ZoomInfo Technologies Inc. (GTM) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining. Good afternoon. Day 2 of the Wells Fargo TMT Summit. I'm Michael Turrin, the software analyst here at Wells. Very pleased to have ZoomInfo's CFO to my right, Cameron Hyzer. Thanks for joining. Appreciate the time.

Thank you.

We'll start with the easy ones. We'll let you frame out your reported earnings in Q3. So just the highlights, the takeaways, key metrics that you're focused on, and then we can just dig into some of the details afterwards.

Sure. So yes, I think Q3, we had a good quarter. But certainly, we felt the impacts of the macroeconomic environment more crisply in September. And as a result, we do very much focus on kind of the sequential growth of days adjusted or annualized revenue. We grew 6.5% in terms of Q3 growth, which, given the environment, still happy with, but certainly lower than what we've seen before. Along with that, certainly, we focused on improving our operating margins as well. So adjusted operating margins are up to 41% in Q3. It's something that we've very much focused on as growth moderates over time that we expect those adjusted operating margins to move up and so forth. So I think from those perspectives, some of the key things that we're focused on, and certainly, the big part for us, and I think you get a lot of data and transparency of like what's driving those things in terms of net retention and so forth, it's really focusing on the efficiency of our team, how that's being impacted and where we can continue to improve that going forward.

Yes. As far as the impacts that you are seeing, I mean, everyone has something, there's commonality in general across things like elongation, but you talked a little bit about expansion rates and some of the pressures of the moderating trajectory you're seeing there. Can you just speak to just some of the cross wins that you're seeing?

Yes. The interesting thing, which might be a little different from what people see in other software companies, is that our historical go-to-market motion, both on the new sales and the account management side, has been really efficient historically. And I think you see that in the numbers and comes through in the profitability. When that happens and when we get a kind of market increase in the scrutiny that we're getting on deals, there's not a lot of slack within our team to spend extra time running an extra report or preparing for a meeting with procurement that didn't happen before those sort of things. And I think that lack of slack is actually causing our efficiency on the account management side to deteriorate more than maybe you might see elsewhere. And where we really see it is we're kind of getting to the same outcome with respect to renewals and downsells and so forth. But our team has materially less time to go out to other pockets in the organization and drive those seat and data upsells that we've experienced in the past. And so our -- that is impacting our retention or our expectation for net retention for this year to be lower than what we had seen in 2021. And I think we've talked about that going down more to the levels that we saw before that kind of mid- to high single digits above 100.

I think there's an investor concern or profile around businesses that sell into sales-focused functions, and the fact that a lot of the moderation in headcount that we're seeing seems more sales-focused as a lot of the tech companies here put more emphasis on margin. . Are we overthinking what that means for ZoomInfo currently? I'm curious, your perspective on big greenfield opportunities still in front of you. We know that tech and services have been really strong verticals for you in the past. So ability to diversify away from some of those things versus concerns around near-term impacts.

Yes. So it's interesting. And even over the last couple of years, we've seen greater growth from other industries outside of software, high tech, largely because those were the early adopters of digitization around their go-to-market motions. The slightly interesting thing is that our system is specifically designed and really drives for us as well as a number of our customers greater efficiency and effectiveness of your sales force. So on the new business side, we continue to see -- it's held in much better than other things because if you are looking to optimize your sales force, if you're looking to kind of conserve cash or improve your path to profitability, sales is an area where you're probably spending a lot of money. If you can help your sales team be 10%, 20%, 30-whatever percent more efficient and more effective, that's well worth the investment to make that happen. In the environment that we're in today, we do need to kind of find the people that are willing to listen to that conversation and actually dig in to see that value. But we have a number of customers on the new customer side that continue to buy the platform. Our biggest sale that we did is a $1 million ARR sale or ACV sale, they basically like justified it based on we have 1,000-plus salespeople. We're going to forgo the next 10 hires to pay for ZoomInfo. And our expectation is that those 1,000 people are going to be way more effective and efficient than if we had just added on another 10 folks to the team.

