ZoomInfo Technologies Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 15 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the ZoomInfo First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Session.

Operator

Please be advised that this conference is being recorded. I would now like to turn the call over to your speaker today, Jerry Sysitsky. Please go ahead.

Speaker 1

Thanks, Kevin. Welcome to ZoomInfo's financial results conference call for the Q1 2024. With me on the call today are Henry Shuck, Founder and CEO of ZoomInfo and Cameron Heizer, our CFO. After their remarks, we will open the call to Q and A. During this call, any forward looking statements are made pursuant to the Safe Harbor provisions of U.

Speaker 1

S. Securities laws, expressions of future goals, including business outlook, expectations for future financial performance and similar items including without limitation expressions using the terminology may, will, expect, anticipate and believe and expressions which reflect something other than historical facts are intended to identify forward looking statements. Forward looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our SEC filings. Actual results may differ materially from any forward looking statements. The company undertakes no obligation to revise or update any forward looking statements in order to reflect events that may arise after this conference call, except as required by law.

Speaker 1

For more information, please refer to the forward looking statements in the slides posted to our Investor Relations website at ir. Zoominfo.com. All metrics on this call are non GAAP unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides posted to our IR website. With that, I'll turn the call over to Henry.

Speaker 2

Thank you, Jerry, and welcome, everyone. Revenue for the Q1 was $310,000,000 and adjusted operating income was $119,000,000 a margin of 39%. We delivered another quarter of better than expected profitability as we remain committed to profitable growth. Our Board approved another $500,000,000 share repurchase authorization and we continue to aggressively buy back shares of ZoomInfo at attractive share prices. Our ZoomInfo Co pilot development efforts are well underway.

Speaker 2

Beta customers are seeing significant ROI and the feedback has been extremely positive. We feel confident that we have a differentiated solution and we look forward to releasing this new version of our platform shortly. We continue to navigate through a difficult operating environment, one that has not improved over the last few months. We'd expected that this quarter would be challenging and it was, but we are starting to see signs of stabilization. As it relates to net revenue retention, in the quarter our SMB business continued to be challenged and performed worse than prior periods.

Speaker 2

And while down in Q1 given the higher mix of those businesses coming up for renewal, company wide NRR was better than expected at 85%. Mid market retention was similar to Q4 and Q1 was the 2nd quarter in a row of sequential renewal rate improvement, reflecting sustained stabilization. We saw enterprise retention stabilize and we saw renewal rates there improve year over year for the first time since 2020 2. Software retention also stayed flat sequentially for the first time since Q1 of 2022. These stabilization trends have continued into Q2 and are promising signs that suggest we have reached a bottom, which we view as a precursor to a potential inflection to growth.

Speaker 2

We also had another quarter of strong win back performance. Customers continue to come back in record numbers after trying low cost, low quality providers. In Q1, we again saw hundreds of customers come back to ZoomInfo maintaining the record levels from Q4 and Q3 2023. One software vendor who left ZoomInfo in December 2023 for a lower cost competitor on the promise of even better data for a fraction of the cost has already returned to us. They're frustrated account executive and business development managers, missed demand gen and quota targets and their leadership team was self aware enough to correct the mistake, buy cheap, buy twice.

Speaker 2

In the quarter, we recorded our largest increase in the $1,000,000 customer cohort since Q1 of 2023 as we continue to drive traction in the enterprise. ACV from our $1,000,000 customer cohort is up 16% year over year. In our marketing solutions, we continue to see strength with improving retention and increasing ad spend on the platform. And operations was the fastest growing area of the platform, up 18% year over year as companies are increasingly using ZoomInfo to solve the data challenges within their CRM system and using our data and insights to power their AI strategies. During the quarter, we closed transactions with companies of all sizes and in all industries, including Walgreens, Kirkland and Ellis, Marsh and McLennan, Universal Robots, Spring Health, MSG Entertainment, Carrot Fertility, OW Logistics and Go Freight.

Speaker 2

A multinational staffing company ran an RFP for a vendor to clean up their CRM data to improve their modeling and predictive analytics on candidates. In a competitive deal where high quality accurate data was paramount, we fixed their existing data problems, future proof their data strategy and provided a foundation for them to run predictive analytics and expand with their use of AI. This resulted in an upsell representing $925,000 in annual contract value, which over the life of the contract will be worth $2,700,000 of total contract value. We also expanded with the mid market data query and deep learning software company as they were looking to save money, reduce vendors and consolidate on a single platform. Like many of our mid market tech customers, they came into our renewal conversations with a mandate to reduce spend by 20% across all vendors.

Speaker 2

We turned that initial mandate into a 60% increase in ACV by replacing multiple vendors and consolidating on Xuminfo sales, operations and marketing solutions, all while providing a better user experience at a better price point. We were also named a leader in Forrester's marketing and sales data providers wave and won 2 Google Cloud Technology Partner of the Year Award. As a Google Cloud Partner that most effectively helped customers enhance their analytics and AI initiatives through pre built data solutions and datasets. Last quarter, I introduced what we believe is one of the most impactful and innovative products for go to market teams, ZoomInfo CoPilot. ZoomInfo CoPilot is the 1st AI powered go to market solution that uses a trusted data foundation to automatically prioritize who, when and how to engage buyers from first signal to content creation and engagement.

Speaker 2

Modern sales is becoming a science and we've built Copilot to enable our customers to make every seller their best seller. Today, sellers need to know which companies to contact, who the right person is at those companies and exactly when to reach out to them. Critically, they must also know what problems those companies are facing and how they solve those problems today. Trying to gather and triangulate the data necessary to know these answers today is incredibly challenging. Surfacing these often buried insights is what we built ZoomInfo CoPilot to do.

