Yext: The Emperor Has No Clothes
“Let’s solve this problem we are creating.” –Howard Lerman, Yext CEO
At the intersection of misleading businesses and poor governance you can find Yext, a $1.7 billion software company I believe is severely misunderstood by Wall Street. Yext claims its products “let businesses control their digital knowledge,” but many small businesses claim Yext is actually extorting them. For example, see here (and here, here, here, here, and here).
Beyond the perceived extortion, Yext has a haphazard assortment of governance issues: audit weaknesses, inappropriate executive comments, and potential theft.
This report is divided into three parts 1) Perceived Extortion, 2) Governance Issues, 3) Financial Overview. Below is an executive summary of my findings:
· Complaints from businesses to the New York, Florida, and Texas Attorneys General indicate perceived extortion by Yext.
· For example, below is a complaint filed with the Florida Attorney General against Yext under the category “Extortion/RICO”:
· Yext partners with questionable resellers that allegedly sell Yext products under false pretenses (e.g., robocall scam centers)
· Yext’s technology may be obsolete due to changes in Google’s algorithm.
· Yext’s CEO Howard Lerman has made questionable comments, including comments that appear to mock his board.
· It appears that an internal app project at Yext, Confide, was transferred to Lerman and private ownership once it became successful.
· Yext has consistently lost money and shows no path to profitability.
Authors’ Note: I am a Stanford senior passionate about investing and short-selling. If you are interested in more research like this please reach out, edorsey@stanford.edu or call/text me at (718) 873–2362. This report is not investment advice and I am not being compensated to write it. This report represents my opinions as of the date of this report. For updates follow me on Twitter @BatmanResearch and SUBSCRIBE TO MY EMAIL LIST.
Perceived Extortion
Yext describes itself as “a knowledge engine” and “a search experience cloud company.” In reality, Yext is an intermediary that helps businesses manage their info (e.g., address, name, phone number, hours of operation) on dozens of online directories ranging from the well-known like Google, Yahoo, and Yelp to lesser-known ones like MapQuest, WhitePages, YellowBot, LocalPages, and HotFrog. Yext does this for a monthly fee and if a business stops paying Yext, many times misinformation will appear. Moreover, businesses are often told they cannot correct their info without paying Yext. For these reasons, some businesses say Yext’s model is “extortion.”
Yahoo and Yext have partnered so that Yext manages Yahoo’s business listings. Let’s take a closer look at how Yext’s partnership with Yahoo works. Yext has a dedicated email for Yahoo listings, “yahoo-support@yext.com” and Yahoo refers businesses that want to fix their Yahoo listings to Yext.
Once a business is referred to Yext they are offered four plans, ranging from $150 to $999/year, to correct or update their Yahoo listing. Below is a screenshot of Yext’s offerings. You will also notice in the bottom left, in small text, businesses are given the option to claim their listing for free.
A business should be able to correct misinformation about itself for free. But, according to an FTC complaint, Yext makes it exceedingly difficult for businesses to correct misinformation for free and instead pushes its paid products. Below is a complaint filed with the FTC against Yext:
Below are three more complaints, obtained via public records requests, that, in my opinion, show a pattern of extortion by Yext:
Yext will likely argue that small businesses are less than 10% of its revenue. I have doubts. Yext’s most recent 10-K says, “Our revenue from direct sales to small businesses represented less than 10% of our total revenue in the fiscal year ended January 31, 2019.” Yext is incentivized to highlight a smaller revenue mix from small businesses to investors because small business revenue tends to have high turnover and be perceived as low-quality.
However, Yext also sells to small businesses through resellers. This is indirect revenue that comes from small businesses. I believe this revenue deserves extra scrutiny.
An April 2019 article in Search Engine Land, “The anatomy of an SEO robocall scheme”, by SEO expert Craig Mount suggests questionable practices by Yext resellers. Mr. Mount received a robocall saying his website listing had expired and could potentially be removed from Google. Over a series of phone calls, he ended up with an “Activation assessment call” from a scammer trying to sell Yext’s listing product for $2,000.
“The anatomy of an SEO robocall scheme” is a concrete example of Yext products being sold through fraudulent robocall centers. Unfortunately, it is not an isolated incident.
Below is a complaint filed with the FTC about how a Yext salesperson or Yext reseller called a business on the No Call List and tried to charge them to be listed on the Amazon Alexa network:
Notably, Yext does not disclose what percent of its revenues come from resellers. Instead, the company groups enterprise customers, mid-size customers, and third-party resellers into one group that accounts for 93% of revenue.
Because Yext does not disclose what percent of revenue comes from resellers, who in turn sell to small businesses, investors do not know how much total (direct and indirect) revenue Yext derives from small businesses. It is also worth noting that in its most recent 10-K Yext disclosed resellers were among its five largest customers.
Perhaps most importantly, Yext’s listings products may be becoming obsolete due to recent changes in Google. In an August 2019 newsletter, Consumer Finder Marketing published an article titled “Have Listing Services Like Yext Become Obsolete Due To Changes In Google?” The article interviews two SEO experts, Mike Blumenthal and Joy Hawkins, both of whom seem skeptical about Yext’s future.
In the article, Ms. Hawkins said, “I often find that people are surprised to hear that my agency doesn’t focus much on citation building or “maintaining” as a strategy. We’ve found that time is better spent on other high-impact tactics.”
Likewise, Mike Blumenthal says, “The idea of getting listed at 80 sites and paying for it annually is an idea whose time has passed.”
