Yext, Inc. (YEXT) Q3 2021 Earnings Call Transcript

Yext, Inc. (YEXT 1.10%)
Q3 2021 Earnings Call
Dec 03, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Yext, Inc.'s third-quarter fiscal 2021 financial results call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Yuka Broderick, head of investor relations. Please go ahead.

Yuka Broderick -- Head of Investor Relations

Thank you, Cole, and good afternoon, everyone. Welcome to Yext's fiscal third-quarter 2021 conference call. With me today are CEO Howard Lerman; CFO Steve Cakebread; and chief revenue officers, David Rudnitsky and Patrick Blair. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements, including statements about revenue and non-GAAP net income, customer upsells and retention, sales efficiency, hiring targets, expense margins, market opportunities, business performance, capital expenditures and other nonhistorical statements as further described in our press release.

These forward-looking statements are subject to certain risks, uncertainties and assumptions, including those related to Yext growth, the evolution of our industry, our product development and success, including with Answers; and general economic and business conditions, such as the impact of the COVID-19 pandemic. These statements reflect the company's current expectations based on its beliefs, assumptions and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports filed with the SEC, including our most recent quarterly and annual reports and our press release that was issued this afternoon.

During the call, we also refer to non-GAAP financial measures. Reconciliations with the most comparable GAAP measures are also available in the press release, which is available at investors.yext.com. Finally, I'd like you -- to point you to investors.yext.com for a slide deck that we've posted to the site, which Howard will be referring to during his remarks today. With that, I will turn the call over to Howard.

Howard Lerman -- Chief Executive Officer

Well, thank you, Yuka. We had a solid third quarter. We closed 86 Answers led deals in Q3, driving over 30% of our new and upsell ACV in the quarter and that compares to 20% of new and upsell ACV in Q2. It also includes our conversion of the states of New Jersey and Alabama to paid customers.

That represents our first customers in the government vertical, and we're seeing fast traction in another new vertical, higher education with Bucknell University, Texas Christian University, and Adelphi University adding Answers to their websites. Our knowledge graph continues to grow with over 405 million facts now contained in it, growing 58% year over year. While we're focused laserly on revenue growth driven by our Land with Answers sales motion, we're also simultaneously focused on greater efficiency, particularly in GAAP sales and marketing as a percentage of sales. And we dramatically improved that metric this quarter from 81% in the third quarter of fiscal '20 to 64% in the third quarter of fiscal '21.

This helped drive our Q3 non-GAAP loss per share to $0.02, well above our guidance of $0.07 to $0.09 loss. We don't believe these are temporary improvements. We are committed to driving sustainable increases in operating margins, and we'll continue to take action on cost efficiencies in the coming quarters. Land with Answers is efficient.

And while these numbers show that we can effectively manage the business despite the continued challenges of the current global economic environment, our metrics also tell a more exciting story that the world is hungry for a big breakthrough in search. Search is critical. Every customer experience starts with the question. And when it comes to branded search, there's really two places where searches can happen, either on a company's website or in Google.

But billions of times a day brand websites fail to answer the most basic questions so their customers at that exact moment of intent bounce over to Google to continue their quest for an answer. And when websites keep failing you and failing you over and over again, you learn to just start your customer journey on Google. But the reality is the experience isn't even better for a customer. In fact, you could argue it's even worse because in that context, Google isn't really a search engine.

It's an ads engine. In other words, it's incentivized to deliver a slew of ads, not a direct answer to the question. And I want to show you what I mean by this. We posted a slide deck to the Investors section of our website.

I'm going to refer to that here. If you look at Slide 3, when I type in a simple branded search query on Google for information about a sleep number product, I get the results shown on Slide 4. There are literally 14, 1-4, ads above the fold before an organic result is an option. Now please take a look at Slide 5 for another example, and this is highlighted in technology comp columnist Geoffrey Fowler's Washington Post article last month, where he highlighted how Google's search experience has gotten worse over time.

If I ask a question about how to check my Krispy Kreme rewards card balance that just, by the way, happens to be the most popular question, ask to them, Google delivers what appears to be an answer from the brand. But if you look carefully, it's not. You see that on Slide 6. It's a random third party.

And while it's not labeled an ad, the experience is all about selling you something. And if you engage on the site, you get hit with pop up ads, like on Slide 7. So why would Google reward this strange site and its very annoying sales tactics and ads ahead of an answer, a direct answer from Krispy Kreme itself. This is ironic because even the co-founders of Google denounced this in one of their early research papers in 1998, and I quote, they said, we expect that advertising-funded search engines will be inherently biased toward the advertisers and away from the needs of the consumers.

They were right. Brand search queries reward the highest bidding advertiser. So it becomes a numbers game and how much does a brand have to pay to get in front of a customer asking for them. And how many ads does the customer have to navigate before getting the answer that they want.

And that is what has inspired our Answers, not ads campaign, that we launched last month, more than just to mean, Answers, not ads poses an important question to every company. When your customers have questions about you, do you want to give them answers or do you want to give them ads? To us, the answer is obvious, but the reality is that the only way a brand can compete with Google is to offer a Google like experience, think of it like their own Google on their own site and that is not easy. Yes, site search exists, but it's not that modern. It's index based, meaning it functions to deliver links that send you to another page on a website.