Speaker 2

And in doing that, CoPilot turned ZoomInfo from a lookup tool to a platform that surfaces the key insights sellers need to take action against each day. A unique strategic advantage of our CoPilot platform is that it's built on top of our world class proprietary data. Our data covers the universe of companies that you may sell to, tens of thousands of attributes on those companies, hundreds of millions of people who work at those companies and the most robust set of signals and insights that we constantly validate and update. What sets ZoomInfo's Copilot apart from any other solution in the market is that it's sitting on top of our AI ready trusted data foundation that drives decisions, personalization and confidence. For our users, CoPilot surfaces diverse and differentiated signals, attributes and activities that already exist in our proprietary data asset and our partner ecosystem, which we continue to expand with some of the most trusted vendors in the market, including most recently with TrustRadius and Technology Advice.

Speaker 2

CoPilot takes signals like website visitors, spikes in job postings, earnings call transcripts, contract renewal dates and expert calls that indicate spending or competitive threats then uses advanced entity resolution and matching to combine them with customers' 1st party data. It then applies AI technology to model and inform users immediately about which companies are in the market for their product and how and why you should engage with them. You can think of this similarly to financial trading. Understanding a company sector and closing price doesn't tell you much about what a stock will do tomorrow. You need indicators around trading volumes, technical indicators, investor sentiment, financial news, expert calls and many other signals in order to create alpha.

Speaker 2

Similarly for our customers, understanding firmographics alone is not sufficient to understand whether or not your next buyer is about to be in market for your product. It's only when you surround that core data with signals that you're able to predict who your next customer should be. Other Gen AI or Copilot products from classic software vendors face a significant problem. They are all layered on top of static CRM data. This data limits the value that can be gleaned from any AI tool for three reasons.

Speaker 2

First, it's limited in scope to what salespeople have manually entered historically. 2nd, it's outdated, stale and likely inaccurate. And 3rd, it lacks the outside signals and insights that drive modern go to market motion. ZoomInfo CoPilot delivers the full picture built on the foundation of the world's most accurate and up to date business data, publishes real time insights and turns that into personalized and relevant content. More than 20,000 beta users have had access to our CoPilot beta.

Speaker 2

Throughout the quarter, their results and feedback have been overwhelmingly positive. Highlights include that on average, Copilot beta users reduced their time spent on account research and manual tasks by 10 hours per week, giving them back almost a quarter of their time to spend on more value added activities. Copilot beta users identified signals I'm sorry, identified signals were responsible for 45% of total opportunities created, proving that CoPilot helps sellers get to buyers faster. And CoPilot users created nearly twice as many opportunities compared to non users in the same roles at the same companies. I can confidently say that CoPilot is one of the best pieces software we've built at ZoomInfo across ease of use, end to end understanding of our customers' pain points and product market fit.

Speaker 2

We have had leading AI models in production for years, but with CoPilot, our product and engineering teams have shown how to put our data and AI differentiation into one of the first real go to market AI products that actually delivers value at scale. At the same time, our go to market team spent the last quarter using Copilot, dialing in talk tracks, sales collateral, testing and more to be prepared to bring ZoomInfo CoPilot to market. We expect to monetize CoPilot and we'll roll it out in a thoughtful way, focusing first on the customers who are most likely to get significant value out of the Advanced platform. Our go to market teams are excited to bring this to their customers and I have a lot of conviction around the upgrade paths in our customer base. I look forward to sharing more details about this motion and our learnings in the back half of the year.

Speaker 2

In conclusion, we continue to make progress toward reaccelerating our business. NRR was better than expected. We're driving traction in the enterprise and we're seeing promising signs that suggest a stabilization in trends. We have a strong and differentiated data foundation and we're excited to bring ZoomInfo CoPilot to market shortly. We are committed to profitable growth and we continue to repurchase shares of ZoomInfo.

Speaker 2

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

Speaker 3

Thanks, Henry. In Q1, we delivered revenue of $310,000,000 up 3% year over year. Annualized revenue based on days of revenue recognition was $1,250,000,000 Revenue came in slightly ahead of our guidance and our focus on efficiency enabled us to deliver adjusted operating income of $119,000,000 representing a margin of 39%, which was above expectations. GAAP net income was $15,000,000 yielding $0.04 per share and non GAAP EPS was $0.26 per share. Retention among our enterprise and mid market customers has stabilized with signs of potential improvement as we look ahead to expirations in Q2 and Q3, while our small business customers were more challenged in Q1 than we anticipated.

Speaker 3

We continue to take a prudent view of the environment and trends among different customer cohorts as we consider the remainder of the year. As a result, we are narrowing and adjusting our range of guidance for the full year. As we reduce shares outstanding through share repurchases, this results in increasing our guidance on a per share basis. In Q1, net revenue retention was 85%. With an outsized small business renewal pool in the Q1, we anticipated NRR to decrease and are pleased to see early signs of stabilization.

Speaker 3

As we move through 2024, we believe there are opportunities to drive improvements into net retention. And as a reminder, our guidance for 2024 assumes that net revenue retention does not improve. In the enterprise, we saw success with our largest clients. $1,000,000 plus clients now contribute more than 10% of overall ACV. Average revenue for 100 ks plus customers continued to grow, largely offsetting the decline in the number of those customers.

