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

Good morning, everyone. My name is Brian Peterson. I'm the application software team here at Raymond James. Very happy to have ZoomInfo back with us here. Cameron and I are going to go through a fireside chat, but we'll keep this interactive. Guys, if you have any questions, raise your hand. Happy to make this as interactive as possible. All right. So Cameron, just maybe to get started, company background, ZoomInfo has, obviously, had an impressive scale of margins. But I'd love to maybe kind of start with a higher level overview for people that are a little bit newer to the story.

Great. So thanks for having me. At ZoomInfo, we provide platform to sales and marketing teams and also talent acquisition teams that really is focused on helping them be more efficient and more effective. We do that by providing really high-quality data about the companies that they're selling to, the people that work at those companies and providing triggers. We think of that as intent around who's in the market for their particular solution. We have over 30,000 customers, and over 1,900 customers that spend over $100,000 with us. We've grown to roughly $1.2 billion in run rate revenue in Q4. And one of the things that we've always focused on, as kind of a hallmark of what we do, is super focused on being efficient in terms of how we're delivering that revenue. We operate at 40-plus percent adjusted operating margins. And a big part of that is actually using our own system to drive a really efficient go-to-market motion kind of set an example for all of our customers on what they could potentially do as well.

So I want to hit on the efficiency side, but actually I'm going to start with kind of a competitive moat question. Actually, I get this a lot. And when I talk to customers, they always ask about the quality of the data you provide and the ability to add insight. Can you maybe double-click on that? And where you see kind of the biggest competitive moat for you guys versus the competition?

Yes. So our view has always been that high-quality data drives better outcomes for customers. It has been the hallmark of ZoomInfo from the very beginning. When Henry founded the company, it was called DiscoverOrg. It was known in the market as the only place where you can get really high-quality data. We've guaranteed parts of our data set at 95%-plus accuracy largely since the beginning. And the way that we do that is we have a couple of contributory networks where we're gathering information from our customers and from freemium users as well as gathering information from basically any publicly available or even semi-publicly available source that's out there. We've developed a lot of technology around quality. It's a machine learning engine that basically takes a number of different data points. And if you think about the billions of different data points that we can come to, many of those are often conflicting or could actually support a conclusion that's different from the truth. So the engine is really about comparing all of the different data points that we get, bringing those into a single kind of view of the world and then publishing what we feel is the most accurate. One of the things that we do that no one else does is we actually have a team of over 300 researchers that are creating ground truth around that data. So if you think about any particular data point like revenue for a private company, it's not something that's easy to get and oftentimes modeled. We'll go out and call 10,000 of the companies within our database. We might get 3,000 responses back when you say, Hi, I'm from ZoomInfo, doing some research on your company. How much revenue do you have? And then we'll take that ground truth that we developed, feed it back into the engine and data scientists to tune those algorithms on the things that weren't necessarily correct. And we do that across contact information. We do that across company information. We do that across our intent information to an extent as well. And that kind of constant research and focus on quality is really what creates a difference, plus the contributory networks, ultimately, like you're not going to contribute into a network unless you're getting value back. So having those be the largest opportunities to gather data creates a differentiation that no one else has. So between the decade-plus of learning and continuing to tune our engines as well as the unique data sources that we have, we feel that we have a real lead and continue to build a bigger and bigger moat around quality versus anything else you find out there.

All right. So that was great. And then so the quality is there. Can you talk about what you've done in terms of like adding the application layer on top of that and where you are in those efforts?

Yes. So I think having high-quality data is great. What we focused on over the last few years is really accelerating the time to value for customers and integrating that data into their workflows and creating software that can really drive value for them and make that data more powerful over time. So when we merged with ZoomInfo, we created a new platform. And the first thing we built into that platform was workflows. It's basically kind of if this then that engine that would -- you can basically script specific motions that you want to run. So if a company is spiking on intent and it happens to be in my region and it fits these criteria, maybe it's over 1,000 people and a specific industry, whatever it is, I want to send them this template or I want to kick off a motion, send it to an SDR or someone like that. And then we continue to build upon that. We built Engage, which is an automation engine. We acquired a company called Chorus. And what we really found that like providing a full platform across, not just the data, but also being able to provide automation and other tools in order to drive better efficiency for our sales team is resonating with our customers. And so that's been the focus over the last couple of years. You see that up to -- we've grown the, call it, advanced functionality up to 31% of overall revenue. And we've even been able to drive success outside of just the sales team. So we rolled out an OperationsOS, which allows you to leverage a lot of these tools for your sales operation team and really focus on how is data integrated into other motions across the world. We've rolled out last year MarketingOS, which is one of our fastest-growing kind of areas right now to really create that bridge where the marketing team can also work more directly with the sales team and to drive specific business-to-business audience in terms of their advertising things. And then we've had a number of recruiters that were basically using the SalesOS, and then come to us and asked us for things like, can we get employment history into the platform? And we've looked at them and said, you don't really need employment history to sell to someone. And they say, well, you do if you want to recruit them. So that was actually the like the big drive to re-skinning the platform to actually make sales flows look like recruiting flows for our customers.

