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

All right. I guess we can get this started. Hey, everybody. My name is Koji Ikeda. I am one of the analysts on the BofA equity research team for software. I'm super thrilled to have Cameron Hyzer.

Thank you. .

CFO of ZoomInfo here. We'll have a little fireside conversation for 30 minutes. So Cameron, from a very high level, I guess, for those in the room that aren't familiar with ZoomInfo and for those on the webcast that may be unfamiliar with ZoomInfo, maybe spend 30 seconds to a minute on what ZoomInfo is, value proposition and maybe a little background on yourself, please.

Yes, totally. So we provide a platform to sales and marketing teams to help them run their go-to-market motions more effectively and efficiently. And the way that we do that is we provide high-quality data and insights about the customers that they're selling to or prospects and the people that work at those companies and when they may be in market, then we wrap that with automation tools and data orchestration tools to help them really essentially sell better and sell more efficiently over time.

Okay. And maybe 30 seconds on yourself?

Sure. So I'm the CFO. I've been at ZoomInfo since 2018. I've been working for subscription kind of software companies for a long time, too long. I think I started working for Thomson Financial in like 2002 or something like that and just enjoyed the subscription world. Obviously, it's gotten a lot bigger and a lot more exciting over time. I did start out as an investment banker. So forgive me about that before that.

Thank you. So I guess, topical for me, last Friday after the close, you guys filed an 8-K, you announced a 3% reduction in force. Maybe walk through that a little bit, why 3% percent reduction, what type of maybe departments that it hit, what type of employees were affected, why now and just help us understand this reduction in force.

Yes. So we've been -- we're always focused on running an efficient company and making sure that we're investing in the things that will drive the best return in terms of the company. I've been working on this project for a little while to really think about spans and layers within the company and flattening the company in order to make our ability to make decisions and execute on projects go a little faster. And so this is one of the first steps in kind of executing against that and flattening the organization. It also enables us to invest in areas that we think are super important. So we've been talking for a long time about continuing to expand our sales and marketing capacity. I think our view is that as the world normalizes, we want to be in a great position to take advantage of that and accelerate growth. So we'll continue to hire in sales and marketing and then there are a number of engineering areas where we also want to continue to build up. We obviously have a very big AI team already but leaning more into that, leaning more into some of the automation capabilities that we've developed as well.

Got it. Got it. And when I was reading through the 8-K, I noticed there was no reiteration of the guidance. So help us understand, was this -- is this RIF included in the guidance when you gave it when you updated for the first quarter results? Or I guess help me understand the reduction in force and how it plays with guidance?

Yes. So because this is a project that we've been working on for a while and analyzing, this was already contemplated in how we thought for our guidance for the year.

Okay. Okay. Okay. Thank you for that account. So I've been asking every management team a couple of questions. around the macro, very standardized and also about generative AI. So starting with the macro question. I guess how would you characterize the environment that you're selling into today, June 2023 versus maybe January of 2023? And then a year ago, in June 2022, what's different? What feels -- what's different about those 3 environments?

Yes. So it's still a tough environment out there, particularly for sales and marketing teams that are looking to invest. Yes, I think our situation is slightly complicated by the fact that we're still really early in our penetration of the overall market. Therefore, a lot of our customers are still the early adopters of go-to-market technology which also happens to be a lot of software companies. So yes, I think software companies have been more impacted by the macroeconomic changes over the last year than a lot of other folks. And certainly, that has impacted our kind of potential to grow with those companies as well. If I look at June of 2022 or 2023, I feel like -- well, let's rewind a little. If we go back to 2022, I feel like the first 4 months of 2022 were like reasonably good, not quite on the same kind of level as 2021 but reasonably good. And it was really as we started to get into Q2 of last year that we started to see more scrutiny being placed on deals. We saw particularly software companies starting to think about how they were [Audio Gap] let's say the second, third of 2022 and got to September, that was a point at which I think there was a much bigger emphasis on cutting costs on really preparing for what was perceived at that point to be real recession coming in a bigger way, particularly for software companies, the idea of like becoming profitable, became like very much front and center. So those -- that dynamics made for a very tough kind of end of Q3 and Q4 last year, largely persisted into the beginning of Q1. And so at this point, as we look at like June, I look at a lot of things based on sales efficiencies, so how well our salespeople are generating outcomes. Sales efficiency took a big hit in Q3 and then in Q4 and then at the beginning of Q1. And I think we've stabilized at albeit at a much lower level than where we want to be, but at least the rate of change has leveled off. And so yes, I think we're happy to see that there's some stabilization with respect to sales efficiency. But in reality, like in any sales cycle, the hardest thing to deal with is uncertainty, and there's still a fair amount of uncertainty out there. So it's still a tough environment to sell into.