That search 1.0, and it's how Google used to work. But Google modernized and they build a knowledge graph. It contains all the facts that they know about the world, their relationships that combines with natural language understanding to present their users with answers and that's where we come in, where Yext comes in. Our Answers search engine is the breakthrough that gives brands a modern search experience, so they can take back that customer journey to deliver answers, not ads to every customer question.

Modern search has three layers. The first is a knowledge graph. That's a brain like database contains all the facts representative entities and their relationships. This provides the foundation for answers to be derived from an understanding of natural language, and that's the second layer of modern search.

The third layer is a dynamic interface that allows users to transact with the answer itself. This is essentially how Google has won in consumer search, and we believe there's an opportunity for the millions of businesses and organizations around the world to win in branded search. This is happening in real time. Every time Yext answers a question, we've won back branded search on behalf of the customer.

If you look at Slide 9, you'll see how Yext Answers addresses the same question about Krispy Kreme gift cards, but instead of receiving a poor customer experience from a third-party website, the customer just gets the correct answer and they can click straight through to the web page where they can check the gift balance online, which you see on Slide 10. And as for the sleep number question about hypoallergenic pillows, on Slide 11, Yext Answers directs the customer to exactly the products that match their requested attributes, including called the action buttons, that's part of that dynamic interface, which lead to a conversion on Slide 12. We know that delivering official answers makes a big difference, not only because more and more brands are adding Answers to their website, but also from their own experience. Almost immediately after launching Yext Answers on our own website, branded searches for Yext declined, this is astounding, 34% on Google.

Now you might think that's a negative. But the beauty is, at the same time, the number of searches on our own site increased by the same amount as the decline on Google. This shows that branded searches on Google and searches on a brand's own site are intricately linked. It's kind of an obvious point, but when you give people a great site search experience, a great search experience in your site, they come back, they get trained, they come back again and again.

Transforming the broken world of search, it's a long game. We are only in the top half of the first inning, and we're generating tremendous interest closing deals of all sizes across all sectors. Finally, I want to take a minute to highlight and welcome Hillary Smith to our board of directors. Hillary is a highly experienced tech executive.

She played a key role in the success of several companies, including Square. She's currently an operating partner at Craft Ventures. We are proud, Hillary decided to join our board of directors and Comp Committee, and we really look forward to working with her. And now to tell you more about our progress in the last quarter, I'm going to turn it over to David Rudnitsky, our co-chief revenue officer.

Dave?

Dave Rudnitsky -- Co-Chief Revenue Officer

Thanks, Howard, and now for a review of Q3. The sales org had a solid Q3. New customer activity continues to improve, and gross retention was in our historical range. In Q3, Yext overall closed 107 new and renewal deals with at least $100,000 of total contract value.

This includes 10 deals with more than $1 million of total contract value. The total number of Yext mid-market and enterprise customers increased 28% year over year to nearly 2,300. This excludes our SMB and third-party reseller customers. Our quota-carrying sales rep count at the end of Q3 was nearly 240.

We're on track to reach our target of 255 quota-carrying sales reps by the end of the fiscal year, consistent with our original plan. In enterprise, we had many new logo signings, powered in part by new opportunities driven by Answers. New logo deals included a multiyear and multimillion-dollar ACV Answers deal at a top three U.S. financial institution and a multi-product deal with online pet food and products direct-to-consumer company, Chewy.

You'll recall that we told you about how we're powering the COVID-19 sites for the states of New Jersey and Alabama on a pro bono basis as the pandemic began. We have now converted them to paying customers. Upsell deals included Humana, Five Guys, Cole Haan and Wells Fargo. And we had significant upsells with CommonSpirit Health and Cox Communications.

In mid-market, new deals included leading bitcoin network LibertyX and direct-to-consumer mattress company, Purple Innovation. Upsell and renewal deals, including Stanford Health and Earl Enterprises, a leading restaurant brand group, which includes Planet Hollywood and Buca di Beppo among others. And in international, while conditions in EMEA remain challenging, due to COVID-related economic lockdown. New deals were signed with Cosmos Pharmaceutical and Rolex, upsell deals with Hutchison 3G UK and Superdry and renewal deals with JTB and Asda stores.

With Answers, we're unlocking a huge opportunity with new companies that we haven't been able to reach before. And we love that it opens up new use cases for us. I want to highlight a new logo win we had with Sinclair Oil this quarter. They signed up with us for Answers because people on the road want to know it's available, what the COVID protocol is for when you get there and other important information.

And we believe we will have opportunities to expand with Sinclair with Answers and other Yext products in the future. This is an example of how Answers led the way. It's a new sales motion that is successfully getting us into use cases that we wouldn't have had a year ago. As we look out over the next several quarters, we see many opportunities like this on our pipeline.

To conclude, we've developed a successful sales motion. We're gaining experience leading with Answers in the sales process and we know how to take a customer and upsell them. Our opportunities are driven by the platform, not by a product and the unique ability to address search as a modern platform. We feel good about our Q3 progress, and we're excited about what's happening with the new opportunities with that.

With that, I'll turn the call over to Steve.

Steve Cakebread -- Chief Financial Officer

Thank you, David. Hey, our third-quarter revenue grew 17% year over year to $89.1 million and unearned revenue increased 20% year over year to $129 million. Annual recurring revenue, or ARR, metric at the end of Q3 was $346 million. That's up 18% year over year from the $293 million we reported a year ago quarter.

