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

All right. Good afternoon, everyone. Thank you for joining us at the NASDAQ conference. My name is Elizabeth Porter. I'm an analyst on the software equity research team over at Morgan Stanley. I'm really pleased to have with us today, ZoomInfo CFO, Cameron Hyzer. Before we kick it off, just a quick disclosure visit the disclosure website at morganstanley.com/research disclosures. And we will have Q&A. So Mike will go around.

With that, Cameron, thank you again so much for joining us.

Yes. Thanks for having me.

Of course. So for those that might not be as familiar with ZoomInfo, can you just give us a brief overview of the company, the portfolio of products and end customers you serve?

Yes, totally. So, our real goal is to help salespeople, marketing folks, the operations folks that support them and talent acquisition professionals. Basically be more effective and efficient and we do that with a platform that provides data on the companies and people that work at those companies that those salespeople are targeting. And then a variety of tools on top of that, that help with the automation of those sales motions and conversation intelligence as well. So we have Sales OS platform that is really our flagship platform that we've had for over a decade to really drive better sales motions among our teams. And more recently, we've built on to that and operations platform to help those operations professionals that are supporting the sales teams to bring in the kind of high-quality data that we have into the other places where those teams are running motions. We have a marketing OS, which is an ABM platform that helps marketing teams be more targeted in who they're running their marketing campaigns against. We have a talent OS, which helps talent acquisition people with their, call it, passive search capabilities.

Great. And so before we dive into the company, I do want to touch on macro. And obviously, it's a really rapidly changing environment. But can you help us better understand kind of what happened between the 2Q call in August where it sounded pretty good despite some of the macro headwinds starting to ease and then Q3 call in November, then you guys did more materially change your outlook?

Yes. So we've been talking about the macro impact that we've seen really since Q2. And I think through Q2, we started to see deal cycles elongate and more scrutiny being placed on deals. But the buyer mentality for us really changed in the September timeframe and particularly as a kind of company with a bigger U.S. presence than other places. I think the buyer community kind of takes a lot of their cues from the same places that the stock market does in that we had a kind of worse inflation report than was expected and then a Fed discussion that really took people from, well, maybe there's a soft lending coming to. There's a real high chance of a recession. And so I think a lot of our buyers started to put incremental scrutiny on the deals that -- and renewals that were coming up, and that really started to impact our capacity as a sales team. So we've always run a tremendously efficient sales team, and there's really no slack in the system for those incremental calls or longer calls or discussing something with the CFO that hadn't been discussed before, started to impact our upsell capabilities as that continued.

Got it. And if we think back just during COVID, and there was obviously this really clear need for B2B data. You still had to do your prospecting even if you weren't going to that conference and collecting business cards. And that likely accelerated some penetration to the opportunity, but it also drove this just greater awareness that there are tools out there to improve your efficiency. So can you just talk about the penetration that you see in the broader market today? And then secondly, kind of the penetration that you see within the existing customers?

Yes. So, when we look back at COVID, it's actually interesting, the beginning of COVID was a negative for us. And then I think as time went on, we figure out how to deal with it and started to see more benefits. I actually feel like we aren't so much a COVID beneficiary as we were the after effects of COVID where governments around the world were pouring more money into their economies. That certainly helped our business and I think helped a lot of businesses particularly those that are supporting sales where people are looking for ways to take advantage of all the opportunity that was out there, and we could help them accelerate that. It is still very interesting where we sell to businesses that sell to other businesses, obviously. We've gone through our system and identified by name, over 700,000 businesses that sell to other businesses. We have 30,000 -- over 30,000 customers today. So still relatively lightly penetrated in that overall market. And we see that there's still a lot of demand from customers in terms of people looking to improve their go-to-market motions and improve the effectiveness and efficiencies of their team. So overall, there's a lot of potential that's still out there, and particularly as we're adding on additional functionality. We refer to it oftentimes is advanced functionality within the platform. That's even more lightly penetrated than just people that are leveraging high-quality data and insights to drive better motions.

