Welcome, everybody. Good afternoon, to this next, virtual fire, or fireside chat in person, not virtual, at the 26th Annual Needham Growth Conference. I'm Ryan MacDonald, I'm a software analyst here at Needham, and it's my pleasure to be joined by Yext and the company CEO, Michael Walrath. Michael, thanks for joining us.
Thanks for having me.
Absolutely. So we've got about 40 minutes. We'll go through some fireside chat questions, but for those of you in the audience, if you do have questions for Mike, well, raise your hand, and we'll make sure to get those asked and answered throughout, and we'll leave a little bit of time at the end as well. So with that, let's dive in.
Great.
So Mike, you know, for those who might not be familiar with Yext, how about a brief overview of the business?
Sure. Yext has been around since 2006. Our core product offering, as it exists today, has existed since about 2010.
Mm-hmm.
Public since 2017. I was the Chairman for 12 years before I became the CEO 22 months ago.
Mm-hmm.
Um-
It's been 22 months already.
Twenty-two months.
Wow!
Yeah, some days it feels like a little bit more.
Yeah, yeah, yeah.
We had 0% interest rates the day I took the-
That's right. That's right.
Yext is a digital presence or digital experience platform-
Mm-hmm
That helps brands to create a single source of truth around all of their complex brand information and deliver that information through both first and third-party digital experiences.
Mm-hmm.
Our primary product offering would include things such as Listings, Syndication Management, Reputation Management, Location-Based or Product-Based Pages-
Mm-hmm
As well as, search experiences, and various ties into generative AI capabilities.
Absolutely. When you think about the market size and opportunity for Yext platform, you know, particularly for some of those core products you noted-
Yeah
You know, how large is it?
I think it's large and growing and very difficult, you know, as evidenced by the-
Mm-hmm
Various different ways that people, you know, sort of create the TAM definition.
Mm-hmm.
I think digital experience management, or digital presence management is gonna be an area of huge growth for the market, especially living in a world where, you know, answers are gonna move to a more generative experience.
Mm-hmm.
What that's gonna do is put a tremendous premium on the ability to create single data source of truths-
Mm-hmm
And then deliver the, you know, a copious amount of data in the form of authoritative data, in the form of content-
Mm-hmm
To the engines of those generative answers. So we really feel like the entire marketing software universe is gonna be dramatically impacted by the fact that the way that consumers ask and receive answers to questions will go through a fundamental shift over the coming, you know, quarters and years.
Absolutely. I think that results in sort of a complete evolution of your strategy of how you're communicating with your customers-
For sure
Today.
Yep.
So, so what's set like a bit of context in terms of the backdrop on the macro environment in the eyes of Yext? You know, like other software companies, you've not been immune to deal elongation or downsizing, right?
No.
What's the selling environment been like for Yext in over the last calendar year, and how do you envision it playing out in calendar year 2024?
Yeah, so, I've been a little unpopular on this, because it's been a really difficult environment to separate kind of signals that have historically been really good signals and have turned out not to be very good signals over the last, you know, few quarters in particular. So I think we've seen some things, you know, driven by the interest in Generative AI, the interest in creating the in the transformation of the, the digital experience for brands, that have basically created a huge groundswell of opportunity.
Mm-hmm.
A year ago, we were sitting here talking, you know, ChatGPT was two months old, and all any boardroom wanted to talk about at that time was: How are we gonna use this generative AI stuff to talk to our customers? And things like that.
Mm-hmm.
And look, we're all excited about it, I think, and it, it created a lot of interest, a lot of meetings. And as we went through the course of last year, even with, for us, what was still a pretty sort of inefficient Go-to-Market, we saw this kind of bubble of demand-
Mm-hmm
Being created. You know, I think what most didn't account for was the fact that the conversation in boardrooms, certainly, you know, in Q2 and Q3 of last year, shifted from, "How do we transform our digital experience?" to, "How are we gonna spend less money, be more profitable, and be more efficient in a worsening economic environment?
Mm-hmm.
And so those, the signal of lots and lots of pipeline combined with, you know, 12 years of that pipeline converts at a certain percentage rate-
Mm-hmm
I think caused a lot of optimism around the re-acceleration of subscription software ARR in the second half of the year.
Mm-hmm.
I think we, maybe from PTSD, maybe from just having been through a few of these cycles before, we're probably a little bit ahead of the curve in identifying that there was real risk.
Mm-hmm
To the close rates.
Mm-hmm.
It's just hard. If you've watched every, you know, if you've closed X% of your pipe every Q4 for 12 years, it's hard not to believe that's gonna happen again.
Yeah.
