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

Okay. And then let me ask you one last one on the macro, not to kind of beat this to death. But if I zoom out and look at it globally, the -- I think even at this conference, there's a huge debate right now. Are we going to have a soft landing? Or is it going to be something more difficult. Jamie Dimon yesterday said, penciling 20% to 30% odds of something a lot worse than people are expecting. So what is the read that you're getting, right? Because I think your teams are sensitive to it. You've got -- they've got a great read on the shorter-term sales cycles. What are they saying about business confidence and propensity to buy out there at this moment?

And I think there are, call it, countervailing forces that we're dealing with. Certainly, a large percentage of our business comes from the software universe where, frankly, the macroeconomic environment is tough, but actually the bigger thing that they're focusing on is just becoming more profitable. So kind of cutting costs despite anything else is actually the bigger driver, which is impacting our software business significantly. But if you zoom out to the kind of macroeconomic environment overall, like I don't think it's getting better yet. I don't necessarily think it's getting much worse right now, but there's still uncertainty in people's minds in terms of what they're focusing on. The countervailing part to that, though, is that people are looking for where they can be more efficient. And those are actually really good conversations for us to be having for when you can connect having high-quality data about the companies and people that work at those companies with making your motions more efficient. Those sort of leaders are actually [ leaning in, ] and we're seeing good upsells and good environment to make those sales, particularly with many of our largest clients.

And since you just brought up the software industry, Cameron, I wanted to dive into that for a moment.

Maybe I shouldn't have brought it up.

40% of ARR in round numbers, in round numbers 40%. I know that, that will be -- that's been downticking a little. But it's an extremely high outlier, right? In the exposure to the software industry. So it's been a bit of a perfect storm, I think, for you from that dimension. Can you remind us just how did that exposure become so elevated? I know that part of it goes back to the roots of DiscoverOrg and the assets that they had. But I think one of the questions we get is, well, maybe that's a leading indicator, right? Software industries are tech forward. They're going to lean in, do this first. The rest of the world will kind of figure it out later or should we actually, in some way, think of ZoomInfo as a little bit more of a vertical provider in software and tech?

Yes. So I do view the 39% of our business being in software, as really an indication of how lightly penetrated we are into the overall market. It's a massive market that we're serving. It's any business that sells to another business. And so the history of that is, those are our early adopters. I think that's true for a lot of software companies. It's the early adopters are more tech-forward companies. And we're continuing to grow and grow much faster in industries that are outside of software. As you mentioned, DiscoverOrg, when we started was really focused on high-quality data for our customers. And so we had a smaller data set that was largely focused on IT decision-makers at companies. And so you rewind into the DiscoverOrg days, it's almost all software. And when we acquired ZoomInfo, we were 60% of the business at that point. ZoomInfo also had a number of software companies as customers. But it was the predominant piece of that. The really interesting thing that happened when we just acquired ZoomInfo is that ZoomInfo was much more focused on quantity. So really kind of getting information about every person and every company that's out there. We went from having, I don't know, 15 million kind of contacts within our database to 100 million basically overnight. And that really exploded the addressable market for us. All of a sudden, we could sell much more readily to transportation logistics companies or pharmaceutical companies or financial services companies to retail companies. So we've seen all of those other industries really accelerate and continue to grow much more quickly than software has over the last 2 or 3 years. And at this point, while -- yes, I realize that software is a big part of our business at $1.2 billion and it being 60% outside of software, like that's over a $700 million business on its own. And that continues to grow more quickly than the software. Even in 2021, when it was a frothy environment and software is doing well, all of those industries were growing more quickly as well, and it's really a function of just being more lightly penetrated into those industries. And frankly, if you think about the inertia of your go-to-market motions, most software companies were not founded in 1972, and we're building their go-to-market motions at that point. They were founded within the last, I don't know, 20 years, they've been able to develop motions centered around more modern tools, getting the rest of the world to that spot is a really exciting opportunity for us that's really large, and we continue to penetrate.

Okay. So the trend line is already there actually from a multiyear perspective on diversifying pretty quickly outside of software?

Yes.

