Just last week we posted that Software Infrastructure is Hot Again (and OKTA priced above the range at $17 and has moved up to $23). Less than a week later we have a story out of the Information about how now technology companies are scrambling to find experienced CFO talent to lead them to an IPO. That's a major change in thinking.
This week (Wednesday) we get the Yext IPO (NYSE: YEXT). Yext is a bit of an odd duck in the space. Despite some initial concerns it looks like demand for the deal is strong. The banks are Morgan Stanley, JPM, RBC, PacCrest and Piper - not a bad cover. We'll deal with the Google elephant in the room below. The roadshow is such that the slides are not super-helpful although we have them available. You might be better off reading the Yext IPO roadshow transcript instead of trying to follow the sparse slides.
Some investors were spooked by the surrealistic beginning of the roadshow (which is a video in the Facebook style) during which the CEO (Howard Lerman) is seen preaching to a group of rapt employees in some conference room high up in the sky. Mr. Lerman is suited up in an all black ensemble and stares into the camera with blazing blue eyes of conviction. What ensues is a discussion of where to go for lunch and how "curly fries are the best kind of fries."
Despite the misgivings Yext is definitely onto something. Conventional internet "search" is giving way to different ways of looking for things, especially mobile applications and maps. Consumers also expect much more information at their fingertips, not just a website. Now "results" include detailed business information including hours of operation, reviews, complete menus of food or services, amenities, credit cards accepted, photographs, etc. Questions like "does this hotel allow pets?" or "do they have gluten free menu options?" are often answered right in the listing.
Map-based searching has a much higher conversion rate for businesses which provides huge ROI when they get it right. Surprisingly, much of this information is sourced by web crawlers and crowd sourcing. Something as simple as a change in hours of operation can result in conflicting information online and confusion with customers.
Yext helps businesses manage their online presence. Sounds simple until you realize there are dozens of places that basic information is stored online. Google is primary for many but others - especially Facebook, Snapchat, Instagram, Yelp, the Apple App store and scores of other niche and local sources.
What Yext has built is a "system of record" for businesses to maintain their information online that syncs with hundreds of different services automatically. Yext has managed to get all the major online service providers to accept their information into their systems via an API.
The Yext website is a bit cheesy since it aims to convert small businesses to the Yext network automatically. However they have signed up a number of very large customers like Marriott and Arby's who rely on Yext for their online information. For example one of their enterprise customers expanded from less than $100K in billings to over $750K per year as they expanded their number of locations and took advantage of higher level Yext services. The ability of Yext to win a greater share of the enterprise market will be a key to their long-term positioning.
Small business is $15-17M per year and is expected to stay flat while medium and large businesses are growing at ~50% YoY. Yext is also investing in vertical industries like automobiles and government services where they are in a better position to consolidate their lead and get the larger customers.
Yext has rolled out a developer-facing service but it's too soon to know how that will play out. Their hope is that new applications of the Yelp "knowledge engine" will emerge and some may provide M&A opportunities for Yext as they grow.
Our IV shown below suggests YEXT shares have upside from the IPO, even if they price above the range. This is a $15-20 stock.
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The big risk of course is Google and to a lesser extent Apple. While Yext doesn't have any customer concentration issues they have a big platform concentration. When it comes to mobile there is only Apple and Google in terms of the operating system. Companies like Facebook and Snapchat are well placed in mobile but these are not really the platforms for search and discovery that consumers turn to first.
Google (GOOG, GOOGL) has stumbled along with offerings like "places" but they haven't worked very well. But Google knows that maps and mobile are the key to their future. The much higher ROI isn't lost of them. One challenge for Google is that they rely on the advertising model. It's easy to see why this works so well in Search but not so easy when you consider Maps.
Google Maps wins because of quality and functionality with consumers. Google is working hard to integrate local information and lots of content into Maps. For example they have managed to get their own restaurant review numbers up. They still lack the depth and quality of Yelp but it's often "good enough."
It's hard to see how business-supplied data isn't better quality than crawled and crowd-sourced information in many cases and excluding Yext data seems like a bad idea. Google would have a hard time approaching Yext customers with a paid-for "system of record" offering that works across multiple services (not just Google.)
Yext has lots of work to do in order to cement their position and Google could certainly make their life more difficult with changes to their algorithms and content methods. Yelp has kept their pricing fairly low making it a "no brainer" for many businesses who need to maintain and manage their internet presence.
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