I think what we're seeing, you know, from companies who, you know, have already finished their year, and even from the Q3 reports, was a really significant shift in the tone of the commentary around, you know, a lot of confidence after Q2 about the re-acceleration of ARR-
Mm-hmm
In the back half of the year, to now a lot of confidence that not only are those ARRs not gonna reaccelerate, but they're actually gonna continue to decelerate-
Mm-hmm
In a lot of cases. And so I think we're a little ahead of this curve. I think when we look at what happens in the next 12 months, you believe either one of two things. You either believe that this sort of demand bubble will shift subscription software bookings into the first half of the year-
Mm-hmm
And we'll see this sort of unusual seasonal shift, where a lot of the interest in these products will actually translate into demand in Q1.
Mm-hmm
And Q2, or, and this all depends on your lens on what the C-suite's gonna do-
Mm-hmm
You will just see a normal, you know, a return to normal, most likely in the second half of next year.
Mm-hmm
Of this calendar, of this current calendar year.
Mm-hmm.
Where, you know, through the normal fiscal budgeting process, you see that kid of recovery happen then.
Mm-hmm.
You know, they call me the curmudgeon because I'm typically taking the downside case-
Yeah
On these things.
Yeah.
I like to maintain my reputation as the most bearish software CEO on planet Earth. I just don't have a lot of faith that the CFOs are gonna wanna turn around after going through a budget cycle where they finally reined spending in and started to force their teams to consolidate some of the software spend.
Mm-hmm.
That they're gonna immediately turn around and give that back at the expense of profits, but that's just my cynical point of view.
Do you think, sort of as we go into next year, that, you know, given that dynamic that, you know, you've talked about in the past, maybe return to high single mid to high single digits?
Yeah, yeah
ARR growth. Like, you know, how does that-
Yeah
Maybe dictate that viewpoint, I guess?
Well, that, you know, it's a great-
Yeah.
Yeah. So that's, you know, I think the challenge is that, you know, in our last call, one of the things I said was, "We absolutely anticipate to see our ARR growth significantly accelerate-
Mm-hmm
In the second half of the year." In order for that to happen, we're gonna have to make progress throughout the year.
Yeah.
You know, how do you. You know, I guess what you're asking is, how do you parse that sort of very bearish view on-
Yeah
The overall environment-
Yeah
With the fact that our business is gonna improve? There are two pieces to that. The first is-
You almost convinced me that you didn't say that, and I like, "Oh no-
Oh, no, I said it!
I thought about that.
I know, I said it. And I wouldn't say, I wouldn't say it if I didn't believe it was true.
Yeah, yeah.
I think there are some unique things in our business. I think one is that we, we've had some, some headwinds in our business that were self-inflicted, and we've talked a lot about these.
Yep.
Because we had to, we had to get the business healthy. And part of that was determining where we had revenue that was, that was unhealthy-
Yep
That was unprofitable. And so we've seen, you know, revenue's been challenged, but margin expansion has been good.
Mm-hmm.
The other thing that I really think that I'm very positive about is that in the environment I just described-
Mm
Where CMOs and others are gonna be asked to do more with less-
Mm-hmm
The broader your platform is and the more things that your platform can do, the more likely you are to be able to create consolidation across an environment. And the environment where consolidation is gonna be the most important is the one where we are not, like, where there's not profligate spending on new software.
Yep.
Where there's pressure to say, "Hey, look, we don't need..." You know, I think the day I came in there, you know, I asked how many software contracts we had, and the number was approaching 100 different software contracts-
Wow
For a pretty small company.
Yeah.
So, you know, I think, I think Darryl, our CFO, and others are gonna be very focused on: How do we bring those numbers down?
Mm-hmm.
We have brought those numbers down. And so, you know, from our standpoint, that's a good thing-
Yeah
Because we can play across a much broader set of that space than a lot of our vertical competitors.
Yes, and then you can be a potential solution to consolidate around, if you will.
Absolutely.
Mm-hmm.
And so good execution on the go-to-market, good customer satisfaction and servicing execution-
Mm-hmm
And then continuing to add on things that your customers really want-
Mm-hmm
In this environment and making sure your product roadmap is lined up to what's gonna drive value to a CMO who's under both software budgetary pressure, potentially marketing budgetary pressure, and maybe most importantly, team budgetary pressure.
Yeah.
So, you know, we've not only seen inflation in software, but we've also seen inflation in headcount.
Mm-hmm.
And that's starting to come down, too.
Mm-hmm.
And so if I'm a CMO, not only do I have less money to spend on software, I may or may not have less money to spend on marketing, but I also have less money to spend on people.
Yep.
I need to consolidate responsibilities.
Yep.
And I also need to consolidate how many panes of glass-
Mm-hmm
I'm viewing my marketing, my end-to-end customer life cycle through.
