Fintel has launched coverage of Yext (US:YEXT) this week, after being alerted by the brand management software company’s significant surge in its stock price, rising by 38.4% in trading on Wednesday. 

While any rally usually warrants attention, when we applied Fintel’s quant analysis on the stock, it sparked even more interest under the microscope.

While the stock’s rally pushes YEXT to annual highs, the stock has only really recovered back to levels seen in late 2021 toward the beginning of the rate hiking cycle.

This surge was fueled by the company's bullish first-quarter results, which exceeded the market's sales and EPS expectations as the figures surpassed the midpoint of management's guidance. The company's strong performance was attributed to expense efficiencies and stable trends in its core direct business.

The subscription software firm provides what it calls "digital knowledge management." It works with customers to manage their digital listings across more than 100 third-party providers such as Apple's iOS, Google search and Facebook. It listed its shares in April 2017 in an initial public offering that quickly afforded it a $1 billion market capitalization. 

Executives are set to present the Yext investment narrative to market players at the Cantor Fitzgerald Technology Conference next week.

Lackluster Sales Growth

In terms of financial performance, sales growth over the year was marginal with 0.6% growth to $99.45 million. Gross profit increased by 5% year-over-year to $78.1 million as the company was able to reduce the costs of sales.

Underlying profits measured by adjusted EBITDA swung to $14.4 million during the quarter from a loss of $3 million in 2022, topping analyst forecasts for a figure around $11 million.

On the bottom line, non-GAAP net income improved substantially to $10.60 million from a loss of $7.75 million in the prior year’s quarter. That equates to 8 cents per share, or almost double consensus expectations.

The chart below from Fintel’s financial metrics and ratios page for YEXT illustrates the growth of group sales versus reported profitability trends over the last five years.

Signs of Turnaround Success

One of the key metrics to gauge YEXT's ongoing turnaround is the Direct Business Net Retention (DBNR) and Annual Recurring Revenue (ARR) for Direct Customers. In the first quarter, DBNR for Direct customers remained steady at 97%, indicating strong customer retention. 

Additionally, Direct Customer ARR grew by 5% year-over-year, reaching $326 million. The metrics demonstrated the company's ability to maintain its customer base and generate consistent revenue growth.

YEXT has also successfully won back customers in its Listings/Reviews product segment by showcasing recent innovations and its future product roadmap, showing the turnaround efforts of the company. It is important to note that YEXT is still in the early stages of its turnaround, and the enterprise spending landscape remains uncertain.

Effective Management

Fintel’s analysis of management effectiveness shows an improving trend in OCROIC, which is a positive sign for investors. The operating cash return on investor capital (OCROIC) measures how much cash the company generates from its invested capital. 

The improvement in OCROIC indicates that the company is utilizing its resources more efficiently, which is a good sign for long-term investors. The OCROIC as shown in the chart and table below shows the performance of this metric through to the fourth quarter of last year. The platform will update the latest results to the table which should show further improvement in trends as underlying profitability continues to grow.
 

Expect Higher Guidance

Looking at the company's outlook for fiscal year 2024, YEXT has raised its revenue and EBITDA guidance following the first-quarter beat. The updated guidance projects revenue of $404 to $407 million and adjusted EBITDA of $49 to $51 million. 

The midpoint of the new guidance range was above consensus forecasts resulting in upward revisions to valuations, albeit by a small amount. The contribution from new AI products could drive further upside to these revisions above the guidance range.

While YEXT's solid performance and improved profitability are noteworthy, challenges remain in the macro environment. Sales cycles have lengthened, and enterprise spending has become more cautious. 

YEXT's focus on cost optimization and its revamped go-to-market strategy have yielded positive results. However, sustained growth acceleration and clear signs of end-market demand will be necessary for further multiple expansion beyond the rally today.

When delving into the cash flow analysis of YEXT, the reduction of investment spending over the last year is evident but has been trumped by the growth of cash outflows from financing.

As the company continues to grow ARR and profits towards overall break-even, we expect the need from financing cash flows will subside which should drive increased positive cash flows from operations.

Analysts Upgrade

Following the strong first quarter read-through for Yext, Fintel’s forecast and analyst page on the stock highlighted an upgrade from Roth MKM analyst Rohit Kulkarni.

In the report, the analyst said that he was encouraged by management's focus on revenue execution and profitable growth. Kulkarni thinks that the group's upcoming new AI products will unlock a new larger target addressable market that could help the business reposition itself as a partner for large enterprises.

Roth MKM raised its target price to $12.50 from $8.50 with the upgrade.

Fintel’s consensus target price $8.47 suggests the stock was trading around the street's fair valuation prior to the update. The consensus target will likely drift higher following the result as analysts adjust models and valuations.

While it is hard to predict performance of tech companies in uncertain times, Fintel will continue to follow the underlying financial metrics to see if this momentum will continue.