Speaker 3

A smaller customers continued to experience down sell pressure with some falling below the 100 ks level. Advanced functionality remained at approximately a third of our overall ACV with operations and marketing continuing to gain traction with customers and both growing double digits, while some of our other functionality was more challenged. From an industry perspective, the fastest growing industries this quarter were retail, manufacturing and transportation logistics, while software and tech continued to experience down sell pressure, particularly for smaller Write offs were lower than we experienced during the past two quarters, but continued to impact us in Q1. We are focused on reducing this headwind by being more selective in deals, leveraging our product led growth motion at the lower end of the market. We are now requiring the majority of smaller and more risky clients to pay via credit card or ACH at checkout, which should help drive an improvement in write offs and allow us to capture the low end of the market more effectively.

Speaker 3

As we indicated in our 8 ks filing in February, we entered into a settlement agreement that addresses both existing and potential class action lawsuits related to right of publicity statutes in 4 states. We accrued $30,000,000 in the quarter related to these settlements, which is reflected in G and A expense. We expect to make cash outlays related to these settlement later this year. We are as committed as ever to driving growth and profitability and as such aim to maintain headcount at current levels while allocating more resources to support our AI and co pilot initiatives as well as augment sales and marketing capacity. Based on these hiring needs, we are exploring options to optimize our real estate portfolio relative to a number of leases that we signed in 2021 and early 2022, and to which we will gain access in 2024.

Speaker 3

We anticipate incurring restructuring charges related to potential negotiations and or subleasing arrangements. Our focus remains on maximizing operational efficiency and driving profitable growth in the evolving market landscape. Operating cash flow in Q1 was $116,000,000 which included approximately $18,000,000 of interest payments. Unlevered free cash flow for the quarter was $123,000,000 representing 103 percent conversion of adjusted operating income. We ended the quarter with $440,000,000 in cash, cash equivalents and short term investments, and we carried approximately $1,240,000,000 in gross debt, the vast majority of which has fixed or hedged interest rates.

Speaker 3

During the quarter, we repurchased approximately 10,000,000 shares of ZoomInfo stock for $153,000,000 Over the past 4 quarters, we've retired more than 31,000,000 shares of ZoomInfo, nearly 8% of total shares outstanding. We are confident that these repurchases will drive meaningful economic return for our shareholders and we will continue to aggressively repurchase shares as we take advantage of disconnects between our share price and the intrinsic value of our growing cash flow generative business. Our net leverage ratio is 1.5 times trailing 12 months adjusted EBITDA and 1.5 times trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreements. With respect to liabilities and future performance obligations, unearned revenue at the end of Q1 was $444,000,000 and remaining performance obligations or RPO were $1,130,000,000 of which 838 are expected to be delivered in the next 12 months. With that, let me turn to guidance for Q2.

Speaker 3

We expect revenue in the range of $306,000,000 to $309,000,000 adjusted operating income in the range of $114,000,000 to 100 and $16,000,000 and non GAAP net income in the range of $0.23 to $0.24 per share. For the full year 2024, we now expect revenue in the range of $1,255,000,000 to $1,270,000,000 and adjusted operating income in the range of $488,000,000 to $495,000,000 We expect non GAAP net income in the range of $1 to 1.02 dollars per share based on $394,000,000 weighted average diluted shares outstanding. We expect unlevered free cash flow in the range of $440,000,000 to 4 $55,000,000 Our full year guidance implies 2% revenue growth and 39% adjusted operating margin at the midpoint of our guidance range. With that, let me turn it over to the operator to open the call for questions.

Operator

Thank Our first question comes from Koji Ikeda with Bank of America. Your line is open.

Speaker 4

Yes. Hey, guys. Thanks for taking the questions. A couple from me here. On the revenue side, lots and lots of positive commentary in the prepared remarks, especially on net revenue retention.

Speaker 5

But you did lower the

Speaker 4

guide a bit, so something did get worse. I know you guys called out SMB weakness, but is there anything else in the guide that we should be thinking about?

Speaker 3

So certainly, the SMB weakness is something that impacted us particularly in Q1 as we had a higher or larger pool of renewals coming in Q1. We also saw new business a little behind where we wanted it to be. Also based on there being a fair amount of SMB weakness, SMB concentration within new business as well as the shift to be more selective in the deals that we're pulling in. So expecting that, that should help us remove some of the headwinds around write offs as we get further into the second half of the year.

Speaker 4

Got it. Thanks, Cam. And I recall in prior calls, you've talked about 10% of ACV that needs to renew still and a lot of those were attached to some of the larger software vendors or tech vendors out there that had big contracts, 3 year contracts that we're renewing sometime in Q2. So is there any way you could provide an update there? Anything we should be thinking about within that cohort that still needs to renew?

Speaker 4

Thanks guys.

Speaker 3

Yes. So not all of that 10% will renew in the Q2. I think it's a few percentage points for a few quarters to come still. But certainly those larger clients that we're seeing, we're seeing solid utilization and feel good about the renewal rates and customers that are coming up in Q2 and Q3, particularly in those larger among larger customers.

Speaker 4

Thanks guys. Thank you.

Operator

One moment for our next question. Our next question comes from Elizabeth Porter with Morgan Stanley. Your line is open.

Speaker 6

Great. Thanks so much. I wanted to ask on the CoPilot product. It sounds like a lot of interesting features going on there. Just give us some more clarity on how you expect to monetize.

Speaker 6

Is this something that comes upon renewal and take some time to get phased in, even though it's going GA in the back half of the year? And, is this more of a seat based model and kind of how do you look to kind of raise prices in a tougher environment there? Thank you.

Speaker 2

I think the first our plan our go to market plan is to make sure we phase this out to the customers who we believe will see the highest value from CoPilot first. And so we built a model that looks at usage, integrations, their ICP. And so we're going after first the customers who are most likely to see the highest value and most likely to upsell into Copilot. I think ultimately on monetization, it is around monetizing additional value per seat. And we think it's going to be an up sell relative to where our customers would have ended up, whether that's an increase in certain renewals or in certain renewals where they have fewer users that might be a flat renewal where historically it would have been a down sell.