Yeah.
And that's where I think we, you know, over the next couple of years, what we see is instead of this massive expansion of vertical software, we'll start to see the broadening of the strongest of the players.
The horizontal players. Interesting. So maybe then, and then just, before we go into kind of the changes you've made internally to, like, set yourself up for success moving forward. On the point of sort of expectations for growth acceleration, I think an area of investor concern that's been brought up since the last quarter call was, you point out the churn of an $11 million ARR customer.
Yep.
And so whether that. And investors really want to know whether that represents sort of a canary in the coal mine.
Sure.
And so, so why do you view the churn event as one time in nature, and, you know, what's your gives you confidence that-
Yeah
Other, there aren't other churn risks in the customer base there?
Yeah, so I think we've talked a lot about churn since the day I took over.
Mm-hmm.
I think, you know, churn can reflect different things.
Yeah.
It can reflect customer dissatisfaction, it can reflect budgetary pressures, it can reflect competitors who are, you know, outcompeting or out-
Mm-hmm.
We've had some level of all of that, right?
Mm-hmm.
I think we've had a lot of private, you know, small, private, well-funded competitors willing to lose money for a very long time-
Yep
To make life hard for us. I think that playbook has gotten a lot harder to run in this environment.
Especially on cost of capital, as much as.
There is no capital.
Yeah, yeah, exactly.
And so-
Yeah
So yeah, it's really hard to go raise money on-
Mm
A growth story that's burning.
Yeah.
I mean, especially when you have a big preference stack, that's just not happening right now.
Yeah.
So I think that's one dynamic. I think, you know, in the case of this individual customer churn that we talked about, which we had in Q4, the reason why I'm confident is because you inspect. I've inspected the heck out of it-
Yeah
Both personally and through my team.
Mm-hmm.
Talked to the customer. We know exactly what the dynamics are, and I've never seen one that's more just sort of pure play financial engineering.
Got it.
This budget was, this and many other budgets inside this particular customer were being-
Mm
You know, cut by up to, you know, up to 80% or 90%.
Oh, wow.
And so, you know, I think we, I think we could've kept the customer in an unprofitable way.
Yep.
I think that would've been a bad decision for the company.
Mm-hmm.
Obviously, we're not happy about it.
Mm
But we'll see what happens over the course of, you know, the next year or two with that customer. And we do think there will be a real challenge for that customer to see the value that they were seeing from our platform.
Yeah. Do you, are there any learnings you can take from that instance? 'Cause you talk about, obviously, I think more important for Yext over time is to be a platform that can be consolidated around. And, in at least in this instance, you know, it was something where they felt that you weren't perhaps something that you could be consolidated around. So is there anything like-
Well-
You took from that situation where, that you can change from a
I mean,
go-to-market, customer retention, like that sort of thing?
I would say more broadly-
Yeah
I agree with the statement that, like, the more you can consolidate different functions-
Yep
Through, you know, what we call, you know, through a single pane of glass or-
Mm-hmm
A single, like, then the stronger your position's going to be.
Yep.
There may have been some small element of that with this customer churn, but I really think that's part of what we're—
Yeah
Saying, is that it was really about budget.
Yeah.
Right? It was less of a consolidation play-
Mm-hmm
And more about budget. And, you know, and to do to retain that customer at the cost of not just the profitability of that customer, but also introduce the type of pricing risk that doing uneconomic deals-
Yep
It's just a-
You don't want.
It's bad business that-
Yeah
You know, we, you know, I think one of the things we've shown over the last couple of years is we're not gonna do bad business.
Yeah, you don't wanna set that precedent. Makes sense. Okay, sorry, go ahead.
It can be. I mean, so, so with the, with the current platform, you think about listings, reviews, management, these are typically folks in either the... You know, it depends on, organizations organize differently, but it's within the marketing department. Often, it's whoever's responsible for, for discoverability, for SEO. It dovetails with a lot of what, you know, what we do drives natural, SEO discoverability because we're putting, content into the market on behalf of our customers. I'd say there's always situations where agencies perform some of these roles, but I think this is more sort of core marketing infrastructure.
So, you know, how you create your data source of truth and where you're collecting, how much of that data is stored natively in our content platform versus how much is being collected through connectors to other sources of truth inside the organization will. You know, this is much less of an, I would say, an agency-driven. I think, you know, paid media is typically much more of a agency-driven buying center. Yes. The cookies is not a big part of our. We don't use. We're not dependent upon cookies to deliver, so. Okay. Let me answer the question a little differently.