I can see 2 sides to this. So I'm curious what your view is. It would seem like the core data asset is the strongest entry point for a lot of that conversation, the productivity it enables. But there's also a potential for consolidation story if you're selling the surrounding software applications. So help me with those relative to just some moderation and expansion. Like why isn't -- why aren't those things helping potentially offset?

Yes. And if you look at the functionality upsell, that continues to hang in a little better. I do think earlier in this year, there was a fair amount of talk around consolidation. Now we're starting to see more action around that. We've had a number of customers in Q3 that have consolidated other go-to-market systems onto the ZoomInfo platform. I will say that relative to a greenfield conversation of, like, bringing on conversation intelligence or bringing on automation or bringing on an ABM kind of marketing platform, they are a little bit more complicated in terms of the sales cycles. It's very rare that you'll have a company that has 5 vendors that they want to consolidate that all expire on the same day as a starting point. And then you're dealing with users kind of changing their motion. So there is real kind of savings associated with that, and there are real benefits to all being in one place in terms of not having to swivel the chair and drop things, not having to deal with the integrations between systems. So those are all real, but the kind of sales process to get there is a little bit more complicated. So where we are seeing momentum around that, that's a -- it's a good proof point for us, but it's not necessarily going to accelerate through in the really short term.

Understood. You may or may not have stolen some of the thunder from this session a few weeks ago. And so I want to go back to just some of the comments on ways to think about growth for next year given some of the -- layering up of some of the things that we're talking about. You talked about the importance of sequential growth and the moderation that you're seeing there. You sort of framed a baseline way to think about those trends into next year. Can we just step through that one more time?

Yes. I think we've historically always crafted our guidance based on a wide range of potential outcomes and set the guidance at the lower level of that range so that we're confident that we can meet and exceed. That obviously implies that the environment gets worse than what we're seeing today. So if you assume that the environment gets worse, then we perform at the levels that our guidance is at Q4, you assume that, that continues all the way through next year, that was the math we were helping people with. And I don't know what the macroeconomic environment is going to look like or how that's going to impact buying behavior, but we aren't seeing that change in the short term, and we're not necessarily going to change how we run our business until we start to see evidence of that improving.

Okay. So to be clear, that logic assumes continued degradation relative to what you're seeing currently?

Yes.

Great. Very helpful. As far as just some of the things that you're seeing in your investment posture, you've always had -- you mentioned a very efficient sales motion. You have stronger margins than most in the software currently. You're still adding some degree of sales capacity to work through some of the bottlenecks that you're articulating. So what informs the trade-offs? And how should we think about the margin offsets if growth were to moderate to some of the more pronounced scenarios?

Yes. Absolutely. We are fully committed to continue to show operating leverage and margin improvement in the business as growth moderates, but we continue to grow. I think as we've shown this year, as you kind of moved through the quarters, there is significant operating leverage still in the business. We've talked in the past about operating between the high 30s and high 40s in terms of adjusted operating income. And as growth moderates, our expectations will continue to go up to the higher end of that range. I think in the short term where there are external factors that are impacting the sales efficiency, I don't know that we're just going to pull back on the capacity around the sales team. In fact, we don't want to because, ultimately, the demand is still very much there for the product, and we need to work through to improve the efficiencies of our team. And so we do plan on continuing to grow the capacity of our sales and marketing team. I would expect that as a percentage of revenue, sales and marketing will either maintain or maybe even grow a little. But there are plenty of other places in the business where we feel there's still operating leverage to be had, whether that's cost of service, R&D or G&A. And so in the short term, I expect the margins -- I think I've talked about them moving up gradually over time as opposed to there being some big step function. And so that's the expectation that we'll have in the short term. I think the benefit of that is that at some point, the buying behaviors and environment will normalize. When that normalizes, we actually do expect to see an improvement in the sales efficiency, which should help us lean into coming out the other end and reaccelerating growth as well as actually seeing some operating leverage on the sales and marketing side as well.