Speaker 2

And new business, we think that we're going to increase win rates and conversion rates because of CoPilot, but we think we have the biggest opportunity within the customer base to drive monetization.

Speaker 6

Got it.

Speaker 3

Thank you. And certainly we've Elizabeth, I was just going to say we've typically run these migration motions over a couple of years in the past. So we don't expect it to all come now. But as we get further on in the year, it's still early now. It hasn't even gone to GA, but we'll have a better view on the potential uplift across our customer base.

Speaker 3

And we intend to post an Analyst Day in the Q4 to dig more into those metrics as well as provide a view into the longer term model based on that.

Speaker 6

Got it. Thank you very much. And as a quick follow-up, I believe last quarter you talked to some shortening sales cycles in Q4. Is that something that continued into Q1? You highlighted a lot of other green shoots in more of the mid market enterprise, but just curious on an update for the sales cycle period.

Speaker 6

Thank you.

Speaker 2

We didn't have any change in sales cycle length in the quarter. It stayed consistent.

Speaker 6

Got it. Thank you.

Operator

One moment for our next question. Our next question comes from DJ Heinz with Canaccord Genuity. Your line is open.

Speaker 7

Hey, thanks guys. Cameron, maybe a couple for you. I just I want to focus on that out of the Plus ACV cohort. I mean, I appreciate your commentary on improving retention dynamics. I think you said it

Speaker 1

was the 2nd straight quarter.

Speaker 7

I was a little surprised in light of that to see the absolute number of customers decline by as much as it did. So question 1 is, do you see that bottoming? I know it's a hard question to answer. And then question 2 would be, it sounds like the ACV in that cohort grew nicely. I think you said 16%.

Speaker 7

Just talk a little bit about what's driving that. Is it new personas? I know you said operation subs growing nicely. Is it advanced functionality? Any color with the puts and takes there would be super helpful.

Speaker 3

Sure. So the ACV for the cohort that grew 16% were the larger customers, the $1,000,000 plus customers. And obviously, that's a subset of the $100,000 plus. What we really see there is that larger enterprises and customers that have really leaned into the system are growing and growing nicely. But there are a number of mid market, in some cases even smaller customers that are just over the 100 ks level and still experiencing down sell pressure, whether that's they've laid people off over the last 12 or 18 months relative to their expiration or that they're continuing to face serious budget pressure.

Speaker 3

And those are the customers that we continue to see falling out of that cohort. There are still a number of those, but we are to a large extent, we have lapsed. We think of as peak negativity with respect to layoffs and so forth. So we feel that that pressure going forward won't be as significant as we've seen over the last 3 or 4 quarters.

Speaker 4

Okay. Got it. Thank you, guys.

Operator

One moment for our next question. Our next question comes from Mark Murphy with JPMorgan. Your line is open.

Speaker 5

Thank you very much. So Henry, we've definitely been noticing for many months that software companies are simply not hiring like they see a real demand recovery out there. And so very commonly the headcount growth now is way below the revenue growth in the software industry and it's extremely unusual. I'm just wondering and I think we hear a lot of different conjecture on why that might be. But how would you explain that phenomenon?

Speaker 5

Because I would assume if reps are seeing if they're reaching quota attainment, we think software companies would kind of lean in on the hiring. So just wondering if you think it's that simple or something else is going on? And then I have a quick follow-up.

Speaker 2

I think the world out there and go to market is all about productivity today. And so people are looking across their account executive, account management teams and instead of asking the question of if I added 10 additional people, could I drive more revenue growth? They're saying, can I do this with 10 less people? Are they at full capacity? Can I get the more leads and generate the same amount?

Speaker 2

Can I drive productivity within my team? And so there is just a fundamental shift in the way people are thinking about the unit economics of their businesses. And so they want to do more with less. And one of the things and where that's happening in our customer base, I mentioned this on the last question, where that's happening in our customer base, we're not going to expand by number of seats, but CoPilot gives us a real opportunity to expand ACV through that functionality without having to expand through seat count. And so in organizations where it might have been flat, we think there's an opportunity to expand ACV in organizations where there would have been down sell because there are just less people to hold licenses.

Speaker 2

We think there are opportunities to keep that flat. And so we're going to use that as a real opportunity in the customer base, but I think there is a focus on productivity. Yes. Okay. And then, Henry, that's very well said.

Speaker 2

Thank you for that. I did want to

Speaker 5

ask you because CoPilot, we've heard very good feedback and it's intriguing to turn a weak seller into a strong seller. But then the flip side is we just haven't seen much generative AI monetization at the application layer across all software. I mean, it's been very minimal. So I just want to understand based on you gave a very compelling assessment of some differences. Do you think that ZoomInfo is going to be an outlier?

Speaker 5

Because there's also a

Speaker 3

lot of companies, it feels like it's going

Speaker 5

to take a while before their Gen AI application is driving is like giving them like a 1% tailwind, for instance?

Speaker 2

Look, do I I think that question has a time element baked into it. Do I think ZoomInfo will be an outlier in our ability to generate and to monetize through our AI solutions? Yes. Do I think it's going to be in the back half of twenty twenty four where it shows up that way? No, I do think it's going to take longer than that.

Speaker 2

I have a lot of confidence because I personally pitched this product across dozens of our customers across all segments and all industries. And this is exactly from a product market fit, I don't think we've been ever so close to fit as we have been with CoPilot outside of the core company in Contact Data. And so I have a tremendous amount of confidence that we're going to be able to turn that enthusiasm into monetization, but I also expect it to happen over time. Understood. Thank you very much.