Okay. Okay. And I think that's a good segue into kind of the guidance question. You framed stabilization. It feels like things are getting better, following a tough Q3, Q4 or even Q1 from a demand environment stabilizing. So from a guidance perspective, what are you seeing in the end market demand environment that was really giving you that confidence to reiterate the 2023 guidance on the last earnings call?

Yes. Well, when we look at our customers that are out there and frankly the new customers that we're continuing to sell, there is still a fair amount of demand and interest in people becoming more efficient with their go-to-market motions and becoming more effective, particularly on the new customer side. And for us, the good thing is this new customer is not constrained by and overweighting towards software, we can go out and sell to anyone. There's still a fair amount of demand, and we do pretty well. New sales in Q1 were roughly flat to where they were last year. And I think we're continuing to see some good uptake in terms of new customers. And so the real question is on existing customers, us seeing that sales efficiency start to stabilize, albeit at those lower levels, gives us more confidence that as we continue to add more and more sales and marketing capacity that, that will turn into incremental sales for us as we continue to drive through the year.

Okay. Okay. And I know you guys like to talk about your DAR metric, Days Adjusted Revenue metric. Just walking through the guidance, is it the same type of drivers that you just talked about that are feeding into what -- when we look at the guidance, it looks like the DAR metric actually sequentially improves throughout the year?

Yes. Yes, and part of that improvement in that annualized revenue metric is that our largest quarter for expirations is in Q4. Then Q1 is less than Q4 and Q2 was less than Q1, and Q3 is less than Q2. So in a world where there's a lot of pressure on net retention, and net retention ends up being a headwind for us, that headwind actually ends up being reduced as we're moving through the year, and that certainly helps. And then the other underlying assumption with respect to the guidance is that we are continuing to build sales and marketing capacity throughout the year. And so in a world -- and I think we're assuming that we've kind of -- that we're going to maintain a stable level of sales efficiency, albeit at lower levels so that stabilization of sales efficiency enables us to, as we add more and more salespeople, add more and more revenue as well on top of reducing headwind from the shape of renewals.

Okay. Okay. And thinking about sales capacity, you mentioned right now that the sales efficiency is a little bit lower than historical. But you also just mentioned that...

Fair amount lower than normal.

Fair amount lower than normal, but you also just mentioned that you are planning on adding capacity at some point in time. So when you're looking at your internal metrics or how are you thinking about at what level of sales efficiency it needs to get back to before you start adding more capacity?

Well, we're continuing to add capacity either way. And I think our view to a large extent is there are certain things that we're going to continue to do and invest in, in order to improve sales efficiency. That's part of the reason why we're as profitable as we are and part of the reason that we're successful as we are, using our own system, training people, being aggressive in terms of how we're automating different parts of the process. That's something that we're always going to look to improve. But the bigger kind of change in sales efficiency more recently has largely come from a tougher macroeconomic environment, so where it's harder to sell to people that requires more effort that lowers the efficiency of what our sales team can do. So my view is I don't know when this is going to happen, but at some point, buyer kind of mentality is going to normalize. And when that buyer mentality normalizes, that will actually help our sales efficiency over time. And having more and more capacity to be able to capitalize on that is important for us. I don't know that it's -- like sales efficiency is going to go back to a frothier period like 2021, but it's certainly going to be better than what we're seeing in 2023. And that improvement will not only help us to accelerate the revenue growth but will also help us to realize some of the natural operating leverage that you should get from an efficient go-to-market motion.

And just thinking about sales capacity, just want to be super clear, is that when you set up the guidance, I just want to make sure I understand that the guidance assumes no improvements in sales efficiency? Or does it improve throughout the year to get to the guidance?