So a lot of good stuff on the product side. If I take a step back, obviously, the macro is kind of the key topic du jour for everybody right now. I'd love to understand maybe what you saw from the macro in 2022? And how are you thinking about some of those puts and takes for 2023?

Yes. So I kind of think of 2022 in kind of thirds of the year. The first third of the year, the first quarter, plus the beginning of Q2, started out similarly to the beginning of 2021. We saw kind of acceleration through '21. We didn't start at the high point, but it was -- it felt good. I think we felt, I think, in striking distance of where we're going. We started talking about kind of midway through Q2 about the macro environment really starting to impact our sales efficiency effectively and kind of how things were working. So that kind of middle part of the year was tougher. And then around the early September time frame, we really saw a pretty big change in buyer psychology. I think you went from, well, there could be a soft landing, and things are going okay in the kind of June, July time frame, too. It's definitely going to be a recession. The Fed's raising rates kind of come hell or high water. They don't care about the economy, all they care about is inflation. That change in mentality certainly drove -- yes, made the world a lot harder. We started spending a lot more time just going out and can like reeducating senior decision makers about the value that we provide. It made renewals harder for us. We saw a more significant kind of decline in the upsell opportunity that we had at clients. So that last 4 months of the year, certainly, were tougher. I think you saw that in the kind of trajectory and numbers, and we continue to see that as we go into the first quarter as well.

And maybe just kind of unpacking that from like a net new lens, can you talk about where you're focused there? I know there's been some productivity conversations so -- and maybe some different end markets. Like how are you thinking about the trajectory of net new next year or this year?

Yes. Net new is actually a little more interesting because it did hang in better than our existing client business. Part of the reason that it's been hanging in better is that net new, at least for the last few years, has been more heavily weighted towards, call it, more traditional industries that are a little bit more stable than, say, software. Software has been more heavily impacted. So the efficiency around net new continues to be reasonably good. Net new did grow even in Q4 relative to Q4 of 2021. So when we think about how we've constructed our guidance, our assumption is that net retention will be lower, a little lower than it was if you were just to kind of annualize the activity in Q4. Net new our expectation is that we'll be flat to down in 2023, despite the fact that we're adding -- continue to add more resources and capacity on both of those sides. Really a reflection of the fact that I don't know when the kind of buyer psychology in world is going to stabilize. So we're going to plan for -- it gets worse and stays worse for the entire year. And yes, I think as we -- at some point, when that stabilization starts to occur, we want to put ourselves in a position where we can then accelerate back with the environment and continue to drive the value that we derive for customers.

And can you talk about maybe some of the end markets where you're seeing some success there? I know there's a lot of software exposure, but like in terms of the other end markets that have really driven the net new?

Yes. I mean, it's interesting because it really is any business that's selling to another business. Our second largest vertical is business services, which is a huge swath of companies. It could be anywhere from consulting companies that are either doing implementations or doing strategic consulting. One of the things that kind of came back a little bit better in '22 was like office services. You can think about that as like janitorial services or catering services, like people that are like serving people that are coming back more into the office. Tax advisers are in there. Recruiters are in there. So that's actually helping as well with the new recruiting platform. So that's a big area that continues to do pretty well. It actually grew as a percentage of revenue in 2022. But then there's a whole smattering of other industries, whether that's financial services, transportation, logistics, telecommunications, retail, manufacturing, health care. Like all of these businesses are selling to other businesses and growing faster than the overall business, and they have been for the last couple of years, and we continue to see that in '22 and as we move into '23.

And maybe just kind of pivoting from net new to kind of the [ NRR ] side of things. How do you kind of think through some of the employment changes in setting through those trend lines as thinking about the balance for that figure? Like looking at -- I guess what happened in 2022? And then what do you think about the range for that in 2023 in terms of that kind of employment trends with your customers?