Operator

One moment for our next question. Our next question comes from Jackson Ader with KeyBanc. Your line is open.

Speaker 8

Hey, great. Thanks for taking our questions guys.

Speaker 2

The first

Speaker 8

one is on the down market cohort. I'm just curious, is that is the SMB weakness, does that have more to do maybe with macro environment pressures? Or is there something happening competitively down market where people think they can go somewhere else rather than stick to human stuff?

Speaker 2

Yes. Thank you for the question. It is fundamentally down market. We're seeing much more of a macro effect than a competitive effect. Specifically as it relates to competition, we've not seen a material change in the competitive landscape or an increased impact to our business from competitors.

Speaker 2

Our new business win rates haven't seen any increased pressure either overall or particularly in the SMB, where our competition is most concentrated. And then we had another quarter of just about record win back performance. So we feel really good about how we line up competitively. And we really we feel especially good about how we show up with CoPilot as we roll it out this quarter.

Speaker 8

Okay, great. And then just a quick follow-up either I guess for you, Henry or for Cameron. How much can you give us a sense for how much of the revenue mix actually comes from what you would consider SMB today?

Speaker 3

Yes. So our enterprise business is right at 40% of the business. SMB is still around a third and then mid market is a little below 30% making up the rest of that.

Speaker 8

Got it. All right, great. Thank you.

Operator

One moment for our next question. Our next question comes from Alex Zukin with Wolfe Research. Your line is open.

Speaker 1

Yes. Hey, guys. Thanks for taking the question. I guess maybe just going on to the back of that question about the SMB versus the enterprise versus mid market. Can you maybe just walk through the difference in growth rates in those three businesses as they currently stand for the year?

Speaker 1

And when does the kind of the negative anchor kind of fully roll through? Or is there a potential spiral where each renewal cohort, for instance, in the SMB could get worse? And then just mechanically, I appreciate Henry's comments on win rates and win backs, but what about pricing? Like specifically, are you having to discount more aggressively to either win new business or retain business and that's something you're seeing in the marketplace?

Speaker 3

So, Alex, I'll start with the growth rates between the different cohorts. Realistically, enterprise has been pretty solid. I'd say as we went through early on in 2023 as we're going through the quarters, I think it was challenged, but it was the first group for us to kind of see stability with. We did see continued down sell pressure through 23 in the mid market world and that was particularly acute on the software side where we saw customers really taking out seats either due to layoffs that they've done or over buying that they've done historically. As we came through the end of the year, in Q4 and Q1, we have started to see that stabilize, but mid market was certainly down on an absolute basis across that period.

Speaker 3

SMB actually held in reasonably well as we went through 2023, but really in Q1, we've seen a change in that trend. It does feel like the SMB cohort is more sensitive to the higher rates for a longer discussion that we've seen over the last few months. I think a lot of those companies were kind of hoping for a light at the end of the tunnel. And as that's changed, they're more sensitive to the environment and we've seen real pressure. So I think that's a change that we saw in Q1 more than anything else.

Speaker 3

I'll let Henry address the pricing question.

Speaker 2

Yes. One thing, Alex, that we have not seen from our competitors down market, up market anywhere is that they haven't innovated on data and they haven't innovated on product and they haven't innovated on the is around their go to market motion where they built PLG motions that can attract a large segment of low end SMB buyers. And we were behind on that. And over the last year, we've spent a lot of time building up our PLG motion. Inevitably, what happens with the PLG motion is that we sell at a lower price point for much smaller customers and then we look to grow them as they come into the customer base.

Speaker 2

And so where there has been a pricing difference this quarter versus historically has been in that PLG cohort that comes in at a lower price and then grows with us over time.

Speaker 1

Okay, perfect. Thank you, guys.

Operator

One moment for our next question. Our next question comes from Michael Turrin with Wells Fargo Securities. Your line is open.

Speaker 9

Hey, this is Michael Berg on for Michael Turrin. Thanks for taking the question. Really appreciate the color on NRR earlier in the call here. And I know there's been a lot of questions asked on this, but want to take a different step or different angle on this. As you look towards the rest of the year, in particular, second half of the year, how can we think about the key drivers to potentially improve the NRR rate?

Speaker 9

Is it enterprise strength, SMB weakness rolling off, new products rolling on? Just maybe help us understand what does improve NRR from here?

Speaker 2

I think that there are a couple of things that improve NRR from here. I think, one is we roll out when you think about NRR, it's about renewal rate and then it's about our ability to upsell products that we're innovating or new users into the customer base. And so from a renewal rate perspective, we are seeing that stabilization in mid market. We're seeing an improvement in renewal rate in our enterprise cohorts. So we feel like we've seen those trends continue into Q2.

Speaker 2

So we think that that's a trend that can continue through the back half of the year. And so if renewal rates continues to stay stable and continues to improve, that drives up NRR. We have the new product with CoPilot that will take into the customer base. That should drive up NRR as well. I think between renewal rate and improved products that we can sell into the customer base, those two things make a big impact.

Speaker 2

We also, as Cameron mentioned, there's an element of expirations coming up and multiyear contracts that have that increased last year that will be a tailwind to us this year as well.

Speaker 9

Got it. Helpful. And then Karen, one quick follow-up. As you talk about SMB Cohort and be more selective there in terms of the deals you take on, would that and then would that can we think about it benefiting free cash flow conversion over time? Like can we think about this going from low 90s to mid or even high 90s and back above 100 over time as the quality of the customer base improves?