I think there's gonna be a whole in marketing, paid media in particular, there's going to be a, you know, there's already been an impact, and there's gonna be an impact in cookies going away. What I think is the bigger impact that affects our business is going to be the change in the way that companies like Google and Microsoft generate answers to questions. And so if you think about today, what that search engine result page looks like, you're either competing with dollars for the sponsored position at the top, or you're competing with data or content for the organic, right? When you move to a generative answers model, what happens is your ability to buy your way to the top of that page will disappear.
And so what will be really, really important in that situation is, how am I using my data to create very consistent and widespread content across the web, that will then be indexed by both, you know, by these, you know, take Google for the example, by Google search engine and attached to the generative answers? So I think one of the points of confusion here is that large language models are not going to become search engines. They're gonna become attached to search engines. And so the search engines will still be about parsing the data.
So the same way that Google today looks at your website, but also customer reviews and subpages of your website and all the different places that your website information shows up, you know, in the same form, are all indicators of the quality of that content, and that's how you move up that organic search results page. That all of that's gonna become much, much more important in a world where you're less reliant on being able to buy your way to the top of that page. So-
It makes the Knowledge Graph that much more important because then you-
Yeah
The customer is more incentivized to put more structured facts-
Right
In data into that Knowledge Graph, so then you can then-
Yeah
Have that consistency of... Yeah.
come up with ways-
Yeah
To generate content out of that Knowledge Graph.
Yeah.
So you think about, you know, one of the critical pieces here is the ability to respond effectively and at scale to reviews, to customer reviews. So to the extent that you can marry an LLM to an authoritative database to respond to customer reviews, what happens is you get this more comprehensive, conversational thing happening, which, you know, companies like Google will identify as, you know, there's a very real, authentic thing happening here, and that's higher value than, for example, just some brochure website about. And that's, you know, that's all part of this discussion. So content generation ties incredibly closely-
Mm-hmm
Into authoritative data management.
Shifting to sort of the. We talked about the structural pieces you're putting in place inside the organization so that as the market dynamics improve, if you will, you're sort of better prepared-
Yeah
To sort of capture more of that demand.
Yep.
I want to start on customer success was obviously-
Yeah
A first area of focus for you. Can you talk about just what the key areas of, and what you improved upon within customer success, and how that's translating to gross and net retention metrics?
Yeah. So I mean, I think we talked about this on the first day.
Yeah, yeah.
Right? Like, you know, our customer success metrics weren't where we wanted them to be. I still think they're not where we want them to be.
Mm-hmm.
I think, you know, part of the challenge there is that, you know, we're not operating in a vacuum.
Mm-hmm.
Right? So, you know, and what we deliver from a product standpoint has to shift based on what the customer wants.
Mm-hmm.
And so, you know, we sort of started this journey a couple years ago in an environment where, in a much more robust buying environment-
Mm-hmm
Where I think customers were a lot more willing to hear about your new product offerings and things like that. I think you fast-forward to today, customers really want to talk about their needs-
Mm-hmm
More than, you know, your sort of bright, shiny object.
Yep.
And so you have to respond to these, you know, sort of customer inputs.
Mm-hmm.
Which means that, like, I think when we look at last year, some of the things that we did on the customer roadmap, just frankly were mismatched at some level to what our customers really wanted to buy-
Mm-hmm
By the time we got to the end of the buying cycle.
Mm.
And so we're in sort of constant improvement mode when it comes to how do we generate pipeline that's targeted to what our customers want?
Mm.
How do we move that pipeline through a buying cycle, and then how do we use that as a feedback loop to determine where we might be creating real product innovation, but it's not as transactable as we thought? And I think-
Mm
You know, this is the other thing that makes me very unpopular, is I was, I was out there, you know, I think, you know, early, saying, this, this tidal wave of bookings that everyone's expecting from Generative AI-based solutions is a mirage.
Yeah.
Right? It's not a mirage because the customers don't want it. It's a mirage because buying that stuff at scale and letting the generative models talk to your customers-
Mm-hmm
Is a four to eight quarter away-
Yeah
Situation.
Yeah.
Simply based on the way that enterprises think about legal, regulatory, and compliance risk.
Mm-hmm. Yeah.
Absolutely.
I think it's a good segue into, like, on the go-to-market changes. So you brought in a new CRO and CMO.
Mm-hmm.
You know, I think that obviously comes with incremental investment around new go-to-market strategies. You know, can you talk about maybe what some of those strategies you've put in place and how are you measuring those returns at this point?
Yeah. Yeah, so we, I think we had a weakness when it came to the instrumentation and the measurement of-
Mm-hmm
Both our sales productivity and capacity, as well as our pipeline generation model. And I think part of that comes from, you know, when you start life as many software companies do, as sort of a single vertical product-
Yeah
Company. You know, you can use a pretty simplistic model about thinking about sales productivity and quota-carrying capacity. You know, what we've had to do as we've gone much more broadly and are now sitting in four or five vertical product areas across a single platform, is you have to get a lot more instrumented around what's generating pipeline, how is that pipeline converting into qualified opportunity-
Mm
And then how are those qualified opportunities closed?