If we do click on it though, on the concept of the layoffs, where do you think we are in that cycle? Because that -- we've heard so much of that, and it's been a little bit quick and brutal the cycle of software layoffs, they're letting go AEs or letting go marketing heads or letting go the SDR people. I'm wondering what inning you see that being in. And there is a thesis out there that across the cycle, software companies, they're not going to do that at the top. They'll never do that at the top. You're going to be somewhere into the downslope. And I think a lot of people figure they're probably going to do it at the worst possible time. And they're probably going to end up doing that at the bottom. So I'm wondering how you would interpret what's happening?

Yes. So again, hard to predict exactly where the world is going to go and what's going to happen. My personal guess is mid- to late innings on that. But yes, it kind of depends on how you see the environment moving forward for folks. And honestly, I break this out between their smaller companies and they are more mature companies. I think the more mature companies, they're trimming because they probably had excess capacity relative to what was going on. Smaller companies are very much changing their operating model. And so initially, it was we need to be able to operate at breakeven. If you're a venture funding company to extend your runway or at least getting closer to that. They still are not, in my mind, like focusing on being kind of truly profitable. Operating at 5% or 10% operating margins is not a long-term story for folks. So one of 2 things has to happen. Either they need to get to a point where they can grow into their cost structure or they need to continue to fix it. And I -- a lot of that depends on the environment that they end up operating in.

And are you able to pretty accurately forecast any of the downsell risk on renewals? Are you able to get the telemetry and say, okay, this company is coming up for renewal in Q3, and it's going to be down 5%.

So certainly, we focus on that a lot. And yes, we have our engagement data, how people are interacting with the platform, how much they're using it. And we also have really good data on like who they are, how fast are they growing? What industries are they in and so forth. So we actually have a number of models that we push to our account management teams that really it's a predictive model that says you should either be asking for price because they are using it a lot. They're in a good industry. They're continuing to grow or you should just be protecting your renewal because they're more challenged or it's a low usage kind of customer. And really, you're just like making sure that they don't churn. And so we're giving that information to all of our salespeople every time. And realistically, what -- one of the things that has happened is, engagement has actually improved over the past year. Part of that was that there were a number of companies, particularly in the software space that we're overinvesting and kind of predicting growth within their contracts that didn't materialize. So we had to unwind a lot of that excess capacity that they have bought. And then part of it is that at a particular engagement level, we saw less renewal activity. I think I can think about it as it's like your renewal coefficient. And it was particularly evident in the small kind of slice of the business where there's really low engagement. Yes, it's interesting. When we have really low engagement, historically, you would have seen a 60% renewal rate against that. That has dropped to like 30%, which makes sense. It's like why are you renewing if you're not using it that much. But there's still a number of customers that renew despite a low engagement, but even at more average engagement levels, the renewal opportunities are just -- or the renewal risk is elevated relative to what it was in, say, 2021?

Sure. Yes. Okay. So it sounds like you're on the ball with this and have a pretty good methodology. What -- coming back to the total exposure to software, where do you want it to be at maturity? And what would rise up? So if that trend line continue -- if software continues to decline in your mix, and other industries are going to kind of rise up and make up the delta there, what would it be?

And I'd really focus on what is B2B, GDP and the contribution of software versus other industries. And I think it's really low, definitely below 20%, maybe even below 10%. Yes, there is still a lot of opportunity in software. So even at the end of Q4, if you back into the numbers and you look at 35% or 34% overall growth rate, software went from 44% to 39% of revenue. The software is still growing 20% in 2022 despite a tough environment. And obviously, that slowed as you got into the second half of the year. But it means that everything else was growing in the high 40s. And we continue to see those other industries, and there's just a ton of opportunity out there that we're really excited about helping people drive better motions in terms of how they go to market.

Cameron, I'd love to get your perspective on another aspect of this. I've been trying to ask multiple companies at the conference. We -- this cycle has been quite unusual because we've basic -- it feels like we've had a tech recession without having an actual economic recession, at least so far, right? Software growth rates, I mean, new bookings are down year-over-year everywhere, right? I mean, that feels like a tech recession. Is it possible that, that would mean -- so whenever we do go into a recession, the next one, would we look at it and say, well, tech spend and software spend, it's already been purged, the spend has already been optimized and then it somehow doesn't feel as bad in the next recession?

