through our ongoing collaboration and execution to enhance their search experience, they've expanded on our partnership to include the build out of a search bar that features prominently on their homepage. Sainsbury's Supermarkets, the second largest supermarket chain in the UK, is another example of a customer that chose our platform capabilities to create an entire digital experience. Sainsbury was looking to upgrade their support site to be faster, SEO optimized, and have a great, great search experience which would translate into reduced calls to the call center and ultimately cost savings. After looking at several vendors, they chose the Answers platform for content management web rendering, and search, and would develop their new support site on Yext. With Kazoo, we had a knowledge management win against several established competitors. Kazoo's self-service site had been developed internally and the company was seeking to reduce the volume and cost of customer calls. After showcasing Yext's best-in-class support solution, we demonstrated how Yext could provide both case deflection abilities as well as vendor consolidation. Ultimately, Kazoo chose Yext for both support search and as the default knowledge management solution across the company. I look forward to showcasing some of our latest products, featuring our upcoming spring release, hearing directly from our customers about how they are leveraging our platform, and diving deep into the AI opportunity at our upcoming Yext Investor Day on April 4th. It will be an event you won't want to miss. Now, I'll turn the call over to Daryl.
spk08: Thanks, Mark. As our financial results demonstrate, we continued to execute well in the fourth quarter. Our Q4 revenue grew to $101.9 million, which was above the high end of our guidance range, and our full-year revenue was $400.9 million compared to $390.6 million in the prior fiscal year. Revenue growth in Q4 was approximately 3% in constant currency and 1% on an as-reported basis. This represented a year over year impact of approximately $2.3 million due to FX. Full year revenue growth was approximately 5% in constant currency and 3% on an as reported basis. This represented a year over year impact of approximately $10.2 million due to FX. Unearned revenue was $223.7 million at the end of the quarter, up slightly from the same period a year ago. Annual recurring revenue, or ARR, at the end of Q4 was $400.4 million, up 4% year-over-year in constant currency and 3% on an as-reported basis. This represented a year-over-year impact of approximately $4.8 million due to FX. Direct customers represented 82% of total ARR. Direct ARR at the end of Q4 totaled $327 million. an increase of 6% year-over-year in constant currency, and 5% on an as-reported basis. Our customer account for direct, excluding SMB, increased 7% year-over-year to over 2,960. Third-party resellers, which represented 18% of total ARR at the end of Q4, generated ARR of 73.3 million, a decrease of 6% year-over-year in constant currency, as well as an as well as on an as-reported basis. ARR is how we gauge our progress and momentum in sales, renewals and upsells, and when calculated on the basis of ARR, we believe our dollar-based net retention rate indicates the long-term growth potential of our customer base. Historically, we had used trailing 12-month revenue as the basis for determining net retention, but going forward, we will disclose this ARR-based net retention rate. As of the end of Q4, this rate was 97% for our direct customers and 92% for our third-party resellers. In our fourth quarter earnings press release, we have presented a table of comparable rates for the current and historical periods. As Mike mentioned earlier, we achieved a gross retention rate in the high 80s for the fourth quarter. Bearing in mind, this rate represents our direct customers, excluding SMBs. This was our highest gross retention rate of the year and an improvement over the mid-80s rate that we experienced in the third quarter. As we've said in the past, this is a quarterly rate determined by comparing the annual dollar value of contracts up for renewal in a given quarter against what was renewed, excluding upsells. Turning to non-GAAP results, which are reconciled to GAAP in our press release, Q4 gross profit was $76.6 million, representing gross margin of 75.1%. compared to 77.1% in the year-ago quarter. Full-year gross profit was $301.9 million, and gross margin was 75.3%, compared to 76.6% in the year-ago period. Compared to Q4 last year, our gross margin was adversely affected by severance and employee-related costs associated with our decision to reduce the size of our team by roughly 8%. The total impact of this headcount reduction was approximately $2 million, roughly half of which