Our trailing 12-month net dollar-based retention, which excludes our SMB customers, was 103%. And our trailing 12-month net dollar-based retention for direct enterprise, which also excludes our SMB and third-party resellers, was 104%. While our gross retention was solid within historical levels, what we saw was muted upsells, particularly in our customers with retail footprints and in EMEA, where there's another round of lockdowns. In the near term, we continue to see customers be conservative with expansions given the volatile macroeconomic environment.

But in the long run, we expect our upsell rate to return to historical levels as we continue to grow Answers into the existing customer base and expand with other products and services as well. One note before turning to margins and expenses, I'll just point out that we'll be discussing both GAAP and non-GAAP results and we've provided that reconciliation of GAAP and non-GAAP in our earnings report. Q3 GAAP gross margin was 75.7% this quarter and that compares to 73.3% in the year-ago quarter. Q3 non-GAAP gross margin was 77.4%, compared to 74.9% in the year-ago quarter.

The change in gross margin, primarily driven by leverage on higher revenue. Year-to-date non-GAAP gross margin was 76.9%, compared to 75.6% a year ago. Q3 GAAP operating expenses were $89.2 million, and that's down 10% from the $98.8 million in the year-ago quarter. Q3 non-GAAP operating expenses were $71.4 million or 80% of revenue, compared to $78.9 million or 103% of revenue in the year-ago quarter.

We made significant progress in managing costs this quarter. Non-GAAP sales and marketing expense declined 11% year over year and non-GAAP G&A expense declined 14% year over year. Compared to the year-ago quarter, the primary drivers of this decrease were our ONWARD user conference, which is typically hosted in the fall but didn't happen this year. We reduced spend on travel and events and significantly improved overall operational efficiencies.

Year to date, non-GAAP operating expenses were $223 million or 85% of revenue, and that compares to $206 million or 95% of revenue a year ago. We continue, as David said, to drive lower sales and marketing and general G&A spend as a percent of sales. Many of these efforts are sustainable changes and will drive our operating margins higher over time. Given uncertain business conditions, we're remaining conservative with our hiring, but we're keeping our goal of 255 quota-carrying sales reps by the end of the fiscal year, and we're continuing to invest in product innovation and revenue generating opportunities.

At the end of Q3, we had nearly 240 quota-carrying salespeople on board. Q3 GAAP net loss was $22 million, compared to $42.7 million loss a year-ago quarter. That's a 48% improvement over last year. On the basis of 120.7 million weighted average basic shares outstanding, net loss per share of $0.18 this quarter compares to a $0.38 loss a year ago on the basis of 113.5 million weighted average basic shares outstanding.

Q3 non-GAAP net loss, that's excluding stock-based comp, was $2.8 million. That's a dramatic improvement, compared to the $21.6 million loss in the year-ago quarter, and our non-GAAP net loss per share of $0.02 compares to $0.19 loss in the year-ago quarter. Cash and cash equivalents were $209 million. We continue to believe our balance sheet is strong and positions us well to weather this current economic environment.

Net cash flow from operations for Q3 was negative $7.4 million, but that compares to a negative $31.8 million in the year-ago quarter. Capex was $13.9 million, compared to $2.9 million in the year-ago quarter, and we continue to make progress with our building projects in New York, Washington, D.C., Tokyo and Paris. And we expect remaining Capex related to these projects to be about $19 million. And based on current schedules, expect most of this to occur in Q4.

Now let's turn to our outlook. We expect Q4 revenue to be between $87 million and $89 million. We anticipate non-GAAP net loss per share to be between $0.08 and $0.10. We expect a weighted average basic share count of approximately 123.3 million shares in Q4.

Q4 EPS is impacted by $0.02 to $0.03 of one-time nonrecurring expenses. We continue to drive Answers into a broad market opportunity. And as Howard described, we have that opportunity to help our customers drive value and deliver answers, not ads. Q4 is typically where we get a large amount of our business.

We have a significant pipeline of opportunities that we're executing against. However, our guidance is being realistic that global business conditions remain difficult due to the pandemic, including recent shutdowns, both in Europe and the United States. To wrap things up, I'm pleased with the performance this quarter in a challenging and uncertain macroeconomic environment. We are pleased to have Answers leading the way for our business, and we continue to be laser-focused on efficiency while investing in growth opportunities.

With that, turn the call back over to Yuka.

Yuka Broderick -- Head of Investor Relations

Thank you, Steve. Before we move along to Q&A, we would like to invite you to our Analyst Day, which we plan to hold on Wednesday, March 17, 2021. Joining the Q&A session will be CEO Howard Lerman; CFO Steve Cakebread; and Chief Revenue Officers Dave Rudnitsky and Patrick Blair. Cole, can we please open to questions?

Questions & Answers:

Operator

[Operator instructions] And our first question today will come from Arjun Bhatia with William Blair. Please go ahead.

Arjun Bhatia -- William Blair and Company -- Analyst

Great. Thank you. Steve, if I can maybe just start off with you on the guidance for Q4. We typically see that being a seasonally strong quarter for you.

Where I think the guidance implies a pretty meaningful slowdown in growth and a step down in revenue. Can you just maybe dig into those dynamics a little bit more and the assumptions that you have baked in there? I mean is that an uptick in churn or new logos slowing down in Q4. Just maybe help us understand those dynamics a little bit.

