Description

Yext is a beaten-down software company undergoing positive change with a new CEO and a new quasi-activist board member. Trading at just 1.3x revenue, Yext is a turnaround story emerging from several years of mis-execution on multiple fronts under prior CEO Howard Lerman. New CEO Mike Walrath took over in March 2022 and has refocused on revenue retention and profitability. Walrath owns over 3 million shares of Yext and will receive an additional 2 million shares of performance-based restricted stock units (PSUs) if the share price exceeds $15. In addition, a new director from 9% holder Lead Edge Capital joined the board in October 2022. We see upside valuation of $7-11/share based on aspirational EBITDA margins of 15-25% and a 12x multiple. Walrath is incentivized to drive further upside to this valuation through growth re-acceleration or a sale of the company.

Company background

Yext provides software that allows businesses to organize and publish the facts about their brands on their own websites as well as over 200 service and application providers across Yext’s Knowledge Network, including Amazon Alexa, Apple Maps, Bing, Facebook, Google, Siri and Yelp. Its products include Listings, Pages, Reviews and Search. Its customers include Bank of America, McDonald's, Marriott, Comcast and Albertsons. For example, Chipotle leverages Yext to display up-to-date store location and operating hours across the Internet. The main competitors are Uberall in Listings/Pages, BazaarVoice in Reviews, and Algolia and Elastic in Search. Yext was founded in 2006 by former CEO Howard Lerman and went public in 2017. Today the company generates over $400 million in annual revenue.

Why this opportunity exists

Yext grew rapidly at 30-40% per year prior to the pandemic in 2020. Like many of its SaaS peers, Yext spent heavily on sales and marketing to fund its growth and posted steep operating losses. Investors tolerated Yext’s losses because growth was valued at a premium. However, problems that were brewing before the pandemic began to unravel as COVID negatively impacted many of Yext’s customers in retail, restaurants, and hospitality. The mistakes under prior CEO Lerman included:

• Squeezing customers stressed by COVID: Instead of taking the long view, Yext played hardball with COVID-impacted customers during contract renewals, refusing to give breaks on terms. Some customers cancelled in disgust while others begrudgingly renewed but vowed to eventually leave.
• Neglecting customer service: Yext had a reputation for having great products but poor customer support. COVID exacerbated this issue as financially stressed customers were no longer willing to tolerate paying a premium for poor service.
• Over-rotating to new search product: Recognizing that Yext’s core listings product was mature, Lerman invested in a search product to reaccelerate growth. However, Search had more established competitors and was sold to a different buyer than Listings (CIO vs. CMO). Lerman over-allocated resources to Search at the expense of core Listings, which worsened poor service for existing Listings customers.
• Wastefully spending on sales and marketing: Yext had hired many highly paid sales executives from Salesforce, but they failed to deliver on their quota. The company’s tony headquarters in New York City also carried hefty operating expense.

Since 2020, revenue growth has decelerated to single digit as churn increased, and the company remained unprofitable. As a result, investors fled. This led to a wholesale change of the management team in March 2022 as the CEO, CFO and CRO all resigned.

New management team and focus

Mike Walrath took over as CEO in March 2022 after serving as Chairman of the Board since 2009. Walrath has an impressive track record, having sold online advertising exchange marketplace Right Media to Yahoo in 2007 for $850 million and digital measurement company Moat to Oracle in 2017. Walrath is independently wealthy and does not need this job to pay the bills.  As Yext’s CEO he receives no cash compensation but is highly incentivized to increase shareholder value. He owns over 3 million shares of Yext and will receive an additional 2 million shares of performance-based restricted stock units (PSUs) if the share price exceeds $15. We think Waltrath is primarily motivated by his embarrassment that the company under-performed under his watch as Chairman. He aims to improve revenue retention and profitability. In meetings with investors, he has suggested a potential scenario of 10% growth and 25% operating margins. We think his interests are strongly aligned with shareholders and a sale of the company is his most likely endgame.

Walrath understands that improving revenue retention and profitability are the key to creating shareholder value. Yext’s net revenue retention has decreased from 106% pre-COVID to 98% in the most recent quarter due to the factors cited above under prior CEO Lerman. Since stepping in as the CEO, Walrath has proactively taken calls with customers to close new deals and renewals. He has also put more emphasis on fixing customer service problems and brought in a new CMO and CRO with strong enterprise software experience. With respect to profitability, Walrath has focused on improving sales efficiency by rightsizing the salesforce. Early feedback from former employees suggests that Walrath is the right CEO to replace Lerman.  

We are further encouraged that Evan Skorpen from 9% holder Lead Edge Capital joined the Board in October 2022. Skorpen previously worked at ValueAct and Hellman & Friedman. We think he will bring much needed experience in profit improvement and discipline to the company.

Valuation

Yext is currently growing low single digits on a constant currency basis while operating near breakeven on a profitability basis. If Walrath is able to improve revenue retention, we think annual growth can stabilize at 5-10%. We think 15-20% EBITDA margins are possible in 12 months and 20-25% in 24 months. As such, we see upside of $7-9 per share on 15-20% margin and 12x multiple in the near-term and $9-11 on 20-25% margin and 12x multiple in one to two years. Walrath is incentivized drive further upside to this valuation through growth re-acceleration or a sale of the company.  An even bigger payday for him comes if the share price exceeds $15 and his incentives hit, which would probably require an additional significant product success or broad improvement in market multiples.

Risks

Failure to improve revenue retention: The current macro headwind may compel customers to seek cheaper alternatives and delay Yext’s effort to show improvement in retention and profitability.

Catalyst

Improvement in revenue retention and profitability

Sale of the company