was recognized in our cost of revenue. As part of this process and the organizational changes Mike referenced earlier, we implemented a new cost structure which allows us to focus on higher ROI opportunities while continuing to invest against a number of strategic business needs. In fiscal 23, services was approximately 9% of revenue. As we shift some of these lower margin services to our SI and partner ecosystem, we will see a headwind to revenue and ARR growth, as well as retention. However, this will also result in a positive impact to gross margins. Based on these changes, combined with our Q4 restructuring, we expect our first quarter gross margin to be in the middle of our 75 to 80% range, with continued gross margin improvement throughout the rest of the year. Another key area of focus to increase our efficiency has been on our operating expenses. Q4 operating expenses were $70.1 million, or 69% of revenue, compared to $80.8 million, or 80% of revenue in the year-ago quarter. Full-year operating expenses were $303.7 million, or 76% of revenue, down from $315.9 million, or 81% of revenue in the prior year. One of the main drivers for this has been through a realignment of our sales and marketing cost structure where we've been able to reduce sales and marketing as a percentage of revenue to 41% in Q4 from 51% in the fourth quarter last year. Our Q4 net income was $6.3 million compared to a net loss of $4.1 million in the year-ago quarter. Our Q4 net income per share was $0.05 compared to a net loss of $0.03 per share in the fourth quarter last year. Cash and cash equivalents were $190 million at the end of Q4, compared to $162 million at the end of the third quarter. The increase in our cash balances was partially offset by continued share repurchases executed during Q4, which totaled $8.3 million. Year to date, our share repurchases totaled $77.4 million. We intend to continue to maintain a strong balance sheet and cash position going forward, and will remain open to buying back our stock at attractive prices. Net cash provided by operating activities for Q4 was $35.9 million compared to $29.1 million in the year-ago quarter, and our CapEx, $0.8 million compared to $1.1 million in Q4 last year. I'd now like to turn to our outlook for the first quarter and full fiscal year 24. As we've discussed, the macro environment remains challenging, and customer behavior across all businesses suggest continued uncertainty. Longer sales cycles, tighter budgets, and additional approval layers are common, and our guidance assumes that these weaker macro conditions and its symptoms will persist throughout calendar 23. In addition to the economic environment, Mike referenced anticipated revenue headwinds from our shift in emphasis towards SIs and services partners, which are factored into our Q1 and full-year revenue guidance. At the same time, we are also anticipating a much more efficient and profitable business next year, and we'll demonstrate this in several ways, including our gross margin improvement, a reduction in operating expenses as a percentage of revenue, and growth in our bottom line. To help highlight these improvements, going forward we will begin to give guidance on adjusted EBITDA, in addition to our expectations for both revenue and EPS. Considering that roughly 17% of our costs last year were non-cash in nature, we believe adjusted EBITDA, which is calculated on the basis of our cash expenses, is an important measure to track our progress on profitability. As of today, for the first quarter, we expect revenue to be in the range of $98 to $99 million. Adjusted EBITDA in the range of $10.5 to $11.5 million. and non-GAAP EPS in the range of 5 cents to 6 cents, which assumes a weighted average basic share count of approximately 122.9 million shares. For the full year of fiscal 24, we expect revenue to be in the range of $402 to $406 million, adjusted EBITDA in the range of $44 to $46 million, and non-GAAP EPS in the range of 22 to 23 cents, which assumes a weighted average basic share count of approximately 124.5 million shares. We look forward to seeing many of you in April. And operator, we are now ready to open up the line for questions.
spk00: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Tom White with DA Davidson. Please go ahead.
spk07: Great. Thanks for taking my questions. A couple on guidance, if I could, and then one on AI. Just could you talk a little bit about what the full year guide kind of contemplates as it relates to your listings business? And then also on gross margins, you know, should we anticipate that kind of the sort of steady state or kind of long term kind of target for gross margin is up appreciably after the changes you guys are making on the services side. And then I've got one on AI.