Speaker 9

Thanks.

Speaker 3

And certainly, our goal in taking more upfront payments for those lower quality or smaller customers is largely to lower the kind of write offs. So certainly in a world where we have fewer write offs, that should improve the cash flow and frankly help us be more efficient in terms of where we're dedicating our time. But realistically, I think that that's probably something that happens around the edges. The bigger driver of cash flow conversion will be ultimately us reaccelerating growth. And so where we're able to reaccelerate growth and get growth back into a double digit world that would ultimately push that cash flow conversion higher into mid-90s or even higher just based on the fact that a bigger proportion of our revenue is coming in upfront based on that.

Operator

Thank you. One moment for our next question. Our next question comes from Brad Zelnick with Deutsche Bank. Your line is open.

Speaker 8

Great. Thanks so much for taking the questions. Cameron, I think through your prepared remarks and a lot of the questions that have already been asked, I feel like I have a pretty good sense of how to bridge from the prior guidance for the full year and the updated guide. But maybe if you could, any help because it sounds like small business down ticks, It sounds like there was some green sheet stabilization that you see ahead, perhaps even some upside in enterprise. But when you actually unpacked and came up with the guide, can you give us any help with where to think about where it's coming from specifically?

Speaker 3

Yes. And certainly, during Q1, we saw a continuation of trend in the enterprise and mid market that was stabilizing. I think that was in some ways expected, but we're expecting that to stay on trend. The real change in trend was in the small business cohort and obviously because that was a big cohort of expirations in Q1 and came in at a level that was much worse than we've seen historically. That obviously impacts just the run rate coming out of Q1.

Speaker 3

And then obviously, we're adjusting our assumptions going forward. So while it's a big pool of expirations in Q1 for small businesses, that's not the only expirations that we have during the course of the year. So as we adjust our assumptions in terms of small businesses going forward, we're assuming that that pressure continues through the year. And I think that that the combination of the big cohort that underperformed in Q1 as well as the assumption of that going forward, Certainly reflects a tougher environment than what we had set our guidance under in at the beginning of the year.

Speaker 8

Thanks for confirming. That's helpful color. And maybe just for you, Henry, as we think about that segment of the market, it's obviously got different characteristics, higher churn for every software company that's selling into the segment. Is there anything that you could do once we get past the cyclicality in the environment, anything that you can do to help offset what we naturally know about SMBs, whether it's integrations, go to market partnerships, like what can you do structurally to really help to ensure that you're as high a priority for SMBs as you possibly can be and that you're going to dominate competitively in that segment. Anything structurally that you could do to really improve your chances in that theater?

Speaker 8

Thanks.

Speaker 10

Yes. Look, I

Speaker 2

think number 1, we sell far more from a new business perspective and renew far more from a new business perspective. And I'm pretty sure every competitor combined in the space. And so we're not losing share here. I think the thing that I think about from a churn perspective is ZoomInfo has as a platform had largely been one that you go pull information out of. And our SMB customers are busy.

Speaker 2

They're running small businesses. They are tackling a number of initiatives and a platform that's not dead simple is hard to extract value out of. And so one of the lenses that we built Copilot with was to make sure that we made move ZoomInfo from a pull platform to a push platform. 1 that with AI understands the customer base, understands what they'll care about in ZoomInfo, looks at their CRM data to understand the customers without them having to learn a complex system or integrate their software or to find who their buyer committee is or choose the intent topics that they'd be most interested in. The system auto configures for them and then starts immediately delivering them value around their next best customers.

Speaker 2

And so we think that significantly improved actually we've seen that significantly improve utilization and engagement for our customers who are CoPilot beta customers. And as that utilization and engagement increases in the SMB, that's directly correlative with our renewal rate.

Speaker 4

Thank you.

Operator

One moment for our next question. Our next question comes from Brent Bartschlin with Piper Sandler. Your line is open.

Speaker 10

Thank you. Cameron, I get SMB is weak. It's been weak for a while, getting weaker. It seems like that seems to be a broader industry trend. I wanted to go back to the enterprise business, which did actually grow double digits year over year.

Speaker 10

Can you double click into the durability essentially of that enterprise growth? I can't imagine seats are expanding much in this environment. And so was it just all mix shift to DaaS? Was it tied to vendor consolidation? Walk me through the enterprise ACV growth and the durability of that?

Speaker 10

Thanks.

Speaker 3

And certainly, you mentioned DAS as being a good fit there. DaaS is like largely an enterprise product or at least enterprise in the higher end of mid market. That is a place where we are seeing real traction and also it's becoming a more and more material mix of the business. And certainly, I think to Henry's point before of customers looking to optimize their spend, like DAS is a big part of that. DAS is people building tools to make their sales teams more efficient and building those tools based on high quality data and insights about the customers that they're going after.

Speaker 3

And so, I do think that this is a lot of enterprises that are either investing in AI or investing in automation and recognize that they need high quality data as an input into those projects in order to make them successful. So that's certainly part of it. The other part of it, frankly, is that in the enterprise, we're still fairly under penetrated in terms of the total seats available. So there I don't think that there are a lot of enterprise that are piling on the number of seats. In fact, you see a lot of companies still laying people off.

Speaker 3

But in a place where we are helping to make teams more effective and efficient, when they're getting rid of people in certain places, they're still looking for we're still looking for other pockets within those enterprises in order to drive additional value and frankly drive additional efficiency for those teams.

Speaker 10

Helpful color there. And then Henry for you, I just I want to go back to the sales optimization narrative. It is a very different environment. We've had this kind of overhang on the business relative to tech layoffs and software layoffs for 2 years now. I get CoPilot could be a huge next level productivity uplift, but why won't we a year from now be in the same environment where CoPilot indirectly drives more efficiency above what you can monetize?