Yes. I mean I personally think that this environment is kind of a perception reception more than anything else. It's -- people thinking it's coming and they've been thinking it's coming for quite a long time. That does mean that they're focusing on discretionary spend and really, I think, reducing their kind of growth-oriented spend more than anything else, which I do think that, that is going to impact technology and software, in particular, more than other folks. When there's an actual recession, I do think that people have started to cut many of those discretionary things and they need to think more about their own capacity as opposed to trying to optimize capacity, which probably does have a less impact on software than it does on other things, but hard to predict exactly what's going to happen.

Yes, I'm asking you a lot of crystal ball kind of questions here. Let's go back in the time remaining I want to ask you a bit about the core data asset, the contact record database. The -- you've had this notification and opt-out system in place for many years now that the privacy environment is always evolving but so are your own technologies, your own methods for collecting the data, curating the data, right? Handling all the privacy. Can you speak to that contact records database itself? Because I went back in my notes at the time of the IPO, I think it was 155 million contact records. Where is it today? And is there a rate of growth we can think about on that?

So it's well over 200 million today. And we continue to focus on growing that. Realistically, in the U.S., where we're certainly really strong. You think about how many kind of professionals are the decision makers at companies like we cover probably 90-plus percent of the U.S. So like the growth rate on U.S. is not going to increase that much. Internationally, there are areas where we continue to drive more coverage. And for us, it is much more important that we're adding quality into that, not just growing it significantly. But that growth rate, I'd expect that there's still opportunities to increase that with respect to our international coverage.

Okay. And you might have hinted at this in that answer, but would you look at it and saying we don't really care about the growth rate of the data then a whole lot. It's more about -- you said the quality, but I always as well think of -- I mean, so that's the accuracy of the data. It's also how fresh it is, like how quickly the data updates. How soon do you know if someone has changed jobs or change their phone number? But then there's another dimension to it. Well, it's not just the contacts. It's the firmographic data. It's the hierarchies, it's the org chart and actually the intent signals. So how would you weigh all of that? What do you think is most important?

I do think that the signals are becoming the most important thing because we kind of -- for us, having high-quality contact information is very important. Will be something that we're always focused on continuing to improve. But we've covered much of the waterfront there. The company information as well as the signals are really helping our customers determine not just who to reach out to, but prioritizing who are the best people to reach out to. How are you going to dedicate your resources to getting the most out of it? And when is the right time? You really want to reach out to someone when they're in market, when they're considering buying a solution or a product like yours. And the signals really help drive that in a way that -- you really can't get that anywhere else. So we've invested a lot into intent in our Scoops data as well as, frankly, just changes in company information mean a lot to go-to-market team.

And when you think about that, Cameron, the intent data, the signal is becoming more valuable also the firmographic org chart, all that, who has purchasing authority. All of this is important in the equation. What is it that creates a moat? Because I think, especially going into this economic slowdown, you do hear all these software companies and tech companies are coming under pressure, right? I'm sure they all have a discussion. Is there a cheaper alternative than ZoomInfo. There are cheaper alternatives. There are some cheaper alternatives, but they'll kind of wrangle with it. Is it worth it to get subpar data? So what is it that is -- can you do a little compare and contrast to some of those? And what is it that creates the moat? Is it the contributory network? Is it the research teams that you have? Do you have better web crawling algorithms? Is there something else?

So yes, it's all of those things. In reality, I think that the 3 things that I would point to in terms of creating the moat are, one, quality. Quality data drives better outcomes. I think it's like hard to dispute that. So having higher quality data, which undisputedly is our focus. And a lot of that is the contributory network, it's the evidence-based algorithm that we've developed. It's all of the pieces that generate that quality that are important. Two, it's the breadth of data. You can't find any other vendor that provides all the different pieces that we do in one place. So if you're going to replace Intent and Scoops and firmographic information and technographic information and contact information, you're going to 4 or 5 different vendors trying to tie those together. And that's actually, a, hard to do, but b, creates holes in that. And then the third piece of it is actually our investments into privacy and compliance are unmatched. So if you're a large company, if you're SAP or Google or JPMorgan, many of our largest customers, you're never going to go to some fly-by-night company in Silicon Valley to try and ingest data that's going to drive your motions, not just because it's not as good, but also because they haven't invested into making sure that it adheres to all of the regulations and standards that are out there in the world. So at the enterprise, the investment into privacy and everything that we do is actually a really big differentiator.

Okay. Great note to end on, Cameron, I can't thank you enough for taking the time to be here.

Thank you very much.