Steve Cakebread -- Chief Financial Officer

Yeah. That's a great question. I mean, as I said in the scripted comments, we're trying to be realistic here. We're looking at lockdowns coming and going.

And we think this quarter is probably going to be more challenging than what we saw in Q1 and part of Q2. So we're just being realistic. Like I said on the call, our growth retention is doing quite well, but we need upsells as well from our customers. And I think just given the uncertainty around the world that we're seeing, we're going to sit and say, look, we're going to deliver these results.

We're still focused on improving operational activities as well, but I think on the revenue side, we just really -- Q4 is a big quarter. It doesn't necessarily add to revenue in the quarter. It will set us up for next year. But I just think the uncertainty in the global macroeconomics right now.

We're just going to be realistic about what we can do and deliver those results.

Arjun Bhatia -- William Blair and Company -- Analyst

Got it. Thank you. And Howard, I saw an announcement that you guys made that you had a new WordPress integration with Answers. There's obviously a pretty big WordPress footprint out there.

Can you just help us understand that opportunity, what it means for Answers adoption? And should we think of that as being similar to the Adobe partnership that you have? Or is there a different dynamic at play there?

Howard Lerman -- Chief Executive Officer

The WordPress -- Arjun, first off, thanks for the question. The WordPress integration addresses a little bit of a different segment. The bigger enterprises tend to use in Adobe, the Adobe Experience Cloud. The WordPress integration really is targeting more of some of our CBU customers.

The biggest bottleneck for us is often getting the Answers integration live on a website. And so the WordPress integration makes it so that anybody using WordPress can do it without code, they can just easily plug it in, turn it on. So that has been a nice little way to get faster with a bunch of sort of midsized customers that want to use Answers.

Arjun Bhatia -- William Blair and Company -- Analyst

Perfect. Thank you.

Operator

And our next question will come from Stan Zlotsky with Morgan Stanley. Please go ahead.

Unknown speaker

Hi. This is Elizabeth on for Stan. I was wondering if you could give us just some more context on some of the success you've had with Answers versus other areas of the business. And kind of when we can start to think about uptick in there, offsetting some of the uncertainty that you're seeing in business and just kind of the timing of when we can see that kind of move the needle? Thank you.

Howard Lerman -- Chief Executive Officer

Yeah. Thanks for the question. First off, in Q3, we closed 86 Answers deals, and I just want to be clear, that's not free trials. That's closed business in the quarter.

That represented 30% of our new ACV, new and upsell globally. And by the way, that compares to 20% is what we saw in Q2. So we are seeing tremendous momentum in Answers. In addition to that, Land with Answers, it is clear, is a more efficient sales motion.

I think we've been talking about this for the past couple of quarters of Landing light with Answers. And it's not a new strategy. It's a new sales motion to land with a product that addresses 100% of the world that every client needs, every business needs on their website, we can get out there. We can land with this product and we can upsell it.

And so you've seen us be able to penetrate new markets like government, new markets like higher education, go check it out on bucknell.edu or tcu.edu. You can -- or even the World Health Organization. If you go to who.int, that's their website and click to their COVID-19 site, you'll see we're answering tons and tons of questions there. This is a really big opportunity.

We're completely focused on both revenue growth through acceleration of Answers, but also, at the same time, we're focused on operational efficiency. And that's what you saw in Q3, like we pointed out on the script to basically suggest we went from minus -- I think we were minus $0.02 on our EPS, showing -- and the decrease from 81% of revenue in sales and marketing to 64% year over year. So we are seeing huge efficiencies in addition to our ability to acquire logos with 86 closed in the quarter.

Unknown speaker

Got it. Thank you very much. That's it. Thanks.

Operator

And our next question will come from Naved Khan with Truist Securities. Please go ahead.

Naved Khan -- Truist Securities -- Analyst

Yeah. Thanks a lot. Two questions. So on the last call, on the second-quarter call, I think you guys have talked about sort of a bottleneck or almost too much demand for Answers where it just takes a lot of time to onboard customers.

Any progress in kind of removing that? And I think you just also spoke about self-serve as potentially a solution? Can you maybe touch on that a little bit? And then secondarily, maybe, can you also talk about the Adobe partnership and any early results from that channel that you might have to date?

Howard Lerman -- Chief Executive Officer

Naved, Howard. I'll take the first part of your question, and I'll kick it over to Dave for the Adobe update. We're very focused on removing friction to be able to be a self-serve product. The two main things that we did in the Q that made that accelerate, were, first, we went general availability with our Hitchhiker program.

And a Hitchhiker program, that's our brand for Yext admin. So they are the super experts in our platform. And historically, it's been pretty hard. You've had to be an expert to set up and use Yext.

You really had to know your way around. You didn't have to be an engineer, but you had to be -- have a lot of institutional knowledge to be able to configure things. And we've been working really hard to simplify that and to put better training in place, and we've seen a great pickup in people becoming Hitchhikers. And now if you go to our site, it's funny because you can almost track what's happening in the flows and stuff because if you just go to our website and you click free trial, you go through that.

There is a self-serve experience there. And there's quite a lot of people coming through that every day. And then what happens is we still have to get people set up manually, helping them get their knowledge graph set up, except if you really know and you become a Hitchhiker, you can start to do this yourself. So we've seen some pick up there.

