Yext(YEXT) - 2020 Q4 - Annual Report

Part I Business Yext operates as a search experience cloud company, enabling businesses to manage their online facts through a Knowledge Graph platform that powers brand-verified answers across approximately 175 third-party services - Yext's core mission is to put businesses in control of their facts online, delivering brand-verified answers through its Knowledge Graph platform, which integrates with approximately 175 services and applications like Google, Amazon Alexa, and Apple Maps[23] - The company's growth strategy focuses on expanding its customer base, increasing sales to existing customers, international expansion, developing new products (e.g., Yext Answers), and extending its Knowledge Network[37] - Key products include Listings (syncing content across the Knowledge Network), Pages (creating search-optimized landing pages), and Answers (a natural-language search experience for a company's own website)[44] - As of January 31, 2020, the company had over 1,200 full-time employees, a significant increase from approximately 170 quota-carrying sales representatives in the previous year to about 250[52][65] Revenue and Net Loss (in millions) | Fiscal Year Ended January 31, | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue (in millions) | $298.8 | $228.3 | $170.2 | | Net Loss (in millions) | $121.5 | $74.8 | $66.6 | Dollar-Based Net Retention Rate | Metric | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Dollar-Based Net Retention Rate | 106% | 110% | 109% | Risk Factors The company identifies numerous risks, led by a history of significant net losses and the uncertainty of achieving future profitability, alongside operational, financial, and legal challenges - The company has a history of net losses, reporting $121.5 million, $74.8 million, and $66.6 million for fiscal years 2020, 2019, and 2018, respectively, with an accumulated deficit of $422.7 million as of January 31, 2020[70] - Growth is substantially reliant on expanding the sales force, but the company has historically had difficulty recruiting and retaining a sufficient number of sales personnel[77] - The business depends on strategic relationships with approximately 175 third-party application providers in its Knowledge Network, where the loss of a key partner, such as Google, could lead to a significant loss of customers[84] - A material weakness in internal control over financial reporting associated with processes to calculate, record, and account for sales commissions was identified as of January 31, 2020[119] - The company faces competition from in-house manual solutions and other vendors, with the launch of its "Answers" site search product in October 2019 bringing it into competition with more established search product providers[63][90] - The business is subject to complex and evolving data privacy laws, such as GDPR in Europe and the CCPA in California, which increase compliance costs and potential liability[141][142] - The recent and ongoing coronavirus outbreak has disrupted operations, restricted travel, and may have a material adverse effect on the business, though the financial impact cannot be reasonably estimated at this time[152] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[204] Properties Yext's corporate headquarters are in New York, NY, with a new, larger subleased headquarters at 61 Ninth Avenue, and other leased domestic and international offices - The company's worldwide corporate headquarters are in New York, NY, with a new sublease for approximately 142,500 square feet at 61 Ninth Avenue, New York, NY, signed in April 2019 to serve as the future corporate headquarters[205] - Other offices are located domestically (e.g., Rosslyn, VA; San Francisco, CA) and internationally (e.g., London, UK), and all facilities are leased[206] Legal Proceedings The company states it is not currently a party to any legal proceedings considered material to its business or financial condition - Yext is not currently a party to any material legal proceedings[207] Mine Safety Disclosures This item is not applicable to the company - Not applicable[208] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Yext's common stock trades on the NYSE under "YEXT" since its 2017 IPO, with no dividends paid or intended, and the company completed a $147.0 million common stock offering in March 2019 - The company's common stock began trading on the New York Stock Exchange under the symbol "YEXT" on April 13, 2017[211] - Yext has never declared or paid dividends and does not anticipate doing so in the foreseeable future, intending to retain earnings for business growth[212] - On March 20, 2019, the company closed a common stock offering, selling 7,000,000 shares and receiving net proceeds of $147.0 million[215] Securities Authorized for Issuance Under Equity Compensation Plans | Plan Category | Securities to be Issued (Options & RSUs) | Weighted-Average Exercise Price | Securities Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 22,281,983 | $7.05 | 2,811,777 | Selected Financial Data This section presents a five-year summary of Yext's financial performance and position, showing consistent revenue growth from $89.7 million in fiscal 2016 to $298.8 million in fiscal 2020, alongside widening net losses from $26.5 million to $121.5 million due to significant operational investments Consolidated Statements of Operations Data (in thousands) | Fiscal Year Ended January 31, (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $298,829 | $228,283 | $170,201 | $124,261 | $89,724 | | Gross Profit | $221,799 | $170,870 | $126,106 | $87,311 | $58,691 | | Loss from Operations | $(122,953) | $(75,645) | $(66,640) | $(42,700) | $(26,138) | | Net Loss | $(121,544) | $(74,837) | $(66,565) | $(43,150) | $(26,495) | Consolidated Balance Sheet Data (in thousands) | As of January 