Yes. So the guidance assume that sales efficiency ticked down in Q1, which it did. And then it stays consistent at those levels throughout the year.

Is there a broad way to think about, hey, with the -- if you weren't to hire any more salespeople today or just for a while, call it, 12 months. And the sales efficiency gets back to kind of the internal target levels, what could growth look like? Was it significantly higher than where we're at today? Or just help me understand that a little bit.

Yes. I think it's higher than it is today. Part of the way to think of sales and sales efficiency and growth is that your sales force capacity, if you think about that as a percentage of revenue. If we weren't going to hire anyone and we continued to grow, then it would actually become a shrinking percentage of revenue, which ultimately makes the kind of ability to grow faster harder because you are -- you have less resources as a percentage of your base, and you're measuring growth off of that base. So our real focus right now is to continue to grow sales capacity in line with revenue and that, that will enable us to accelerate that revenue growth when that sales efficiency starts to come back to a more normalized level.

Got it. No, that makes a lot of sense. I wanted to switch the conversation over to kind of the second big topic, flavor of the day, generative AI. I'm going to ask you 3 questions on generative AI. First question, how does ZoomInfo think about leveraging AI, generative AI technology within your offerings?

Yes. So there are a lot of really exciting things about the large language models that are being developed and generative AI that's out there. Some of those are super easy for us to do just because we do have a large AI team already that's helped build a lot of the machine learning algorithms to help us clean our data. One of them that we rolled out more or less immediately is Chorus meeting summaries. So we've spent a lot of time in the past really driving high-quality transcripts for multi-speaker meetings. It's actually a kind of hard problem to solve. And I'd say that Chorus is one of the better kind of capabilities out there. So if you can plug in a transcript that's highly accurate in terms of the conversation that happened, that's right down the middle of the fairway in terms of what an LLM model can then turn into a summary. So a number of our customers are -- really been excited about the capability that, that brings because within seconds of finishing a meeting, you get a transcript -- or you got a summary that basically gives you, what are the key takeaways, what are the major to-dos or action items coming out of a meeting and send out to everyone immediately without having to wade through the transcript or the video or whatever else. And so that's an area where that will be part of our premium tier of Chorus and it will help drive people into a better alignment of the value that they're getting and what they're paying. There are other areas where we're excited about continuing to put AI into the platform, whether that's natural language search as opposed to going through 5 different filters to figure out what you're looking for. Just asking who are the people I should be reaching out today or whatever else. And long term, that could very well translate into generative AI interactions that we're able to power for our customers with prospects or customers as well. So that's certainly an area where we think that there's good monetization opportunity. Some of that will be getting people into higher tiers. Some of that will be continuing to drive more engagement and retention with our customers, which is exciting. And then the other part which may actually be the bigger kind of opportunity with respect to generative AI is that there are a lot of businesses out there that are going to look to deploy generative AI in their go-to-market motions over time. And one of the places that they're going to look to do that might be prospecting or working with their customers. And what they're going to do is they're going to deploy that on top of their CRM system and the data that they have within their CRM system. And historically, C-level people have not been super focused on I want my data in the CRM system to be highly accurate and up to date and fully complete. And so when you're trying to deploy AI against that, you're going to realize that garbage in your CRM system is going to create garbage coming out of your AI motions, and that's not going to enable them to really get the benefit of the investments that they want. When they want to employ that foundational layer of making sure that their data is up to date and accurate as possible, the place that they're going to come is to a vendor like ZoomInfo that has those capabilities to help them enrich and complete their CRM system. And really, there's no one else that can offer that in as complete and accurate a solution as we do.

I wanted to ask you a question on how AI and generative AI maybe changed the way or not the way the customers are addressing the pain points that -- and the opportunity that you guys are addressing. Since the beginning of this year, lots of awareness around generative AI, lots of imaginations running wild of what it can do. So how have the conversations changed or not with your customers as they're trying to solve their customer engagement?

Yes. So and the pain point that we're helping people with is really helping them make their go-to-market motions more effective and efficient. We haven't seen a lot of generative AI kind of get into that yet. You do see some vendors starting to come up with kind of slideware of what that means. So Salesforce has a presentation out there of like what Einstein GPT would do. But we haven't seen a ton of companies really start to implement those things yet. Certainly, as they do, that's an exciting opportunity for us that we're focused on leaning in on.