Governance Issues & Potential Theft
Yext has a variety of governance issues atypical for a $1.7 billion NYSE listed company. Alone they may represent trivialities to most investors but, in sum, they exemplify a pattern of questionable judgment and an executive-first, shareholder-second culture.
Howard Lerman, Yext’s 39-year-old founder and CEO, has made some questionable comments in the past, especially concerning his board. Below are some of his statements:
“We take all the risk, then we pull our pants down and show them what they get.” (2009 TechCrunch Interview)
“We were sending around track numbers for businesses to all these sites, f*cking, sorry, messing up their listings on all these sites with the wrong phone number and I was like crap. We are actually contributing to a huge problem here. Let’s solve this problem we are creating.”(2013 Interview)
“I didn’t really tell [my board]. The less I talk to my board the better I know we’re doing.”(2013 Interview)
“Step number one when you want to do something crazy is you definitely don’t tell your board about it. Why would you want to do something like that?… You just do it, you go, and then you’re like, you know, and then you tell them what you did after you’ve done it.” (2014 Interview)
“A defining characteristic of great people is that they don’t give a sh*t.”(2015 Tweet)
Most troubling is Howard Lerman’s statements about Confide which are below. Confide is a confidential messaging app, similar to Signal or Snapchat. As shown in the transcript below, Confide was developed internally at Yext, but it appears to me that Howard Lerman potentially stole the app once it became successful.
Below is my transcript of Lerman’s 2014 interview that mentions Confide. You can view the first part here (starting at 17:19), and the second part here (starting at 18:29).
Interviewer: You started an interesting mobile app called Confide within Yext?
Lerman: “We sure did.” …
Lerman Continued: “So we launched Confide, so, um, I took two mobile engineers off the Yext team and started it, went to the board and said, ‘hey by the way, just so you know we made this app and by the way we are going to make it a new company. But, what we are going to do to keep things fair is we are going to give Yext 19.9% of the company [Confide] uh and uh and so Yext has huge upside, but really for Confide to have a chance it has got to have a new cap table.”
First, companies do not just transfer control of internal projects. Imagine if Jeff Bezos started AWS at Amazon, but then spun it off as a personal project after it started to take off.
Second, I can find no public evidence that Yext owns a 19.9% equity stake in Confide or was compensated for starting it. If Yext simply transferred control of Confide from itself to Lerman and other investors this seems like theft.
Yext does not mention Confide in its 10-K and makes only one mention of Confide in its proxy statement: “Since 2014, Mr. Lerman has also served as Co‑Founder and Chairman of Confide, a privately held electronic messaging service.” That’s it. No mention that Confide was started at Yext, and no mention of any compensation for selling its stake in Confide.
Furthermore, Lerman published a tweet that made it seem like he personally created Confide:
Yext should clarify how and when it was compensated for Confide.
Beyond Confide, Howard Lerman seems to have an outsized presence within Yext. Tom Dixon, Yext’s CTO, and Sean MacIsaac, Yext’s EVP of Infrastructure, were high school classmates with Lerman. In addition, Lerman often hosts extravagant conference events. Below he is hosting a mock talk show at Yext’s 2019 ONWARD Conference.
Also, in its most recent 10-K Yext’s auditor, Ernst & Young, noted two material weaknesses. Yext described the weaknesses in its 10-K risk factors: “The first material weakness pertained to controls over the revenue recognition process resulting from a lack of logical access controls over our revenue system and the lack of review controls with regard to manual revenue adjustments… The second material weakness primarily related to the lack of review and oversight over the financial close. We determined that we had insufficient financial statement close processes and procedures, including the classification and presentation of expenses.”
Financial Overview
Yext has no debt, $244 million in cash, and has lost $187 million as a public company.
Since it’s IPO Yext’s shares outstanding have ballooned:
And losses have too:
Throughout all this, Yext insiders have been selling stock at a relentless pace, mostly through 10b5–1 plans. Since its 2017 IPO Yext executives have sold over $131 million in stock:
Worst of all, Yext does not seem to be scaling well. Normally, as software companies grow investors hope to see sales and marketing as a % of revenue decline as the business gains economies of scale and earlier customers stay longer. Likewise, general and administrative costs should go down as a % of revenue as a business scales. It looks like the opposite is happening Yext:
In my opinion, the growth in sales and marketing as a % of revenue would have been worse if not for the adoption of ASC 606, as commissions and related costs are now being amortized over a longer period. This took place in 4Q19.
Yext also told investors that general and administrative expenses are currently higher than normal because Yext is “incurring double lease expense in NYC until [its] new headquarters opens in mid-2020.”
Regardless, the key metrics seem to be going in the wrong direction. My best guess is that Yext has cycled through the easy small business customers and it is becoming harder and harder to find new ones to recruit. The company has also announced new products like Yext Answers and is focusing on larger enterprises, so this may play a role in higher sales and marketing costs.
At current prices Yext trades at 6x revenue with revenue growth of roughly 30%.
Conclusion
I want to be clear about what this report is and isn’t. I believe that the perception of Yext in the general public and public markets is wrong and I hope this report highlights why. Others will disagree with my view. I’m sure there are thousands of customers who have used Yext and liked it. In fairness to the company, they have pivoted remarkably from their origins as a telephone ad business. Maybe they will successfully do so again — it seems like they are trying.
Nonetheless, consumer complaints and media reports indicate a pattern of questionable behavior by the company. In my opinion, Yext is a troubled, harmful, serially unprofitable company and should be valued as one. For now, mark me a skeptic.
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