31, (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $563,620 | $267,128 | $203,489 | $86,465 | $85,497 | | Total Liabilities | $362,408 | $182,579 | $122,036 | $93,605 | $60,118 | | Total Stockholders' Equity (Deficit) | $201,212 | $84,549 | $81,453 | $(127,755) | $(95,236) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 31% revenue increase in fiscal 2020 to $298.8 million, driven by new customers and expanded subscriptions, alongside significant operating expense growth leading to an increased operating loss, with liquidity supported by $256.1 million in cash and a $147.0 million stock offering Results of Operations For fiscal 2020 compared to 2019, revenue grew 31% to $298.8 million, while cost of revenue increased 34%, resulting in a slight gross margin decrease to 74.2%, and operating expenses rose 40% to $344.8 million, driven by higher headcount and related costs, leading to a wider operating loss of $123.0 million Fiscal Year 2020 vs. 2019 | (in thousands) | 2020 | 2019 | Variance ($) | Variance (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $298,829 | $228,283 | $70,546 | 31% | | Gross Profit | $221,799 | $170,870 | $50,929 | 30% | | Gross Margin | 74.2% | 74.9% | | | | Sales and marketing | $218,076 | $158,845 | $59,231 | 37% | | Research and development | $49,445 | $36,098 | $13,347 | 37% | | General and administrative | $77,231 | $51,572 | $25,659 | 50% | Fiscal Year 2019 vs. 2018 | (in thousands) | 2019 | 2018 | Variance ($) | Variance (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $228,283 | $170,201 | $58,082 | 34% | | Gross Profit | $170,870 | $126,106 | $44,764 | 35% | | Gross Margin | 74.9% | 74.1% | | | - Quarterly revenue has increased sequentially, driven by new customers and expanded subscriptions, while operating expenses have also generally increased due to higher employee-related costs and lease expenses[256][259] Liquidity and Capital Resources As of January 31, 2020, Yext's principal sources of liquidity were $256.1 million in cash and cash equivalents, with net cash used in operating activities of $30.8 million for fiscal 2020, significantly bolstered by a March 2019 common stock offering that provided $147.0 million in net proceeds - As of January 31, 2020, principal sources of liquidity were cash and cash equivalents of $256.1 million[262] - Net cash provided by financing activities in fiscal 2020 was primarily from a common stock offering ($147.0 million net proceeds) and stock option exercises ($14.9 million)[276] - Subsequent to fiscal year-end, on March 11, 2020, the company replaced its credit agreement with a new one providing a senior secured revolving loan facility of up to $50.0 million[268][465] Cash Flow (in thousands) | Cash Flow (in thousands) | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(30,768) | $5,240 | $(32,409) | | Net cash provided by (used in) investing activities | $39,308 | $28,134 | $(88,123) | | Net cash provided by financing activities | $168,373 | $24,384 | $129,604 | Critical Accounting Policies and Estimates Management identifies several critical accounting policies requiring significant estimates and judgment, including revenue recognition, capitalization of contract acquisition costs, stock-based compensation, and lease accounting - For contracts with multiple performance obligations, the company uses the residual method to determine the standalone selling price (SSP) for its subscription services, as professional services prices are more observable[286][409] - The company capitalizes incremental costs to obtain revenue contracts (like sales commissions) and amortizes them over an average benefit period, estimated to be three years for new contracts and one year for renewals[289][366] - Stock-based compensation is measured at fair value on the grant date, with the fair value of stock options calculated using a Black-Scholes model, which requires significant assumptions about volatility and expected life[290][292] - For lease accounting, the company estimates an incremental borrowing rate for each lease to calculate the present value of lease liabilities, which is a significant management estimate[297][298] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from foreign currency exchange rates, inflation, and interest rates, but a 10% change in the U.S. dollar's value or interest rates is not expected to have a material effect, and inflation is not believed to have had a material impact - The company is exposed to foreign currency risk from its international operations, but does not expect a 10% change in exchange rates to have a material effect on its financial position[304] - Interest rate risk is associated with the company's $256.1 million in cash and cash equivalents, and a hypothetical 10% change in interest rates is not expected to have a material impact[306][307] Consolidated Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for fiscal years ended January 31, 2020, 2019, and 2018, along with independent auditor's reports, detailing assets, liabilities, equity, revenues, expenses, and cash flows, supported by extensive notes Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements but an adverse opinion on the effectiveness of Yext's internal control over financial reporting as of January 31, 2020, due to a material weakness related to sales commission accounting - The auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements for the three years ended January 31, 2020[313] - The auditor issued an adverse opinion on the company's internal control over financial reporting as of January 31, 2020[332] - The adverse opinion was due to a material weakness identified in the company's processes to calculate, record, and account for certain costs capitalized to obtain revenue contracts (i.e., sales commissions)[333] - Critical audit matters highlighted were the completeness and measurement of capitalized costs to obtain revenue contracts