Got it. I'm going to ask one more question on generative AI and then open up to the audience if there's any Q&A out there. So my last question is the monetization aspect of it. And you did touch upon it that it's going to be embedded within some offerings. It sounds like you're going to have premium SKU versions out there with Chorus.ai, so I think we got that part. But the third part is new products. What is the potential for new products for ZoomInfo being built with, I guess, generative AI and AI? And I recall, we had a webinar with you a couple of weeks ago, and you alluded to maybe a virtual SDR. That sounds like something new. Can you talk about that if that is something that might be coming out in the next 12 to 18 months?

Yes. I mean I don't know that we have a specific time line, so it is more of a mid- to long-term thing. But certainly, leveraging our experience with SDR motions and leveraging the data of what is the TAM that you're going after in terms of the companies that are most likely to interact with you, what's the message that you should be delivering to those companies and which of those companies are potentially in market for a solution like yours, like that is the core pain point that we're already solving. Layering on a virtual SDR on top of that, that at the beginning might be a copilot for a salesperson to generate a bunch of meetings or kind of initially reach out to folks and longer term, could just really be a -- we're going to generate x number of meetings and that has an activity-based pricing to it, it's certainly something that we could imagine kind of delivering and delivering a lot of value to people and something that we're currently investing in to make sure that, that happens.

Okay. Okay. Thank you. Any questions from the audience? Please raise your hand and we can get a mic over to you. Any questions? We got one question over here, please. .

Is there anything you could do to change or solve for your heavy exposure to the software industry? I mean -- or is that just kind of a feature? Or have you started exploring other markets that might find your services interesting? Because I guess that we may never get a 2021 robust software market like that again. So I'm just trying to think how you think about the next few years.

Yes. I mean, we certainly think of our exposure to the software market as more of a feature than anything else. In reality, those were the early adopters of our platform. And the fact that there is still a relatively large percentage of our revenue is a reflection on the fact that there's a whole lot of opportunity out there that we haven't tapped into. Part of that is history that we started off kind of profiling IT organizations. So it was really natural that people selling to IT organizations would be our customers. That's primarily software companies. And it really wasn't until we acquired ZoomInfo in 2019 that we expanded the coverage of our database to be really almost every professional that is working at a company or every decision maker, and it really expanded our TAM to include financial services companies and transportation and logistics companies, retail companies and everything else. So we're still very early in the expansion of going to other companies. And frankly, there is a little bit of inertia there too, where, yes, if your average software company might have been founded in 2012, that's 10 years old, was developing their motions when a lot of these type of tools were available. Your average like local HVAC maintenance firm, it's probably founded in 1952 has 70 years of figuring out how to find customers, and that might have included and frankly, for -- we've talked to some recently where it does include driving around to local office parks and seeing like which companies have new signs-up. Like that's the fairly antiquated way to go to market and find new customers but still very much exists today in a lot of the, call it, less kind of technologically driven part of the market. And so there's a ton of opportunity for us to continue to convert those customers and to help them be more efficient. Literally, their eyes pop wide open when they see, so you want to know all the companies that have more than 10,000 square feet of space in your zip code, filter 1. You want to see which ones moved recently, filter 2. You want to see which ones are industrial versus office folks, filter 3. You want to know who the VP of facilities or head of HR is. Like doing that is like very eye-opening for a lot of folks and something that we just need to continue to triple lay on when they become open to, yes, how can they improve those motions. The other thing that's interesting that I'd like to point out to people is, yes, software is a little less than 40% of our overall revenue. That means that everything else is a $700 million business. It's not like a small thing that we're just trying to work out. It's actually a fairly sizable software business that has a ton of room to grow, but is a fairly exciting big business for us. It's not a -- we think we can do this. There are a lot of people out there outside of software that are already using the solution and driving a lot of value from.

Cameron, how are you thinking about capital allocation given history of fairly transformative M&A but a pretty recent share buyback announcement?