Yep.
So by bringing in the types of leaders who we've brought in, Tom Nielsen's been, as our CRO, has been here about 14 months now.
Mm-hmm.
Raianne's been here a month or two. Raianne, our CMO, a month or two longer.
Mm-hmm.
It just takes time to build the machinery of, you know, having the complex end-to-end demand funnel.
Mm-hmm.
We feel really good about the work that's been done there, and I-
Mm
Think it's gonna help us a lot in a, you know, at least for the time being, tougher selling environment-
Yep
Because our signal is better than it used to be.
Yeah. And what initiatives would you say that the CRO, Tom and Raianne, are most focused on for as you go into fiscal 2025 here, in terms of iterating off of the, you know, the initial pieces that they've put into place over the last year?
Yeah, so I mean, one of the things we've seen and we've talked about a lot is we've seen, you know, we've gotten leaner on the sales side-
Mm-hmm
And we've seen a corresponding increase in sales productivity.
Mm-hmm.
So that gives us a lot of confidence that, you know, we're becoming more efficient as a selling organization.
Mm.
I've talked a lot about when you combine that trend of more productivity with the ability to see your pipeline further out-
Mm
Then you can start to get into the mode of actually adding, you know, adding fuel.
Yeah.
Right? Which is in the form, for us, in the form of quota-carrying heads.
Mm-hmm.
So I think we're. You know, we talked about this last quarter. We're starting to really analyze, are we at a place where that productivity has increased to the point, and we've got the pipeline engine working to the point-
Mm
We can actually add a lot more quota-carrying heads?
Yep.
And then really understanding where are you putting that pressure-
Mm-hmm
Is critically important because, you know, in a consolidating environment, growth is gonna come from taking share.
Yep.
Right? And, and we have a lot of opportunity to take share from much more, much more vertical-
Mm-hmm
Customers who are going through their own kind of, you know, I'd say fundamental business challenges.
Mm-hmm.
So, you know, I think those things, like the focusing on what are you trying to bring to market, along with all the metrics-
Yeah
Is the stuff we're excited about.
Well, and I think obviously you could have a solid go-to-market motion and plan, but you also need to support that and back that up with product innovation, correct?
Yeah.
And so you've made a lot of investment in AI that you-
Mm
Talked about before.
Yeah.
And I thought at the Investor Day last year that you know, the demoed functionality is pretty compelling-
Mm
Functionality in terms of Yext Chat, you know, AI-generated content creation.
Yep.
I understand that, you know, we're not seeing sort of full adoption or readiness for adoption yet, but what, what's been the customer feedback generally in terms of the, the functionality and, and-
Yeah
Interest in the use cases?
I think it's mixed.
Yeah.
Right? I mean, I think not everyone's ready for this-
Yep
For this world. The interest is clearly there, and-
Mm-hmm
I think the use case and the need is clearly there.
Mm-hmm.
I just go back to, you know, you have to, you know... We have to understand the way that the larger enterprise thinks about-
Yeah
You know, how to deploy this stuff. And, you know, yeah, they wanna go, you know, you know, sort of reduce a bunch of humans who answer the phones or chat with folks and are you know, and that, that's expensive stuff.
Mm-hmm.
But they're. And you have business leaders inside businesses who are ready to kinda, you know, rip out the expensive stuff and put in the AI-driven stuff.
Yep.
But they're just going to encounter internal roadblocks-
Yep
Until it's become clear how to do this without risking your customer experience.
Yeah. And so you have, obviously, the initial applications and the use cases on the chat and the content generation, but, you know, and we've talked about this a little bit, I would think the Knowledge Graph is sort of, like I said earlier, sort of that perfect mechanism for training an LLM off of that data set, and then so you get-
Yeah
More accurate content, you're limiting hallucinations to the extent you can. Is there a way to better productize that, or sort of market that capability as, like, sort of where the future-
Yeah
Of where the market is going with-
Yeah
Customers versus today?
So, I think there's a little bit of a misunderstanding in general about the idea that, like, the way you saw. So there's clearly an accuracy problem with LLMs.
Yep, yep.
Right? And I think there's generally a pretty big misunderstanding in the market that the way you're gonna solve that accuracy problem is you're gonna train a model using data.
Mm-hmm.
Right? That's actually not how it's gonna happen because, you know, it's gonna have the same problem, right?
Yeah.