And I definitely do want to get into the advanced functionality piece. But kind of before we do, kind of going back to kind of the core data set. We often just get asked on how mission critical is this access to ZoomInfo. On one hand, you do have companies that are having their IT budgets that are squeezed. You do have -- you can collect business cards if you need to. But on the other hand, you're not -- businesses aren't expanding sales heads in the same way that they were before. So that driving that incremental efficiency in that -- the given heads that you do have has become that much more important? So just help us frame like what's the risk that a company could pull back on their usage of ZoomInfo when times do get tough?

And I think if you go and ask the users and your average salesperson, they will tell you that ZoomInfo is the most critical application or platform that they're using to drive to hit their number. The plenty of examples, a personal example, my sister runs a small company in San Diego and she called me up 1 day and she says, "I'm hiring my first sales guy and he won't join unless I get ZoomInfo." It looks like that important to them in order to help drive what he does as a salesperson. And so I think the individual salespeople largely feel that it's super critical to what they do. I think as you get further and further away from that problem, there's more education that we need to continue to help people with. But I think as we've grown as a company and I continue to meet more and more CFO's. Two years ago, many people would say, "Zoom what?" and now people are like, yes, you help our sales team be more efficient. That recognition is along that path that we want to get to. In a greater scheme of like our -- as sales teams are not growing as much as they have been in the past. I do think that a core thing that we do is help people do more with less. So generally, if you look at a bunch of investors that have gone out and done surveys and other things, ZoomInfo typically ranks at the top of those surveys for sales teams on what they would not be able to cut in order to trim their [ fat ] or whatever else.

Great. And when we think about the vendor landscape, ZoomInfo is definitely best of breed when it comes in to our customer conversations. But we also do hear about some other platforms, whether it's the small niche players like Apollo or [ lead4ward I ], LinkedIn Sales Navigator is often something that comes up or done in Bradstreet. So what is your kind of competitive advantage within that landscape?

Yes. I mean I think kind of named a variety of different types of companies. LinkedIn Sales Navigator is obviously a very big platform. We think of it very much as a channel. So when you're using LinkedIn Sales Navigator the way to reach out to people is primarily through in mails. Yes, I think that, that can be a great tool and a great channel for a number of sales folks. But realistically, most people run their motions on things other than or in addition to just sending in mails to people, they want to be able to reach out by e-mail. They want to be able to call people. They want to be able to advertise to people to reach out to them through other social networks. All of those things are things that we facilitate for our customers and are really able to create an overall platform that they can go through whatever channel they want. So I think for people that are using Sales Navigator, it is oftentimes in conjunction with ZoomInfo in order to help drive not just one channel, but all of their channels and how they're prioritizing and focusing on customers. Yes, the other platforms that you mentioned tend to be a niche platform within a certain part of the data that we're offering. And I think we focus above and beyond anything else on the quality of our data. We guarantee the quality with our customers. And I think our belief in what a lot of our customers tell us as well as the high-quality data and insights drives better outcomes. So from a competitive perspective, most of those companies are markedly smaller than we are. And I think the reason that we've been able to grow and kind of grow with our customers so well is because of the quality focus that we have. And the real focus on outcomes for our customers and not just kind of providing data, but providing data in a way that can drive a better outcome for them.

And kind of within your customers, about 40% of the business is exposed to software. And obviously, we've all seen headlines about tech layoffs. So can you just help us frame kind of what is ZoomInfo seeing in the market today? And then second, would love to get some color on where you -- what your exposure is outside of software, some of those biggest bigger verticals and just the health of that business outside of software?