And then once you have the data and what we need you to do is put it up on your site, and that's where things like the WordPress integration, and that's the second big thing we did this quarter, to have removed the friction from that flow to become more self-serve with a few clicks, you can set up Answers on your WordPress site, if you're a WordPress user and have set up your data in your knowledge graph. We continue to make progress there. We continue to see quite a lot of free trial requests every day. You can almost go through and monitor the flow.

You'll see every time you log in and try to do something, you're going to see an update there. This is a process. It's not going to happen overnight to become a self-served landing but that is the sort of North Star here, and we're excited about the progress we've made.

Dave Rudnitsky -- Co-Chief Revenue Officer

And Naved, it's Dave Rudnitsky. And just to answer your question about Adobe. We've got a really good motion going with them now, and I feel really good about it. I've had success building a partner program in the past.

And we've got a solid bottom-up, top-down engagement. We started to get our field A's engaged on account-based together pursuits. We've started to engage at the highest levels with their executives. I feel like the collaboration is going really well, and we've had a few deals that were completely influenced by our relationship with Adobe this past quarter.

And as I look at the excitement of going into the Q4, we've got a number of engagements where we're partnering with them together on joint pursuits in a very bespoke way, and we found a couple of great use cases to work together. So I feel really good about it.

Naved Khan -- Truist Securities -- Analyst

Thank you. Maybe a quick clarification, if I may, on the first part of the answer. So if I had to just think about the backlog, whether it's Answers or the core offering. How does that look like compared to the prior quarter?

Howard Lerman -- Chief Executive Officer

We continue to drive great demand for Answers. It's clear every company needs it. It's clear that a free trial is a compelling offer, particularly for mid-market companies. And the hope is that with integrations with companies like WordPress that are large CMS companies and power tons of small business and midsized business websites, we'll accelerate that.

For the big companies, they come through and that still requires a real Yext admin to be with you, and that's more on the company that's using experience cloud or a company that's using a bigger CMS that wants to use our platform. And so they'll end up in Dave's hands.

Naved Khan -- Truist Securities -- Analyst

Thank you, Howard. Thank you, David.

Dave Rudnitsky -- Co-Chief Revenue Officer

Thank you.

Operator

And our next question will come from Matt Coss with J.P. Morgan. Please go ahead.

Matt Coss -- J.P. Morgan -- Analyst

Hi. Good afternoon. Thank you for taking my questions. One for David.

Was there any uncertainty near the end of the quarter as we were leading up to the U.S. election? And then, Steve, can you talk about the mix of sustainable or durable opex improvements versus one-time savings from no Yext ONWARD conference and less travel this year?

Dave Rudnitsky -- Co-Chief Revenue Officer

Hey, Matt. As far as the election, surprisingly, no. I mean, it was a point of interest when you engage with the customer to talk about. It was on top of mind, but it didn't influence any of our deal cycles whatsoever that I know of.

It's a non-issue actually.

Howard Lerman -- Chief Executive Officer

Yeah. I'd like to just add to that. I mean we had a really solid Q3, especially in the United States.

Steve Cakebread -- Chief Financial Officer

Yeah. And then with regards to sustainable, yes, obviously, a third of the spend was around ONWARD. We're rethinking that a little bit. We'll see what happens next year, depending on how the world opens up.

The other there -- yes, obviously, the travel is at close to 0, if not 0, but we're also making huge progress in infrastructure. As Howard said, the sales motions what the Answers has changed dramatically, and we think a majority of that savings is going to be sustainable. We're still working on processes and infrastructures. Self-serve is going to help.

So I feel fairly comfortable. We're on a good trajectory to continue to improve our opex as a percent of revenues and drive those down, and we'll see how things go next year as well. But we've really got our teams looking at changing processes. The sales motion is changing with both self-serve and Answers and feel good that we'll be on a sustainable path to our non-GAAP breakevens at some point.

Matt Coss -- J.P. Morgan -- Analyst

OK. That's helpful. Thank you. And then maybe one last one.

So I know you're being prudent with the Q4 guide and especially mid COVID resurgence and new lockdown. It's hard to predict the future, but I mean, do you think Q4 might be a low watermark in terms of growth or if there are additional -- we don't know, we don't know, but --

Steve Cakebread -- Chief Financial Officer

Yeah, that's a great question. And to be fair, Howard and I have that conversation almost daily as to where is the bottom and all of this. I will say that we're being realistic in our growth. And it's not because we think -- we know we're not losing customers, but we also know that they're not stepping in yet.

The renewals, like I said, on a gross basis, were historically good, and we feel good about that. So as people start not just us, but as other companies start to see daylight at the end of this tunnel. With the goal of 255 sales reps, with good gross retention, with new products, we feel that we're going to be in a great position to start to benefit from that uptick. Your question is a million-dollar question, though, is when does that start? And I just think with the uncertainties coming into Q4 for everybody, it's hard to call that bottom at the moment, but we'll see as the next couple of months progress, what happens here.

Matt Coss -- J.P. Morgan -- Analyst

Thank you very much.

Operator

And our next question will come from Rohit Kulkarni with MKM Partners. Please go ahead.

Rohit Kulkarni -- MKM Partners -- Analyst

[Technical difficulty]

Yuka Broderick -- Head of Investor Relations

Rohit, we can't hear you. Can you please try asking your question again, you're cutting in and out.

Rohit Kulkarni -- MKM Partners -- Analyst

Sorry about that. [Technical difficulty]

Howard Lerman -- Chief Executive Officer

Operator, can we get back to Rohit. Rohit, one more time please. Cole, let's go onto the next question, we'll get Rohit back in the Q&A please.