All makes sense. I mean it sounds like the demand signals you're seeing are still strong. They're signaling need to add capacity. So can you just expand on the signals that you're watching, just -- whether it's just initial engagement from customers and some of the -- just the things -- the trends that you're watching on the data side?

Yes. So certainly, part of it is just the pipeline viewing where we continue to see leads, build, where we continue to have conversations. A big part of it is when we look at our largest customers. There's still a ton of opportunity there within other pockets of the organization, and that's not going away, and it's not being supplanted by other providers that are out there because there aren't really any that can provide for those larger customers. So I think those are the signals that we're really focused on to really make sure that the demand continues to be there. The velocity at which we're delivering against that demand is the part that's being impacted. But we have 2 things on our side. One is duration, and the other is a strong balance sheet and a high-margin company where we can continue to invest into those things in order to deliver against that.

I mean one of the questions that we've gotten a lot that I think a few quarters ago, you helped just debunk or just add some context around is just the correlation with seats. So can you just walk-through for those that aren't as familiar with the underpinnings of the business model, how to think about seat-based versus functionality-based pricing and just some of the scenarios that you could see there?

Yes. So our pricing model starts with a platform fee, which is a flat fee kind of regardless of size. It does change based on the functionality. So a list price might go from $15,000 at the low end to $45,000 at the high end. And that's the base price that people are going to pay just to start with the platform. It usually comes with 3 to 5 seats. Then people scale up based on the number of seats that they're deploying it against as well as there are kind of databricks that we're selling alongside of that to help to enrich their systems and really deliver data into their CRM or marketing automation systems to enrich their total addressable market. Overall, the platform fee and the seats part are kind of roughly equivalent in both less than half of the overall revenue. Obviously, for a very large customer, it's going to be a bigger part of their fee. The platform fee is very small for a smaller customer. For a smaller customer, it might be a larger platform fee and fewer of the seats as they're scaling up. But those are the 2 kind of big drivers. But certainly, someone that wants to add 15% more seats, that's not necessarily going to be 15% more dollars for us. There's a level as that scales up, and it seems true as you scale down.

How does the change in the bundles that you've kind of framed the products around fit into that discussion as well? Because with sales, marketing, ops, talent, they all have different use cases and also different user populations, right? Some have really deep power users that it would seem like you can monetize with a higher-end price point than some that have a broader general population using.

Yes. That is totally the case. The model that I just laid out is primarily the sales OS piece of that, which is very similar to kind of how we've priced historically. When we rolled out the RevOS umbrella with the other operating systems within it, they do have largely different pricing models. Talent is very similar to sales, in that it's largely seat-based. But when you think about operations, operations is largely based on the amount of data that you're orchestrating or kind of using within the organization. So there are very few companies that will just have an OperationsOS. But when you do have OperationsOS, it is very much -- there's a small operations team, and then they're orchestrating data kind of throughout the organization. So that data component of the pricing becomes a much bigger piece. On the marketing side, it's actually somewhat similar. The MarketingOS is all about creating an audience and then orchestrating that audience through different marketing motions that you might run. And again -- so the size of the audience is actually a bigger driver. And then there are actually usage-based components within the MarketingOS because we do provide the capability to do advertising online through the MarketingOS. And so the amount of advertising that you're pushing also drives some of that marketing spend. The OperationsOS, obviously, is a much bigger piece. MarketingOS we rolled out in March. So it's not necessarily a huge contributor to revenue yet.

Just going to ask a couple of the bigger picture questions that we get on ZoomInfo because I think it's useful to level set and having the expert here also helps. Just the type of business that ZoomInfo is admittedly different, a different market than what many software investors are used to. And so I think there's this view that you're touching data and that puts -- presents some risk. And I think at the Investor Day did a good job of bringing Simon to the stage and talking about just some of the things you're doing proactively, manage some of that. But just from your perspective, can you just answer the question as you would when an investor is asking something similar?