Yes. So I think throughout the economy, whether it's in software or other verticals, there are a lot of people that are thinking about how they run their business and thinking about how that may change in the event of a recession. Certainly putting more scrutiny on all the different vendors that they have to ensure that they're really getting the value that they expect from their vendors. And so the problem is in order to find the ones that you aren't getting as much value out of, you have to scrutinize all of them. And I think so we are in that bucket of scrutiny. Largely, we're getting to the same outcomes with customers. So we're still renewing with folks and seeing good engagement with our customers. But overall, that's happening across the board. I do think it's happening a little bit more dramatically with software. But I wouldn't say that its way out of the norm compared to other folks. If you look at the overall composition of the business, it's a little under 40% is resident and software. The next largest vertical for us is business services, which admittedly is a very wide definition. It's everything from systems integrators like Capgemini, all the way down to janitorial services and tax accounting firms and those sorts of things. So a lot of different things fall into that. But that's a little over 20% of our overall business. And then after that, you get a wide variety of verticals that are in the kind of mid- to high single digits. The largest of those is financial services, and then you get transportation and logistics, you get manufacturing, health care, retail, there's just a whole bunch of ones that are earlier on in their kind of life cycle of sophisticating their go-to-market motions. But have all been growing faster than our overall business for the last couple of years. And I think there's a lot of potential for those to continue to grow nicely going forward.

Great. And then turning back to the advanced functionality, which you mentioned are these tools to help automate your sales workflow. You mentioned conversational intelligence, but can you just give us like a quick overview or what are some of the other workflows ZoomInfo [indiscernible]. And then second, how much of an uplift to ACV can you start to see as customers move beyond the company kind of contact data into these advanced functionality workflows?

Yes. So I've used this example before, but it's a good one to kind of frame the conversation and walk through what all the pieces are as well as what that uplift is. So if you have 20 to 50 -- 25 to 50 seats, you might be a $50,000 customer on our advanced platform, which is really a company and contact data. If you move up to our Elite platform, that's probably a 30% to 50% uplift and Elite includes 2 kind of primary things. One is intent data. So that's identifying companies that are in market for your particular solution. And then workflows on top of that, that allows you to kick off a particular motion and automate pieces of that. Other parts within the sales OS stack are then conversation intelligence, where we are recording and transcribing calls that your salespeople are having with customers and prospects. And then identifying through artificial intelligence, the key moments in those calls so you can drive motions, you can help with coaching, you can also create analytics around that. That's probably another 30% to 40% uplift on that. And then we have an engaged platform gage product as well, which helps automate many of those motions. So sending out templated e-mails to folks and understanding what the response rates and interactions are with those so that you can continue to improve that e-mails, calls, et cetera, over time. Then the last kind of bigger part of the sales OS platform, we do have a chat capability that's also AI-driven that can help prioritize those people coming to your website. So a typical customer could start out at the [ $50,000 ] level and by taking all of the sales or less functionality that could be a 6-figure kind of deal overall at that size. Then we have operations OS, which is really functionality to help people orchestrate and route data within their organization and to provide data bricks as well. So if you think about incorporating a lot of the high-quality data and insights that we're providing to folks into other systems that you're using your motions. For instance, doing that in Salesforce, if you're building something in Snowflake or if you have a marketing automation system, connecting all of those together is what the operations OS does and then feeding enrichment capabilities and data capabilities into that is part of the operations OS. The operations OS can be sometimes even larger than what we'd sell for sales or so you can think about that as being another $100,000 opportunity within that same customer. And then our marketing OS, which is a newer offering, is an ABM platform that allows you to create an audience of B2B people. So if you think about I want to advertise or create a marketing motion around directors of facilities at companies with more than 1,000 people in the Greater London area, you can create that audience and then run different motions, whether that's online advertising, whether that's social, advertising, whether that's e-mail campaigns, whatever that is, it's all been done through the marketing OS. And for that same size customer, that could be another 6-figure deal. And then our final one is the talent OS, which is probably smaller. But again, if you're recruiting people wherever in the organization in terms of passive search, that's another area of functionality that we can give to you. So that customer that started out is $50,000 can be over $300,000 in terms of their overall spend with us as we continue to provide incremental value through those advanced functionality capabilities.