Operator

Certainly. And our next question will come from Mark Mahaney with RBC. Please go ahead.

Mark Mahaney -- RBC Capital Markets -- Analyst

OK. Two questions, please. I'm trying to figure out the materiality of Answers to Yext business, that 30% of new TCVs useful of total TCV now? Does that mean it's probably high single digits, low double digits? And then you just talked about other products and solutions, and you mentioned it earlier in the script. Could you just spend a little bit of time on what those are? Thanks a lot.

Howard Lerman -- Chief Executive Officer

Hey, Mark. Most of our deals that we're starting to be -- that we started to see are really being Answers led, which means that Answers is a huge part of our deal, a huge part of the deal and often is the deal. If you look at higher ed, for example, that's a 100% Answers led deal and 100% Answers deal at Bucknell University, Texas Christian University. If you look at the states that we've sold into in government, those are primarily Answers deals, almost entirely Answers deals.

That's the main use case that's being solved for there. So it's material and if you look at the biggest deal that Dave talked about closed with the top three financial institution, that was the biggest deal in the quarter. And I think we said how big it was. It was about $2 million of ACV.

That was an Answers deal. And that was the main use case. Their Head of Digital came in and sat down with Dave and I right before the pandemic started, and he said, oh, gosh, you know what I'd love is a Google for my own website. And boy, we are like, do we have something for you, and that is where Answers materialized from that deal.

So Answers is a material part of our business. And going forward, Mark, the best way, I think, to think about us as we've retuned our company a little bit this year, we're a search company. And if you look at the biggest companies out there, every customer journey starts with a search. When you think about our new products, where we might go, there are extraordinary applications for search across every company.

And that doesn't mean just on a website that could mean search internally. That could mean search for a product. That could mean search for content. That means all sorts of technologies around search.

And we think that with Landing with Answers, we are setting ourselves up to be able to be a search partner for every company, for every company that needs, it's starting with their own customer journey but expanding into all the areas across their enterprise where they need search, all, by the way, I should mention, founded on that original principle that if you read our S1, the very first sentence is, Yext is a knowledge engine. It's all about the knowledge graph. The breakthrough of Yext is knowledge-based search. No other search company out there does knowledge-based search based on NLP.

It's all index based, it's all keyword based. Our unique angle, our differentiator is knowledge-based search based on a knowledge graph. We're going to do that for every company that we can in every area that we can in all kinds of new markets as we build what we think -- what I think could be the second biggest search company on the planet.

Mark Mahaney -- RBC Capital Markets -- Analyst

OK. Thank you, Howard.

Operator

And our next question will come from Koji Ikeda with Oppenheimer. Please go ahead.

Chad Schoening -- Oppenheimer and Company -- Analyst

Hi, guys. This is Chad Schoening on for Koji. Thanks for taking the questions. Two questions here, if I may.

First on free trials. I know you haven't given an exact number on the conversion rate there in the past, but can you share any incremental details there on how that's kind of trended throughout the quarter? And what your expectations are there kind of into the new year? And then I have one follow-up. Thanks.

Howard Lerman -- Chief Executive Officer

The free trial is one way we're getting customers to come in. It's a marketing offer. It's a limited time offer. We started it in March.

We may keep it. We may not. It's going pretty great. It's been very successful in generating interest.

It's been very successful in generating leads for our sellers. It's not the only way we land. For example, I think we mentioned that top three bank, the top three financial institution. We often land without a free trial, and that's OK, too.

The free trial is more compelling for mid-market or CBU customers or prospects than it is for enterprise. We look closely at the conversion rates. Typically, it's classic SaaS. If you look at the classic Software-as-a-Service company, you'll see conversion rates between 20% and 50% depending on the industry and the segment.

And we're right in line with that.

Chad Schoening -- Oppenheimer and Company -- Analyst

Great. That's super helpful. And then my second one is actually on the technology side. And thanks again for that demo at the onset of the call there.

That was helpful. I'm just thinking about the kind of increasing prevalence of chat bots and AI. And curious how you're leveraging the increased velocity of search data from all the customer queries on your platform to kind of improve that value proposition to your customers. And is that all finding its way into kind of your R&D road map? Thanks.

Howard Lerman -- Chief Executive Officer

It's funny. It's a really great question, Chad, because as we all know with AI and machine learning, data is oil, data is gold. The more data you have, the more questions you have, the better your models get, the more tests you can run, the better answers you can give. So the more queries we handle and we are beginning to handle lots and lots and lots of queries every day.

And like I told you, it's our objective to be the second biggest search company on the planet. The better and better our search results get, which is happening continuously. We just put out a search release in the quarter, I think we actually put this out into general availability this week or last week and that had a multi algorithm improvement where users can, of our system, Hitchhikers can pick which types of algorithms they want to apply to which types of entities, which is super cool. That means, hey, if you're using maps, I might want to use a direct answer if someone asked for a phone number, but I might want to use extractive Q&A, which is a different algorithm for someone that's asked a question, which is contained in an FAQ.

These are all the parts that make up a modern search engine. And so to your point, the more data you have, the better answers you're going to give. And then you also asked about chat bots and chat bots, let's be clear. When we talk about chat bots, there really are a lot of different kinds of chat bots out there.