Yes. So one of the ways to think about net retention, and we saw net retention go from 116 to 104. So that's about 12 points of degradation. I'd like to break that down between what is the upsell versus what's the churn rate and downsell. Ten points of that reduction actually came from reduced upsell. So that's -- the really big drivers that we were less successful in continuing to upsell our customers. That's a bigger dynamic in software than anywhere else. And -- it's certainly -- at least it's obvious to me, it should be obvious to a lot of people that software companies, in terms of their sales forces, we're growing much more significantly in 2021 than they were in 2022. So if you're adding 10% or 20% more to your sales force in 2021, most companies were down -- were flat and might even be down if they were laying people off in Q4 in 2022. So that certainly was a headwind -- kind of went from being a tailwind to a headwind. So you've got a bigger dynamic with respect to that. Realistically, like we still see a lot of opportunity even with those customers that are laying people off because we aren't necessarily wall-to-wall across those companies. But one of the things that I think we're struggling with is that a lot of people talk about doing more with less. From my experience in companies, if you go back to 2008 or even 2001, the way that, that operationally actually happens is people say, you have less. Like they go and they cut a bunch of cost. And then they say, now go figure out how to go get more. I don't know that we've seen the majority of our customers actually transition to the -- now I'm going to work on investing into ways to be more efficient or change things, I think, particularly in Q4 and at the beginning of Q1. It's more of a I need to figure out how to control my cost structure. And I think software is more volatile from that perspective just because you have a lot of companies that are going from, I was 20% -- I have like negative 20% margin, and I want to go to 10% margin. Like that's a big change in your cost structure that we need to help them navigate and ultimately, show them how we can actually help them do that as opposed to be part of the like red line part of the equation.

And you mentioned kind of the upsell, the downsell. Where does cross-sell factor under that? Because you've had the acquisitions. You have more products now. How do you think about cross-sell maybe in the kind of the longer-term growth factor wise?

I think of cross-sell as being part of that upsell number. In reality, the biggest decline in upsell was around seats and data. Cross-sell has come down, but not as dramatically as like the seats part of the world.

And so I know Dave has come in on the go-to-market side. Any thought process there? And any areas that may change? Or where do you see the opportunity to improve? I mean the go to market is pretty efficient.

Yes. And the go-to-market is very efficient. We're really excited about what Dave brings to the table. He obviously has -- and I think his real skill set comes in that enterprise motion. I think if the current environment has exposed anything for us is that we've always been super-efficient on that transactional sale, going and finding someone in an organization, showing them the value of the platform and closing a deal pretty quickly in terms of getting them access to that. What we haven't been grade out is that top down, call it, buying committees/C-level conversation that kind of helps push the platform down into other parts of the organization. And frankly, that's where we kind of feel some of the pain because we need to go and convince that CFO or procurement person or other people within the organization of the value that we're providing because they weren't necessarily involved in the initial sale of it. Dave's seen that movie at scale, like really driving a great go-to-market motion from an enterprise perspective and that top-down sale at places Cisco and Salesforce in his career, has been successful with that. And then actually helped bring that top-down enterprise motion to a transactional company at PagerDuty. So not only has he seen the movie of where we want to be in a few years, but also seen and help be successful in that kind of shorter term 6 to 12 to 18 months. How we're going to implement it? And where we're going to make it successful? So I think that augmenting the kind of really efficient motion that we've driven with more, call it, air support from the C-level executives is something that we're really excited about, driving towards and ultimately something that we think can help accelerate both net retention and growth over time.

So I'm going to open it up to the audience if there's any questions.

[indiscernible] Can you talk about maybe cascading [indiscernible]? What, if anything, do you now need to do differently on structure? Do you have relationship manager, technical experts? How does that [indiscernible] talk about how to execute it? What's the current [indiscernible]?

Yes. So -- I'll repeat the question or if you can repeat the question?

Yes, effectively, as some of the go-to-market changes, how does that look like? Putting a little bit more as a pen paper on that, and I'll let you...

Yes, so I don't think that we're necessarily going to change everything that we do. We view this as incrementally kind of adding air support as opposed to like stopping the transactional motion that we do. You had mentioned that like we, historically, had a viral sales process. It hasn't actually been viral, it's actually salespeople reaching out to individuals and kind of pushing value more than users kind of coming to us. So at some level, instead of just pushing value at the users, it's articulating that value to the C-suite as well. So I think that, that is a slightly different discussion where -- our sales process is actually pretty easy, right? You go and you ask someone like what's your motion in terms of finding new accounts or selling to other accounts? So one of the examples that Henry has talked about before as we had in an HVAC maintenance company, I think they were in Minneapolis or something. And they literally said like, okay, if we want to go find new accounts, we send someone out every Friday. And they drive around and they look at all the big buildings and they look for the signs that have changed. Like really that's your motion? They've been doing it for like 50 years, and it's worked for them to like find new customers. Like whether you bring up the demo and you're like, okay, so this filter is, here's companies that have moved, here's how much square feet they have. Here's the Director of facilities. Like it's 10 minutes instead of driving around Minneapolis like trying to find new buildings, that's super easy to like get someone who's receptive to that to say, yes, I could see how this would help me be more efficient, I can see how it would help me find more deals. It would help me prioritize which ones to focus on. You can't just go to the CFO's office and say, let me show you this demo. Like they don't care. I'm a CFO, I would never take that meeting.

