I’d love to know what the thought process is behind naming companies these days. Luckily, corporate naming conventions are not a basis of investment evaluation and don’t have a correlation with financial performance, so we’ll move on to more important criteria.
Yext is a B2B platform that companies use to manage corporate information/facts across a multitude of online platforms such as Facebook, Google Maps, Yahoo, Bing, etc.
Let’s take a look at what a real-world example would look like. Shannon’s Shoes is a women’s shoe retailer with one location. Day-to-day operations are handled by Shannon herself and that includes online presence. She promotes the business on a multitude of platforms and has listed the company across many business directories in addition to being listed on google maps and Facebook. She’s recently moved locations and between managing the move and ensuring that operation remain as smooth as possible, she hasn’t had the time to scour the net to ensure that all social platforms/business directories reflect the new address and contact details. This is where Yext’s value add comes into play. Shannon would use the Yext platform to enter in updated contact details once and have it reflected across a number of online platforms using what Yext refers to as proprietary integrations. Also, Shannon has noticed duplicate entries of her business in a number of online directories, each with slightly different and incorrect contact details. Shannon would be able to isolate the multiple listings and have the ability to block those listings from appearing to potential customers. This sends a clear message to her potential customers online and improves her search ranking with particular search engines.
Yext appears to have anchored themselves as the go to solution in maintaining accurate corporate details online. Judging by Google search interest, Yext is the most popular, and by a large margin, among its peers.
Keeping in mind that the market for this sort of service is in it’s infancy, being the most searched should not be misconstrued as a recipe for positive financial performance. The real question is what kind of market penetration can they achieve? Have they reached a level of maturity or are they still in an early growth stage? We’ll try to get an understanding of this by evaluating the company’s S-1 filings as well as Google Search Trends for the company.
Yext’s S-1 filing indicates that the potential market for their business offering are the 100 million businesses listed globally on Google Maps. While this seems large, the reality of the matter is that only a segment of those businesses will really benefit from Yext’s solution. Firstly, for the many mom & pop shops that are managing maybe less than a handful of locations, they’ll often manage corporate listings in house since the cost of farming out this particular task may prove too costly and unnecessary. One source gives the opinion that an operation of 20 or more locations would be best suited for the platform.[i] On the other side of the spectrum, large corporations that have their own dedicated departments dealing with social media and web presence will often keep this task in house. Secondly, there are many directories/corporate listings that the Yext platform supports, however there are maybe a handful that really matter to businesses which means that the trade-off offered by market competitors of a much lower price point but less access to less referenced directories may be worth it. Furthermore, Yext’s platform is relatively new which means there needs to be a significant investment in generating market awareness and an understanding of the benefit of a service of this nature. Suffice to say, the estimated 100 million businesses that Yext believes to be their potential market, is likely much smaller.
Yext provides revenue retention rates which in a nutshell is the calculation of how much more a client onboarded in year 1 has spent in year 2. Yext places particular focus on the mid-sized and reseller customers as their small business customers are prone to ‘high turnover’ rates. At first look, the results appear to be positive,
“Our dollar-based net retention rate was 113%, 121%, and 118% for fiscal years 2015 and 2016 and the nine months ended October 31, 2016, respectively.”
Taking a closer look, we observe a concerning trend with revenue from net new mid sized and reseller clients slowing in a significant way. The red boxes highlighted below represent revenue from net new clients onboarded for the particular year in question. As depicted, both 2015 and 2016 net new revenues lag 2014 despite significant increases in marketing and sales expenditure. This would suggest that the company may be facing platform adoption constraints.[ii] Our concern is that continued increases in marketing and sales efforts may see the company fall further into the red.
From a top and bottom line perspective, we note a mixed message when comparing 2015 and 2016 results. Revenues are increasing, however not at the rate that expenses are growing which resulted in FY 2016 loss that increased on both a nominal and per share basis when compared against FY 2015.
The Search Trend
While financial losses are to be expected with a new company with a novel product offering, what is out of the norm is the widening financial losses coupled with what we observe to be stagnant market awareness.
Market awareness is a difficult thing to gauge; however, Google Trends can give a sense of internet search interest. We’ve taken a look at search trends for the term ‘Yext’ for the period March 2014 to January 2017[iii], we isolated searches to the United States (Company’s headquarters are in New York) and found that the trend has been relatively flat.
As a company grows and awareness increases, we should see search interest grow in tandem. A red flag should be raised when search interest is stagnant or waning in the face of increased marketing and sales dollars spend. Either the marketing campaigns are ineffective or the product/service is not conducive to online search. We believe the issue to be the former since Yext’s platform is highly conducive to internet search. (Likely a person is most likely to come across this service while surfing the web.)
We believe that the company faces an uphill battle. It is operating in a relatively new space which will require a significant investment in market awareness that may or may not lead to increased adoption rates but will certainly push the company deeper and deeper into the red. Investors should be aware that the potential market may be a lot smaller than anticipated and that market maturity may be reached at a much smaller scale. Suffice to say, investors should be cautious if considering Yext as an addition to their portfolio.
[i] Youtube: “Why You Should Avoid Yext as a Small Business | Edge of the Web”
[ii] SEC S-1 financials were limited to 2015 and 2016 data. Data shows that 2016 marketing and sales expenditure increased 58% compared to 2015.
[iii] We specifically chose to exclude search trends for the period after January 2017 as the increase in search growth was likely related to Yext’s IPO filings.