spk08: Great. Thanks, Tom. It's Daryl. On the question with the revenue guide, we don't really forecast out or plan out the business based on products. What I can say is obviously we mentioned the headwinds that we're seeing from a couple of different areas based on some of the strategic decisions that we made in Q4, so that's certainly going to have an impact. We think that impact is in the range of low single-digit percentage point on growth. What I will say about the listings business is Mark highlighted some of the specific customer examples in his section that demonstrates the strength of the listings product and how that ties into the rest of the platform. We feel pretty good about that. Your second question with respect to margins, yeah, you're right. The actions that we took in Q4 was primarily aimed at how we operate the services business and and or plans for the future so yeah we'll see a step function in q1 compared to q4 like we said uh you know we'd expect q1 gross margins to be in the middle of that 75 to 80 range and you know we'll show continued improvement throughout the rest of the year okay great and then i'm sorry it's mike i was just going to piggyback on what daryl said about the listings business so one of the things we we told you in q1 and q2 was that
spk04: a lot of the gross retention challenges that we saw in Q1 and Q2 were largely coming from listings only or primarily listings customers. And so we're very pleased to see that our gross retention metrics have improved throughout the year and particularly in Q4 into the high 80s. And I think that's a, what that shows is that we're doing a much better job bringing satisfaction to these customers and servicing these customers. And so in the area where I think we were most exposed, which were in largely the listings-only customers.
spk07: Okay, I appreciate that added color. Thanks. And then just on generative AI, you know, there's been a lot of debate about how it may kind of alter the established search engine paradigm. Can you just elaborate a bit more on, you know, whether that represents an opportunity or a risk for Yext?
spk04: Let me start, and then Mark will probably go a little deeper on this. I'll just tell you this. The platform that we've built is designed to be model agnostic. It can, regardless of whether any of the existing players or new players show up and become participants in this market with dominant models, all of that bodes well for Yext and for our customers because what we're interested in is making sure that the best models are in use. Mark can talk a little bit more about how we do that within the platform. What I think we're seeing is a lot of businesses awakening to the risks of not controlling the sources of information that are being fed to the AI. Even just over the last couple of months, you started to see businesses take actions to significantly limit what's being done with AI without having better controls over how the technology is being used. And that's the problem that we saw for customers.
spk01: Just to add to what Mike said, you know, what generative AI is doing right now is it's raising the bar for, you know, digital experience. And it's starting to see, you know, you're starting to see content, starting to see basically generative AI and the ability to deliver direct answers as part of consumer experiences. So the opportunity for us is to really help our customers and help businesses deliver a similar experience to what the consumer experience is. Because if this is the new bar, then every enterprise, every business in the world is going to have to live up to that new expectation of digital experience. And so the big difference here is that for a business, though, you need to make sure that you're answering questions that have 100% accuracy, that come from a set of corpus or a set of information that you control. And, of course, as you see new searches come in, the ability to add and augment that information to make sure that the next time someone asks that question that you can. And that's why it's a pretty big opportunity right now that we're seeing show up in so many different sectors and so many different areas. But for us, we're really excited about it.
spk07: Great. Thank you very much.
spk00: The next question comes from Rohit Kulkarni with Roth MKM Partners. Please go ahead.
spk06: Hey, I'll go with AI first and the model next. So first on the chatbot, maybe talk about how do you provide kind of concrete anecdotes or kind of showcase that the chatbots that Yext has with the corporate information versus the Bing chat that has had a whole bunch of misses as such. So I guess maybe talk through how does Yext chat integrated with existing knowledge base could outperform Bing's or some other large language model integrated chatbots with public information. And then any color on pricing on any of the new recent announcements on chat or the CMS?