Most of them aren't really chat bots at all, but are just chat windows that try to get you to put your phone number in which become a lead gen form and then someone's texting you that you didn't want to talk to and they have your phone number. So that's what most chat bots look like. And that's not really a chat bot, that's really just a form to get you to get your phone number. We think -- and by the way, chat bots or chat or live chat, it turns out it's actually kind of expensive.

It costs money every time someone chats with you on the other end, if there's someone, even if they're in an outsourced center in the Philippines or in India or wherever they're chatting with you, that still cost dollars per session, sort of like a customer support call. So we think that search has a place where it will always be, which is to deflect as many chats or as many customer success or service calls as possible. Krispy Kreme, for example, in that example we gave earlier, they've seen a reduction in call volume to their call center of 42% since putting Answers up. That's an astounding savings.

And so simply by being able to ask a question and search on a site and get a quick answer that will deflect a lot of people that would have otherwise tried to chat, tried to call, thereby saving the company money. So chatting is really getting pretty deep into your personal account situation. And that's pretty different than, hey, what's the routing number for a bank or hey, how do I check my Krispy Kreme reward card balance or, hey, what's the phone number of Dr. Rudnitsky.

Chad Schoening -- Oppenheimer and Company -- Analyst

Great. Thank you.

Operator

And our next question will come from Ryan MacDonald with Needham. Please go ahead.

Ryan MacDonald -- Needham and Company -- Analyst

Hi. Thanks for taking my questions. Howard, I guess, expanding upon sort of your previous answer, you've talked a lot about with Answers that really the value propositions are one, driving increased conversions and driving more sales by e-commerce on people's websites but then also customer service deflection. Just curious, as you're going out there and sort of trying to demonstrate the ROI of Answers, which use case seems to be resonating more? And has that shifted at all, given sort of the strong trends we've seen early in the holiday season in terms of e-commerce trends, as well as sort of customer service interactions over digital channels?

Howard Lerman -- Chief Executive Officer

Well, first off, Ryan, I'd love to -- you did a great job with the picture with those first two value props. We are hiring quota-carrying reps still in North America, and we look forward to your application. If you go to the Yext website and search for jobs, you should search for that in Yext Answers, you will see a list of jobs because of our NLP. So great job with the first two value props, but there was a third too, which you also sort of hit on, which is the ROI.

So the three value props of Yext Answers when we sell we run in our selling program and our magic pitch are, number one, that every customer journey starts with the question and there's two places where that can happen on Google or your own site. And when you have -- when someone's on Google, they're going to see ads, when they're on your own site, you keep control and they're going to get answers from you directly. I think, by the way, we also showed from our blog post, and we talked about this on the script, that branded search and searches on Google are intricately linked. Overnight, after putting up our own Yext Answers box on our own site, branded searches for Yext went down 34%, and the correspondingly went up on our own site.

We saw roughly the equivalent searches happened that we were able to handle. So it really depends on the industry what the particular value prop is to the business. And so in the case of a retailer, it might be about call deflection, but in the case of a healthcare company, boy, it might be all about offering virtual appointments. We've seen certain cases of companies that begin to offer the ability to book a COVID-19 test within their search experience on their site, and you see a rocket in search volume across -- and we're talking big numbers here, people searching on their website for COVID-19 test and booking a virtual -- sorry, booking a real appointment to show up at a physical time at a later date.

So it really just depends on the industry. But the third value prop is the intelligence, is the fact that you can see what people are asking and you get real-time insight into those questions and can exactly see how many phone calls you got, how many driving directions you got off that modern dynamic search interface which looks a heck of a lot like Google, except it's on your own site where you can capture your own customers and keep all those conversions for yourself as opposed to setting to your competitor. So I look forward to your application.

Ryan MacDonald -- Needham and Company -- Analyst

Yeah, yeah. Super helpful. And look for that online, I suppose. I guess my second question is, I've seen that the recent expansion to the Japanese language, and it looks like maybe you're starting to have some early success there.

Can you talk about sort of the resources you're now looking to allocate to that Asia Pac region as a growth opportunity? Maybe I'll start selling there for you?

Howard Lerman -- Chief Executive Officer

Patrick, do you want to take that question?

Patrick Blair -- Chief Revenue Officer

Yeah, I can take that question. Thank you very much for the question. We had a great launch of Answers in Japan as it sounds like you've probably seen, we have our sales team there trained up. We're trying to collaborate globally across sales to make sure that the magic pitch, Howard just mentioned, is obviously translated the right way into Japanese, and that team is all out there trained and ready to go.

So that team is ready to go in rocket in terms of allocation of resources. We have a marketing team in Japan. We have a sales organization in Japan. We have Hitchhikers in Japan, so we're ready to go with Answers there.

Ryan MacDonald -- Needham and Company -- Analyst

Excellent. Thanks.

Operator

And our next question will come from Tom White with D.A. Davidson. Please go ahead.

Tom White -- D.A. Davidson -- Analyst

Great. Thanks for taking my question. Howard, in the beginning of the prepared remarks, you talked at length about Google and your Answers, not ads kind of messaging. Any early data or kind of thoughts on how that message, that kind of go-to-market message is resonating with your customers? And I guess, Google is obviously an important partner for you guys for the location's product and presumably for your customers as well.

So maybe just comment on, I guess, how you guys kind of envision yourself kind of balancing those dynamics? I mean, is that an issue? Or is that not something that I should be thinking about? Thanks.