So it's a pretty meaningful uplift that you can get in that ACV as your customers are going beyond that company and contact data to those advanced workflows and new departments. One of the things that I think is -- we're seeing right now is that it's taking longer to sell into those opportunities during the Q3 results, you mentioned that just on the go-to-market is taking longer, and that's translating to about 20% increase on time just to kind of get the renewals in the door, which eats away at that opportunity to go in for the advanced functionality or the marketing or the talent department -- so 2 questions here. If a key headwind is just kind of the sales capacity, like why not just hire more heads -- and then second, are there any changes that you can make in the go-to-market to improve sales capacity or reduce those time spent on renewals so you can more aggressively go after that upsell?

Yes, definitely. So we're continuing to add more sales capacity, and we'll continue to do that. I think there's -- I don't know that I call it an upper limit, but certainly, there's a limit to how quickly we can add capacity into how quickly that capacity really is productive. And so for us, we've always focused on continuing to build capacity in a kind of continual way in order to create a sustained growth path over the long-term. But certainly, the efficiency limits that have been set up on that team as a result of the macroeconomic environment, it slows that down a little but we will continue to add capacity and work our way through that. There are also a number of places where we want to improve the efficiency of the team, some examples of what we've been doing are we took some SDRs, which are sales development reps, kind of lower level support folks and put them into a renewal team to really offload some of the more routine activities around renewals and to allow our account management reps to focus on more value-added activities. That should help in some of that efficiency discussion. So yes, we're always looking at ways where we can incrementally improve our efficiency and go-to-market motions. And so those are -- that's one of the examples of working to offset that efficiency or capacity constraint that we've kind of realized. And I don't know that it's going to fully offset or mitigate that. But certainly, we're looking for that to help around the edges.

Great. I'll ask another question and then turn it over to the audience for any Q&A. So after the Q3 earnings call, there was this kind of more cautious tone on the demand environment. We've put it from many other companies. And Street took down their numbers. They were kind of in like the mid-20s growth. But a couple of weeks later, you were at a conference and suggested that growth could be more in kind of the high teens looking at your days adjusted sequential revenue growth. And I often get asked by investors, okay, like what could have changed in those couple of weeks? Was there something demand-wise that changed? Or was -- the Street just mismodeling and you had to kind of reset some expectations? Just help us frame kind of what happened in the [indiscernible].

Yes. In terms of the business, there was really nothing that changed to talk to a bunch of investors. And I think the conversation is very consistent. Yes. Certainly, some analysts took their numbers up after Q3, which we felt was inconsistent with the kind of discussion that we had. We wanted to make sure that everyone was considering the wide range of potential outcomes that we generally think about. And certainly, yes, I think that we needed to make sure that people weren't getting ahead of themselves, particularly if you consider a macroeconomic environment that could well get worse as we go through Q4 and into next year versus get better?

Yes. No, I think that's definitely the right move to kind of be resetting kind of looking at this environment. But -- good to hear that there wasn't something drastically changed in those 2 weeks. Great. So we have a question second row.

Okay. I'm fairly new to the company. So I hope you don't mind the question. What are the key sort of proprietary data sets that you have? And how do you get them?

Yes. So when I think about the data that we're providing, we kind of break it into 3 groups. One is company data, the information about companies. One is the people that work at those companies and then the third is intent data. We really started in the contact or people part of that equation. And so there's a -- we have information largely on what would be on your business card for over 250 million people. A lot of that is proprietary. It comes from contributory networks that we've developed with both our customers and freemium users, and it's constantly changing in terms of where people work and how you get in touch with them, those sort of things. On top of that, we can then build a lot of great information about the companies. Some of it starts with just how many people work there, but also how many people work in different geographies and what the org chart is, who reports to who. And then we build upon that with information on what sort of technologies do they use. We model in what the revenue levels are for those companies. All the -- what industries those companies are in. Some of that is often publicly derivable but certainly to have it all in one place is a great value to all of our customers. And then from an intent data perspective, that is entirely proprietary, that's looking at what companies are in market for a particular solution. And we do that based on looking at what people are at those companies are reading online or searching for in terms of different topics. And we have over 4,000 different topics, ranging from HVAC repair to health care, insurance, things to different technology pieces. All of those things are proprietarily generated, and we're generating intense signals that are helping our customers identify who are the most likely companies for their particular service.