Yes. Totally. Certainly, we do interact with data. Some of that data would be considered personal information. For the layman's term, it's basically the data that's on your business card. So it's your name, your title, your phone number, your e-mail address, et cetera. We also have obviously a lot of data around companies and so forth that wouldn't be considered personal information. But as a result of that, we're very focused and forward-leaning in terms of the privacy that we have in place looking at all of the regulations that are out there. And really, our privacy posture is beyond all of the regulations. We have a notice and choice program where we're reaching out to people. We have a very clear and easy-to-use website where you can interact with your data. You can change it, amend it. You can opt out of the platform entirely.

Can I get myself a better title?

You can not give yourself a better title necessarily. You should talk to your boss about that. But I think that's a really important thing to make our customers feel comfortable with the data itself, and it becomes a differentiator, particularly in large enterprises. So when we have a conversation with a chief privacy officer at a large company, they're concerned not only about meeting the regulations that they're subject to, but also about their reputational risk when they're interacting with data. And so having a conversation with Simon McDougall, who was the kind of enforcement officer of GDPR within the ICO at the U.K., learning about what other companies are doing. We have a number of tools within the system that help people better manage their kind of privacy posture. I think we've talked about how we can surface only contacts that have been notified within the x period of time, whether that's 6 months or a year or 2 years. We have capabilities where we only show are the salespeople within your organization like publicly derivable information or you can kind of suppress other types of information. You can do that region by region. So for instance, in Germany, you only want publicly derivable information. You want all the links of how to get that and show that to people, we can provide that in Germany. And we can provide a different filter in the U.K. where maybe you're okay with anyone who's been notified over the last 2 years. And then if you're here in Nevada, you're fine with your salespeople having access to everything. We can allow that on a region-by-region basis. And realistically, I think that transparency and kind of functionality around privacy creates a real differentiator for the largest companies.

You've used acquisition in the past, both to kind of add scale and marry data sources and create the competitive mode around the data business and, more recently, to move into the application layer. The markets are changing. We're talking about it with the macro and the growth versus margin trade-offs. Just how does that inform your stance on M&A currently? And what are the things that you're evaluating as the CFO of ZoomInfo?

Yes. So certainly, our bar for acquisitions, it's probably gone up a little, but it's still -- it was always very high. We only focus on things that are strategic and add value to our customers, things that either make our data better or become much better with data, things that our sales team can sell easily and bundle in with what we do. And at least from my perspective, and I'm lucky that Henry generally shares this view, it needs to be accretive in the short to midterm. And that's accretive from a bottom line perspective. So anything that we do buy needs to be at a point where we believe we can generate profits and do that well. I do feel like the bid-ask spread for kind of private company valuations is probably not fully settled.

You're not the first CFO to say that here over the past couple of days.

So I think there's patience on our end that would -- that would be needed before we kind of really lean into things. But yes, I think we're opportunistically looking. Realistically, from a data and a SalesOS side, I think we're really comfortable with the offering that we have and excited about the capabilities that we can roll out to other customers. So there's no pressing thing that we're looking for, but there are things around the edges that could be interesting over time.

Yes. I'm glad you mentioned accretive. I think one of the also questions we'll get from investors is around -- it's almost an unfair position, but it's the core data asset margin is so strong, that it's hard to find other things that are not, in some way, dilutive. And so as you mix towards more of the software applications, it's a little bit of a dampener on where the margins sit. What's your perspective on those trade-offs? And is there a point where just the synergy of everything means that this is not as pronounced as investors might be thinking?