So if you, if you think about a large-scale financial advisor-
Mm-hmm
Right, and they wanna put a customer-facing, large language model-enabled, you know, conversational mechanism-
Mm-hmm
On there just to, you know, call it chat, call it whatever you want-
Mm-hmm
On their website to talk to their customer about the financial advisors.
Mm-hmm.
If you attempt to train the model over the course of weeks or months using a data set that's changing on a daily basis-
Ah, yeah
What happens is the day you set that model free, it's wrong.
Yeah.
Right? So now, you know, for a period of time, it'll still-
'Cause you have to constantly update and iterate on it.
Yes.
Yeah, interesting.
It'll be correct.
Okay.
And so I actually think this is a really sort of fundamental misunderstanding about how this is going to evolve.
Mm-hmm.
Solving the authoritative information problem is not about training the model on a more authoritative data set.
Mm-hmm.
It's about constraining the model with a more-
Mm-hmm
Authoritative data set. And one of the things that's gonna be really important with that, and this is the reason why Google and Bing are the leading players here, is because when you marry the conversational model with the search technology-
Mm-hmm
To find the authoritative answer, that's when you get magic.
Yeah.
Because you don't have to retrain the model based on an ever-changing set of data.
Mm-hmm.
You just have to wrap the answer to the question-
Yep
In the conversational model.
Yeah, okay.
If that makes-
Yeah
If that makes sense. So you combine semantic search, an authoritative data set-
Yeah
And a conversational model into a box that to the customer just feels like a much more accurate conversational model.
Mm-hmm.
But what's actually happening behind the scenes is you're using the model to understand the question, to turn it into a semantic search-
Mm-hmm
To find the answer, the authoritative answer to that semantic search, and then you're delivering that answer as some combination of conversational or link or rich snippet or however you might choose to structure it.
So it's more about the logic that you're using to train the LLM at the end of the day-
It's, yeah.
Versus actually what the source data is that's training it.
This is one of the reasons why we've seen-
Yeah
So much, you know, sort of, you know, PR ware-
Yep
Around the large language models is that there's this assumption that, like, I can just package a large language model-
Mm-hmm
Give it to you, train it on a bunch of data, and it's gonna come up with better answers. But that's actually not
Yeah
It might be a little better for a period of time.
Mm-hmm.
It's incredibly expensive to train that model-
Mm-hmm
And then retrain that model constantly.
Yep.
And you know, the duck is paddling a lot harder-
Yeah
Under the water.
Yeah.
The experience of the customer will be, "Hey, I'm having a conversation with a conversational model," but there's going to be a lot of Semantic Search-
Mm-hmm
And Structured Data-
Mm-hmm
Things happening underneath-
Mm-hmm
All of that, that makes it, that makes it work without having to retrain these models constantly.
Yeah. So that being said, it sounds like clearly you know what, maybe what the problem is in the market or like, where we need to get to in the marketplace.
Yep.
And you mentioned, you know, so sort of we're probably still four to eight quarters away from broader adoption. What do you need to do on the R&D side in the next four to eight quarters to really be able to make sure that, you know, what you've got is sort of market-ready for that point?
I think we need to understand the prioritization of the different use cases for the customer.
Mm-hmm. Yep.
And really, where do the, where do they. You know, 'cause there's lots of these use cases, right?
Mm-hmm.
It's not just content generation or chat.
Can you do that out of the box by, like, vertical use case, do you think?
Yeah, look, I, I think it's, it's sitting with your customers-
Yep
And understanding, like, what do you wanna build first?
Mm-hmm.
Right? And in a lot of cases, you know, you're talking about, you know, the thing I just described.
Mm-hmm.
It's kind of a three-part system.
Yep.
Right? Good data, search, and some form of an LLM, and there's gonna be lots of these things, and they're gonna be commoditized, so you can choose different ones.
Yep.
And then using that to deliver generically a customer experience that might feel like chat or search or something else, but it's gonna be more conversational. I think the biggest thing... I actually think this is. There's a lot of really cool, exciting R&D stuff to be done here, but I actually think what this is is more of a helping the enterprises understand when it's, you know, how to make it safe to do this, right?
Yeah.
So I actually think it's more of a, you know, sales and business process, you know, over the course of the next 4-8 quarters. It, you know, we can deliver the constrained, safe experience today.
Mm-hmm.
But again, until we've convinced legal and regulatory and compliance-
Yeah
That we can do that, it's going nowhere.
Yeah. Yeah, absolutely. How do you. It also seems like that there's an additional or incremental training that's required within your organization, because I think of how different maybe the sale will be relative to maybe the, some of the core, you know, Yext offerings. Do you agree?
I don't. Well, I mean, I don't disagree per se-
Yeah
But I think the question is, are we selling these things to the same buyers, or are we selling them to different buyers?