That has worked on me.

Nor would I like, frankly, focus on like what the sales guys like day-to-day world looks like. But I really care about the fact that, that person can show me that is saving a day, a week in terms of routine tasks that he's focusing on. I really care about other people kind of going through and saying, yes, I achieved higher quota because I'm using this tool. And so we did a survey, largely to start to build that set of data points to go and show decision-makers, that not only is this making people's lives easier, but it's actually generating real return in terms of time saved, in terms of better performance, in terms of prioritizing where they're focusing. And so it's really just articulating that story to folks and getting more of that, yes, we should use this in a lot of places, not just for the people that have signed up for it so far.

Maybe it's kind of dovetailing on that, but just thinking about a partner channel and SIs. Is that an opportunity for you? I know there's not typically a big implementation, but thinking broadly top down, like where would that potentially fit in terms of that motion?

Yes. So historically, that has not been a motion at all almost for us. And part of that is like there's close to $0 to implement our platform. Whatever you got to turn it on and you want people get going. I do think there are becoming bigger opportunities for that. So if you think about OperationsOS, where it is a more complex integration into other systems. Frankly, a lot of -- where we have seen some success and where we're pushing more is that when people are reimplementing a sales force or something like that, there are big dollars there. One of the biggest kind of tripping points for folks is that if the data in your current CRM is not good, just porting that over to a new system like makes users like less than excited. So where we have seen success is where we can come in and enrich data and help create quality in a new implementation. But certainly, the place where we're also pushing is where there are strategic discussions around improving the efficiency and effectiveness of your sales team, we plug into those discussions really well as well. So it is an area of opportunity that we'll continue to hopefully drive some growth in as opposed to not.

Anything else from the audience? So I just want to hit on margins. Obviously, they're pretty healthy, north of 40%. You guys are continuing to grow, you're investing, how do you think about that balance between growth and profitability going forward?

Yes. So I think there should be growth and profitability. I've kind of been saying that for quite a while. So realistically, when I think about how we're kind of driving the business, I think any software company should, a, focus on sales effectiveness and efficiency. And so I kind of carve that out a little. Currently, we've seen a lot of pressure on our efficiency. We're still way more efficient than your average software company, but we've seen pressure on efficiency. I do think as the environment and buyer psychology normalizes, we should see that efficiency come back a little. So our view is that because there's still a ton of demand out there and a ton of opportunity in terms of the customers that we can go after, we want to continue to build sales capacity in order to attack that. Frankly, when we do see that -- when we do see the environment normalize, we'll hopefully be able to accelerate with that with a greater capacity and see some margin improvement from the sales and marketing line item. So I think in 2023, our expectation is that we'll grow sales and marketing expense in line or maybe even slightly faster than revenue. But the rest of the business, we operate at roughly low 30s as a percentage of revenue on an adjusted basis for cost of service, R&D and G&A. We'll continue to see the natural operating leverage that we would generate there, probably mostly from cost of service and then G&A and maybe to a lesser extent, from R&D, purely because we'll be able to continue to grow the business without growing those teams as quickly. The other thing that's pretty interesting is that in the frothier environments, in 2000 and 2021, it was very frothy from an employment perspective for technology skill sets. I think most companies are seeing attrition come down with respect to developers and technology, salespeople and marketing folks and whatever else, which also like adds to the efficiency of those teams. And therefore, it means that we don't need to grow them as quickly because we have more tenured people that can continue to drive value.

And maybe I'll wrap it up after this. But in terms of the healthy margins and you generate that cash flow, the rate environment has changed. How do you think about the priorities? Is it M&A or debt? Or what are you looking to do with the cash?

So yes, I think, look, in an environment and a kind of wobbly economic environment, there's a premium to having cash. So I think that's the -- where we've landed in terms of those discussions. We're not really focused on M&A in the short term. I think, opportunistically, we'll continue to look for things that we've been successful in the past, but that's not the primary driver in the short term. But having that cash longer term could be helpful. And at some point in the future, I'm sure we'll get to a point where we'll focus a little bit more on returning capital to shareholders versus maintaining that flexibility. But I think that's a longer-term discussion that we'll get into overtime.

Great. Cameron, thanks so much. Everyone, thanks for listening in.

Thank you.