Yes. It's interesting because I've had this conversation with a couple of folks. And if you look at a lot of SaaS companies, the majority or at least the plurality of their costs are in sales and marketing. We're out there selling value on a subscription basis, whether that's data or whether it's an application. Obviously, we focus on things that are easy for our team to sell. So it's not going to be kind of 12 or 24 months implementation and super complicated. But yes, if you're selling value on a subscription basis, the reason that we are -- kind of do that so well is not because we're selling data. There are a lot of data companies that don't do that well, too. It's because we use our system, and we lean in really hard in terms of maximizing that efficiency of the sales and marketing team. So the kind of difference in margins I don't think is as dramatic as people make it out to be. On the R&D side, yes, I think most software companies spend more in R&D than our kind of pure data business would. But if you're taking a weighted average and calling our advanced functionality of kind of software business -- so you have a 70-30 split between data and software right now. Our software kind of spend on R&D is actually up there. And I think over time, we'll actually be able to bring that down a little so that we're creating a weighted average of something in the high teens and kind of mid-single digits or high single digits. And it'll largely stay where it is in that kind of low teens area. And otherwise, cost of service and G&A, like, again, no difference between a software company and a data subscription company. So I don't know that the margins are purely because of software, they have to be lower. I think that if you focus on efficiency, particularly in sales and marketing, you can actually drive companies to be more profitable and kind of closer to our overall margin structure.

That's helpful context. We're running out of time quickly. I'm going to ask 2 more. They're going to be focused on next year. The first is as a CFO. Internally, just how the macro environment that focused on costs might be changing the way that you're evaluating processes? I think in your call back -- in the call back that we had you referenced that your software spend was not going to fall. You still need to invest for the future. So the software analysts were always kind of thinking through the signals of what a CFO is cutting. So the first is just on the general planning perspective as a CFO.

Yes. So the -- either hard part or good part about my position is that we already run a business that's growing pretty well and has over 40% margins. So it's not like I walk out the door and say, "oh, there's a bunch of waste over here, here and here that we can just cut." You know, I go and I talk to my procurement team, I say, have you done this? Have you done that? They're like, yes, we did that in January, and we're doing this. So I think we've always focused on being more efficient, making sure that whatever we're buying from a software perspective is being implemented. It's being used. It's really driving the value that we expected to get out of that, which means that I don't have a lot of things that I can just kind of cut out. Certainly, I think, like, a lot of other CFOs and companies, though, we are applying more scrutiny to deals. We're working to make sure that we're bringing in multiple bids when we need to and making sure that we're continuing to drive the best value that we can from the investments that we're making. And that's true on the software side as well as all the other parts of the business as well. I do think one of the things that we have been really good at over time, and it helps drive particularly our cloud spending and cost of services, we're not just focused on what we're spending, but also value engineering around that to make sure that, for instance, that we're not using resources when we don't need to be or that we're over provisioning things. And so that value engineering is actually, yes, it's kind of the master's level like cost savings, but something that I think everyone -- yes, I don't know that anyone does it perfectly, but something that we focus on a lot.

And the last one is just on -- from the investor perspective, 2023 priorities, points of focus, things that you measure success by that you expect we might be talking about next year at this time?

Yes. So we're always focused on continuing to operate efficiently, and that means living up to our commitment to gradually improve margins over time. We continue to believe, and from every conversation that we have with enterprise customers, that there's a ton of opportunities. So we're going to continue to lean into those customers, help them drive more value. And I think Henry has talked to a lot of folks where the data enrichment part of that discussion is real opportunity that we continue to see. If you think about a lot of people have implemented CRM systems, they put a lot of data into the CRM systems, and then they immediately jump to building applications or analytics on top of that, but they don't have great capabilities to maintain the accuracy to keep those -- that data up to date. And that's an opportunity where, particularly large enterprises, it's hard to imagine any kind of forward-leaning and high-caliber sales team over the next 5 years or whatever that doesn't have some much higher-quality capability to maintain the accuracy of that data, and that's an opportunity that I think no one else can deliver.

Great point to close on, Cameron. Thanks for joining us. Appreciate it.

Yes. Thank you.