Mm-hmm.
Right? I think the answer might be some of each.
Mm-hmm.
When it comes to, you know, how do I, you know, create, you know, onsite or offsite digital experience-
Yep
You know, that's a partnership between probably the CMO and the CIO in most companies.
Mm-hmm.
And so yeah, I think we have to get better at taking that conversation across borders inside.
Mm-hmm.
But I would also tell you, like, when you, you know, that the implementation of large-scale listings-
Mm-hmm
You know, and, and things like that, requires a partnership between the CMO and the CIO as well.
Yep.
So it's not like. It's just who's your primary buyer-
Mm
A nd then who are the enabling stakeholders?
Yeah.
You know, and understanding who's paying for this-
Mm-hmm
Is a key part of it.
Yeah. This is probably then, like, the million-dollar question, why, you know, you get paid the big bucks. But then, you know, knowing what we just talked about, the dynamics in the end market-
Yeah
Y ou know, macro, what R&D requirements there are, you know, how do you sort of then frame this up into balancing what, like, a growth profile-
Yeah
Versus profit margin expansion and how you op-
Yeah
Plan for the business?
Yeah, I've been pretty vocal about this. I think I have a different, a little bit different lens than a lot of software entrepreneurs in that-
Mm-hmm
Like, you know, I've been a pure play founder, product entrepreneur, I've been an investor, I've operated at larger scale. And in the end, I think it all comes down to capital allocation.
Yeah.
Right? And it comes down to, you know, is the investment that we're making in growth justified by the growth that we're, we're seeing?
Mm-hmm.
Now, I think growth is being challenged across the board right now.
Mm-hmm
Because of the environment that we're in, and so we have to ask ourselves this question on a daily basis.
Mm-hmm.
One thing I've heard really clearly from investors is, like, you know, you're not gonna get a lot of credit, you know, if we've improved the margin profile of the company to closer to 15% EBITDA margins, that we're not gonna get a ton of credit for, you know, for growing that by, you know, to 20% or 25% in a world where, you know, we're still not answering the question about is this a growth business overall?
Yeah. Yeah.
I think we have to be really intellectually honest about whether or not there's a growth business here.
Mm-hmm.
Should we be continuing to invest as much as we are in a future growth business?
Mm-hmm.
But I think we also have to be patient.
Yep
In an environment like this, you know, there's a lot more signal than just what's our revenue look like today-
Yeah
That tells us whether or not there's a growth opportunity.
Yeah, and
Hopefully that makes some sense.
Yeah, absolutely. And, and so then if you sort of, you know, look at what the market is telling you and, and you make sort of that decision that, you know, you don't think there's a growth environment today-
Yeah
Where do you think the levers are that you can pull within the P&L that, to drive most of that activity?
I think there's a lot, I think there... You know, we have a lot of, you know, we're making a very significant expense, investment in, you know, OpEx-
Yeah
P rimarily. I mean, our margin, you know, our margins have improved significantly-
Mm-hmm
As we've gotten more disciplined-
Absolutely
Around that in the last 12 months. But, you know, I think our OpEx expense is that of a company that believes it can grow.
Mm-hmm.
And look, I think the market's telling us pretty clearly that they're not sure that they believe that yet.
Yep.
Right? And I understand why.
Mm-hmm.
Right? We have to... That's a show me story.
Yep.
Right? And, you know, I think we're not properly valued if we're a company that can grow.
Mm-hmm.
Not totally sure we're properly valued if we're a company that just produces EBITDA either.
Yeah.
I tend to think we're not properly valued in any scenario, but that's, you know... If I didn't think that, we'd probably have a problem.
Yes.
So, you know, I, I think that, you know, we need to, you know, and Darryl keeps me honest on this, like, you know, and I think we keep each other honest on this, like, we, we have to be real-
Mm-hmm
About, you know, how long is that, that horizon, and how real is the growth opportunity?
Mm-hmm
Because that's what, you know, good capital allocators do.
Mm-hmm. And you've, you've said also longer term targets where, you know, to get to a Rule of 40, be a Rule of 40-plus business, and-
Yeah
On the low end, it's 10% growth. On the high end, 20%-ish.
Yeah.
You know, we're kind of reading the tea leaves a little bit here, but what do you think the major swing factor is on the difference between 10%-20%, you know, from an end market perspective?
Look, I think the biggest question for us right now is how much can we consolidate-
Mm-hmm
In this market? There's been a lot of fragmentation. You know, we've allowed competitors to take more of this market than-
Mm-hmm
Than we should by being a little, you know, by being maybe distracted and maybe focused on things that are, you know, gonna move the needle-
Mm-hmm
Less over the last three or four years. You know, I don't think we have distraction problems inside the business today. I think we're incredibly focused on competing effectively-
Mm-hmm
Taking share that we deserve to have because of the value and the breadth of our platform, and delivering product innovation that accelerates that process.