spk01: Sure, I'll take two different questions there. I'll start off with sort of how do we think that we will be able to deliver a better experience? And I think the key is that we're delivering an enterprise experience. And what that means is that as the chat conversation takes place, as that back and forth takes place with the user, the information that the generative models has or the sort of narrow information that it has is just the information that's in the knowledge base. And part of the challenge is, of course, to make sure that these generative models do not make up information. And one of the cool things we're doing here is we're combining our large language model expertise with our search offering, with our search expertise combined with our knowledge graph expertise and bringing all those technologies together to ensure that when not only can it answer a question accurately but more specifically that it doesn't answer questions that it doesn't know anything about. And that is one of the real challenges with these large language models. And the way we do that is by, of course, narrowing down the data set and then more specifically leveraging these large language models for what they are, which is the ability to sort of translate natural language into other forms and other structures. The second part around pricing, we just announced the XChat offering. We are in a limited beta right now, so we don't have a pricing model that we're ready to share with the world, and same thing with content generation.
spk06: Okay. And then on the guide for the fiscal year, I don't know whether you already helped quantify the headwind associated with, you know, how you're de-emphasizing – direct sales to SMBs, and then more SI partner relationships. So maybe, I don't know if it's easy to quantify kind of incremental revenue and incremental EBITDA kind of headwinds that you are assuming in the current fiscal year, right?
spk08: Hey, Rohit, it's Daryl. Thanks for the question. What we can say is we laid out sort of a couple different headwinds in Mike's section, and When you look at those in the aggregate, we think the impact to year-over-year revenue growth is in the low single-digit percentages. We haven't really gotten into how that sort of rolls into EBITDA, but you can see the pretty good increase in EBITDA from fiscal 23 to our fiscal 24 guide, so we've certainly made a lot of really great progress this year on generating efficiencies that will be sustainable.
spk06: Okay, great. Thanks, Mike. Thanks, Debbie.
spk00: The next question comes from Arjun Bhatia with William Blair. Please go ahead.
spk03: Hi, guys. Thanks for taking the question. Maybe if I can just continue on the generative AI conversation. I'm curious where you see Yext Chat fitting into the broader picture with Yext Answers. And I'm trying to envision a customer use case is there room for a customer to adopt both the X chat and the X answers or does gender of AI and natural language responses Replace the need for semantic search that a customer may have on their other website Yeah, so
spk01: The best way to think of this is that there's going to be multiple digital experiences that exist in the world. There's not just one. There's not sort of like one digital exchange to rule them all. Whether it be mobile, whether it be web, whether it be messaging and chat, whether it be a commerce experience, they're all different experiences. They're all operating against the same information. So there are certain digital experiences that may call for more of a messaging experience, right? Something where you want to have an exchange that's more, you know, sort of human-like, and that might be the best scenario. Maybe that's sort of an example of like a shopping assistant or even like handling support use cases. There are other examples where you want to have, you know, free-form, full result sets that you can visualize and you can interact with, like in a commerce setting or, you know, something like a locator, right? Those are just different They're different user experiences that somebody may want to deliver. And so as we have expanded our digital experience offering and expanded the set of composable pieces or building blocks of our platform, we want to give our customers the option. We want to give them the choice. We want to give them the widest breadth of tools of building blocks that they can possibly have in order to create as many different experiences as they like.
spk03: Okay. Got it. That's helpful. And then just Taking a step back as we think about all the new product announcements, you have the XChat, you have the CMS solution, the self-generating CMS rather. Where are we in just the development of these products and getting them to a fully functional level? And then from a financial perspective, how should we think about just the timeline of when we start to see an impact on revenue and customer adoption from these solutions?
spk01: So we talked about content generation being there as part of our spring release, which will be coming out in a few weeks. For Yext Chat, we're in early stages of a beta right now. We actually are beginning to launch a handful of beta customers. And so for us, we're looking at you know, getting those customers successful, and then, you know, towards the back half of the year, you know, opening it up to a much, much wider audience.
spk03: Perfect.