Speaker 10

Or is there a plan to move more away from seat based pricing, move towards platform fees, drive higher DAS attach rates and monetize CoPilot on top of DAS? Just trying to think through these changing environments and sentiment that you're seeing out there and it's just not clear to me if Copilot actually can provide an uplift or not?

Speaker 2

I think one really interesting thing that I've seen across the upper end of the mid market and the enterprise is that when you show them CoPilot, you start hearing things like, oh, we've been trying to build out here for the last 5 years. Oh, that would be exactly what we would need to build. Oh, we've been talking about wanting to build something like this. And so we have a real opportunity to deliver what every upper mid market and enterprise business would grow dozens of developer that for years to try to accomplish. And so I think we can monetize the value that we're driving both in terms of productivity uplift, but also from the avoidance of having to build that type of software internally and probably build it pretty poorly.

Speaker 4

Thank you.

Operator

One moment for our next question. Our next question comes from Brian Peterson with Raymond James. Your line is open.

Speaker 1

This is Jonathan McCarrie on for Brian. Thanks for taking the question. So, how would you characterize the demand environment in the non software verticals? I know you guys have kind of spoken to that previously. Maybe more specifically, did the NDR trends there sort of mirror what we're seeing in the broader business?

Speaker 1

Or is there more strength in the new side? Or how would you characterize that in the non software verticals?

Speaker 3

And certainly as we look at the last 12 months, software and technology have been under significant pressure. You see them down on an absolute dollar basis year over year and net a net retention level that's well below the overall net retention that we have. Obviously, that means that those non software businesses, non technology businesses have grown more significantly. Most of the segments within that are growing kind of mid teens or in some cases even more than that if you look at like retail or transportation and logistics. And obviously just the math would tell you that the net retention for those businesses is also well above the overall company average as well.

Speaker 3

So I think that we've gone through a year ending at the end of March here where software businesses, our software customers have been digesting a lot of the, call it, replatforming or operational operating model changes that they've they put through throughout 2022 and the beginning of 2023. Our subscription model is now digesting all of that. And so I do think that there's the opportunity, particularly among those larger and mid market software companies to stabilize a little bit more. But the rest of the business is effectively better because they didn't have the same dynamics, particularly around driving more profitability that you see in software businesses that have decelerated in a significant amount.

Speaker 11

Okay. Thank you.

Operator

One moment for our next question. Our next question comes from Tyler Radke with Citi. Your line is open.

Speaker 12

Hey, good afternoon. Thanks for taking the question. Cameron, as I look at the guidance for the full year, obviously, it's come down a little bit, but it still implies that sequential growth has to pick up in the second half of the year. Can you just remind us what's driving that sequential acceleration? And I guess on the SMB environment, how have you seen the 1st month or so trend in the second quarter relative to what you saw in Q1?

Speaker 3

Yes. So certainly, the acceleration in the second half of the year is largely based on the fact that our expirations that we're going to see in Q2 and Q3 are much smaller than they were in Q1 and frankly Q4 before that. So a lower number of expirations obviously provides less opportunity for down sell among our customers and therefore the up sells and the new business that we're continuing to drive will have a bigger impact on the revenue number as we go through. And so that's kind of true across the board. And as we look at the retention mix, we see that.

Speaker 3

Frankly, April, very much, was on trend for those comments. So we feel that the smaller expiration and the success that we continue to see with upselling and new sales is already on course for that.

Speaker 12

Thank you.

Speaker 11

Go ahead, sir.

Speaker 12

I was just going to sneak in a follow-up for you, Cameron. Thank you. As we look at the trajectory for the rest of the year, can you also just remind us how you're thinking about the $100,000 customer adds? Should that bottom and start to grow again at a certain point? And similar question on NRR, when do we expect to see the bottom there?

Speaker 3

Yes. So I think from the $100,000 perspective, the real pressure that we feel in terms of the number of customers are among smaller customers. So mid market customers and maybe even some small businesses that are spending just above the $100,000 level and have down sell pressure, whether that's internal budget pressure or layoffs or changes in their operating model. That continues to be there. We haven't kind of we haven't fully gotten through all of those customers, but certainly we've gotten through some very big cohorts that had peaked in terms of layoffs and call it early 2023.

Speaker 3

So we do think that there's the opportunity for that to eventually grow or at least not go down by as much. But certainly, overall in that cohort, we actually see the ACV levels being pretty stable because the larger customers continue to grow more significantly and make up for losing some of those smaller customers. From a retention perspective, we very much see retention among the enterprise and mid market stabilizing. And certainly, as we see a little bit of mix shift, that also helps the overall numbers. So it does feel like that's a place where we can build off of as we move forward into the second half of the year.

Speaker 3

And frankly, the multi year customers also continue to grow, which is obviously helpful for retention as well, which is a reflection of the fact that we are shifting the mix towards larger customers and those larger customers do tend to be multiyear customers as well. So our guidance assumes that retention does not improve, but we do see a number of trends underlying where we think that that opportunity for improvement is there.

Speaker 4

Thank you.

Operator

One moment for our next question. Our next question comes from Josh Ferrelli with Needham and Company. Your line is open.

Speaker 13

Yes. Thanks for sneaking in. I got two quick questions here. We talked about the PLG motion. I was curious how broadly is this now rolled out to both new and existing customers?

Speaker 13

I know that was a point of discussion before. And then just quick on sales and marketing, that was above my estimate by a healthy amount for the quarter here while R and D was below. Curious how you're thinking about sales and marketing spend for the balance of the year relative to the updated operating income guidance? Thanks guys.