Thanks, Cameron. I have a couple of questions, actually. I mean I have -- there is some anecdotal evidence and quite a number of customers. Although you're a B2B platform, really, some of the customers are actually consumers inside companies that basically subscribe to the service without you having a relationship with a corporate. And they basically -- they say, "Well, I need this, I'm going to do it. I don't use my credit card and I use it. And then I wanted to check how many of those are really in the platform now? And how many can you upsell into a proper relationship?

Yes. I mean I think I'd separate that into 2 groups. We do have a premium platform where people are getting limited access to the system and in return, they're providing back information from their e-mail systems. That's probably a little bit more of the, call it, someone who just got the system without kind of making it a bigger corporate kind of discussion. There are some customers like as salespeople that are literally like, this is super valuable to me. I'm willing to put $10,000 or $15,000 or $20,000 on my credit card for me or my team to basically do a better job at hitting their number. But I'd say that most of those relationships grow pretty quickly into a bigger team discussion and not just a single person. Realistically, the premium version and we also run a lot of free trials with the aim of kind of bringing on a larger customer. The premium version isn't something that we're actively focused and it's not the biggest part of our bringing on a paying customer. It's more about the data acquisition and kind of working with those customers that don't need the full platform per se.

Yes. And then I have another question. I mean if you actually look at the marketing stack, there are many people around you that basically are doing things which are either analytics or basically convert the data or [ massage ] the data, in which way are those things important for the value of the platform because you basically have scale and dominance in what you do, isn't really time to basically buy the adjacencies as well?

Yes. And I think in the core sales OS, we have acquired some companies and kind of rolled them into an overall platform. This year, a lot of what we've done is really focused on an integrated experience for folks. If we move over into marketing and the marketing platform itself is really an ABM focused capability. I think we're really excited about the value that that's providing to customers, but there probably are other capabilities that are offered around the edges. At this point, I don't think that there's anything where we identify a big hole where we need to go out and add pieces. But over time, I can see that we're opportunistic around what are things that we could bring on to the platform, add significant incremental value to the customers and make that accretive in the short-term. We do have a very high bar with respect to acquisitions as part of what being successful with acquisitions is, it's selecting the right ones and then focusing execution around that. But I wouldn't say that there's something that's like I wouldn't say it's time to see a waterfall of like a ton of acquisitions immediately just to shore up parts of the plan.

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We have about a minute left. I'd love to sneak one in on margins. You've talked about the ability to expand margins as growth slows. Any sort of framework for investors in terms of thinking about as growth slows to this kind of 20% range should we think about margin opportunities?

Yes. So, I think that our business, like a lot of other software businesses has natural operating leverage in it, and we'll continue to realize that operating leverage, particularly as growth slows. I think the mental model in my mind that's different today than it necessarily was like a year ago is that there's a lot of operating leverage in sales and marketing, assuming that the efficiency kind of stays relatively constant or just degrades a little where we see an external impact on efficiency that brings it down more and that's not a demand signal where we very much believe that there's a lot of demand out there. We actually want to continue to invest into the sales and marketing capacity. And as we talked about before, really continue to attack that demand, realizing that it's going to happen, at least in the current environment at a somewhat lower efficiency level. So our expectation is that we'll maintain or maybe even increase our sales and marketing spend as a percentage of revenue as we go through, and we'll realize operating leverage from other parts of the organization. And that will be kind of consistent and modest improvements as we go forward. And then as the buying environment normalizes, the economy normalizes and the buying environment normalizes. I don't know when that's going to happen, but at some point, it certainly should happen. Then we'd actually see the efficiency around the sales and marketing team start to normalize as well and come back, maybe not all the way to the levels we've seen before but come back to better levels, and we should see reacceleration of the revenue growth as well as margin improvement or operating leverage realization on the sales and marketing line item as well.

Great. Awesome. That brings us to our time. Thank you so much.

Thanks.