Yeah.
You know, in an environment where net new software spending is harder to come by-
Mm-hmm
You have, you know, we have to grow through share.
Yeah. Do you think, and as you look at the sort of the portfolio of the offerings in the business, you know, you obviously can say you recognize what some markets more mature than others.
Yep.
You know, search is obviously a growth area. The AI can hopefully be a growth area. Do you think listings is still a growth business?
I do. Well, yeah, I do. I think it's.
Mm
As in a world of generative answers, actually having your listings information, you know, correct is really, really, really important.
Mm-hmm.
I think at the core of that is having your, all of your data correct.
Yep.
And so these things, to me, they're not really separable. They all-
Mm.
How you price them and how you package them-
Yep
You know, the optics of growth and different things, that and the perception of the customer of where the value is, like, one of the beauties of having a four- or five-product platform is-
Yeah
That you can price based on customer perception of value, but in the end, the, you know, the sort of margin structure of the overall deal is gonna be pretty similar.
Yeah.
And so, you know, I think those are advantages for us. But-
Mm-hmm
I really do believe that the need for authoritative data is gonna be a tailwind for the company over the long run.
Nice. Maybe finally, just capital allocation. You, you know, you've got a pretty strong balance sheet.
Yep.
$180 million plus of cash.
Yep.
You've been executing on share buybacks-
Yep
You know, recently.
Yep.
How do you sort of prioritize what, what uses of cash, whether it's-
Yeah
Additional buybacks or-
Yep
You know, M&A-
Yep
Is that attractive?
Yeah, I think, I mean, we bought $100 million worth of stock, you know, up through, I think the end of our-
Mm-hmm
Q3. We have not seen, you know, over the last couple years, that the private M&A market has been really interesting.
Yeah.
I think there have been a lot of misset expectations and, you know, like, this is not surprising. It takes a while for the private market, you know, to sort of flow through what is a complete revaluation of what public companies and how public companies are valued. I would tell you, I think we're starting to see it. I think, you know, venture investors, private equity investors, and management teams have all come to terms with the fact that, you know, there are not gonna be small company IPOs.
Yeah.
There are not gonna be down rounds, that private equity and venture investors have no appetite for illiquid markdowns of their, of their portfolios. And I think that creates an environment where actually there's gonna be a lot of opportunity-
Yep
O ver the course of the next, you know, 12-18 months for really interesting acquisitions, good companies that just lack the growth profile-
Yeah
Or the balance sheet to continue to grow and whose preference stacks are messed up from the valuation bubble that we saw. So, I'm actually much more bullish than I've been-
Mm-hmm
You know, the fact that they're, I do think you're gonna have to kiss a lot of frogs-
Yeah
To find, you know, some good companies out there. But they're there, and we're interested.
Yeah. Good.
This is a much more difficult environment, thankfully, finally, for some businesses that have financial profiles that I don't understand. I mean, I understand how they've been created, but, you know, low and no growth companies who've raised way too much money and haven't achieved scale are gonna have a really hard time running loss-leading playbooks in this environment. We're seeing it happening, we're seeing. I think we're seeing rationalization across the board. You know, they can no longer spend. There's no more profligate spending for moderate growth, which is what, which is what you did when you were basically trying to commoditize a leading player, right? That's the playbook that's been run against ZI for the last 10 years.
Like, I think it's as recent as the combination of an unwillingness of growth investors to continue to plow money into things, and the balance sheet's getting smaller, right? So there comes a point where you have to be break even because you can't raise more money. And so the rationalization of this market has been going on over the last 12 months, but I think a lot of these things are coming to a head now. That's gonna make it easier for us.
Um... Yeah.
Yeah. Look, I'm, you know... I think it's—I think buying contracts is a very tricky business because you trigger a contract, you know, you trigger a review when you move a company out. So, like, I just—I'm not gonna say we wouldn't consider things like that, but I think the, you know, sort of value frameworks would have to be really, really compelling for us to wanna consolidate a bunch of small, commoditized competitors who don't have product that we think is as good as ours. I think there are really interesting broadening opportunities across. You know, I mean, again, you figure this out by talking to your customers.
Your customers will tell you where they want to consolidate more of the functionality and more of what they wanna see through your, through your platform. So, like, and they'll even tell you who's doing a good job, right? So I think that, you know, following the customer in these types of environments is a really good way to both grow your business from a transactional standpoint and also potentially from a broadening standpoint, product broadening.