spk04: Thank you. You asked about, like, you know, when should we expect to see financial contribution. I think it goes to the way, you know, the answer to that question is it goes to the way we think about how we go to market, right? So, You know, we're not necessarily thinking of these things as point solutions. We're thinking of them as digital experiences that we're going to help enterprises deliver more effectively. And so, you know, depending on the company, they may need all of these digital experiences. They may only need some of them. And the modularity of the platform, the ability to take pieces of it and make it all work off the same knowledge graph and the same set of models and technology is is one of the really compelling things about the platform. So we're happy, as we've said before, we'll land with one solution or many solutions depending on what's top of mind for the customer. Our goal is to prove the power of combining semantic search and large language models with the knowledge graph in an enterprise setting. And once we've done that, then the upsell, cross-sell motion is obvious because you've already composed a knowledge graph and you can then just layer additional experiences on that seamlessly.
spk03: Okay, got it. That's helpful. Thanks for taking the questions.
spk00: As a reminder, to ask a question, you may press star then one on your telephone keypad. The next question is from Ryan McDonald with Needham. Please go ahead.
spk05: Hey, thanks for taking the question. This is Matt Shea on for Ryan. Nice to see some recovery in the dollar-based retention in the quarter. It looks like gains were stronger in the third party than the direct segment. What drove the difference in the quarter-over-quarter recovery, and what gives you guys confidence that Q3 was the trough for those metrics and that you can continue to build off of the success that you started to see in Q4 over the course of FY24?
spk04: I'm going to let Daryl answer the numbers questions. I'll say qualitatively, I think we can feel this and we can see this and feel this in our customer engagements. What drives the gross retention numbers is obviously customer satisfaction. We've talked about this quarter after quarter. It was not fun in Q1 and Q2 to speak with every customer who left us and hear about the reasons why. I can tell you I haven't stopped speaking to customers. I talk to them all the time. every opportunity we get. And, you know, our focus on customer satisfaction and making sure that not only do they want to continue using the products that they're using, but they want to buy more from us is taking hold. And so qualitatively, we feel really good about the progress we've made there as we enter a new year here where we'll go through the same, you know, up for renewal ramp that we see every year. And I think we'll just keep getting better at this.
spk08: Yeah, Matt, this is Giles. Just to answer the question on the numbers, just want to make sure it's clear. We moved from the legacy method that we were doing to calculate net retention on revenue over to ARR. ARR is a more forward-looking metric. We're also disclosing ARR at the end of each period, so we thought it would be useful to provide a retention rate based on that same basis. And just to help provide a little bit more clarity, The compares to the revenue rate to the ARR rate are generally pretty close within one to two percentage points each quarter. But going forward, we'll continue to provide this on the ARR basis as it lines up pretty neatly with our ARR disclosures. So when you think about that, the higher gross retention that we saw in Q4 in the high 80s is certainly helping move that you know, move the net retention metric in that direction.
spk05: Got it. That's helpful. Appreciate the color. And then I appreciate the earlier comments on some of the new C-suite additions, the new CMO and new CRO. Now that they've been in the seat for, you know, four to six months, maybe a little longer, as you look to start the new fiscal year, what strategies would you say that they are the most focused on and how is this informing some of your initiatives for the coming year?
spk04: Yeah, so I think we're roughly four months for Tom and roughly six months for Ran. And when we hired these leaders, one of the things I told you was with sales cycles in the six to 12-month range, it takes a while to really see the quantitative impact of a better go-to-market machine because it takes a while to build that. And as you're building it, you're definitely getting better at delivering through that engine But, you know, it's not like it starts on the day that they get here. So, you know, we're really pleased with the progress that's being made there. I think Tom and Rayanne, they know their business well and they're executing effectively. And, you know, and the results are showing that things are improving. I think we expect that to continue throughout the year. And a lot of the things that we've been building and launching on the go-to-market side of things are really just now getting into usage. Yeah. It's still early, but we're feeling really good about what's happening on that side of the business.
spk00: At this time, there are no more questions in the queue. This concludes our question and answer session, as well as today's conference. Thank you for attending today's presentation. You may now disconnect.
Disclaimer