Howard Lerman -- Chief Executive Officer

Thanks for the question. It's not an issue. It's a marketing campaign for our search product, very different than a data partnership with the maps team. Look, we are working really hard to get the word out there about Yext as a search company.

I told this just a second ago to Mark when we were talking that when you look at the biggest companies, every customer journey, every customer experience starts with a question, starts with a search. And we've been, for the last decade, building up enough structured knowledge and enough technology on the NLP side to become a fully formed search company. And what you were seeing is site search as the first sort of portion of that on top of the knowledge graph. This isn't a change in strategy.

This is a change to what you've seen this year is a change in sales motion with our Land with Answers motion and which, by the way, is clearly more efficient because you've seen quantitatively the improvements in sales and marketing over revenue quarter over quarter at 64% this time versus 81% last time. And so everything we've been doing is all about repositioning and positioning this company as a search company, becoming a fully formed search company of which site search and Answers is the first part.

Tom White -- D.A. Davidson -- Analyst

Got it. Thank you.

Operator

We have our final question that comes from Rohit Kulkarni with MKM Partners. Please go ahead.

Rohit Kulkarni -- MKM Partners -- Analyst

Hey. Thank you. Thank you for squeezing me in. Hope everybody hear me fine.

I guess a question on where -- are you seeing kind of budgets allocated to Yext Answers coming from different pockets in their company as it feels to me that historically, probably it came from more IT, more people managing the website and like that. Are you seeing kind of deeper pockets like if 34% of branded search results came back to Yext then probably, that's a very big potential ROI for a large company, spending a lot of money on Google. So any anecdotes that you can share on whether you're seeing kind of budgets to Yext coming from other places within a large organization?

Dave Rudnitsky -- Co-Chief Revenue Officer

Rohit, Dave Rudnitsky. Yeah, what's interesting is we're seeing budgets come from a multiple sets of executives. It could be from the chief digital officer, it could be from the chief marketing officer, it could be from the CIO, it could be from the chief experience officer. What we're hearing from all of our customers and the reason I feel so good about what we did this past quarter is we're in the middle of their -- probably their most important initiative right now, which is digital transformation.

We just concluded our client advisory board late yesterday afternoon. And we had 20 of the biggest brands, not just the Yext but 20 of the biggest name brands in the world. And they laid out for us their top initiatives. And interesting enough, the four of them were all focused around digital transformation.

It was the acceleration of it. They know they need to change quickly, just like sales companies have changed their sales motion, they need to change the way they do business. So acceleration of the digital transformation. It's the ability to make it pervasive.

So not just go after a silo, we'll go after the entire corporation and change the way they do business. They have to have a strategy of balancing both potential to go back to work, physical with digital. And the other thing they really want, and Howard alluded to this before, they want actionable insights. They want to understand what's going on with the business and how to react.

And our platform puts us right in the middle of, and that's why we're starting to see all of these different lines of business or lines of executives come in and actually put money on the table. And it's exciting because whether it's coming from the CTO has got an initiative, the CIO, the CDO, the CXO, we've been interacting with all of them, most of our sales cycles, and it's exciting to see. So we're not just siloed from where the budgets are coming from.

Rohit Kulkarni -- MKM Partners -- Analyst

OK. Great. And if I could ask one follow-up, a different topic. On proportion of kind of spend or budgets coming from restaurants and retail, how is that trending? And do you think the renewals, as well as new wins in that -- in those two categories have kind of bottomed out?

Howard Lerman -- Chief Executive Officer

Well, we talked, I think, at our earnings call after Q1 about a tale of two cities where there are certain types of industries, which are clearly very affected by COVID-19. And there is no question that a number of those industries that you transact, for example, off of Google maps with to go there physically, whether it's a hotel, whether it's a restaurant, whether it's an airline, wherever you're interacting in the real world, even healthcare, those industries have been really hurt by the pandemic. They've been slowed. Our gross retention levels have been solid.

They've been at historical or around historical levels in the past couple of quarters. Like Steve said, what they haven't done is been willing to expand. So what we've seen is they've kind of held, they're holding, they've been slower to drive expansion, particularly in Europe, and that's where you've seen the net retention number come down a little bit, but the gross retention number that we look at has been solid.

Operator

We'll bring the call back to Yuka.

Yuka Broderick -- Head of Investor Relations

All right. Everybody, thanks so much for your time. We look forward to talking to you again next quarter, and we look forward to seeing you at our Analyst Day in March. Have a good night.

Howard Lerman -- Chief Executive Officer

Thank you all. Bye.

Steve Cakebread -- Chief Financial Officer

Thank you.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Yuka Broderick -- Head of Investor Relations

Howard Lerman -- Chief Executive Officer

Dave Rudnitsky -- Co-Chief Revenue Officer

Steve Cakebread -- Chief Financial Officer

Arjun Bhatia -- William Blair and Company -- Analyst

Unknown speaker

Naved Khan -- Truist Securities -- Analyst

Matt Coss -- J.P. Morgan -- Analyst

Rohit Kulkarni -- MKM Partners -- Analyst

Mark Mahaney -- RBC Capital Markets -- Analyst

Chad Schoening -- Oppenheimer and Company -- Analyst

Ryan MacDonald -- Needham and Company -- Analyst

Patrick Blair -- Chief Revenue Officer

Tom White -- D.A. Davidson -- Analyst

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