Speaker 2

The PLG one and then Cameron can take the second part. On PLG, it is it depends on how you define PLG. If we think about PLG as purely self-service, I come in, I get a free trial, I turn into a customer, that part of PLG is limited to a cohort of leads that come through our website. So it's not open to any user. If we're talking about it as the ability to manage your invoices, paper upgraded users, add ad spend in marketing OS, paper renewal that is that capability is available to all of our customers.

Speaker 3

And then from an operating expense perspective, sales and marketing, we are continuing to invest in sales and marketing. There are also some kind of one off things around payroll taxes and how are we pay taxes on stock comp that created a little bit of a blip in Q1 related to sales and marketing that won't necessarily recur as we go forward. But certainly, we're going to be really focused on marketing around and selling co pilot as we move into the second half of the year. So that'll be something that we want to continue to invest in. R and D, we have been really focusing the R and D team on the co pilot initiative and based on the new functionality that's being developed, there is a bit more capitalization that happens there.

Speaker 3

So I think that capitalization probably may not have been incorporated in everyone's model if you're just looking at the prior trends.

Speaker 4

Thank you.

Operator

One moment for our next question. Our next question comes from Raimo Lenschow with Barclays. Your line is open.

Speaker 11

Thank you. Thanks for squeezing me in. Since I'm at the back of the call, maybe more like a high level question. The Henry, if you look like obviously what's happening to you guys at the moment, it's nothing zoom into it specific. It's kind of like where the market is at the moment and where customers are, so that's impacting you, but it's impacting the whole industry that you're playing in.

Speaker 11

What do you see in terms of how do you think that your industry will reemerge because a lot of your competitors are private, So you're kind of well funded, very highly profitable. So how do you think that's playing out? And what do you see in competitive situations there already? Has that started already? Thank you.

Speaker 2

Look, I think think first of all, we're taking a very durable approach to our future. And the products that we're building today and bringing to market, we believe build a foundation on top of which we can continue to build on. Is CoPilot going to be the last AI product we build? No, it's going to be the first and it's going to build a great foundation for the future. I think if I look around the space, it's much easier to look at the core of our solution and understand why it's important to every go to market team today and 5 years from now and 10 years from now.

Speaker 2

And it's a lot easier to look at our solution and understand why in a generative AI world, our data, our insights, our proprietary data asset becomes more and more valuable while application layer software becomes less and less important, because it'll be much easier to build with AI in the future. But that our data asset and what we're building around it becomes core to every generative AI go to market use case in the future. And so I think in that respect, you can I can see a universe where the software layer, the application providers are much more easily disrupted by AI than the core data providers who built flywheels and networks to gather the data and have incredibly high quality data that every company can build a generative AI solution on top of? And so we have a lot of confidence around what we're building and the future there. And think the application layer is more disruptable.

Speaker 11

Okay, perfect. Thank you.

Operator

One moment for our next question. Our next question comes from Rishi Jaluria with RBC Capital Markets. Your line is open.

Speaker 14

Wonderful. Good afternoon. Thanks so much for squeezing me in. I'll keep it to 1, just given that we're past time. Henry, I wanted to follow back on the conversation around the PLG motion.

Speaker 14

I guess help us understand, number 1, how is traction? And in this case, I'm talking purely the self-service customers where someone can become a paying customer of XUMINFO without having to engage with the salesperson. I guess, help me understand, A, how is that motion kind of going? How is it being received? And I guess, B, why not go even deeper down that path, especially given that at least in a lot of conversations we've had, there is a certain amount of friction to adopting ZoomInfo that isn't necessarily there at some of your competitors.

Speaker 14

And I'd have to imagine without dedicated sales resources, it comes in a very, very high contribution margin. Maybe you could help us bridge that, that'd be great. Thank you.

Speaker 2

The increase, the number of customers and accounts that have access that we bring in from a PLG motion. Now, we also believe that we've built an incredible sales led motion at ZoomInfo that is far more efficient than just about anything you'd see out there in the broader software marketplace. And so when there are leads that we think are most optimized to come through a sales led motion, we're going to push that to the sales led motion. When we think there are leads that will be best served through the PLG motion, we're going to push those leads through the PLG motion. And so I think we're always going to have 2 ways that we go to market from a new business perspective.

Speaker 2

And we're going to leverage each where we think, where our internal models actually tell us that we're going to get more if one goes to PLG or we're going to be better optimized if the lead goes into our sales led motion. But over time, what we've seen internally and what we'll continue to deliver on is more and more going into the PLG motion. Thank you so much. One

Operator

moment for our next question. Our next question comes from Pat Walravens with Citizens JMP. Your line is open.

Speaker 4

Okay, great. Thank you. Shifting to other notes in SMB. So, Henry, I was delighted to see you settled the right of publicity class actions. Kudos to Anthony and your legal team.

Speaker 4

Two questions. So it resolves the claims in 4 states. Are there any others in other states or is that it? Then the second question is, are you making any changes to the community edition or the directory pages as a result? And does any of that impact your plans for sort of new PLG motions for SMB?

Speaker 2

Yes. Thank you, Pat. These will handle all of the states where there are claims. So we feel really good about putting that behind us. There are minor changes to our community pages in those states, but we don't anticipate those causing any issues for us from a community perspective or from a PLG perspective either.

Speaker 4

Awesome. Thank you.

Operator

And I'm not showing any further questions at this time. And this does also conclude today's conference. Thank you for your participation. You may now disconnect and have a wonderful day.

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Earnings Conference Call
ZoomInfo Technologies Q1 2024
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