Yes. so certainly, we are a fairly cash-generative business, 40% cash flow margins on an unlevered basis, so something that we focus on continuing to drive and feel it's important for any business to do. As a result of that, we're still a relatively new public company but have started a buyback motion opportunistically to buy shares recently. And so we're working our way through that first mandate of buybacks, and then we're going to go back to the Board and reevaluate kind of how we did. And where and when we should continue or expand upon those buybacks. Certainly, from an acquisition perspective, right now, we're not super focused on going out and doing a ton of acquisitions. I think, over time, there are opportunities that will hopefully present themselves, and we're -- part of being good at doing acquisitions is also being disciplined about doing acquisitions. So we are waiting for the right things where we feel we can really add value for both customers as well as our investors going forward. But realistically, we also have a fair amount of capacity from a cash flow perspective as well as incremental debt that we can offer. But I don't think that's necessarily the kind of primary constraint on not being able to do more buybacks in the future.

Cameron, I wanted to go back to kind of the growth drivers out there. And you mentioned outside of software, and I wanted to dig into that a little bit. When you think about verticals or geographies or maybe company size, is there a way to think about a category of end market that you're most excited about to drive growth?

Yes. Yes, I think certainly, if I think about the places where we're most excited, continuing to drive growth in the enterprise is something that we see a ton of value in partially because we have a number of existing customers where we're underpenetrated from our point of view and feel that there's a ton of opportunity to continue to grow both from the kind of parts of the organization that we service as well as additional functionality that we're able to deliver to those customers. So that's an important part of what we're really focusing on and continuing to drive more and more into the enterprise. Certainly, in terms of industries, we've had a lot of success and continue to see faster growth in transportation and logistics and manufacturing and financial services, in health care, in retail, even in business services that are kind of outside of like the tech-enabled business services part of the world. Like all of those industries continue to see stronger growth and a lot of new sales opportunities that we continue to lean into. So I think that's just a reflection of the fact that, yes, there's a lot of the economy out there that hasn't digitally transformed their go-to-market motions and there's that opportunity to do so over time. And then certainly, internationally, that's something that we've talked about for a while. Europe is probably the kind of most obvious short-term international opportunity for us, continues to grow faster than the overall business, but has had a number of challenges over the last year just based on the macroeconomic environment there. So some places that we're continuing to build capacity and sell into but may not be the kind of short-term burst that it was if you look back more than a year ago.

Got it. Last question for you, Cameron. Data privacy topic. In the last earnings call, you called out a software company that moved over to you because of data privacy. What specifically was it about the data privacy that ZoomInfo offered that nudged that customer to join? And how do you guys think about data privacy in the future?

Yes. So -- and if you think about a large enterprise, they're basically using our data to power go-to-market motions which effectively means that they need to get comfortable with how we've collected the data and how we've notified people as compliant and frankly goes above the regulations that are out there. . And so it actually ends up being a real competitive advantage in the enterprise that we are very focused on privacy that we have a very transparent news and choice program. We explain to people exactly how we do things and what -- where it comes from, all of those pieces. We have a privacy team of, I think, 18 or 20 people that's led by our Chief Compliance Officer who was the Deputy Chairman, or whatever his title was, at the ICO. He was basically responsible for enforcing GDPR in the U.K. and Ireland. Like that's a heavyweight person that can talk to customers about what are the things that they should be doing around privacy, what should they be worried about, how does that work with respect to what they're doing. So when we're talking to large customers, people like SAP, who's like a big German software company, very focused on making sure that they're adherent to all the regulations wherever they are. When you talk to like FedEx or AT&T or, frankly, Bank of America, like they have in-depth privacy teams that are focused on making sure that they're getting things from the right vendors that are transparent and following the rules and make sure that they do what they say they do. It's hard to imagine companies like those like going with a kind of smaller, I don't know, Silicon Valley 50-person company to get their data and make sure that it's compliant. And so in the enterprise, it's a huge competitive advantage. In the mid-market, it ends up being a -- we're going to follow what SAP does or what Microsoft does or whatever else. And the small businesses, like they don't care as much. But yes, in a lot of customers, it matters and it matters a lot.

Got it. Cameron, we're out of time. Thank you so much for getting on call. We appreciate it.

Sorry, we didn't go longer.