and revenue recognition, due to the complexity and volume of transactions[318] Consolidated Financial Statements The consolidated financial statements present Yext's financial position and performance, with the Balance Sheet as of January 31, 2020, showing total assets of $563.6 million and total liabilities of $362.4 million, and the Statement of Operations for fiscal 2020 reporting revenue of $298.8 million and a net loss of $121.5 million Consolidated Balance Sheet (in thousands) | | Jan 31, 2020 | Jan 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $377,812 | $230,069 | | Total Assets | $563,620 | $267,128 | | Total Current Liabilities | $244,928 | $179,780 | | Total Liabilities | $362,408 | $182,579 | | Total Stockholders' Equity | $201,212 | $84,549 | Consolidated Statement of Operations (in thousands) | Fiscal year ended Jan 31, | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | $298,829 | $228,283 | $170,201 | | Gross Profit | $221,799 | $170,870 | $126,106 | | Loss from Operations | $(122,953) | $(75,645) | $(66,640) | | Net Loss | $(121,544) | $(74,837) | $(66,565) | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial figures, including revenue disaggregation showing North America accounts for 82% of fiscal 2020 revenue, details on performance obligations, $165.7 million in unrecognized stock-based compensation, $361.3 million in U.S. federal NOL carryforwards, and lease obligations Revenue by Geographic Region (in thousands) | | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | North America | $245,629 | $197,285 | $155,966 | | International | $53,200 | $30,998 | $14,235 | | Total revenue | $298,829 | $228,283 | $170,201 | - As of January 31, 2020, the company had $328.1 million of remaining performance obligations under non-cancelable contracts[416] - Total unrecognized stock-based compensation cost related to unvested awards was approximately $165.7 million as of January 31, 2020, expected to be recognized over a weighted-average period of 2.95 years[451] - As of January 31, 2020, the company had $361.3 million of gross U.S. federal Net Operating Loss (NOL) carryforwards available to offset future taxable income[471] - Total remaining operating lease payments as of January 31, 2020, are $193.4 million (gross), with a present value of $123.8 million[481] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[493] Controls and Procedures Management concluded that the company's disclosure controls and procedures were ineffective as of January 31, 2020, due to a material weakness in internal control over financial reporting related to sales commission processes involving outsourced IT service providers, for which remediation activities are underway - Management concluded that disclosure controls and procedures were ineffective as of January 31, 2020[495] - A material weakness was identified related to the processes to calculate, record, and account for sales commissions, involving controls related to outsourced IT service providers[497] - Remediation activities are underway, including identifying new IT outsourced service providers and improving the design of processes and controls for sales commissions[505][508] - Material weaknesses identified in the prior year (fiscal 2019) related to IT general controls, revenue recognition, and financial close were remediated as of January 31, 2020[500][502] Other Information The company reports no other information for this item - None[506] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, corporate governance, the code of ethics, and the audit committee is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - Information required for this item is incorporated by reference from the registrant's definitive proxy statement for its 2020 Annual Meeting of Stockholders[510] Executive Compensation Information regarding executive and director compensation, as well as the compensation committee report, is incorporated by reference from the company's 2020 proxy statement - Information required for this item is incorporated by reference from the registrant's definitive proxy statement for its 2020 Annual Meeting of Stockholders[515] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by certain beneficial owners and management is incorporated by reference from the company's 2020 proxy statement, with details on securities authorized for issuance under equity compensation plans included in Item 5 of this report - Information required for this item is incorporated by reference from the registrant's definitive proxy statement for its 2020 Annual Meeting of Stockholders[518] Certain Relationships and Related Transactions, and Director Independence Information regarding related person transactions and director independence is incorporated by reference from the company's 2020 proxy statement - Information required for this item is incorporated by reference from the registrant's definitive proxy statement for its 2020 Annual Meeting of Stockholders[519] Principal Accountant Fees and Services Information regarding principal accountant fees and services, as well as the audit committee's pre-approval policies, is incorporated by reference from the company's 2020 proxy statement - Information required for this item is incorporated by reference from the registrant's definitive proxy statement for its 2020 Annual Meeting of Stockholders[520] Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Annual Report on Form 10-K, including financial statements, schedules, and an index of all exhibits filed with or incorporated by reference into the report - This section provides a list of all financial statements, schedules, and exhibits filed with the Form 10-K, including governance documents, material contracts (such as the new credit agreement), and required certifications[522][523][524] Form 10-K Summary The company reports no summary for this item - None[528]